Services Trade in Indonesia

3. The regulatory environment for services trade in Indonesia

Abstract

This chapter describes the regulatory environment for services trade in Indonesia using the OECD Services Trade Restrictiveness Index. It presents domestic regulatory and policy developments that affect services trade and maps the country’s participation in regional trade agreements and their coverage of relevant services trade disciplines.

Key points

• The regulatory landscape in Indonesia is complex and dynamic with major policy developments and reforms re-shaping services trade and investment in recent years.

• On average, economy-wide barriers remain high compared to OECD and regional averages. This undermines trade and investment potential not only in services, but across other economic activities. Services trade barriers also tend to be high in strategic sectors such as financial services, some professional services, telecommunications, and some transport and logistics services. In physical infrastructure services, however, Indonesia maintains an open regulatory environment, even compared to OECD countries.

• Regulatory reforms over the last years, including Law No. 11 of 2020 on Job Creation (also known as the Omnibus Law) contributed to lowering trade barriers, including through the implementation of a negative list approach on foreign investments which liberalised investment in certain services sectors.

• Indonesia continues to face regulatory challenges on digital trade and e-commerce, with relatively high barriers and recent regulatory developments that impose additional conditions on foreign e-commerce providers.

• Indonesia has benefitted from participation in ASEAN, which promotes an open intra-ASEAN market for services trade, investment and the movement of professionals. While Indonesia conducts its own trade negotiations with non-ASEAN partners, it has benefitted from ASEAN’s extra-regional efforts, including ASEAN plus one free trade agreements and the recently concluded Regional Comprehensive Economic Partnership Agreement (RCEP) that Indonesia implemented in 2023.

• Indonesia could benefit from joining the WTO Joint Statement Initiative on Services Domestic Regulation and adopting the Reference Paper on Services Domestic Regulation that would help align domestic regulatory reforms with international best practices to improve transparency, facilitate licensing requirements and procedures, qualification requirements, and technical standards for services providers.

3.1. The general regulatory environment for services trade

Indonesia has a complex regulatory framework affecting product markets and competitiveness for goods and services (Lewis et al., 2022[1]). High regulatory barriers in services trade impede access to foreign services and inputs, increase trade costs, and undermine export competitiveness. Moreover, regulatory differences across countries create frictions for multinational companies, which compound the trade cost effects and reduce incentives to expand into foreign markets. In light of the growing importance of services and services trade for Indonesia’s economic growth, it is essential to understand potential gaps and areas where improvements could be made to enable services trade to grow. This chapter analyses the regulatory environment for services trade in Indonesia across 22 major services sectors using the OECD Services Trade Restrictiveness Index (STRI) (Box 3.1).

Box 3.1. The OECD Services Trade Restrictiveness Index (STRI)

The OECD STRI is an evidence-based diagnostic tool that provides an up-to-date snapshot of regulations affecting services trade in 50 countries and 22 sectors.

The STRI suite of tools includes: i) a regulatory database compiled by the OECD based on laws and regulations in force; ii) composite indices taking values between zero (complete openness to trade and investment in services) and one (total market closure to foreign services providers), that quantify the measures identified; and iii) online, interactive policy tools that allow users to compare selected countries and to simulate potential policy reforms. It captures barriers to services trade on a multilateral level without taking into account free trade agreements or conditions applied on a preferential basis.

The regulatory information is organised under five policy areas.

• Restrictions to foreign entry, including, inter alia, information on foreign equity caps, nationality and/or residency requirements for board of directors and managers, and foreign investment screening.

• Restrictions on movement of people, encompassing key restrictions to the movement of foreign services providers such as quotas, labour market tests, limitations to duration of stay, and lack of recognition of foreign qualifications.

• Other discriminatory measures, comprising discrimination of foreign services providers with respect to taxes, subsidies, and public procurement participation.

• Barriers to competition, including information on anti-trust policy, government ownership of major services providers and whether these are exempt from competition law and price regulation.

• Regulatory transparency, recording information on consultation and publication of laws and regulation prior to their entry into force, and excessive red tape in the form of burdensome administrative procedures related to the establishment of a company, obtaining a license or being granted a business visa.

The STRI records laws and regulations enforced at the national level; the regulatory database and indices are updated annually by the OECD.

