US vice president’s visit puts spotlight on Indonesia’s precarious trade position

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24 April 2017. By Phoebe Seers.

US Vice President Mike Pence's Indonesia visit comes at a time when the country is fighting a number of trade battles both at home and overseas. Although Pence is reported to have secured a temporary export permit for American mining giant Freeport, there has been no word on a US Commerce Department investigation of allegations that Indonesia is dumping biofuels in the country.

With both Washington and Jakarta threatening increasingly protectionist trade policies, more trade disputes between the two countries may lie ahead. If that is the case, Churchill Mining's ongoing dispute indicates that companies will use dispute resolution mechanisms to kick back at Indonesia's policies.

Freeport has secured a permit to export copper until February next year, according to a Reuters report, and Pence has thanked Indonesian President Joko "Jokowi" Widodo for the interim solution, but a White House foreign policy adviser was quoted as saying: "We told them that there were more steps that needed to be taken."

In February, Freeport put Indonesia on notice that unless an agreement could be reached, it would file for arbitration over new rules that came into force in January requiring the US mining giant to surrender its contractually binding contract of work for a license with no equivalent contractual force and divest 51 percent of its shares to the government, among other things.

Less than two weeks ago, the US Department of Commerce announced that it would investigate allegations that Indonesia was dumping biofuels in the US. If US biofuel producers can persuade the department of that, the US could introduce antidumping and countervailing duties on Indonesian biofuels. Indonesia has already filed a World Trade Organization complaint against similar EU duties, and could be expected to do the same against any US measures.

Running a sizable trade surplus with the US, Indonesia has also recently found itself on a list of nations US President Donald Trump has ordered probed over potential trade abuses. That study will also examine alleged constraints imposed by the WTO.

Indonesia is no stranger to trade disputes, both through the WTO's dispute settlement system and the World Bank's International Centre for Settlement of Investment Disputes, or ICSID, although only the latter is available for individual investor claims.

Churchill Mining brought its claim against Indonesia through ICSID in 2012, seeking $1.3 billion-plus in damages. In December last year, ICSID threw out Churchill's claim on the basis that many of the licenses and permits securing Churchill's investment in Indonesia were forged and fabricated.

At the end of last month, Churchill applied to have that decision annulled. In line with ICSID rules for annulling a decision, the application is ostensibly aimed at proving that the tribunal departed from a rule of procedure, exceeded its powers and/or failed to state the reasons on which the decision was based. Yet it is clear that Churchill could not resist putting on the record some major gripes it has with the way Indonesia conducted itself over the five-year dispute, and the tribunal's manner of dealing with those.

"The tribunal did nothing when counsel for Indonesia threatened one of the claimants' witnesses," Churchill complained.

When Churchill sought confirmation that Isran Noor, the Regent of East Kutai and the state's key witness, would attend the hearing to answer questions about events that took place while he was regent, "the state was evasive, only confirming his non-attendance on the second day of the hearing."

That decision not to attend was "calculated," Churchill said. "The day after the issuance of the award, Mr Noor hosted a press conference in which he accepted congratulations for the tribunal's decision and stated: 'We won an arbitration dispute in an international tribunal. This is proof of our sovereignty over the management of Indonesia's natural resources'."

Indonesia's argument was that the disputed documents were "forged and fabricated as part of a massive, systematic and sophisticated scheme to defraud the republic [of Indonesia]."

Churchill emphasized the failure of a range of senior Indonesian officials, including Noor, to detect the forgery, and the responsibility of the Indonesian police and Bawasda, the government agency tasked by the regency to investigate indications of forgery, for their representations that no forgery had taken place.

The tribunal found that the forgery had taken place with help of a regency "insider." The immediate consequence, Churchill said, was that the state would be responsible for the criminal wrongdoing of its public officials, citing the International Law Commission.

Indonesia has been on the receiving end of six ICSID arbitral suits. One of the most quickly resolved was a claim filed by US Newmont Mining over changes introduced by Indonesia that would force all miners to develop local mineral-processing facilities.

Newmont filed for arbitration in In July 2014 after a seven month dispute that had halted exports. In August, Newmont's chief executive, Martiono Hadianto said the mining giant had reached a "constructive solution" with the government and would be withdrawing its claim. Shortly after, a memorandum of understanding was signed between the two sides.

Some commentators have said Freeport might be hoping for a similar result, following its noises about arbitration. However, aside from reports of a temporary export permit, the government does not appear to be easily swayed. Possibly it feels embolden by its recent "win" in the Churchill case.

After his trip to Jakarta, Pence said there was room for "significant progress" for American businesses in Indonesia, and foreshadowed some reworking of commercial and economic ties, saying that the US sought a free and fair relationship that helped job creation and economic growth for both sides.

Former Indonesian trade minister Mari Pangestu over the weekend said in a CNN article that existing rules for dispute resolution could be supplemented by strengthening bilateral mechanisms for dialogue.

However earlier in the year, Freeport said it had failed to reach an agreement following "more than five years of discussions with the government."

Richard Adkerson, Freeport's president and chief executive officer, said: "We are simply asking the government to honor our legally binding contract. We urge the government to honor the contract and demonstrate that the country remains open for foreign investment."

Indonesia may well be withdrawing from bilateral investment treaties that include investor-state dispute settlement clauses ― such as recourse to ICSID ― but it will still be subject to WTO rules. And if the government persists in kowtowing to economic nationalists at the expense of its international trading partners, and continues to subject foreign businesses to regulatory uncertainty and an uncompetitive business climate, Southeast Asia's largest economy might find its goods are greeted with heavy duties and even closed doors overseas, and that foreign companies resort to international tribunals, possibly resulting in embarrassing, public tickings-off and perhaps even financial penalties.

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