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Relations with Indonesia will survive Morrison’s Jerusalem thought bubble

By Tim Harcourt  November 22, 2018

All hell broke loose during the Wentworth by-election when Prime Minister Scott Morrison suddenly announced he was thinking of moving Australia's embassy in Israel from Tel Aviv to Jerusalem.

The main objections came, not on merits of the idea itself, but on whether it would upset Indonesia, the nation with whom Australia had just completed a landmark, but unsigned, free trade agreement and the nation with the world's largest Muslim population.

The agreement is now unlikely to be signed for quite some time. In a face to face meeting with Indonesian President Joko Widodo last week that was intended to clear the way, Morrison was instead pressed about the Middle East.

What is now Indonesia is almost certainly the Australian continent’s oldest trading partner.

But how important is the Indonesian trade relationship really? And would it be folly to sacrifice it on the altar of Middle East politics?

Australia and Indonesia have been entwined for a long time.

What is now Indonesia is almost certainly the Australian continent's oldest trading partner.

Indigenous Australians fished and traded sea cucumber and other goods with their Makassan counterparts from at least the early 1700s. Makassar is in the south-west corner of the Indonesian province of Sulawesi.

Australia provided critical support as what was then known as the Dutch East Indies fought for independence from the Dutch after the end of World War II.

The Australian government provided medical supplies. Australian waterside workers refused to load Dutch ships.

These close ties continued 50 years later during the Asian financial crisis of the late 1990s when the Reserve Bank of Australia clashed with the International Monetary Fund and the US Clinton administration, which wanted to impose tough conditions on Indonesia in return for bailing it out.

Australia's then treasurer, Peter Costello, took the advice of Reserve Bank deputy governor Stephen Grenville, who had been a diplomat in Jakarta, and stared down the IMF and the US.

As a result, the Indonesian economy fared much better, recovered more quickly and avoided much of the damage endured by other developing economies that had done as the IMF wanted.

Two decades on, Indonesia is one of Australia's top-15 trade partners, worth $16.5 billion in two-way trade, and one of the biggest markets for Australian education.

In many ways, Indonesia is underdone as a partner for Australia.

Its population is around 268 million but only about 250 Australian companies of any size operate there, compared with more than 3000 in China.

Among the companies that do have a big presence are ANZ, Leightons,  Commonwealth Bank of Australia, Orica and Bluescope.

Its attractions are a massive and growing urban middle class and its need for infrastructure given the logistical challenges of connecting a huge population living across more than 17,000 islands.

A free trade agreement is important to both sides, whatever political rhetoric President Widodo may need to employ to hold off his fundamentalist opponents.

Morrison told Widodo he would decide on the location of Australia's Israel embassy by Christmas. The trade deal is likely to be signed soon after.

Tim Harcourt is the J. W. Nevile fellow in economics at UNSW Business School. A version of this post appeared on The Conversation.

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