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How Indonesia can gain US$129 million from Brexit

duncan/flickr, CC BY-SA

Despite having more than 70 years of diplomatic relations, Indonesia and the United Kingdom’s trade relationship is quite minuscule.

The UK receives less than 1% of Indonesia’s goods exports and Indonesia receives only 0.3% of UK exports.

But if Indonesia can take advantage of the UK’s decision to leave the European Union (EU), known as Brexit, then Southeast Asia’s largest economy would gain at least US$123.9 million in trade surplus from an expected increasing trade flow between the two countries. It would be a much-needed boost for Indonesia, which last year recorded a trade deficit of US$3.2 billion.

tristantaussac//flickr, CC BY

Taking advantage of Brexit

Despite its controversy, a positive economic consequence of Brexit for the UK is it gives the country the independence to renegotiate new trade agreements with third countries. This includes Indonesia.

After Brexit, the UK is likely to form other trade agreements with third countries outside the EU, including Indonesia, under a no-deal scenario.

In a no-deal scenario, the UK would immediately leave the EU with no agreement about the “divorce” process. This means the UK can regain regulatory sovereignty from overly burdensome EU trade regulations. EU social and employment laws come with a significant cost to the UK economy – 22 of the 100 costliest EU-derived regulations fall into this category and they are particularly burdensome for small businesses.

Without these burdens, the UK can renegotiate its deals with other countries, including Indonesia.

The UK is not Indonesia’s main trade partner. It ranks 17th in the list of Indonesia’s export destinations.

Indonesian goods exports to the UK consist of footwear (16.3%) wood and wood products (9.7%), apparel (7.7%), machinery and electrical equipment (6.0% ), furniture (5%), paper (5%) and other products.

Meanwhile, Indonesia imports a large proportion of high-technology products from the UK such as machinery with a 15.3% share of Indonesia’s total imports.

The post-Brexit era should serve as a basis for a more open and profitable bilateral relation between the two countries.

Based on my calculations, not only would Indonesia benefit, the UK could also increase its GDP by US$1.2 billion as it benefits from trade agreements with various countries including Indonesia.

If Indonesia chooses not to form any trade deals with the UK following Brexit, the country may see its GDP drop by US$26.7 million. That’s relatively small compared to Indonesia’s total GDP of US$1.2 trillion.

Throughout the developed countries, having a region-wide free trade agreement (FTA) that involves the UK and other countries will become a cure for the contagious effect of creeping protectionism. FTAs will create a positive signalling effect that will lead towards more liberal trade throughout the region.

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