Foreign investment in service sectors is regulated under Indonesia’s Investment Law (Law No. 25 of 2007) complemented by additional implementing regulations notably Presidential Regulation No. 10 of 2021 and Presidential Regulation No. 49 of 2021 on Investment Business Areas. The latter specifies the activities where investment is open, conditional, or restricted for foreigners. While investment in a large share of services areas is open under this instrument, some key sectors such as air and maritime transport, as well as courier services remain conditional on fulfilling specific requirements (e.g. adhering to limits on maximum shares that can be owned by foreigners). Moreover, specific investment limitations under sectoral regulations continue to apply in other sectors such as financial, audio-visual and some professional services (e.g. legal and accounting services).

Services activities are also affected by other cross-cutting barriers. For instance, certain management positions in corporations are reserved for Indonesian nationals, and commercial or local presence requirements exist in all sectors. Price preferences are granted to local providers in public procurement. There is at least one major state-owned enterprise in all sectors except for computer services, motion pictures and sound recording. Indonesia also applies labour market tests on all categories of services providers covered in the STRI (i.e. intra-corporate transferees, contractual services suppliers and independent services suppliers with initial durations of stay limited to two years).

The average STRI score of Indonesia is relatively high (0.37 out of a maximum of 1) compared to the APEC average (0.24) or the OECD average (0.19), but it is on par with some of its regional trade partners such as Thailand (0.37) and Viet Nam (0.34) (Figure 3.1).

Looking at the STRI scores across the sectors, Indonesia is more restrictive than the OECD average across all but one sector, namely architecture services (Figure 3.2). However, the differences vary across sectors. The highest gap is in market bridging and supporting services, notably legal services, accounting services, and financial services. The difference is also high in some services that underpin digital activities, notably in telecommunications services. While the gap with OECD countries is less pronounced in logistics and transport services, some sectors such as maritime transport, distribution and courier services are substantially trade restrictive. Indonesia’s STRI scores are lowest in services that are essential for the development of physical infrastructure, including architecture services where its score is lower than the OECD average, indicating an open regulatory environment for trade.

 

Source: OECD STRI database 2023.

3.2. Sectoral regulations

3.2.1. Digital network services

Leveraging the benefits of digital transformation is underpinned by well-regulated essential services that enable reliable, fast, and affordable connection across digital networks. For instance, telecommunications services provide the essential infrastructure for networks to connect while computer services and information and communication technology (ICT) hardware enable end-to-end communication. Content-related services, notably audio-visual services, have been particularly affected by rapid digitalisation as movies, music and other content can be more easily shared or streamed through digital platforms.

For Indonesia, the STRI indicates that foreign services providers face regulatory impediments across most digital network services (Figure 3.3). This is especially the case in content-related services with restrictions on foreign entry contributing close to 80% of Indonesia’s STRI score in broadcasting services and over 40% in motion pictures and sound recording services. The share is also high in computer services (37%), complemented by relatively high restrictions (36%) affecting the movement of computer professionals, an essential activity supporting the installation and maintenance of information and communication equipment. In telecommunications services, the highest contribution to the scores comes from barriers to competition (70%) which are due to a combination of different obstacles for effective competitiveness, including the presence of state-owned firms in the sector (PT Telkom Indonesia is a state-owned company that is also majority owner of PT Telekomunikasi Selular, or Telkomsel), the lack of independence of the Indonesian Telecommunications Regulatory Body (BRTI), and the presence of dominant service providers across all segments of the telecommunications market.

 

Note: In the non-PDF version of the document, you can switch between “Combined” or “Sector” view by clicking the icons at the top of the figure.

Source: OECD STRI database 2023.

In addition to barriers affecting digital network services, the OECD Digital STRI provides useful insights into cross-cutting barriers that affect all digital transactions in Indonesia (Box 3.2). The Digital STRI indicates that barriers to digital trade in Indonesia are relatively high compared to OECD, APEC and ASEAN averages (Figure 3.4). This is driven by a combination of factors affecting digital infrastructure and connectivity, electronic transactions, e-payment systems, and other barriers.

While Indonesia follows best practice regulations when it comes to interconnection among providers of communications services, some policies related to data connectivity can impose hurdles on foreign providers. For instance, providers of financial services must store and process financial information in Indonesia. Moreover, data localisation requirements apply also to electronic certification and digital signature service providers as well as electronic system operators that provide public services.

Beyond these localisation measures, however, data can be shared abroad but transfers remain subject to prior co-ordination with the Ministry of Communications and Informatics and require a detailed report by the data holders.

