Nickel is Indonesia's strong card, Chinese investors remain immune to new rules

JAKARTA - Nickel makes Indonesia more important for China. But for Chinese investors, getting into the Indonesian mining business also means being ready to face rules that can change. Trade agreements cannot always be a protector.

Senior economist of the Economic Research Institute for ASEAN and East Asia or ERIA, Chen Lurong, in an interview with Yicai Global, quoted Friday, July 3, said that RCEP and the increase in the China-ASEAN free trade area or ACFTA 3.0 cannot prevent changes in Indonesian policies. The agreement only provides a way to ask for compensation after the policy changes.

The statement comes as Chinese investment in Indonesia's nickel sector continues to grow to supply the needs of the electric vehicle, battery, and semiconductor industries. However, when Indonesia changes rules in strategic sectors, trade agreements do not automatically provide full protection to investors.

In mid-May, the China Chamber of Commerce in Indonesia sent an open letter to President Prabowo Subianto. They protested against tax and royalty increases, tightening of foreign exchange retention rules or the obligation to hold a portion of the foreign exchange from exports in the country, as well as cutting nickel ore mining quotas which in some cases are said to exceed 70 percent. Tsingshan Holding Group's main operations in Weda Bay were also affected.

A few days later, Indonesia formed a new state-owned enterprise that was mandated to manage the export of strategic resources.

According to Chen, such policy changes cannot be prevented by RCEP or ACFTA 3.0. Both agreements only provide a legal basis for investors to claim compensation after the policy is implemented.

Chen assessed that Chinese companies need to arrange investments through countries or jurisdictions that have a network of bilateral investment treaties and strong trade agreements. However, he warned that arbitration, i.e. out-of-court dispute resolution, usually takes a long time and costs a lot. In many cases, negotiating directly with the host government is more realistic.

In China-Indonesia relations, nickel is an important part. China needs a stable supply of electric vehicles, batteries, and semiconductors. Indonesia, in five to 10 years, is considered to be able to build a complete nickel supply chain with Chinese capital support.

Some of China's investment in Indonesia is related to the pressure of US tariffs on Chinese exports. Production is moved to third countries so that the supply chain is safer from trade barriers. However, according to Chen, not all Chinese investment in Indonesia is just a tactic to pass through tariffs. Many are also driven by China's need for raw materials.

According to Chen, Indonesia in five to 10 years can build a more complete nickel supply chain with Chinese capital support. The added value can go up to batteries and their derivative industries. But the homework is not small.

Chen said Indonesia still faces a shortage of skilled labor, inadequate infrastructure, inefficient regulations, and very limited research and development. To enter the semiconductor industry, for example, it is not enough to have nickel. It takes stable electricity, ultrapure water for the production process, clean rooms, and high technology knowledge.

Chen also highlighted that less than 1 percent of the Indonesian workforce has professional qualifications in the field of information and communication technology. This means that the ambition to rise in the high-value-added industry must be supported by human resources and technology ecosystems, not just mineral reserves.

Chinese investment could help close some of that gap. However, Chen cautioned that technology should not be locked up too long in joint ventures. A healthier model is to bring technology into the local supply chain so that the benefits do not stop in the company's circle.

RCEP and ACFTA 3.0 still have benefits. RCEP simplifies rules of origin, namely the provisions for determining from which country a product originates in regional trade. ACFTA 3.0 provides a legal channel between countries if disputes escalate into government affairs. Both agreements also limit regulatory discrimination and do not require technology transfer as a condition for market entry.

Even so, Chen assessed that RCEP and ACFTA 3.0 did not provide strong legal protection against unilateral policy changes. Investors, said Chen, cannot make the two agreements the main mechanism to protect rights when disputes arise.

Chen assessed that the relationship between China's new energy industry and Indonesia still has the opportunity to develop. However, this requires a framework of intergovernmental cooperation that contains binding provisions on technology transfer, environmental, social, and governance compliance, local content, and dispute resolution mechanisms.

According to Chen, such a framework goes beyond the scope of RCEP and ACFTA 3.0.