Trade Liberalization and National Industrial Competitiveness of Indonesia within the RCEP and the ASEAN Free Trade Area

Background

Indonesia’s participation in regional trade agreements such as the ASEAN Free Trade Area (AFTA) and the Regional Comprehensive Economic Partnership (RCEP) marks a significant shift in its trade policy strategy towards greater openness and integration with regional and global markets. These agreements aim to reduce trade barriers, harmonize regulations, and promote deeper economic cooperation among member countries. AFTA, established in the early 1990s, focuses on trade liberalization within Southeast Asia, while RCEP, which came into effect more recently, extends this integration by including major Asia-Pacific economies such as China, Japan, South Korea, Australia, and New Zealand. For Indonesia, these frameworks are not only about expanding market access but also about increasing industrial competitiveness by encouraging structural reforms, technological upgrading, and eficiency in production.

The trade agreements like AFTA and RCEP bring both pressure and opportunities for Indonesia’s local industries. These agreements expect Indonesian industries to compete better in regional and global markets. But to do this, they need to improve how they produce goods, lower their costs, and use better technology. Some sectors, like food and agriculture-based industries, have managed to grow under these trade deals. However, other sectors, especially those that depend on simple, low-value production, are struggling to compete with countries that have better technology and lower costs. So, while trade liberalization creates chances to export more, it also brings stronger competition. This means Indonesian indstries must adapt quickly and become more innovative to keep up.

A key area influenced by trade liberalization is industrial productivity and efficiency. With lower tariffs and reduced trade costs under AFTA and RCEP, firms must increase their productivity to survive in an environment where foreign competitors can enter the Indonesian market more easily. As a result, many Indonesian manufacturers have slowly begun changing how they operate. To stay competitive, they are starting to use more efficient production methods, adopt automation, and improve the way they manage their supply chains.  However, the adoption of advanced technology and efficient processes remains uneven across sectors and regions. Many small and medium-sized enterprises (SMEs), which form the backbone of Indonesia’s industrial structure, often lack the capital, knowledge, and institutional support needed to modernize and scale up effectively in a liberalized trade setting.

Technological progress, or the lack of it, is a key factor affecting Indonesia’s industrial strength under RCEP and AFTA. Trade deals usually help spread technology through imports, foreign investment, and joining regional supply chains. In Indonesia, however, the results have been mixed. Big international companies often bring in better technology and ways of working, but local companies don’t always benefit much from this. Without strong policies and support for research and development (R&D), many Indonesian firms stay stuck in low-tech manufacturing (Setyoko, 2023). This puts Indonesia at a disadvantage compared to countries like South Korea, Japan, and China, which are much more avanced in technology and are major members of RCEP.

Trade liberalization also affects how well Indonesia performs in exports. Deals like AFTA and RCEP remove many trade barriers, so Indonesian products can reach bigger markets more cheaply. Some sectors like palm oil, textiles, and processed food have benefited. But Indonesia still struggles to sell a wider range of products and to add more value to its exports. Problems like poor logistics, weak infrastructure, and unclear regulations make things harder. So, how well Indonesia can compete in AFTA and RCEP depends on how well it can fix these internal issues while using the trade deals to its advantage.

Theoretical Framework

Trade liberalization is based on classical economic theory, especially the idea of comparative advantage. This means countries can benefit by focusing on goods they produce more efficiently. By trading, they can use their resources better, increase productivity, and both sides can gain. Indonesia’s participation in AFTA and RCEP shows its plan to use its strengths (like natural resources and low-cost labor) to grow in a more connected regional economy. These agreements aim to boost industry by lowering tariffs and giving better access to markets.

Neoclassical trade theory adds that open markets, fair competition, and the use of available resources (like labor and capital) help improve outcomes. Based on this, Indonesia should benefit by shifting its resources to more productive industries. AFTA and RCEP are expected to help this shift, improve productivity, and bring in more investment. Indonesian firms need to compete by being more efficient and meeting global standards.

Modern trade theories go further by including things like innovation, economies of scale, and smart government policy. New Trade Theory says that success in trade also depends on how well firms innovate and grow. For Indonesia, it’s not just about opening markets, but also building industrial areas, supporting innovation, and using the right policies. To join regional supply chains, Indonesian companies need to grow in key sectors like automotive parts, electronics, and processed food.