Law No. 27 of 2022 on Personal Data Protection was adopted in October 2022 and is expected to enter into force in October 2024. The new Law streamlines and consolidates existing rules on personal data protection and provides clearer rules on transferring data abroad that will be closer to international best practice. For instance, it allows transfers to other countries when the recipient country has equivalent level of data protection to that of Indonesia or other safeguards are put in place (e.g. binding contractual obligations or consent by the data subject) to ensure an adequate level of protection as data moves abroad.

Other factors contributing to Indonesia’s Digital STRI score include lack of participation in the UN Convention on the Use of Electronic Communications in International Contracts or the UN Convention on Contracts for the International Sale of Goods, and some constraints applying to e-payment providers (such as additional capital requirements for banks that aim to provide Internet banking services, foreign ownership and voting limits on non-bank payment services providers and providers of clearing and settlement services).

In October 2023, the Ministry of Trade issued Regulation No. 31 of 2023 that updated previous rules related to business licensing, advertising, guidance and supervision of business operators in electronic commerce. The new regulation introduced more transparent rules for e-commerce providers as well as measures aimed at strengthening consumer protection. Yet from a trade-perspective, certain measures could impose additional hurdles to foreign e-commerce providers. Among these measures, new updates were introduced on the conditions that mandate foreign e-commerce operators to have a representative office in Indonesia (e.g. applies to providers having conducted transactions with at least 1 000 consumers within a year; having delivered at least 1 000 packages to consumers within a year; or having at least 1% of domestic internet users or visitors over the course of one year). E-commerce providers, both domestic and foreign, will also be required to apply a minimum price of USD 100 per unit for purchases of final goods from abroad and will be required to prioritise the commercialisation of domestic goods and services. New rules have also been introduced for social media platforms, including with respect to limiting their role in sales transactions.

Box 3.2. The OECD Digital Services Trade Restrictions Index

The OECD Digital STRI identifies, catalogues, and quantifies barriers that affect trade in digitally enabled services across more than 100 economies. It provides policy makers with an evidence-based tool that helps identify regulatory bottlenecks, design policies that foster more competitive and diversified markets for digital trade, and analyse the impact of policy reforms.

The OECD Digital STRI captures cross-cutting impediments that affect all types of services traded digitally. The indices take values between 0 to 1, where 0 is completely open and 1 is completely closed. They are calculated on the basis of information provided in the Digital STRI regulatory database.

The Digital STRI is organised under five policy areas: Infrastructure and connectivity; Electronic transactions; Payment systems; Intellectual property rights; and Other barriers affecting trade in digitally enabled services.

For more information, see http://oe.cd/dstri.

3.2.2. Logistics, transport, and other services supporting supply chains

As production along global value chains has become more sophisticated and geographically distant in recent years, transport and logistics services have evolved significantly to cover a wide range of activities for integrated supply chain management, from network strategy design to the distribution and delivery phases. The rise of online retail sales has accelerated this process through a rapid increase in the volume of parcel deliveries, underscoring the importance of reliable and fast shipments across markets.

The STRI covers several services sectors that are relevant enablers of supply chains, including four transport services (air, maritime, rail and road freight transport), four logistics services (cargo handling, storage and warehousing, freight forwarding and customs brokerage), as well as distribution services and courier services.

The level of barriers affecting these sectors is relatively high in Indonesia, compared to OECD countries, especially in sectors such as maritime transport, logistics cargo handling and courier services (Figure 3.5 and Figure 3.6). Like in other sectors, barriers to foreign entry constitute a considerable share (over 50% on average) of the overall index value which reflects to a large extent the contribution of horizontal (economy-wide) measures. Additional measures include, for example, limitations on maximum foreign capital ownership for sectors such as air transport and parts of maritime transport for which a limit of 49% foreign ownership applies under Presidential Regulation 10 of 2021. Such measures can have a higher impact on the ability of foreign companies to establish affiliates in Indonesia and as such contribute to higher indices. Interestingly, courier services, previously unlimited, has become subject to a 49% foreign ownership limit under Presidential Regulation 10/2021. However, postal services, previously limited to a maximum 49% foreign ownership, is now removed from the list and thus fully open.

 

Note: In the non-PDF version of the document, you can switch between “Combined” or “Sector” view by clicking the icons at the top of the figure. Source: OECD STRI database 2023.

 

Note: In the non-PDF version of the document, you can switch between “Combined” or “Sector” view by clicking the icons at the top of the figure.

Source: OECD STRI database 2023.

