Jakarta. An analyst recently warned about the dire consequences of easing local content policy just to get the US to revise its reciprocal tariffs.

President Prabowo Subianto recently floated a plan to make Indonesia’s local content policy “more realistic and flexible”. This rule mandates manufacturers to include locally-made parts in their products. The potentially relaxed rules -- which many American companies have found to be taxing -- will likely be one of the offers that Indonesia proposes when negotiating with the US to bring down its tariffs. The Donald Trump government had admitted that this local content requirement was among the reasons Washington decided to slap a 32 percent levy on Indonesian goods.

Prabowo’s plan sparked concerns as it could lead to soaring import, while even deterring foreign investors. In a recent interview with the Jakarta Globe, senior economist Bhima Yudhistira said that Indonesia could find better ways to appease Trump. Like many other countries, Indonesia currently enjoys a 90-day pause to Trump’s reciprocal tariff before it finally kicks in on July 9. 

“There are several things that Indonesia can do during this tariff pause, including negotiating a long-term agreement so we can at least get certainty for the next five years. … But we need to be selective in reforming or eliminating import barriers such as the local content policy,” Bhima told the Globe on Thursday.

Bhima warned that such relaxation could cause Indonesia to get flooded by imports, thus dealing a fatal blow to the country’s trade balance. It can even deter foreign investors as they no longer see the need to set up local production plants -- something that can help generate jobs for Indonesia’s large population -- as their products can enter the market without having to source local parts.

“It can be detrimental if the government is not careful in choosing what sort of product and industry gets the local content relaxation. … Potential investors might choose to become importers. … Any changes will also discourage investors who have already set up local manufacturing, including those in the battery ecosystem industry,” Bhima said.

He believes that there are other better offers out there that Indonesia can bring to the negotiating table instead of relaxing the local content rule. This includes buying more American military equipment -- something that is quite timely as Prabowo, who is a retired army general, intends to modernize Indonesia’s defense systems. 

“We can make the US as one of our main sources for military equipment as part of the deal,” Bhima told the Globe.

The US is Indonesia’s fifth-largest arms supplier, according to Bhima. In 2023, Indonesia even inked a deal with American weapons maker Lockheed Martin to buy 24 Sikorsky S-70M Black Hawk GFA-type helicopters. Indonesia also signed a purchase agreement for 24 F-15EX fighter jets from the American planemaker Boeing that same year. Prabowo was the defense minister at the time.

The local content policy was in full swing under the previous Joko “Jokowi” Widodo government. This rule was part of Jokowi’s strategy to attract foreign direct investment (FDI), which he believed could open up job opportunities and boost the economy. In 2023, Jokowi signed a regulation that required electric cars sold in the country to have at least 40 percent domestically-made parts by 2026, up from the previous 35 percent. 4G-enabled phones in Indonesia now have to contain at least 35 percent local content by law with plans to further boost the required percentage to 40 percent.

American tech giant Apple had struggled to sell its iPhone 16 in Indonesia for the past months over failure to meet the requirements on locally-made components. The company later secured the government’s approval, and has just launched the much-awaited iPhone 16 in the Southeast Asian country.

Prabowo unveiled his plans for a more flexible local content requirement when he gathered Indonesia’s businesspeople in Jakarta earlier this week. The forum had mainly zeroed in on Indonesia’s response to Trump’s tariff blitz. Senior minister Airlangga Hartarto is scheduled to fly to Washington DC next week to directly negotiate with the Trump government. Airlangga had previously revealed that Indonesia was mulling easing the local content mandate on information and communication technologies to sweeten the offer. 

“The [local content] policy has good, nationalist intentions. People who have known me for a long time would say I’m the most nationalist person … but we have to be realistic,” Prabowo remarked, while adding that the rules would only make Indonesia less competitive than other countries.

“So I’m on board with making our local content requirements more flexible. Perhaps we should change it to incentives. So please, my ministers, let’s make this rule more realistic,” Prabowo said, without going into details on what sort of incentives he had in mind.

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