Endogenous growth theory focuses on internal drivers like education, research, and innovation. For Indonesia to stay competitive under AFTA and RCEP, it needs to improve technology and skills. Foreign investment and technology from trade can help, but without strong local capabilities, the gains may be small and uneven. Institutional economics highlights the importance of good governance and strong institutions. Free trade agreements alone won’t improve competitiveness unless backed by clear rules, good infrastructure, and smooth processes (Salam, 2023). To make the most of AFTA and RCEP, Indonesia must improve its regulations, logistics, and customs to support industry and compete globally.

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Analysis of Trade Liberalization

1) Market Opening

Opening markets under AFTA and RCEP marks a major shift in Indonesia’s trade policy from protecting local industries to encouraging open and competitive markets. The removal of trade barriers and simpler cross-border rules have made it easier for Indonesian products to enter regional markets. Local companies now need to adjust their production, costs, and distribution to meet the demands of more open and advanced markets across ASEAN and RCEP countries. This has pushed many manufacturers to improve product quality and increase production to meet export standards.

However, Indonesian industries have responded differently to this change. Large companies in sectors like automotive, textiles, and processed food have used the opportunity to expand exports and build regional partnerships. On the other hand, many small and medium enterprises (SMEs) struggle with limited access to finance, export knowledge, and support systems. As a result, the benefits of market access mostly go to bigger, well-connected companies, while many smaller firms remain unprepared to compete.

The impact of market opening also depends on the type of industry. Sectors involved in global value chains, like electronics and components, gain from easier access to materials and export markets. But industries that were used to selling only in protected local markets now face tougher import competition. So, improving competitiveness takes more than just market access, it also requires strong institutions, supportive policies, and investments in industrial development. Without these, market liberalization alone won’t lead to long-term industrial success.

2) Tarif Reduction

Tariff reductions under AFTA and RCEP have reshaped Indonesia’s trade by lowering import costs and boosting export competitiveness. Cheaper raw materials and intermediate goods have helped local industries reduce production costs and improve efficiency, especially in capital-intensive sectors. This has also made it easier for downstream industries to join regional production networks.

For export-oriented sectors like agro-based, textiles, and chemicals, lower tariffs in partner countries have increased export volumes. However, long-term success depends on more than just prices, factors like innovation, quality, and reliability matter too. In sectors where Indonesia lacks scale or technology, tariff cuts alone aren’t enough, leading to uneven benefits across industries. Some grow, while others struggle with rising imports and tighter profit margins.

Tariff reductions have also exposed structural vulnerabilities in sectors historically protected by high import duties. Domestic producers in low-efficiency, import-substituting industries now face direct competition from foreign firms with superior economies of scale, better technology, and lower production costs. This competitive pressure has generated both creative disruption and policy dilemmas. On one hand, it encourages modernization and industrial consolidation; on the other, it risks deindustrialization if adjustment support is inadequate. The long-term impact of tariff reduction on industrial competitiveness thus depends on the extent to which Indonesia can couple liberalization with effective industrial policy and institutional reform.

3) Economic Integration

Economic integration through AFTA and RCEP is not just about cutting tariffs. It also includes aligning regulations, encouraging investment, and improving cooperation between institutions. Indonesia’s active role in these agreements shows its understanding that being competitive today means being wellconnected and part of regional supply chains. By becoming more integrated into Southeast Asia and the Indo-Pacific economy, Indonesia wants to grow beyond just being a production center and it aims to become a key part of international manufacturing and supply networks. To reach this goal, Indonesia need to follow regional standards, adjust production incentives, and build strong cross-border logistics and digital trade systems.

Regional economic integration offers big opportunities for Indonesia. Being part of regional supply chains helps local firms lower costs, gain knowledge, and attract foreign investment, especially in manufacturing. This encourages Indonesian companies to upgrade technology and focus on specific product areas, helping build a stronger, more advanced industrial sector. For Indonesia, this could be a way to move beyond the “middle-income trap” through better skills and more complex industries.

However, there are still challenges. Policy gaps, weak infrastructure, and uneven regulations across regions limit the full benefits of integration. Many local firms struggle with the technical rules of regional trade, making it hard for them to join regional value chains. So, integration alone isn’t enough, it must be supported by national reforms, better coordination, and stronger institutions. The success of AFTA and RCEP in improving Indonesia’s industrial strength depends on how well the country aligns its internal improvements with its trade commitments.