Barriers to competition are more prominent in sectors such as air transport and rail freight transport (both above 30% of overall index value). State-owned enterprises are present in both sectors: PT Garuda Indonesia in air transport and PT Kereta Api Indonesia in rail freight transport. As state-owned enterprises, they enjoy certain exemptions from competition law under Article 51 of the Indonesian Competition Law (Law No. 5/1999). In air transport, additional measures include forbidding commercial airport slot exchanges and price regulation on domestic routes, while in rail freight transport, the sector regulator is not fully independent from the Government.

Other policy areas, e.g. restrictions on the movement of people and discriminatory measures, tend to make a smaller contribution to the scores, although in some sectors these can still be significant (e.g. 26% of the score value in logistics freight forwarding is due to restrictions on the movement of people). Restrictions on regulatory transparency have a higher contribution in logistics services due to impediments related to customs procedures (e.g. Indonesia has a single window for customs procedures, but other customs facilitating measures, namely pre-arrival processing and advance rulings are not in place).

3.2.3. Market bridging and supporting services

With the growing complexity of international business models, market bridging and supporting services become essential for firms supplying services across multiple markets. For instance, financial services ensure access to credit, payment systems and insurance to scale up production and sales. Trustworthy, transparent, and easy to understand accounting information is needed in order to assess creditworthiness and ensure compliance with financial regulation. Legal services are necessary to support operations at home and affiliates abroad, ensure compliance with regulations and support the enforcement of contracts.

Restrictions on foreign entry in Indonesia contribute the most to services trade barriers in each of these sectors, especially in insurance (84%) and commercial banking (72%) (Figure 3.7). In accounting and auditing as well as legal services, in addition to restrictions on foreign entry, barriers to the movement of people are substantial impediments. Professionals often travel across borders to supply services and often depend on having the appropriate qualification or license before they can provide services. In Indonesia, in both professional services, the possibility for foreign participation is limited. In the case of accounting and auditing, the number of foreign partners in the Office of Public Accountants is limited to no more than one-fifth of all partners and foreign public accounting firms need to associate with a local firm. In legal services, foreign companies are not allowed to establish law firms in Indonesia and Indonesian nationality is required to obtain a licence to practice.

 

Note: In the non-PDF version of the document, you can switch between “Combined” or “Sector” view by clicking the icons at the top of the figure.

Source: OECD STRI database 2023.

3.2.4. Services contributing to physical infrastructure development

Architecture, construction and engineering services are essential for infrastructure development and contribute to advancing industrial development and essential infrastructure such as roads, bridges, and buildings. Construction services have historically been considered strategic and are often closely linked to procurement and allocation of fiscal resources. Architects and engineers are key professionals contributing to the design and technical feasibility of constructions projects. These service areas are highly complementary and often provided by the same company.

Restrictions on foreign entry remain a high contributor (close to 40%) to the STRI scores across all three sectors (Figure 3.8). Construction services are governed under Law No. 2 of 2017 which requires foreign entities to establish either a representative office in co-operation with an Indonesian construction company or to incorporate a legal entity in a joint venture with an Indonesian partner. Licenses for representative offices are granted for three years, while licenses for joint ventures are not limited as long as they carry out at least one project every three years.

 

Note: In the webbook version of this report, you can switch between “Combined” or “Sector” view by clicking the icons at the top of the figure.

Sources: OECD STRI database 2023.

Impediments on acquiring land and real estate can be cumbersome in these sectors as they have a direct bearing on the development of construction projects. In Indonesia, acquisition of land and real estate is not prohibited, but foreigners can only be granted a right of use (known as Hak Pakai) for 30 years with a possible extension of 20 years. Land ownership must remain with the government or an Indonesia citizen. Prior to 2023, eligibility for Hak Pakai required a special limited stay permit (Izin Tinggal Terbatas or ITAS). This requirement was lifted, however, in September 2023 in an effort to promote foreign investment and economic development by opening the real estate market to foreigners.

The scale and complexity of construction projects make it highly labour-intensive, requiring both skilled and unskilled labour. Restrictions on the movement of people have a significant impact on Indonesia’s indices for all three sectors, but are highest in engineering services (43%) and construction services (34%). Apart from labour market tests and other horizontal restrictions, the movement of qualified construction personnel and construction engineers may be affected by licensing issues. For example, Indonesia has a residency requirement for construction engineers and temporary licenses for engineers are not in place. However, foreign qualifications are recognised and foreign engineers are allowed to participate in domestic construction projects.

