In recent weeks, public debate in Indonesia has been dominated by domestic concerns: nationwide protests, high-profile corruption scandals, cabinet reshuffles, and the appointment of a new finance minister. Yet no matter how urgently we address challenges at home, Indonesia cannot escape the turbulence of an increasingly fractured global trading system.

Since US President Donald Trump upended multilateral trade norms with his nationalist policies, instability has become the new constant. For countries like Indonesia -- whose open economy is deeply integrated into global markets—this shifting environment demands careful recalibration of economic policy.

When Protectionism Backfires
What happens in the United States, the world’s largest economy, inevitably reverberates abroad. Recent projections highlight the costs of Trump’s protectionist approach for America itself. The Congressional Budget Office (CBO) expects real GDP growth to slow to 1.4 percent in 2025 and 2.2 percent in 2026 -- below historical trends.

High tariffs are suppressing exports while raising input costs for domestic industries, eroding competitiveness, investment, and job creation. Inflationary pressures are also mounting: consumer prices are projected to rise 2.9 percent in 2025 and 3.2 percent in 2026, while unemployment could climb to around 4.5–4.6 percent.

A Yale Budget Lab study warns that tariffs and retaliatory measures by US trading partners may shave 0.5 percentage points off annual GDP growth and increase unemployment by up to 0.7 percentage points. Federal revenues have risen—tariffs have generated some $171.7 billion, or 0.56 percent of GDP -- but the burden falls disproportionately on lower- and middle-income households facing higher daily costs and weaker purchasing power.

Mixed Global Reactions
Washington’s tariff escalation has triggered a cascade of responses. The European Union retaliated with counter-tariffs while still proposing a “zero for zero” path toward negotiation. European Commission President Ursula von der Leyen has described Trump’s actions as “a major setback for the global economy.”

China, in turn, has imposed tariffs of up to 34 percent on US imports, restricted rare earth exports, and blacklisted certain American firms. Canada, despite limited exemptions, has also prepared countermeasures.

Indonesia -- hit with average US tariffs of 19 percent on its exports -- has chosen a more diplomatic route. High-level delegations have been dispatched to Washington, while at home the government plans to eliminate most tariffs on US goods and increase imports of strategic American products. The approach reflects a balancing act: preserving market access without fueling escalation.

But the ripple effects extend further. Southeast Asia’s export-driven economies -- Vietnam, Malaysia, Thailand, and Indonesia -- have seen their electronics, automotive, textile, and agricultural products lose competitiveness as US tariffs reach as high as 49 percent for certain goods. To compensate, ASEAN states are diversifying exports toward China, Europe, and intra-regional markets, while accelerating investment integration under RCEP.

Foreign direct investment (FDI) flows have also shifted. While inflows into China have slowed, some American firms are relocating operations to ASEAN to bypass US tariffs on Chinese goods. Yet global FDI overall has slumped to its lowest level since 2005 as investors wait out uncertainty. Friendshoring -- directing investment toward politically stable partners such as ASEAN and India -- offers opportunities, particularly in services and green energy. Still, geopolitics remain volatile, especially amid rising Middle East tensions.

Indonesia at a Crossroads
For Jakarta, the choices are stark. Aligning too closely with Washington may secure market concessions but risks lopsided deals in the long run. Taking a confrontational stance, on the other hand, could backfire on Indonesian exports and strain future relations.

The more viable path is smart diplomacy -- maintaining dialogue with the US while diversifying markets, accelerating export product diversification, and strengthening regional integration. This strategy offers balance, ensuring Indonesia is not overly dependent on any single partner.

The Domestic Dimension: A Shift in Economic Doctrine
Global headwinds come just as Indonesia undergoes a domestic policy transition. The recent cabinet reshuffle replaced Sri Mulyani Indrawati -- renowned for her fiscal orthodoxy and market discipline -- with Purbaya Yudhi Sadewa, a more pragmatic, expansionary figure. Many analysts see this as a doctrinal shift from long-term stability toward short-to-medium-term growth via aggressive fiscal stimulus.

Such a shift is double-edged. On one hand, expansionary policies can cushion domestic demand when exports falter under global turbulence. On the other, bold fiscal moves risk eroding market confidence and introducing new macroeconomic vulnerabilities—especially when external pressures are intensifying. Indonesia faces a dual challenge: navigating global uncertainty while managing a fundamental transition in its economic policy orientation.

Cautious Optimism
In these circumstances, the way forward calls for cautious optimism. Indonesia cannot afford either complacency or fatalism. Growth strategies must remain flexible, adaptive, and grounded in national interests rather than daily stock market fluctuations or blind faith in export recoveries.

As the government drafts the 2026 state budget, it must integrate global realities into planning. Fiscal projections cannot rely solely on data but also on keen awareness of shifting external dynamics. Prudent policymaking requires openness to debate, flexibility in assumptions, and readiness to adjust course as conditions evolve.

In a fragmented global economy, dogmatism is a liability. Pragmatism, resilience, and foresight are Indonesia’s best tools to remain steady in an era when protectionism in Washington -- and beyond -- shows no signs of abating.

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Iman Pambagyo is the Trade Ministry’s Director General of International Trade Negotiations (2012-2014, 2016-2020) and Indonesia’s Ambassador to the WTO (2014-2015).

The views expressed in this article are those of the author.