(Yicai) July 1 -- Neither the Regional Comprehensive Economic Partnership nor the upgraded China-Association of Southeast Asian Nations Free Trade Area can shield Chinese firms from Indonesia's abrupt policy shifts, according to a senior economist at the Economic Research Institute for ASEAN and East Asia.

Trade agreements can only help companies claim compensation after a policy shift has already happened, not prevent it, Chen Lurong told Yicai, suggesting investors stop treating trade agreements as protection against political risk.

The ERIA is a Jakarta-based intergovernmental think tank researching global value chains, free trade agreements, and Asian regionalism.

In mid-May, the China Chamber of Commerce in Indonesia sent an open letter to President Prabowo Subianto on behalf of Chinese firms, protesting tax and royalty hikes, tighter foreign-exchange retention rules, and cuts in nickel ore mining quotas that exceeded 70 percent in some cases, including Tsingshan Holding Group's flagship Weda Bay operation. Days later, Indonesia established a new state-owned entity with a mandate over strategic resource exports.

China and the ASEAN signed the ACFTA 3.0 Upgrade Protocol in Kuala Lumpur in October last year to further upgrade the framework agreement on comprehensive economic cooperation.

Excerpts from the interview with Chen are below:

Yicai: When regional integration and a country's resource nationalism pull in opposite directions, which signal should Chinese investors weigh more heavily? Does ACFTA 3.0 offer any real buffer against this kind of unilateral policy shift?

Chen: Chinese companies should structure foreign investment through a jurisdiction with a strong bilateral investment treaty or free trade agreement network. For projects with long-term investment, such as mining, tax efficiency should not be the main factor of consideration. Generally, host countries with dense treaty networks are safer.

BITs contain fair and equitable treatment, most-favored-nation, and investor-state dispute settlement clauses that provide institutional buffers to protect investors. FTA investment chapters add obligations on regulatory transparency, anti-corruption, and specific FET standards. However, neither BITs nor FTAs can prevent the risk of a policy shift itself. They can only provide legal rights to claim compensation afterward. I don't think ACFTA 3.0 can help much in this particular situation, even after its full implementation.

It is worth noting that even if China and Indonesia have signed BITs and FTAs containing practical ISDS clauses, it costs a long time and high legal fees to go through the whole procedure of arbitration. More realistic is to negotiate directly with host governments about compensation formulas.

Yicai: Indonesia is more and more involved in a "triangular" trade pattern for batteries, electric vehicle components, and processed metals, where US tariffs push China's exports through third countries rather than reducing dependence on them. How much of the Chinese manufacturing investment in Indonesia is genuine, durable relocation, versus a fragile tariff-routing arrangement that could unwind if the US tightens scrutiny?

Chen: Some Chinese investment in Indonesia is under the stress of the US tariff escalation against Chinese exports, but not all. It is an open secret that an exporting country can bypass import restrictions from the destination market by investing in third countries and relocating production abroad. China's share of ASEAN's total imports had increased to over one-quarter by the end of 2025. However, the White House has extended tariff pressure via Section 301 to ASEAN, Mexico, and India, which are the "third countries" that host offshored Chinese production.

A significant part of Chinese investment in Indonesia is driven by the needs of the domestic market in China. Take nickel mining as an example, both China and Indonesia gain from the cooperation. China gets access to a stable material supply needed for the development of the EV, battery, and semiconductor industries, while, within five to 10 years, Indonesia would host a full nickel supply chain using Chinese capital as the vehicle.

This part of forward-linkage expansion might get less direct economic resistance from the US directly. Since the US-China rivalry is going beyond a simple trade war, more geopolitical and diplomatic contests that affect Chinese investment in ASEAN are yet to come.

Yicai: Is Indonesia genuinely moving up the value chain, or consolidating a deeper but narrow position as the world's nickel-processing hub? What's the biggest capability gap still separating it from a true regional production ecosystem? And is Chinese investment closing that gap or reinforcing the narrow specialization?

Chen: The Indonesian development is constrained by a lack of human capital and skills, poor infrastructure, inefficient regulatory architecture, and so on. For instance, the development of semiconductors can only be enabled by high human capital, digital infrastructure, such as stable electricity supply, ultra-pure water systems, and clean-room workplaces, and technological know-how. So far, less than 1 percent of Indonesia's national workforce holds information and communication technology professional qualifications, and local research and development investment in nickel-linked industrial space is very limited, if not nonexistent. Moreover, industrial upgrading can hardly occur without parallel investments in complementary capabilities and governance.

Strategic cooperation with China could help Indonesia solve some of these bottlenecks, but not all of them. The most foreseeable achievement over the next five to 10 years is that Indonesia uses its nickel leverage to build a full value chain that extends the economy to high-value-added downstream activities, especially in the nickel battery sector.

But investors got to realize that the technology should not and cannot be locked in the joint-venture subsidiaries for too long. A more sustainable model is to bring in some technology and integrate the entire local value chain.

Yicai: Amid the volatility in US trade policies, the RCEP and ACFTA 3.0 are often called regional "stabilizers." How much genuine predictability do they actually give a Chinese company planning a multi-year investment in Indonesia? Where do they constrain unilateral disruption, and where are they toothless?

Chen: The RCEP's most commercially significant innovation is its unified rules of origin that simplify regional supply-chain management. ACFTA 3.0 creates a framework that addresses the production relocation dynamic caused by the US tariff escalation. It supplements the RCEP dispute resolution mechanism with a formal legal pathway to elevate diplomatic stakes when a country government -- not an individual investor -- brings a state-to-state claim.

As for Chinese investment in Indonesia, the good thing is that both agreements create binding legal commitments that constrain the host country's regulatory discrimination. Chinese companies are granted national treatment in manufacturing under the RCEP commitments. Also, under RCEP and ACFTA 3.0, it is not mandatory for Chinese investment to transfer technology, as the conditions of market access.

However, neither of them provides strong legal protection against unilateral policy shifts. Unfortunately, investors cannot count on these agreements as the primary mechanisms to protect their rights when disputes arise.

Yicai: Looking to 2030, will the China-Indonesia new energy relationship mature into a genuinely co-owned industrial ecosystem, or remain an uneasy bargain tested by resource nationalism and tariff politics? What would have to be true, on both sides, for the more optimistic outcome to prevail?

Chen: That kind of relationship is possible only if China can navigate a new phase of outbound engagement by creating a resilient and sustainable ecosystem and value chains with Indonesia via setting up an inter-governmental framework containing action plans and binding provisions for technology transfer, environmental, social, and governance compliance, local-content requirement, and dispute resolution. That goes beyond what either the RCEP or ACFTA 3.0.

It is worth noting that negotiating a treaty that contains sector-specific obligations with credible enforcement mechanisms normally goes beyond both parties' economic considerations.

Editor: Futura Costaglione