In light of important government demand for infrastructure development, restrictions in public procurement have a particular bearing on construction projects. Procurement in Indonesia is governed by the Procurement of Government Goods and Services Presidential Regulation No. 16/2018 which allows foreigners access to the procurement market, although certain preferences are granted to local suppliers in the process. Moreover, Indonesia not a party to the WTO Government Procurement Agreement (GPA) which enables a mutually open government procurement market among its parties.1 Moving towards participation in the WTO GPA could improve Indonesia’s access to foreign knowledge, capital and technology, while safeguarding the participation of Indonesian firms in the area of procurements.

3.3. Regulatory developments

The regulatory environment in Indonesia has changed substantially over the past decades. Annual information in the STRI database facilitates the identification of regulatory changes that are relevant for services trade across all sectors covered. The standard period covered in the STRI dates from 2014 but reform patterns can go back far beyond that. In order to better understand Indonesia’s long term regulatory developments, this section reflects on the reforms undertaken as far back as 1989 utilising the STRI as a tool to identify key regulatory reforms since then.

As shown in Figure 3.9, Indonesia has undertaken considerable reforms over the past decades, gradually opening up to international services trade and improving its domestic regulatory environment. Compared to the 1989 benchmark, Indonesia’s average STRI had dropped by around 35% by 2023.

While the pace of reform has been uneven between 1989 and 2023, it has accelerated substantially in recent years, especially since 2021 when a new investment regime came into force. Foreign investment in Indonesia is regulated under Law No. 25 of 2007 which mandates the government to define which sectors are open to foreign investment and under what conditions. In March 2021, Presidential Regulation No. 10 of 2021 (as updated by Presidential Decree 49/2021) was enacted and replaced Presidential Regulation No. 44 of 2016. A key reform under PR 10/2021 was to open up all sectors to foreign investment except those listed in the instrument as closed or restricted to foreign investment. In addition to moving to an “open by default” negative list approach, PR 10/2021 reduced the scope of sectors that remain restricted: the current list mentions 69 business sectors as closed to foreign investment and 26 business sectors as partially restricted. Under the previous Presidential Regulation 44/2016, there were over 160 sectors closed to foreign investment and over 200 sectors partially restricted.

While the scope of liberalisation is substantial, in some cases, such as air transport services, the new PR 10/2021 introduced more stringent conditions such as lowering foreign equity limits to 49% after they had been raised to 67% in PR 44/2016.

PR 10/2021 is one of the implementing measures introduced as a result of Law No. 11 of 2020 on Job Creation (as amended by Law No. 6 of 2023) also called the Omnibus Law. This instrument introduced a broad mandate for the government to ease foreign investment restrictions and to foster job creation for Indonesians. While the scope of reforms has progressively widened, Indonesia has introduced new restrictions, notably with regards to foreign e-commerce services providers.

Table 3.1 presents examples of key regulatory developments undertaken by Indonesia between 1995 and 2023.

Table 3.1. Examples of key regulatory developments affecting services trade in Indonesia between 1995-2023

