Indonesia Faces Economic Fallout from US Tariffs Amid Global Trade Uncertainty

Indonesia is grappling with the economic repercussions of a sweeping 32 percent tariff imposed by the United States on all its imports, effective April 3, 2025. This move, part of a broader US policy affecting around 60 countries with tariffs ranging from 10 to 49 percent, threatens to disrupt global trade dynamics and poses significant challenges for Jakarta as it navigates an already uncertain economic landscape. With the US market accounting for roughly 9 percent of Indonesia’s total export volume, industries such as textiles and palm oil—already under competitive and political strain—are at risk of losing access to one of the world’s largest consumer bases.

Immediate Economic Impact on Indonesian Exports

The US, with a nominal GDP of approximately US$27 trillion in 2023, represents a critical market for global exporters, including Indonesia. Accounting for about a quarter of the world’s GDP and importing $3 trillion worth of goods annually, the US consumer market is a linchpin of international trade. The newly imposed tariffs, however, introduce a layer of uncertainty that could ripple through Indonesia’s economy. While the taxes are borne by importing businesses in the US rather than exporters directly, the potential loss of market share is a pressing concern for Indonesian policymakers.

Commodities like textiles, which struggle to maintain competitiveness, and palm oil, often mired in geopolitical controversy, are expected to bear the brunt of these tariffs. The risk of losing the second-largest export market for Indonesian goods could force businesses to seek alternative buyers. However, as global trade tensions escalate, other countries may turn inward, prioritizing domestic production over imports, even when it is less cost-effective. This shift could shrink the global market for Indonesian exports, exacerbating economic pressures at home.

Challenges in Replacing the US Market

One of the immediate dilemmas facing the Indonesian government is whether its goods remain competitive enough to attract new buyers. In an ideal scenario, Jakarta could redirect its export volume to other markets to offset losses in the US. Yet, the reality is far more complex. As nations impose their own tariffs to shield domestic industries from global supply chain shocks, the window for Indonesia to secure alternative trade partners may narrow. This trend, driven by a growing skepticism of globalization despite evidence that it lowers consumer prices and boosts economic growth, could lead to a cascading effect on Indonesia’s trade balance.

Moreover, the psychological impact of tariffs often outstrips their direct economic consequences. Even businesses unaffected by the US market may raise prices out of fear and uncertainty, further dampening domestic consumer spending in Indonesia. Asian markets, already jittery, saw significant declines in the hours following the tariff announcement by President Trump, signaling broader regional unease. For Indonesian firms, this climate of fear could translate into reduced investment and slower growth, compounding the challenges of an already weakening economy.

Geopolitical Shifts and Raw Resource Dilemmas

Recent geopolitical trends add another layer of complexity to Indonesia’s predicament. A growing number of countries are stockpiling raw resources to buffer against short-term trade disruptions, aiming to bolster competitiveness in higher-value manufacturing sectors. For Indonesia, this raises the tempting prospect of prioritizing raw material exports over its current focus on downstreaming and value-added industries. Such a shift could help maintain the trade balance in the short term but risks undermining long-term economic goals.

The administration of President Prabowo Subianto has staked much of its credibility on moving away from resource extraction toward manufacturing, promising higher-paying jobs to an electorate wary of economic stagnation. Reversing this policy to focus on raw exports could provoke political backlash and jeopardize Indonesia’s aspirations to escape the so-called “middle-income trap”—a stage where growth plateaus without structural reform. Economically, reverting to extractive practices would also diminish the potential for sustainable development, locking the country into a cycle of dependency on volatile commodity markets.

Navigating Domestic and International Pressures

Compounding these economic challenges is the difficulty of communicating the nuances of tariffs to businesses and the public. While US tariffs do not directly affect Indonesian trade with other nations—such as the 46 percent rate imposed on Vietnamese imports to the US having no bearing on Vietnam-Indonesia trade—the perception of a broader trade war can distort market behavior. Businesses may preemptively hike prices or scale back operations, even if their supply chains remain untouched by the US policy. This disconnect between economic reality and market psychology poses a significant hurdle for policymakers seeking to stabilize confidence.

On the international stage, President Prabowo’s approach to foreign policy will be critical. Known for a robust, at times assertive stance, his administration must balance national pride with pragmatic trade diplomacy to avoid alienating potential partners. A global trade war, not just between the US and other nations but also among countries competing to fill the void left by diminished US imports, looms on the horizon. Indonesia risks being seen not as a collaborative ally but as a competitor in this high-stakes environment, particularly if uncertainties in its economic, legal, and political frameworks deter foreign investment.

Short-Term Reactions and Long-Term Strategies

In the immediate aftermath of the tariffs, countries worldwide are likely to respond with aggressive measures to recapture lost trade opportunities. For Indonesia, this could mean heightened competition with regional neighbors vying for the same alternative markets. Short-term strategies, such as stockpiling key resources to ensure supply chain resilience, may offer temporary relief. However, these must be paired with diplomatic efforts to forge new trade alliances and mitigate the risk of isolation.

Over the longer term, challenging the tariffs through mechanisms like the World Trade Organization (WTO) offers a potential avenue for redress. Bilateral and multilateral trade agreements could also help offset the economic costs of restricted access to the US market. Yet, these solutions require time and coordination, resources that may be in short supply as global trade tensions intensify. For now, the Prabowo administration must prioritize non-confrontational engagement with both affected nations and potential partners to secure Indonesia’s economic footing.

A Test for Indonesia’s Economic Resilience

The US tariffs represent more than a financial burden; they are a litmus test for Indonesia’s ability to adapt to a rapidly shifting global order. With industries at risk, public confidence wavering, and geopolitical stakes rising, the government faces a delicate balancing act. It must safeguard its economic interests without sacrificing the structural reforms needed for long-term growth. At the same time, it must navigate a world increasingly defined by protectionism and competition, where mutual benefit in trade relationships is harder to achieve.

As the fallout from these tariffs unfolds, questions linger about Indonesia’s capacity to weather the storm. Will Jakarta find new markets to replace the US, or will domestic industries buckle under the strain? Can the Prabowo administration maintain its commitment to value-added manufacturing, or will short-term pressures force a retreat to resource dependency? For now, Indonesia stands at a crossroads, its economic future hanging in the balance as global trade enters uncharted territory.