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Implementation of RCEP and AFTA in Indonesia

Indonesia’s implementation of AFTA and RCEP shows its efforts to align national trade and industry policies with wider regional goals. By simplifying customs procedures, reducing tariffs, and easing rules of origin, Indonesia aims to make trade more efficient and lower costs for local producers. The government has also reformed some regulations to meet agreement requirements, including opening parts of the service sector, increasing transparency for investors, and improving trade infrastructure. Systems like the National Single Window and OSS (Online Single Submission) have been launched to make trade and business processes smoother and to attract more regional investment.

However, puting these agreements into practice has not been equal across the country. Regions like West Java, East Java, and North Sumatra benefit more because they have better infrastructure, skilled workers, and access to ports (Wardani, 2023). In contrast, many other area are left behind due to poor logistics, weak digital sytems, and limited local capacity. This uneven progress means the benefits of trade liberalization are not shared fairly. To fix this, Indonesia needs strong domestic policies that close these gaps and make sure all regions can take part in and benefit from regional trade agreements.

To support industrial growth under AFTA and RCEP, Indonesia has focused on export promotion, investment incentives, and helping small and medium enterprises (SMEs). The Ministry of Trade has launched training programs, market information tools, and export financing to help local businesses. Foreign investors in key manufacturing sectors also get tax breaks. However, these policies often face problems like weak enforcement, slow bureaucracy, and poor coordination between national and local governments. Their success also depends on how well businesses and local institutions can apply and benefit from them.

Indonesia’s plans for AFTA and RCEP are part of its larger goals, such as the Making Indonesia 4.0 roadmap. This plan aims to improve technology use, strengthen supply chains, and boost innovation. The goal is to move from raw material exports to more advanced manufacturing, supported by foreign investment and technology transfer. To achieve this, Indonesia needs not just good policies but also strong institutions, better infrastructure, and active support for private businesses. In short, the success of AFTA and RCEP depends on how well Indonesia connects these trade deals with its long-term development plans.

Impact of RCEP and the ASEAN Free Trade Area on Participating Countries and Implications for Indonesia

The Regional Comprehensive Economic Partnership (RCEP) and ASEAN Free Trade Area (AFTA) have collectively reshaped trade dynamics across the Asia-Pacific and Southeast Asia by fostering deeper economic cooperation and integration. Participating countries, particularly those with robust industrial capacities such as China, South Korea, and Vietnam, have demonstrated strong performance gains through increased intra-regional trade, foreign direct investment, and integration into regional value chains. These countries have effectively capitalized on liberalized trade rules to expand their manufacturing bases, upgrade technology, and consolidate their positions as regional industrial hubs. By leveraging policy alignment, efficient infrastructure, and innovation systems, they have transformed trade openness into concrete competitive advantages across multiple sectors.

For ASEAN member states, the impact of AFTA has been uneven, yet substantial in shaping regional trade architecture. Countries like Thailand and Malaysia have successfully diversified their industrial exports, supported by government-led strategies to enhance competitiveness and facilitate technology adoption. Vietnam, in particular, has emerged as one of the key beneficiaries of both AFTA and RCEP, attracting multinational corporations and integrating swiftly into high-technology value chains, especially electronics and machinery. The ability to combine open trade regimes with targeted industrial policies has allowed these countries to scale production and increase market share within and beyond the region. In contrast, lower-income members such as Laos and Cambodia have experienced more modest industrial gains due to limited institutional and infrastructural readiness (Samudra, 2023).

Indonesia’s experience within these two agreements has been more complex and nuanced. While the country has benefited from expanded market access, especially for palm oil, automotive components, and processed food products, the overall gains have been constrained by persistent structural bottlenecks (Lubis, 2011). Compared to regional peers, Indonesia’s export base remains concentrated in resource-based and low value-added products, indicating a slower pace of industrial upgrading. Technological adoption across industries remains uneven, and productivity growth has lagged behind competitors such as Vietnam and Malaysia. These challenges underscore a need for more coordinated industrial policy that can effectively translate trade liberalization into sustained export competitiveness and manufacturing development.