Year	Sector	Reform
2023	E-commerce	Under Ministry of Trade Regulation No. 31 of 2023 on Business Licensing, Advertising, Guidance and Supervision of Business Actors in Trade via Electronic Systems, several changes were introduced to e-commerce providers related to licensing and business models, advertising, competition and consumer protection among other areas. For example, under this new measure, foreign e-commerce platforms need to apply a minimum price of USD 100 to their domestic sales.
2021	Horizontal	Presidential Regulation No. 10 of 2021 (as updated by Presidential Decree 49/2021) was enacted and replaced the previous Presidential Regulation No. 44 of 2016. PR 10/2021 opened up all sectors to foreign investment except those listed as closed or restricted to foreign investment
2020	Horizontal	In November 2020, Indonesia enacted Law No. 11 of 2020 on Job Creation (as amended by Law No. 6 of 2023) also called the Omnibus Law. The objective of the Law is to attract more investment, foster the creation of new jobs and stimulate the Indonesian economy by improving the business environment (e.g., streamlining licensing procedures and simplifying land acquisition) and harmonizing various laws.
2018	Accounting, construction	As of 2018, the foreign equity limit in accounting firms was lowered to 20%, from 49% previously. The law also requires one half of all partners to be licensed accountants. Furthermore, technical specifications should now use local products and follow national standards subject to availability in the construction sector, which affects the conditions of competition in public procurement in favor of local providers.
2017	Distribution, Courrier, logistics, maritime transport, construction	In 2017, more favourable conditions for the release of imported goods before determination and payment of duties benefitted distribution, courier and logistic services. In the same year, Indonesia revoked minimum capital requirements for maritime transport service. However, the Construction Act of 2017 imposed nationality requirements on the management of construction and architecture companies.
2016	Horizontal	Under Presidential Regulation 44/2016, Indonesia has fully or partially opened several sectors to foreign investment including air transport, logistics services, telecommunications, audio-visual services (motion pictures and sound recording), and architecture and engineering services. Minimum capital requirements for certain corporation structures were also removed in 2016.
2013	Horizontal	In 2013, the Indonesian Investment Coordinating Board introduced Regulation No. 5/2013 which requires foreign investment to have a total investment value greater than IDR 10 000 000 000 (around USD 600 000). In the same year, there was a relaxation in the movement of natural persons, as the duration of stay increased from one to two years, as stipulated by Government Regulations No.31/2013.
2012	Horizontal	In 2012, the requirement that board of directors must be nationals in all sectors except for financial service sectors was revoked under the Ministry of Manpower and Transmigration Decree No. 40/2012. However, the same decree required that the industrial relation manager and human resource manager must be national in all sectors.
2010	Construction, courier services	Through Presidential Decree No. 36/2010, Indonesia increased the maximum foreign equity share in construction to 67%, up from the previous limit of 55%. Similarly, in courier services, the foreign equity share increased to 49%, having been previously fully closed to foreign investment.
2007	Telecommunications, logistics, transport, and commercial banking	Under Presidential Decree No. 77/2007, Indonesia increased the maximum foreign equity share in telecommunication (from 49% to 65%) and logistics freight forwarding services (from fully closed to 49%), and fully liberalized rail freight transport from a previous limit of 95%. However, there were decreases in the foreign equity share limit for maritime (from 95% to 49%), road freight transport (from 100% to 49%), and insurance (from 100% to 80%). Starting in 2007, as per Bank Indonesia Regulation No. 9/8/PBI/2007, commercial banks were mandated to have national managers. Moreover, since 2007, the screening on foreign investment no longer explicitly considers economic interests
2002	Logistics cargo handling	Under the Ministry of Transportation Regulation No. 14/2002, the foreign equity limit for cargo handling logistics was raised to 49%, having previously been totally closed to foreign investment
2000	Telecommunications, transport	Under the enactment of Presidential Decree No. 96/2000, limitations were introduced on foreign ownership in certain sectors that were previously fully liberalized. These included telecommunication (49%), air transport (49%), maritime transport (95%), and rail freight transport (95%
1998	Telecommunications, transport	Through Presidential Decree No. 96/1998, telecommunication, air transport, maritime transport, and rail freight transport were fully liberalized, from previously being completely closed to foreign investment
1997	Horizontal	Under Manpower Act No. 25/1997, Indonesia began imposing restrictions in the form of a performance requirement. It became mandatory for an employer to appoint an Indonesian national as an associate to a foreign worker for technology and knowledge transfer purposes. The associate should also receive training to attain the same qualifications as the position held by the foreign worker
1995	Horizontal	Under Presidential Decree 75/1995, it became a requirement for the board of directors to be national, whereas previously there were no restriction on the nationality of the board of director. In the same year, under Act No. 1/1995, the minimum capital requirements were set at IDR 20 million, marking a change from the previous absence of any minimum capital requirements

3.4. Indonesia’s involvement in regional initiatives on services trade

Indonesia is increasingly concluding regional and preferential agreements as a means to progressively expand regional and international economic integration (Table 3.2). Much of these efforts take place through ASEAN, which has been a key avenue to pursuing more ambitious trade agreements as a regional block.

Table 3.2.  A selection of Regional Trade Agreements (RTAs) with Indonesia relevant to services trade

