The new Free Trade Agreement (FTA) between the EFTA States and Indonesia has been approved in a Swiss referendum in March 2021. The FTA opens trade opportunities impacting a wide range of industries, including consumer products and commodities.

The Comprehensive Economic Partnership Agreement (CEPA) with Indonesia, which Switzerland signed in 2018 together with the other EFTA member States Iceland, Norway and Liechtenstein, is currently under ratification procedure and the entry into force is still pending. Only recently, a narrow majority of Swiss voters (51.65%) approved a referendum on the CEPA of 20 December 2019.

The date of entry into force of the Agreement is linked to the ratification, acceptance and approval process in the contracting States. Thus, the Agreement will enter into force on the first day of the third month after at least two EFTA States and Indonesia have deposited their instrument of ratification, acceptance or approval. The FTA is expected to be effective in the coming six to eight months.

Importance of Indonesia as a trade partner for Switzerland

Indonesia is Switzerland’s third most important trading partner in Southeast Asia.1 The annual trade volume between Switzerland and Indonesia in 2020 was almost 830 million euros. Indonesia is the fourth largest country in the world in terms of population, with a growing middle class. Moreover, Indonesia is already the largest economy in Southeast Asia and is expected to become the seventh largest economy by 2030 and possibly the fifth largest by 2045.2 After China, Indonesia is considered the second fastest growing G20 nation. This might lead to a great growth potential and an increase in economic importance of the Southeast Asian State.

Content of the Free Trade Agreement

In 12 Chapter, 17 Annexes and 17 Appendices the EFTA States and Indonesia decided on how their future trade relationship should look like. Selected contents of the FTA are as follows:

Trade in goods

For industrial goods, fish and marine products as well as other products such as footwear, clothing and electrical machinery originating from Indonesia, the FTA foresees to abolish all customs duties in the EFTA States. The concessions in the agricultural and food sector correspond in principle to the level also granted in other Swiss FTAs.

For its part, Indonesia will gradually eliminate or reduce customs duties on most industrial products originating from an EFTA State, including fish and other marine products, products of the chemical or pharmaceutical industry, machines, watches and parts of the textile sector.

Moreover, tariff concessions on both basic and processed agricultural products have been agreed upon in the annexes II-V of the CEPA. Notable products are especially cheese and dairy products, coffee, chocolate and biscuits as well as baby food and energy drinks.

According to the Federal Department of Economic Affairs, Education and Research (EAER) this concerns about 98 % of Switzerland’s current exports to Indonesia after the expiry of the tariff dismantling periods.3

[3] Factsheet

Rules of Origin

The Agreement includes liberal rules of origin, based on the European model. Accumulation with all types of products (industrial and agricultural) among the parties is possible as well as self-declaration of origin.

Trade and Sustainable Development

The CEPA also includes one chapter on trade and sustainable development, which makes the free trade agreement quite unique. This chapter provides a recognition of the parties that economic development, social development and environmental protection are interdependent. Chapter 8 of the CEPA includes a reaffirmation of the parties’ commitment to multilateral environmental and labor agreements and principles and to uphold levels of protection. Each party has the right to establish its own level of environmental and labor protection.

Concessions for palm oil from Indonesia

As part of the CEPA, Switzerland has granted Indonesia moderate concessions on palm oil. These consist mainly of tariff quotas for crude palm oil, palm stearin and palm kernel oil in a total amount of 10,000 tons, which will be gradually increased over five years to a total of 12,500 tons. Within these quotas, tariffs are not eliminated, but only reduced by around 20 to 40 percent.

However, the preferential treatment is subject to specific conditions, especially the imported palm oil must meet the sustainability targets in Article 8.10 of the Agreement. To ensure environmentally, economically and socially sustainable production of vegetable oil, Indonesia commits to effectively implement laws to protect primary forests, peatlands and similar ecosystems, to stop deforestation, peatland drainage and slash-and-burn agriculture, and to respect the rights of indigenous people and workers. In order for Swiss importers to benefit from the partial tariff reductions for palm oil, they must prove that the imported oil complies with the agreed sustainability principles. The implementing provisions shall be regulated in the Ordinance on the Import of Sustainably Produced Palm Oil from Indonesia at the Preferential Tariff Rate.

Moreover, preferential imports within these quotas must also be made in 22-ton tanks. This aims to ensure that the origin of the palm oil can be traced.

Ordinance on the Import of Sustainably Produced Palm Oil from Indonesia at the Preferential Tariff Rate

The conditions in Article 8.10 must be specified in national law. Therefore, the Ordinance on the Import of Sustainably Produced Palm Oil from Indonesia at the Preferential Tariff Rate aims to implement the corresponding provision of the CEPA.

The ordinance stipulates that importers who wish to import palm oil from Indonesia at a preferential rate must provide proof of compliance with the sustainability goals set out in Article 8.10 of the CEPA. Four established certification systems are approved as proof. An importer who is certified according to one of these systems can submit an application to SECO (State Secretariat for Economic Affairs) for approval of the sustainability certificate.

On 18 December 2020, the Federal Council opened the consultation on this Ordinance (consultation 2020/73), which ended on 1 April 2021. The Ordinance will enter into force together with the CEPA.

Generalized System of Preferences

Upon entry into force of the CEPA, Indonesia’s status as a developing country, which qualifies for preferential treatment within the Generalized System of Preferences (GSP) framework for developing countries will no longer be valid. Article 19 of the Swiss Customs Law is decisive for determining the customs duty rate. Companies that are currently applying preferential import duty rates for goods coming from Indonesia are advised to get in contact with their suppliers in Indonesia to ensure a smooth transition.

Role model for other FTAs?

As stated above, the CEPA is unique in a way that, besides the usual clauses, it also includes the innovative PPM (Process and Production Method) sustainability standard. The design of the concessions for palm oil und thus the link to conditions in Article 8.10 that set requirements for the sustainable production of palm oil is a premiere in Switzerland. The clear aim of this clause is to contribute to international efforts to improve sustainability standards for global trade.

The sustainability clauses of the free trade agreement might have a lasting impact on future trade negotiations. The strong opposition by several groups in Switzerland and the narrow decision by Swiss voters in favor of the trade agreement were due to major concerns regarding the sustainability aspects of palm oil.

As the EFTA is currently also negotiating the trade relationship with the MERCOSUR States (Argentina, Brazil, Paraguay and Uruguay), the discussions around the sustainability clause might also have an impact on this agreement.

Conclusion

The CEPA is the first free trade agreement of Indonesia with European countries. It is also a unique type of contract because it includes the PPM sustainability standard.

Swiss multinational companies should explore possibilities of aligning their supply chain with the potential opportunities in using the FTA. This can include among others the following:

  • Review if goods from Indonesia are currently imported under GSP (Generalized System of Preferences)
  • Trade flow assessment to estimate the potential custom duty savings under FTA
  • Explore possibility of trade-optimized sourcing and supply chain
  • Current processes compared to the requirements of the FTA
  • Designing a possible transaction model which is compatible with the FTA

The successful implementation of this free trade agreement may also clear the way for a future free trade agreement with MERCOSUR States (Argentina, Brazil, Paraguay and Uruguay).

According to a recent study by the State Secretariat for Economic Affairs (SECO), in case of a conclusion of a free trade agreement Swiss export to the MERCOSUR region would increase by 55%  in the medium-/long-term . Given that the opponents of the free trade agreement with Indonesia primarily focused on palm oil and ecological arguments, the sustainability aspects and standards in a future trade agreement with MERCOSUR will be decisive.

[1] Economy and Trade Switzerland–Indonesia

[2] Facts about Indonesia (in German)