Indonesia, the world’s largest producer of crude palm oil (CPO), is grappling with a significant economic challenge as the United States imposes a steep 32 percent tariff on its imports. Announced as part of a broader strategy to curb the US trade deficit and bolster domestic employment, the tariff threatens to disrupt a key export market for Indonesian palm oil, raising concerns about the future of an industry that has seen steady growth over the past five years. With the US accounting for a substantial portion of Indonesia’s $31 billion trade surplus in 2024, stakeholders are now scrambling to mitigate the fallout and explore alternative markets.

Impact of the Tariff on Indonesian Exports

The US tariff, which took effect as part of a two-phase policy rollout, includes a baseline 10 percent levy on imports from all countries, followed by additional “reciprocal” tariffs targeting nations with significant trade surpluses, such as Indonesia. At 32 percent, Indonesia’s rate is lower than Vietnam’s 46 percent and Thailand’s 36 percent but higher than Malaysia’s 24 percent, a key regional competitor in the palm oil sector. The policy, justified by the White House as a response to “unfair” trade practices including local content requirements and complex import licensing, exempts only a handful of strategic goods like semiconductors and critical minerals.

For Indonesia, the stakes are high. The country exported $26.3 billion worth of goods to the US in 2024, including electrical equipment, clothing, footwear, rubber, and crucially, palm oil. Over the past five years, CPO exports to the US have more than doubled, rising from under 1 million tonnes to over 2 million tonnes last year. The tariff could stagnate this growth, hitting an industry that supports millions of livelihoods, from smallholder farmers along the Kampar River in Riau to large-scale processing plants across Sumatra and Kalimantan.

Eddy Martono, chairman of the Indonesian Palm Oil Association (Gapki), warned of the ripple effects during an interview with a local outlet. “If Indonesian palm oil is still in demand in the US, the ones who will ultimately be harmed are American consumers” he said, highlighting that the increased costs could be passed on to buyers. Martono also pointed out that certain palm oil products, such as margarine and oleochemicals, cannot easily be substituted with other vegetable oils due to health regulations and production constraints in the US market.

Domestic Challenges and Government Response

The tariff comes at a time when Indonesia’s palm oil industry is already navigating domestic policy challenges. The government’s domestic market obligation (DMO), export approval requirements, and existing export duties have been points of contention for producers seeking greater flexibility to compete globally. Martono has urged authorities to ease these regulations to cushion the blow from the US tariff, arguing that such measures could help maintain the industry’s competitiveness.

Business groups are also pressing for diplomatic engagement with Washington to secure access to the world’s largest consumer market. Bilateral talks could offer a pathway to exemptions or reduced rates, though analysts caution that the US administration’s focus on reducing trade deficits may limit the scope for compromise. For now, the Indonesian government has yet to announce a formal response, leaving producers and exporters in a state of uncertainty.

Exploring New Markets Amidst Uncertainty

With the US market under strain, the palm oil industry is looking elsewhere to sustain its export momentum. Martono suggested targeting emerging markets in Africa, Central Asia, and the Middle East, regions with growing demand for edible oils and industrial products derived from palm oil. While these markets may not immediately match the scale of US demand, they represent a long-term opportunity to diversify Indonesia’s export portfolio and reduce reliance on traditional destinations like the US and China.

However, pivoting to new markets is not without challenges. Infrastructure, regulatory hurdles, and consumer preferences vary widely across these regions, requiring tailored strategies and significant investment. Moreover, competition from other palm oil producers, such as Malaysia, could intensify as global supply chains adjust to the US tariffs. For Indonesian exporters, the path forward will demand both innovation and agility.

Broader Implications for US-Indonesia Trade Relations

The tariffs are not just a blow to the palm oil sector but also a signal of broader tensions in US-Indonesia trade relations. The White House has cited policies like Indonesia’s local content requirements (TKDN) and rules mandating natural resource firms to onshore export revenues above $250,000 as barriers to fair trade. These measures, designed to bolster domestic industries and retain economic value within Indonesia, have long been a sticking point for foreign businesses seeking market access.

For American policymakers, the tariffs are part of a larger effort to “level the playing field” and boost domestic employment by curbing reliance on imported goods. Yet, critics argue that such protectionist measures risk escalating trade disputes and disrupting global supply chains. In Indonesia’s case, the impact could extend beyond palm oil to other key exports like electronics and textiles, potentially straining bilateral ties at a time when geopolitical cooperation in the Indo-Pacific region is increasingly vital.

The palm oil industry’s challenges are not solely economic. Environmental concerns, including deforestation and habitat loss linked to plantation expansion in regions like Riau and Kalimantan, have long drawn international scrutiny. The US tariffs could inadvertently influence these dynamics—if export revenues decline, pressure to clear more land for production might ease, offering a temporary reprieve for conservation efforts. However, if producers push aggressively into new markets with less stringent sustainability standards, the opposite could occur.

Socially, the tariff’s impact could be felt most acutely by smallholder farmers who depend on palm oil for their livelihoods. In areas like Kampar, where workers transport fruit along the river to processing plants, income volatility could exacerbate existing vulnerabilities. Policymakers will need to balance economic imperatives with support for these communities, ensuring that mitigation strategies do not overlook the human cost of trade disruptions.

Looking Ahead: A Test for Resilience

As the full effects of the US tariffs unfold, Indonesia’s palm oil industry faces a critical test of resilience. The coming months will reveal whether diplomatic efforts can soften the blow, or if exporters can successfully pivot to untapped markets. For now, the mood among stakeholders is one of cautious pragmatism—acknowledging the scale of the challenge while seeking innovative ways to adapt.

Beyond the immediate economic impact, the situation underscores the fragility of global trade networks in an era of rising protectionism. For Indonesia, a nation whose economic growth has been fueled by exports, the path forward will require not just policy adjustments but a broader rethinking of how to navigate an increasingly unpredictable world stage. As farmers along the Kampar River continue their daily labor, the future of their industry hangs in a delicate balance.