Regional Trade Agreement	Entry into force	Services provisions
Agreements by Indonesia
Indonesia – Korea Comprehensive Economic Partnership Agreement	1 January 2023	Covers chapters on trade in services, professional services, movement of natural persons, financial services, professional services, among others.
Indonesia-EFTA Comprehensive Economic Partnership Agreement	1 November 2021	Covers chapters on trade in services, and specific annexes on issues such as the movement of natural persons supplying services, recognition of qualifications, telecommunications, and financial services, among others.
Indonesia – Australia Comprehensive Economic Partnership Agreement	5 July 2020	Covers chapters on trade in services, professional services, financial services, telecommunications, as well as movement of natural persons, among others.
Indonesia – Japan Economic Partnership		Covers chapters on trade in services, movement of natural persons, and annexes on financial services.
Agreements by ASEAN
Regional Comprehensive Economic Partnership (RCEP) Agreement	1 January 2022 (2 January 2023 for Indonesia)	RCEP consolidates the agreements between ASEAN and FTA partners and aims to modernise and expand regional trade.
ASEAN – Hong Kong, China Free Trade Agreement	4 July 2020	Covers chapter on trade in services with accompanying schedule of specific commitments.
ASEAN – Australia – New Zealand Free Trade Agreement	10 January 2012	Covers chapters on trade in services, movement of natural persons, and contains annexes on financial services, telecommunications, electronic commerce.
ASEAN – Korea Free Trade Agreement	1 January 2010	Covers market access and national treatment commitments in over a hundred services sectors.
ASEAN – India Trade in Services Agreement	1 October 2010	The ASEAN-India Trade in Services Agreement includes provisions on transparency, domestic regulations, recognition, market access, national treatment and dispute settlement
ASEAN – Japan Comprehensive Economic Partnership (AJCEP) Agreement	1 December 2008	Covers chapters on Trade in Services, and includes Annexes on Financial Services and Telecommunication, as well as chapters on the Movement of Natural Persons.
ASEAN – China Agreement on Trade in Services of the Framework Agreement on Comprehensive Economic Cooperation	1 July 2007 (updated in 2015)	Covers provisions on trade in services, including specific commitments in various sectors. In the context of an update in 2015, further sectors were opened. A third round of update is planned for 2024.
Agreements intra-ASEAN
ASEAN Trade in Services Agreement (ATISA)	5 April 2021	ATISA superseded AFAS and aims to deepen integration in services sectors and create a more open and transparent environment for services suppliers in ASEAN. A key development was to adopt the Schedules of Non-Conforming Measures on a negative list approach. There are three specific annexes under ATISA on financial services, telecommunications services and air transport ancillary services. The MNP Agreement remains in force and complementary to ATISA.
ASEAN Agreement on Movement of Natural Persons	14 June 2016	The MNP Agreement provides enhanced commitments related to the movement of people in ASEAN. It superseded similar commitments in earlier AFAS packages.
ASEAN Comprehensive Investment Agreement	2009	Incorporates obligations on the prohibition of performance requirements.
ASEAN Framework Agreement on Services (AFAS)	12 August 1998	AFAS aims to substantially eliminate restrictions to trade in services among ASEAN member states with the objective to move towards more open services trade in the region. There have been ten packages of commitments under the AFAS, seven additional packages in financial services, and eight additional packages of commitments in air transport services.
ASEAN Mutual Recognition Agreements (MRAs)		MRAs facilitate the mobility of professional services providers by enabling mutual recognition of qualifications. ASEAN has concluded seven MRAs covering services such as engineering, architecture, accounting, medical, dental and nursing services.

Indonesia has concluded economic partnership agreement with Korea, members of the European Free Trade Area (EFTA), Australia, and Japan. All these agreements cover chapters on trade in services, with scheduled commitments attached, as well as specific chapters on financial services, telecommunications, professional services and specific provisions dealing with the movement of natural persons providing services. Indonesia also began negotiations with the European Union in 2016 and with Canada in 2021.

As a member of ASEAN, Indonesia has been actively involved in trade agreements negotiated by ASEAN with other key trade partners in the region. Currently, ASEAN has agreements with Hong Kong, China, Australia, New Zealand, Korea, India, Japan, and the People’s Republic of China (hereafter “China”). ASEAN negotiations have been underway with Canada since 2021, and new rounds of negotiations were convened in June 2023 to upgrade the ASEAN-China FTA 3.0 from the previous version concluded in 2022. Although negotiations with the European Union began in 2007, these have been on pause since 2009 in favour of bilateral negotiations among ASEAN members and the European Union.

In both Indonesia’s bilateral trade agreements and those concluded through ASEAN, services liberalisation features prominently. These agreements all cover specific chapters on trade in services with varying degrees of market access and national treatment commitments covering a broad range of sectors. Several agreements also have provisions on telecommunications, financial services, professional services, and electronic commerce.

In order to broaden and deepen regional trade, the Regional Comprehensive Economic Partnership Agreement (RCEP) was launched in 2012 between ASEAN and its free trade agreement partners (Australia, China, India, Japan, New Zealand, and Korea).2 RCEP aims to be a comprehensive and ambitious economic partnership agreement that complements existing bilateral and plurilateral agreements in the region. It also seeks to enhance market openness among ASEAN trade partners that were not connected before. For example, Japan had no agreement with Korea or China before RCEP even though negotiations for a trilateral free trade agreement were underway between 2011 and 2019.3

Within and among ASEAN members, the integration of services trade has advanced progressively over the past 30 years. During this time, ASEAN members have signed and implemented several trade agreements, including the ASEAN Free Trade Agreement (AFTA) in 1993 and the ASEAN Framework Agreement on Services (AFAS) in 1995. The most recent Agreement, the ASEAN Trade in Services Agreement (ATISA), entered into force in April 2021 and superseded AFAS.

