A new U.S. trade deal with Indonesia secures fossil fuels and access to critical minerals

HANOI, Vietnam (AP) — A new trade pact between Indonesia and the United States has recast their economic ties, binding Jakarta’s resource wealth and energy future more closely to Washington’s strategic needs.

Indonesia agreed to widen access for U.S. investors in critical minerals, boost its purchases of U.S. crude and liquefied petroleum gas, back the development of an American coal export corridor and cooperate on small modular nuclear reactors.

In turn, the U.S. trimmed a threatened 32% tariff on Indonesian goods to 19% and granted broader access to the American market, including a zero-tariff entry policy for major products such as palm oil, coffee, cocoa, spices and rubber.

Though the U.S. Supreme Court’s ruling against President Donald Trump’s tariffs may impact how it is implemented. The deal fits with longer term U.S. efforts to secure critical mineral supply chains, beef up its oil and gas exports and reduce dependence on China.

Meanwhile other export-reliant Southeast Asian economies negotiating with the United States, including Vietnam, are closely watching the Indonesia–U. S. trade deal for clues about the tariff levels and concessions Washington may demand across the region.

Indonesia, the world’s largest nickel producer, has vast mineral reserves needed for electric vehicles and clean energy systems. It’s caught between the conflicting aims of the U.S. and China, a key source of foreign investment and market for Indonesian coal and nickel, analysts say.

China is concentrating on electrification, renewables and dominance of battery supply chains, while the U.S. is pairing its push for mineral access with more fossil fuel exports.

Haryo Limanseto of Indonesia’s Coordinating Ministry for Economic Affairs, said the deal’s energy provisions “balance foreign trade and meet domestic energy needs.”

“The leadership of Indonesia is trying to tread a fine line between the West and China,” said Putra Adhiguna of the Jakarta-based Energy Shift Institute, adding that Chinese influence is “inescapable” since it is Indonesia’s largest trading partner.

US gains a new foothold to Indonesia’s minerals

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

Restrictions on exports of critical minerals to the U.S. will be relaxed to expedite development of Indonesia’s rare earths and critical minerals sector with U.S. partners, promising “greater certainty” for companies involved in extraction to help boost production, the agreement says.

Major policy shifts have altered Indonesia’s mining sector in the past six months and the trade deal’s new restrictions on existing foreign-owned entities in Indonesia will curb excess output from processing plants. 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 has firms operating or financing multiple nickel smelters and industrial parks.

“Indonesia is absolutely central to this competition because it combines resource endowment with political ambition,” said Kevin Zongzhe 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 agreement “opens the door for U.S. firms to have a real shot” at “modestly leveling a sector where Chinese industries established first mover advantage,” he said.

Indonesia to purchase more US energy

Indonesia has agreed to cut red tape so that its companies can more easily purchase U.S. energy products.

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 has gained momentum during trade talks, with energy purchases emerging as a way to narrow trade gaps. It’s unclear if the turmoil in oil trading due to the war with Iran might impact that effort.

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

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

Shift in energy transition policies

The deal reflects changed U.S. energy priorities under the Trump administration, away from cooperation on reducing Indonesia’s climate change -causing emissions.

In 2022, Indonesia joined the Just Energy Transition Partnership, a multi-billion deal where the U.S. and other wealthy nations pledged support for reducing coal use and expanding clean energy. The program was faltering even before Trump withdrew from it last year.

Despite the U.S. withdrawal, Indonesian officials said the $21.4 billion partnership will continue. As of January, at least $3.4 billion, around 15%, of the funds had been received, according to Airlangga Hartarto, Indonesia’s minister for economic affairs.

Adhiguna said the deal’s biggest impact may be political, with Jakarta emulating the U.S. emphasis on fossil fuel use.

“There is the risk that the political leadership of Indonesia is going to fall back into that hole,” Adhiguna said.

That will mean still slower progress in areas like solar energy.

Over the past five years, tropical, sunny Indonesia has installed less than 1 gigawatt of solar energy — compared with roughly 2 GW in Vietnam and nearly 60 GW in India. The International Energy Agency found that fossil fuels, like coal, oil and natural gas, made up nearly 78% of Indonesia’s energy mix in 2023.

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

Tariff strike down creates confusion

The deal’s future has been clouded by the U.S. Supreme Court’s recent ruling against Trump’s sweeping global tariffs, just after the agreement was reached — casting doubt on the durability of his trade strategy. The agreement requires ratification by Indonesia’s parliament before it can take effect.

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

Some provisions of the agreement are drawing criticism, including those that are seen as diluting Indonesia’s halal certification requirements in the mostly Muslim country of nearly 288 million, Southeast Asia’s most populous nation.

“Parliamentary approval could be an uphill battle and added uncertainty from the U.S. side may complicate things further,” Sitepu said.

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

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