The impact of AFTA and RCEP on Indonesia’s industrial competitiveness is evident in the performance of key sectors. The automotive and agro-processing industries have shown modest improvements in export value and production scale, aided by preferential trade terms and increased regional demand. However, sectors that lack technological depth or economies of scale have seen rising import competition, eroding domestic market share and creating vulnerabilities. The influx of more efficient imports from countries like China and South Korea has pressured local firms to either innovate or exit. This dual outcome reveals the critical importance of industrial readiness and adaptability in ensuring that trade agreements generate positive net benefits for the domestic economy.

FDI shows different effects of AFTA and RCEP in the region. Countries like Vietnam and Thailand have seen big growth in manufacturing FDI, but Indonesia’s growth has been slower. This is because of unclear regulations, strict labor rules, and poor infrastructure. Investors see Indonesia as a market with potential but also as costly and slow due to bureaucracy. Because of this, many multinational companies set up factories in nearby countries and only sell products in Indonesia (Lubis, 2011). This situation shows Indonesia needs faster institutional reforms and better industrial policies to attract more investment and join regional production networks more effectively.

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The table below summarizes key comparative impacts of RCEP and AFTA across selected participating countries, focusing on indicators relevant to industrial competitiveness:

The data reflect Indonesia’s relative underperformance in key metrics such as export growth and FDI attraction, underscoring the urgent need for reform-driven policies that enhance industrial capabilities. Unlike Vietnam or Malaysia, which have strategically harnessed trade openness to build globally competitive industries, Indonesia remains in a transitional position. Future success under RCEP and AFTA hinges not merely on access to markets, but on building the institutional and technological foundations necessary for long-term competitiveness.

Conclusion

Indonesia’s participation in AFTA and RCEP shows its goal to join regional and global trade more closely. While these agreements have opened markets, cut tariffs, and improved cooperation, Indonesian industries still face challenges like outdated technology, weak institutions, and uneven development across regions. Compared to neighbors like Vietnam and Thailand, Indonesia needs better policies, industrial upgrades, and more invetment in innovation to turn trade opportunities into real growth. Moderate progress in exports and foreign investment shows the need for clearer, flexible industrial policies that fix internal problems and prepare for regional integration. In the long run, Indonesia’s success in AFTA and RCEP depends on its ability to reform, innovate, and coordinate efforts across industries and regions, making trade liberalization a true driver of competitive and sustainable industrial development.

Penulis:
1. Almay Filardho Candra Ahyadi
2. Muhammad Rafyaa Rizki Ramadhan
3. Muhammad Rifqy Pramudya
Mahasiswa Hubungan Internasional Universitas Brawijaya
Aktif juga di organisasi Eksekutif Mahasiswa Universitas Brawijaya & Badan Eksekutif Mahasiswa Fakultas Ilmu Sosial dan Ilmu Politik

Editor: Ika Ayuni Lestari

Bahasa: Rahmat Al Kafi

References

Samudra, D. (2023). ASEAN–China Free Trade: The Impact of ACFTA Policies on the Sustainability of Indonesian SMEs. Journal of Principles Management and Business, 3(1). https://doi.org/10.55657/jpmb.v3i01.172

Lubis, A. D. (2011). Analisis Daya Saing dan Kesiapan Indonesia dalam Rangka Integrasi ASEAN: Studi Kasus Automotives, Rubber Based, dan Agro Based Products. Buletin Ilmiah Litbang Perdagangan, 5(1). https://doi.org/10.30908/bilp.v5i1.117

Wahyudi, E., & Budiono, B. (2014). The Impact of AC-Free Trade Area on the Performance of Industrial Sectors in Indonesia. Journal of Economics, Business, and Accountancy Ventura, 17(1), 1–12. https://journal.perbanas.ac.id/index.php/jebav/article/view/261

Salam, A. R. (2023). Pemanfaatan Regional Comprehensive Economic Partnership (RCEP) bagi Peningkatan Ekspor Indonesia. Trade Policy Journal, 15(2). https://jurnal.kemendag.go.id/TPJ/article/view/753

Setyoko, N. R., Rokhim, R., Rohman, I. K., & Rofii, M. S. (2023). Indonesia’s Export Growth Decomposition in ASEAN and ASEAN Dialogue Partners. Economic Journal of Emerging Markets, 16(2). https://doi.org/10.20885/ejem.vol16.iss2.art7

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