The U.S. must not ignore Indonesia

We have the opportunity to befriend an Asian country with a huge population, a large and growing economy, and a strategic location.

Source: State Dept.

As China’s power grows in Asia, other countries have been forming defensive coalitions to balance it out. Recent examples include Japan’s new military and economic cooperation with Vietnam, closer Japanese cooperation with the Philippines, upgraded ties between Vietnam and India, and so on. Many of these countries are looking to the U.S. as a source of protection, which is why Vietnam recently upgraded its relationship with Washington, why India’s Prime Minister deepened military cooperation with the U.S. earlier this year, and why the Philippines is allowing the U.S. to build four new military bases on its territory.

But one of these partnerships appeared to fly under the radar, getting very little news coverage and attention. Earlier this month, right before the APEC summit in San Francisco, the U.S. and Indonesia announced a comprehensive strategic partnership. This entails a variety of initiatives — economic investments, cooperation on issues like climate, health and terrorism, and so on. It also includes military cooperation. Although China is never mentioned, its presence clearly looms large in the agreement, which talks about countering cybersecurity threats from “state and non-state actors”, improving Indonesia’s “maritime domain awareness”, and so on.

This agreement comes on the heels of years of increasing military ties and joint exercises. At the root of Indonesia’s concern is the fact that China claims pretty much all of the South China Sea as its territory. Among China’s claims are the waters near Indonesia’s Natuna Islands. In 2021, China demanded that Indonesia stop drilling for oil and gas in those waters; Indonesia rejected China’s claim, and the two had a long standoff in the region. Indonesia’s leaders know that without U.S. aid, they’ll be vulnerable to more such bullying.

But this doesn’t mean Indonesia is ready to be the U.S.’ best friend. Polls pretty much all show that although Indonesians like the U.S., they feel similarly positive about China, and want to maintain a neutral position between the two. Here’s one example:

Source: ECFR

Pew has many more poll questions that all show the same thing. Meanwhile, CSIS looked at various surveys and found that while Indonesians feel a little warmer toward the U.S. than toward China, the country’s elites are neutral.

In other words, Indonesia is basically a “swing state” in the great rivalry that’s shaping up in Asia. And given its huge population, strategic location, and large and growing economy, it’s probably the most important swing state. But in general, Americans seem to be almost totally unaware of this — indeed, there’s little awareness of Indonesia’s existence at all.

Indonesia: huge and important but still invisible

The first key thing to realize about Indonesia is that it’s really, really big. It’s the world’s fourth-most-populous country, with about 84% as many people as the U.S. And it’s far and away the biggest country in Southeast Asia:

Steady and fairly rapid economic growth is turning that demographic heft into economic clout. Indonesia is richer than most of the other countries in Southeast and South Asia, and yet its growth is keeping pace with most of them:

Exactly how Indonesia is accomplishing this growth is a really interesting story. It’s one of the few countries in the world that pivoted from being a manufacturing powerhouse to a natural resource exporter without slowing down, and is now trying to pivot back. I wrote a post about it last year:

Indonesia: The most amazing development story on Earth?

In addition to being an important potential market for U.S. goods, Indonesia could be a key location for “friendshoring” of U.S. supply chains. The recent U.S.-Indonesia agreement included a key piece about the semiconductor industry:

The U.S. State Department will partner with the Government of Indonesia to explore opportunities to grow and diversify the global semiconductor ecosystem under the International Technology Security and Innovation (ITSI) Fund, created by the CHIPS Act of 2022…The United States views Indonesia as a partner in ensuring the semiconductor supply chain can keep pace with the digital transformation underway…This collaboration underscores the significant potential to expand this industry in Indonesia to the benefit of both the United States and Indonesia.

The partnership will begin with a review of Indonesia’s current semiconductor ecosystem, regulatory framework, and workforce and infrastructure needs.  The outcome of this review will inform potential future collaboration on developing this critical sector.

In other words, the U.S. government is preparing to give Indonesia advice on how to make itself a more suitable destination for manufacturing FDI. If that effort is successful, Indonesia’s attractiveness as an investment destination could go far beyond the chip sector. With its large mineral deposits, it could potentially help break China’s strangleholds on the processing of critical minerals and on battery manufacturing.

But Indonesia’s strategic importance to the U.S. goes beyond its economic potential. It lies along critical trade routes between the Indian Ocean and the Pacific Ocean — around 40% of China’s goods trade passes through the South China Sea. This trade has to pass through one of three Indonesian straits — Malacca, Sunda, and Lombok — or else go the long way around Australia. If a major conflict does break out between China and the U.S., the waters and islands around Indonesia could be the location of much of the fighting, as they were in World War 2.

