New US trade deal with Indonesia secures access to fossil fuels and critical minerals

Hanoi, Vietnam — A new trade agreement between Indonesia and the United States has restored their economic ties by tying Jakarta’s resource wealth and energy future more closely to Washington’s strategic needs.

Indonesia agreed to expand access to US investors in critical minerals, increase purchases of US crude and liquefied petroleum gas, support the development of an American coal export corridor and cooperate on small modular nuclear reactors.

In return, the US trimmed the 32% tariff on Indonesian goods to 19% and offered broader access to the American market, including a zero-tariff entry policy for key products such as palm oil, coffee, cocoa, spices and rubber.

A US Supreme Court ruling against President Donald Trump’s tariffs could affect how they are implemented. The deal fits with long-term U.S. efforts to secure critical mineral supply chains, increase its oil and gas exports, and reduce dependence on China.

Meanwhile, other export-dependent Southeast Asian economies negotiating with the United States, including Vietnam, are closely watching the Indonesia-US trade deal for clues about tariff levels and concessions Washington is demanding across the region.

Indonesia, the world’s largest producer of nickel, has vast reserves of the mineral needed for electric vehicles and clean fuel systems. Analysts say it is caught between the conflicting goals of the US and China, a major source of foreign investment and market for Indonesia’s coal and nickel.

China is focusing on dominating electrification, renewables and battery supply chains, while the US is pairing its push for mineral access with more fossil fuel exports.

Hario Limanceto, of Indonesia’s Coordinating Ministry of Economic Affairs, said the agreement’s energy provisions “balance foreign trade and meet domestic energy needs.”

“Indonesian leadership is trying to strike a fine line between the West and China,” said Putra Adiguna of the Jakarta-based Energy Shift Institute, adding that Chinese influence is “inevitable” as it is Indonesia’s largest trading partner.

Indonesia has pledged to promote US investment across its mineral industry, from exploration and mining to refining, transportation and export. In some cases, American investors receive “no less favorable” treatment than domestic firms.

Restrictions on exports of critical minerals to the US will be eased to accelerate development of Indonesia’s rare earth and critical minerals sector with US partners, the deal says, promising “greater certainty” for companies involved in extraction to help boost production.

Major policy changes have transformed Indonesia’s mining sector in the past six months, and new trade agreement restrictions on existing foreign-owned units in Indonesia have prevented additional production from refineries. Foreign businesses must follow the same tax, environmental, labor and quota rules as other companies.

Indonesia’s critical mineral processing sector is currently dominated by China, which owns or finances many nickel smelters and industrial parks.

“Indonesia is absolutely central to this contest because it combines resource endowment with political ambition,” said Kevin Zhongze Li with the Center for China Analysis within the Asia Society Policy Institute, a New York-based think tank.

Competition over critical minerals is heating up and the deal “opens the door for U.S. firms to have a real shot in the arm” as it “modestly flattens a sector where Chinese industries have established a first mover advantage,” he said.

Indonesia has agreed to cut red tape so that its companies can buy US energy products more easily.

It plans to buy $15 billion worth of American energy commodities over an unspecified period, mainly fossil fuels such as liquefied petroleum gas, crude oil and gasoline.

Trump’s efforts to persuade Asian countries to buy more American LNG have gained momentum during trade talks, with energy purchases emerging as a way to narrow the trade gap. It is unclear whether the turmoil in the oil trade due to the war with Iran could affect that effort.

Indonesia, one of the world’s top coal exporters, will invest in developing an export corridor from the US West Coast to help make American coal more competitive in global markets, the deal says.

Indonesia pledged to work with the US and Japan to deploy small modular nuclear reactors, starting with a potential project in West Kalimantan.

The deal reflects US energy priorities under the Trump administration, which have shifted away from cooperation on reducing Indonesia’s climate change-causing emissions.

In 2022, Indonesia joined the Just Energy Transition Partnership, a multi-billion dollar agreement where the US and other rich nations pledge support for reducing coal use and expanding clean energy. The program was languishing before being backed by Trump last year.

Despite the US withdrawal, Indonesian officials said the $21.4 billion partnership would continue. As of January, at least $3.4 billion, about 15% of the funding, had been received, according to Indonesia’s Minister of Economic Affairs Airlanga Hartarto.

Adiguna said the biggest impact of the deal could be political, with Jakarta emulating the US emphasis on fossil fuel use.

“There is a danger that Indonesia’s political leadership will fall back into that hole,” Adiguna said.

It indicates even slower progress in areas such as solar energy.

In the past five years, tropical, sunny Indonesia has installed less than 1 gigawatt of solar power – compared to roughly 2 GW in Vietnam and about 60 GW in India. Fossil fuels such as coal, oil and natural gas will account for about 78% of Indonesia’s energy mix in 2023, the International Energy Agency found.

Indonesia should prioritize building 100 GW of solar and storage capacity and expand interconnection grids to enable renewable energy sharing, said Dinita Setyawati with United Kingdom-registered energy think tank Ember.

The deal’s future has been dimmed by the US Supreme Court’s recent ruling against Trump’s sweeping global tariffs since the deal was reached – casting doubt on the durability of his trade strategy. The agreement requires the approval of Indonesia’s parliament before it can enter into force.

That adds another “layer of uncertainty,” said Meha Sitepu with Washington-based strategic consultancy The Asia Group.

Some of the deal’s provisions have drawn criticism, including weakening Indonesia’s halal certification requirements in Southeast Asia’s most populous Muslim nation of about 288 million.

“Parliamentary approval could be an uphill battle and additional uncertainty from the US side could further complicate matters,” Sitepu said.

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Delgado reports from Bangkok, Thailand. Associated Press writer Edna Tarigan in Jakarta contributed to this report.

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