Indonesia- EU Free Trade Agreement: From Palm Oil to Nickel

Indonesia and the European Union have been through rounds of trade negotiations since 2016. While both sides consistently reaffirmed their commitment to cooperation, talks stalled as each side sought to safeguard its domestic sectors and internal policies from competitive pressures arising from any bilateral trade agreement.

Now, after nearly a decade, the Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU CEPA) is due to be signed on September 23, 2025. Standing alongside Indonesian President Prabowo Subianto, European Commission President Ursula Von Der Leyen declared that “Europe and Indonesia share a deep commitment to peace, to stability, and to a rules-based international order” amid a time of “economic uncertainty” and “geopolitical volatility.” Although the IEU CEPA has to be ratified by all 27 EU member states before it can enter into force, its signing marks a significant step toward deeper economic cooperation.

“While domestic protectionism may present hurdles, the overall strategic logic, shared goals on decarbonisation, diversification, and economic resilience, should push both parties toward a workable compromise. There’s a real window of opportunity here,” says Yanis Bourbon Nikolopoulos, Junior Researcher at the European Institute for Asian Studies, specialising in EU-Asia relations.

China has long been viewed as a systemic rival and a threat to democratic norms. This has prompted many countries to diversify their supply chains away from Beijing, whose expanding geopolitical ambitions, including military assertiveness in the South China Sea and increased pressure on Taiwan, have raised alarm among liberal democracies concerned with sovereignty and regional stability.

The US, traditionally a long-standing ally of both the EU and ASEAN, has become a less predictable partner. Under the Trump administration, a return to tariff protectionism and economic isolationism has raised concerns about the US commitment to multilateralism. In response, many democracies are now seeking to preserve a rules-based international economic order, while adapting it to the shifting realities of a more fragmented political landscape.

As Nikolopoulos points out, the Foreign Trade Agreement (FTA) “can create the kind of predictable environment that both governments and businesses need to thrive, without over-relying on either major power. That kind of balanced alliance could become a model for navigating the same geopolitical pressures.” Indonesia is a leading supplier of critical raw materials, including nickel, palm oil, rubber, coffee, and cocoa. The EU, on the other hand, is one of the world’s largest economies and a trendsetter in trade, sustainability, and regulatory frameworks, creating a strong foundation for mutual interest and cooperation.

Von Der Leyen acknowledged the critical role that Indonesia plays as “a leading supplier of goods that are vital for the digital and green transition”. Nickel is crucial to the development of batteries and electric vehicles, and as the world’s largest exporter, Indonesia plays an increasingly strategic role in global green supply chains.

Talks of the FTA stalled in the past over disagreements regarding palm oil and Indonesia’s export ban on raw nickel. In previous discussions, growing concern over deforestation and environmental degradation linked to palm oil has significantly strained relations between the two powers. While 60% of the EU’s palm oil imports come from Indonesia, the bloc’s strict sustainability rules placed disproportionate compliance costs on Indonesian Small and Medium Enterprises (SMEs), rather than large multinational corporations.

This delicate balancing act between environmental protection and trade fairness has sparked concerns over inconsistent treatment. While palm oil has faced heavy scrutiny under EU environmental regulations, culminating in a WTO ruling that found aspects of the Renewable Energy Directive (RED II) to be discriminatory, nickel, which is even more emissions-intensive, has been welcomed as a linchpin of the EU’s green transition.

 Nikolopoulos acknowledges this criticism but cautions against viewing it as purely hypocritical: “While the current approach may seem like a double standard, it also reflects the EU’s effort to build a more sustainable infrastructure over time. If that long-term goal is achieved, the short-term inconsistencies might be justified.”

However, he stresses that for the EU’s green agenda to be equitable, it must include support mechanisms that reflect the realities of Indonesian SMEs. “Standards like RSPO (a certification for sustainable palm oil) are often far too complex for smallholders to understand or comply with,” he notes. “Rather than adding new layers of regulation, the EU should aim to simplify existing mechanisms and ensure they're accessible to smaller players, not just large corporations that can afford the compliance costs.” Without such reforms, the FTA risks reinforcing structural inequalities in global supply chains, undermining both its development aims and the EU's climate credibility.

The EU and ASEAN must focus on strengthening trade relations as the global market increasingly aligns along spheres of influence. While engaging with major powers like the US remains essential, the EU should also prioritise partnerships with economies that uphold globalisation and multilateralism. To foster a fair and effective trade system grounded in a rules-based order and committed to the green energy transition, the EU needs to invest in decarbonisation efforts across partner nations.

More broadly, the EU should embrace a partnership-driven approach in its green industrial policies, one that enables greater participation from trade partners in the supply chain, such as refining and manufacturing, rather than limiting their role to raw material extraction. Initiatives like the Clean Trade and Investment Partnerships (CTIPs) provide a promising framework to harmonise economic and environmental goals.