Sun Dec 28,
Insights
Indonesia secured a reduced 19 per cent US tariff through a trade deal involving major energy, farm and aircraft purchases.
The move averts deeper job losses in its labour-intensive textile sector already under strain.
Higher tariffs still pressure competitiveness against Vietnam.
Diversification and cost efficiency are now critical for exporters.
Indonesia, which exports key products including readymade garments, fabrics, and synthetic fibres, currently ranks fifth-largest supplier of textiles and clothing to the United States. The US accounts for about 40 per cent of Southeast Asian nation’s total textile and garment exports, primarily in the form of completed goods. Many Indonesian exports to the US have been in labour-intensive sectors of clothing, footwear, furniture, rubber products, and electronics, which support large numbers of jobs in the country. In 2024, US goods trade with Indonesia totalled about $38.3 billion. The US ran a $17.9 billion trade deficit with Indonesia, owing to $10.2 billion US exports versus $28.1 billion imports from the archipelago. Part of this imbalance stemmed from tariff disparities: Indonesia’s average tariff being around 8 per cent, more than double the US average of 3.3 per cent. American companies faced high tariffs and strict barriers in Indonesia, while Indonesian exporters enjoyed relatively easy access to the US consumers. President Trump’s “reciprocal tariffs” in case of Indonesia was inspired by an estimated 97 per cent tariff-equivalent versus the US’s 19 per cent rate. Thus, the finally settled 19 per cent tariff imposed on Indonesia was presented not as protectionism for US’s own sake, but also as a tool to force open Indonesia’s market and level the playing field for the US industry.
Protectionism Realised
In April, the US warned Indonesia of imposing a 32 per cent reciprocal tariff on Indonesian imports after a 90-day pause, allowing negotiations till August 1, for bilateral talks. Facing that threat, Jakarta came to negotiation table. On July 15, President Trump announced reduction of the US reciprocal tariff to 19 per cent from the original 32 per cent to take effect on August 7, 2025. Indonesia agreed to buy $15 billion of US energy products, $4.5 billion of American farm products, and 50 Boeing jets as part of the deal. The eventual agreement was a ‘cap’ that offered Indonesia certainty through 2029, while the US gained tariff-free access to the Indonesian market—a calculated strategy to bolster the US’s economic position in Southeast Asia.
Anticipated Fallout
The initially announced 32 per cent tariff threatened jobs of 50,000 to 70,000 workers, reflecting a severe hit to Indonesia’s labour-intensive manufacturing sector. In the past, during the pandemic phase, nearly 30 textile companies in Indonesia had already laid off 120,000 workers amid a slowdown in the global economy. Sixty textile companies closed due to dwindling demand and lack of capital between 2023 and 2024, resulting in lay-offs of about 250,000 workers. The downturn continued in 2025 also, affecting even Sritex, once Southeast Asia’s largest textile manufacturer. With rising tariffs, Indonesia’s textile industry risked losing its competitive edge. In July, Indonesia’s textiles faced an additional disadvantage against competitors like Vietnam, which was granted a lower US import tariff of around 20 per cent, making Vietnamese products more competitive than Indonesian products in the US market. Nevertheless, the impact on national export performance was not to be immediate but was likely to be seen only by the end of August 2025. However, with higher tariffs imposed on products from China and India, Indonesia's two main competitors, a potential new market share got opened up for Indonesian businesses to fill, if they could compete efficiently.
Negotiation at a Cost
The US continues to be a vital market as the world’s largest consumer of textile goods, supported by its enormous economy. So, the Indonesian government went out of the way to accommodate US negotiators’ compelling demands. During July negotiations, Indonesian state-owned energy giant Pertamina, through its refining arm Kilang Pertamina Internasional, signed MoU with ExxonMobil, Chevron, and KDT Global Resources, including potential deals worth up to $34 billion, with $15.5 billion earmarked for energy imports. Additionally, Indonesia agreed to eliminate tariffs on over 99 per cent of US products exported to Indonesia. Associations representing the textile sector proposed boosting imports of US-sourced raw materials, such as cotton, as a negotiating tool to balance bilateral trade. This move was aimed at reducing the impending tariff and safeguarding the home market by limiting imports. The government equally focused on the challenges faced by the textile and garments industry at home.
Crackdown on Smuggled Imports
In October-end, Indonesia intensified a crackdown on illegally imported second-hand clothing blamed for battering its domestic textile industry. The illegal imports supply the second- hand clothing market in Indonesia. A new regulation reinforced a 2022 Trade Ministry ban on used clothing imports, allowing authorities to blacklist importers caught smuggling used apparel. Between January 2024 and August 2025, 2,584 seizures, valued Rp49.44 billion ($2.9 million), of illegally imported clothes and bags were carried out. Still, many more smuggled goods managed to enter Indonesian borders due to ‘leaks’ in loosely guarded entry channels. In 2024, the volume of used clothing imports to Indonesia weighed 3.86 million kg, valued at $1.5 million. Between January and July 2025 alone, this value reached $1.31 million from imports of 1.09 million kg. Pasar Senen, one of the largest thrift hubs in Jakarta, hosts hundreds of second-hand kiosks that largely sell used clothes and apparel from Japan, South Korea, the United States and Europe, at very low prices.
The domestic textile industry welcomed the crackdown, blaming the decline of the labour-heavy sector on a flood of cheap clothing and apparel from China, rising tariffs in countries including the US, and the general economic uncertainty. Imported used clothing is estimated to have eroded domestic textile industry’s market share by 15 per cent. More so, the booming trend of thrifting also adds to the piles of waste in landfills. In 2023, some thrift sellers bought Rp14 million worth of imported used clothes. Just by selling 20 per cent of this inventory, their investments were recovered, leaving the unsold clothes as waste for the landfills.
Unlike overseas, where the thrifting market is supported by shoppers trying to reduce clothing or fast fashion waste, shoppers in Indonesia are forced to buy second-hand due to the economic downturn. In Indonesia, thrifting products are not supplied domestically due to lack of a used goods recycling system, with such items typically donated during natural disasters.
Strategising for Competitiveness
Ushering into a changed world of global trade, Indonesia now needs to develop comparative and competitive advantages. Indonesia knows it trails behind competing countries, such as Vietnam, which have implemented efficiencies in their production costs, encompassing raw materials, electricity, logistics, and transportation. The efficiency measures in their production costs help keep their products’ prices stable in the US market despite tariffs. Indonesia, therefore, needs to rework on production efficiencies including costs to stay relevant in the competition. Indonesian exporters can no longer rely solely on the US market. Diversifying export destinations to other countries and strengthening domestic market share are other strategic steps Indonesian textile industry must take to maintain its competitiveness, especially after experiencing volatility in global trade policy.