An important policy milestone on services liberalisation was the adoption of the ASEAN Economic Community (AEC) Blueprint in November 2007 that helped to formalise and re-enforce ASEAN member states’ (AMS’) commitments to move towards the free flow of services in the region. In December 2015, the ASEAN Economic Community was formally established and the ASEAN Economic Community Blueprint 2025 was adopted as a roadmap to guide AMS’ efforts towards deeper services integration and enhance AMS’ competitiveness in services.

AFAS was an important mechanism to increase co-operation amongst AMS to improve the efficiency and competitiveness of the services sector, to diversify the production capacity, supply, and distribution of services within and outside ASEAN, to eliminate restrictions on trade in services amongst AMS, and to promote trade in services by expanding the depth and scope of liberalisation beyond the General Agreement on Trade in Services (GATS).

Superseding AFAS, ATISA aims to encompass all the achievements that AMS made and provides an important development by mandating AMS to transition progressively to a negative-list approach on their schedules of commitments. In other words, this entails a transition towards “open by default” trade and investment across all industry sectors except those specifically listed by AMS.

In November 2012, ASEAN Economic Ministers signed the ASEAN Agreement on Movement of Natural Persons (MNP), which enhanced commitments related to the movement of people in ASEAN previously incorporated under AFAS commitments. The MNP Agreement supersedes these and provides a complementary set of commitments to the new ATISA.

In addition, ASEAN co-operation on trade in services has benefitted from a series of mutual recognition agreements (MRAs) aimed at facilitating mutual recognition of qualifications of professional services, including those of engineers, architects, accountants, and medical and dental practitioners.

3.5. Concluding remarks

This chapter reviewed the regulatory environment for services trade in Indonesia using the OECD STRI. The regulatory landscape in Indonesia is complex and dynamic with major policy developments and reforms re-shaping services trade and investment in recent years. On average, economy-wide or horizontal barriers remain high compared to OECD and regional averages which undermine trade and investment not only in services but across other economic activities. Services trade barriers also tend to be high in strategic sectors such as financial services, some professional services, telecommunications, and some transport and logistics services. However, in physical infrastructure services, Indonesia maintains an open regulatory environment, even when compared to OECD countries. Regulatory reforms in recent years, including Law No. 11 of 2020 on Job Creation (also known as the Omnibus Law), have contributed to lowering trade barriers, including through the implementation of a negative list approach on foreign investments which liberalised investment in several services sectors.

Indonesia continues to face regulatory challenges on digital trade and e-commerce, with relatively high barriers and recent regulatory developments imposing further conditions on foreign e-commerce providers. It has benefitted from its participation in ASEAN, which promotes an open regional market for services trade, investment and the movement of professionals. Although Indonesia conducts its own FTA negotiations, it has benefitted from ASEAN’s extra-regional efforts, including ASEAN plus one FTAs and the recently concluded Regional Comprehensive Economic Partnership Agreement that Indonesia implemented in 2023.

Indonesia could benefit from joining the WTO Joint Statement Initiative on Services Domestic Regulation and adopting the Reference Paper on Services Domestic Regulation that would help align domestic regulatory reforms with international best practices to improve transparency, facilitate licensing requirements and procedures, qualification requirements and technical standards for services providers. Evidence suggests that alignment with these disciplines could bring substantial benefits in terms of trade costs reduction (OECD-WTO, 2021[2]).

References

[1] Lewis, C. et al. (2022), “Product market regulation in Indonesia: An international comparison”, OECD Economics Department Working Papers, No. 1741, OECD Publishing, Paris, https://doi.org/10.1787/016eea51-en.

[2] OECD-WTO (2021), Services domestic regulation in the WTO: cutting red tape, slashing trade costs, and facilitating services trade, https://issuu.com/oecd.publishing/docs/oecd-wto-brief-sdr-2021.

Notes

← 1.  Indonesia has been an observer to the GPA in the Government Procurement Committee since 31 October 2012.

← 2.  India withdrew from RCEP negotiations in November 2019.

← 3.  For more details, see https://www.mofa.go.jp/ecm/ep/page23e_000337.html.