The EU's lust for Indonesia's nickel supply

It was intended to be a legacy project for both former Indonesian president Joko "Jokowi" Widodo and the first Ursula von der Leyen Commission: the free trade agreement between the European Union and Indonesia, referred to as the Comprehensive Economic Partnership Agreement (CEPA). 

Yet with Prabowo Subianto having taken office of president of Indonesia in October and the EU then conducting its commissioners' leadership reshuffle, the agreement remains on the table.

This is also due to another major stumbling block: the two sides are diametrically opposed on the issue of trade in raw materials, nickel in particular.

The EU’s position towards Indonesia in the negotiations over CEPA is symbolic for the hypocritical approach that has marked the recent European rush for raw materials.

On the one hand, Europe has an enormous appetite for the raw materials needed for its energy transition and digitalisation, for which it is extremely dependent on other countries.

On the other hand, conscious of the rich world’s history of extractivism in the Global South, this time around the EU strives for ‘win-win partnerships’ with third countries.

These should ensure fair partnerships and local value addition for the host countries where mining projects would take place.

So far, the EU has struggled to unify these two divergent goals.

This is especially apparent when it comes to the case of nickel in Indonesia. Indonesia has some of the largest supplies of nickel in the world. It is an important ingredient in the energy transition: nickel is used to make stainless steel and for batteries for electric vehicles. 

Still, abundant natural resources itself are not a guarantee for economic development. Value is generally created further up in the value-chain. In the case of nickel, this is mainly in the production of stainless steel and batteries.

Recognising this, Indonesia has followed a policy of keeping its raw materials inside the country, before exporting the processed goods. In fact, it has banned the export of raw nickel ore since 2014. 

Essentially, this is could be considered the kind of local value addition that the EU professes to support.

'Neo-colonial extractavism model'

Yet, rather than supporting Indonesia, the European Union has used all instruments in its trade arsenal to get Indonesia to open up its nickel market. In 2021 for instance, it filed a complaint against Indonesia at the World Trade Organization (WTO), which ruled against Indonesia. 

Now, raw materials market liberalisation is one of the EU’s most important demands in the negotiations of the EU-Indonesia CEPA. Its demands include provisions in the energy and raw materials chapter that prohibit Indonesian export restrictions, including the elimination of all export duties on raw materials.

This would weaken and narrow the Indonesian government's sovereignty over its natural resources and risks replicating a neo-colonial model of extractivism, which hinders Indonesia’s development.

In the meantime, while the EU has been fighting Indonesia over trade rules, China has seized the opportunity.

It has already invested billions in the Indonesian nickel sector. As it stands, 80 to 82 per cent of Indonesian battery-grade nickel output is expected to come from majority Chinese-owned producers this year.

Can the EU still compete and form an alternative trading partner for Indonesia?

It would, if the EU revises its dogmatic free-trade approach and comes up with an attractive alternative proposal. It should move towards a truly equal partnership with Indonesia, wherein it does not force it to liberalise its markets and shows genuine willingness to support Indonesian value addition and sustainable economic development. 

That way, Indonesia would not remain a raw material supplier for the EU and be trapped in low-value-added production. It will certainly also require a strong commitment to technology transfer needed in Indonesia.

At this point, the CEPA does the opposite: it regulates several commitments that prohibit the application of local content and of technology transfer. 

The EU should also make an effort to mitigate the tremendous impact of mining for raw materials. Nickel extraction in Indonesia is already taking an enormous toll on the environment, communities and its workers.

It is a major driver of deforestation, with nickel on track to match palm oil as the greatest source of deforestation in the rainforest-rich country. Nickel mining and processing is also causing air and water pollution and its coal-fired powerplants are massive emitters of greenhouse gases.

The EU should therefore uphold the highest socio-environmental standards in its value chain and include mineral commodities in its efforts to combat deforestation. But most of all, the EU should start by reducing its own material footprint in order to stay within planetary boundaries. This will reduce its resource dependency and alleviate some of the pressure on sensitive ecosystems. 

Now that would be a legacy to be proud of.