On top of that, Indonesia’s success would promote the kind of values the U.S. wants to encourage in the region. Along with the Philippines, it’s Southeast Asia’s freest and most democratic country, having successfully made the transition to democracy after decades of military dictatorship. And as the world’s largest mostly-Muslim country, Indonesia promotes a tolerant version of Islam that deserves to be elevated.

In other words, there are plenty of reasons why the U.S. should consider Indonesia a very important country to promote, assist, and partner with. Yet despite the recent agreement, the U.S. in general pays relatively little attention to Indonesia. An Indonesian businessman once called his country the world’s “biggest invisible object”.

If the U.S. is going to change this situation and take advantage of all the potential that Indonesia has to offer, it’s going to need to think harder about what it can do for Indonesia.

What the U.S. needs to do for Indonesia

CSIS’s report found that Indonesians tend to view the U.S. as mostly a military power and a military partner, while it views China as a more important economic power and partner. Thus, in order to deepen the U.S.-Indonesia partnership, the U.S. needs to focus up on shoring up the area where it’s weak — economics.

A deeper U.S.-Indonesia economic partnership has to start with infrastructure. Indonesia’s President Joko Widodo has made infrastructure construction a big part of his economic policy. This infrastructure had to be funded by borrowing money. Much of the money is being borrowed domestically, but Indonesia has also gone looking for foreign financing.

In general, foreign infrastructure financing involves more than just lending — it also typically involves “concessional financing” (lending money at below-market rates, which is effectively a partial grant), and technical assistance. The U.S. basically didn’t do this. Japan — a key U.S. ally — has definitely stepped up, helping Indonesia build a metro train system in Jakarta, and pledging money for roads as well.

But the country that Indonesia has really turned to here is China. Under the Belt and Road initiative, China has poured billions of dollars of infrastructure loans into Indonesia, and pledged tens of billions more — an order of magnitude more than Japan. The most important and impressive Chinese-financed project has been Indonesia’s first high-speed railway, between Jakarta and Bandung:

By Naufal Farras, CC BY-SA 4.0

What similar marvels has America provided for Indonesia? Nothing at all. When Widodo praised China’s infrastructure financing back in 2017, he heavily implied a contrast with the U.S.:

It is not merely talk, but it is about actually building something. From airports to railways, these are industries we can see and touch.

And this infrastructure effort has helped cement broader economic ties between the two countries; China has taken over as Indonesia’s dominant trade partner, where Japan and the rest of Southeast Asia once dominated. Given all this, no wonder Indonesians think China is a more important economic power than the U.S.!

But China’s economic influence in Indonesia is far from unassailable. In general, the Belt and Road project has been mostly a failure, financing uneconomical projects riddled with corruption, cost overruns, and delays, and leaving the borrowing countries on the hook for the resulting bad debts. This has been somewhat true in Indonesia as well:

Nine of Indonesia’s BRI projects, worth a total of $5.2 billion, involve scandals, controversies, or alleged violations—the world’s second-most, behind only Pakistan…Indonesia’s debt to Chinese creditors continues to climb, reaching $22.01 billion in March 2022.

Indonesia came out a bit better than some other Belt and Road borrowers, because it dealt with China in a savvier way, refusing to put up its government budget as collateral for the money it borrowed from China. As a result, the cost overruns and other problems will be more of an annoyance than a trap.

But Indonesia would presumably prefer an infrastructure partner that doesn’t require it to play such hardball in negotiations, and which is less prone to doing shoddy work. Japan is that partner, since its infrastructure is of the highest quality, but it doesn’t have the money to match China. What’s needed is a joint U.S.-Japan project to finance Indonesian infrastructure, where the U.S. puts up the bulk of the cash and Japan provides the technical assistance. Some efforts in this direction are already underway, but they need to be targeted at Indonesia, and the U.S. needs to pony up more cash.

The second thing the U.S. needs to do is become a bigger market for Indonesian goods. The Trans-Pacific Partnership, which included Indonesia, would have accomplished this, but the U.S. tragically cancelled the TPP. Instead, what the U.S. probably needs now are more targeted trade initiatives — measures to encourage Indonesia to provide the U.S. with goods like processed metals, batteries, and low-end semiconductors that America currently depends on China to provide.

The third thing the U.S. can offer Indonesia is manufacturing FDI. Widodo is intent on pivoting Indonesia back from resource exporting to industry, undoing some of the deindustrialization that has set in since the 1997 Asian Financial Crisis. The U.S. can help that by helping point companies looking to diversify away from China toward Indonesia.

If the U.S. does these things, Indonesia will become a closer and more reliable partner. The geopolitical benefits will be enormous, and the economic benefits will be real as well. Indonesia could be the last piece of the puzzle in Asia — but before that can happen, the U.S. first has to show that it’s willing to provide concrete and tangible benefits. The worst thing, of course, would be for the U.S. to continue to ignore this giant, growing, and strategically important country.

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