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Neither the Regional Comprehensive Economic Partnership nor the upgraded free trade agreement between China and Southeast Asia can protect Chinese companies from Indonesia’s sudden policy changes, according to a senior economist at an ASEAN-focused think tank. Trade agreements primarily offer post-incident remedies, allowing companies to seek compensation after policies shift, rather than preventing such shifts in the first place. Investors should be cautious about relying on trade treaties as shields against political risks.
In mid-May, the Chinese Chamber of Commerce in Indonesia issued an open letter to President Prabowo Subianto, protesting tax increases, higher royalty fees, stricter foreign exchange rules, and drastic reductions in nickel ore mining quotas—some exceeding 70 percent, including at Tsingshan Holding Group’s Weda Bay project. Shortly afterward, Indonesia created a new state-owned entity tasked with overseeing strategic resource exports.
Last October, China and ASEAN signed an upgraded framework agreement on economic cooperation, enhancing the previous deal through the China-ASEAN Free Trade Area (CAFTA) 3.0 protocol.
Below are key insights from the interview with the economist:
Yicai: When regional integration conflicts with a country’s resource nationalism, which should Chinese investors pay more attention to? Does CAFTA 3.0 provide any real protection against sudden policy changes?
Economist: Chinese investors should prioritize investments through jurisdictions with strong bilateral investment treaties or free trade agreements. For long-term projects, especially in sectors like mining, tax benefits are less critical than the safety that comes from treaties. Countries with extensive treaty networks generally pose fewer risks.
Bilateral treaties include provisions for fair treatment, most-favored-nation privileges, and dispute resolution mechanisms that serve as institutional safeguards. Free trade agreements often add requirements for regulatory transparency, anti-corruption measures, and specific fair treatment standards. However, neither treaties nor agreements can prevent abrupt policy shifts—they only grant investors the right to pursue compensation afterward. Even with CAFTA 3.0, protection against such risks remains limited, even upon full implementation.
Furthermore, even with treaties containing dispute resolution clauses, pursuing arbitration can be expensive and time-consuming. A more practical approach might be direct negotiations with host governments on fair compensation formulas.
Yicai: Indonesia is increasingly involved in a “triangular” trade network for batteries, EV parts, and processed metals—largely driven by US tariffs that redirect Chinese exports through third countries. How sustainable is Chinese manufacturing investment in Indonesia—genuine relocation or fragile tariff-routing that could collapse if US trade policies tighten?
Economist: Some Chinese investments are affected by US tariff escalation, but not all. It’s a common tactic for exporters to set up operations in third countries to bypass import restrictions. China’s share of ASEAN’s total imports grew to over 25% by the end of 2025. However, the US has extended tariff pressures through Section 301 to ASEAN, Mexico, and India, which host some of these offshored Chinese production.
Much of China’s investment in Indonesia is motivated by domestic market needs. For example, nickel mining benefits both countries—China gains a reliable raw material for EVs, batteries, and semiconductors, while Indonesia aims to develop a complete nickel supply chain domestically, funded by Chinese capital within five to ten years.
This approach is less likely to face direct US economic resistance since the US-China rivalry extends beyond trade wars into geopolitics and diplomacy, which will influence Chinese investments in ASEAN more broadly.
Yicai: Is Indonesia genuinely advancing up the value chain, or is it mainly becoming a niche nickel-processing hub? What are the main gaps preventing a true regional manufacturing ecosystem? Are Chinese investments helping close these gaps or just reinforcing narrow specialization?
Economist: Indonesia’s development faces hurdles such as a lack of skilled labor, poor infrastructure, and complex regulations. For instance, semiconductor development requires a highly skilled workforce, stable digital infrastructure, and advanced technology—areas where Indonesia is still lacking. Currently, fewer than 1% of the workforce holds ICT professional qualifications, and local R&D investment remains minimal.
Progress depends on investments in complementary capabilities and governance reforms. Strategic cooperation with China can help address some challenges, enabling Indonesia to leverage its nickel resources into a complete value chain, especially in advanced battery manufacturing. However, technological and skill development needs sustained, time-consuming efforts.
A realistic goal over the next decade is for Indonesia to use its nickel advantage to develop higher-value activities—particularly in battery production—while remembering that locking technology in joint ventures for too long isn’t sustainable. Long-term growth depends on spinning off technology and building a comprehensive local industry.
Yicai: Amid US trade policy uncertainty, regional agreements like RCEP and CAFTA 3.0 are viewed as stabilizers. How accurately do they actually forecast investment conditions for Chinese companies planning multi-year projects in Indonesia? Where do they truly prevent disruptions, and where do they fall short?
Economist: RCEP’s key benefit is its unified rules of origin, simplifying supply chains across the region. CAFTA 3.0 enhances this framework by addressing the shifts caused by US tariffs. It offers a formal dispute mechanism to escalate diplomatic matters when governments, not investors, are involved.
Regarding Chinese investments in Indonesia, both agreements create binding commitments that limit discriminatory regulations. They ensure Chinese companies receive national treatment and do not require technology transfer as a condition for market access.
However, neither agreement offers strong legal protection against unilateral policy changes. They aren’t reliable tools to prevent or resolve sudden regulatory shifts, and investors should not depend solely on them for dispute resolution.
Yicai: Looking ahead to 2030, will the China-Indonesia energy partnership evolve into a truly joint industrial ecosystem, or remain a fragile arrangement subject to resource nationalism and tariffs? What needs to happen on both sides for optimistic outcomes?
Economist: Achieving a resilient partnership depends on China establishing a sustainable, integrated industrial ecosystem with Indonesia, including action plans, binding agreements on technology transfer, environmental and social standards, local content rules, and dispute mechanisms. This level of cooperation goes beyond the scope of current regional agreements.
Creating such a comprehensive framework requires negotiations that address sector-specific obligations and enforceability—something both countries need to prioritize beyond initial economic interests. Only through sustained, strategic engagement can this partnership mature into a balanced, long-term alliance.
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