Navigating Trade and Investment Treaties to Develop Indonesia’s Sustainable Electric Vehicle Industry Through Technology Transfer

1. Challenges in Developing Indonesia’s Battery and Electric Vehicle Industry

Indonesia’s abundant nickel resources position it as a potential key player in the global EV industry, especially in EV battery production (Tundang, n.d.). However, realizing this potential is not without challenges. The country must address industrial capacity, technology, and international competition issues.

Chang argues that successful industrialization often involves protecting and nurturing infant industries until they can compete in international markets (Chang, 2003). He analyzed the historical experiences of prosperous industrialized nations like the United States, Britain, and Germany. He demonstrated how these countries used various forms of protectionism and state intervention to develop their industries until they became globally competitive and embraced free trade. Free trade agreements and investment treaties often restrict the policy option available to developing countries, limiting their ability to use protectionist measures and industrial policies that could nurture their industries.

Bhagwati (2008) supports the principle of comparative advantage, where countries specialize in producing goods and services with a relative cost advantage. He argues that trade liberalization and specialization lead to a more efficient allocation of resources, increased productivity, and overall economic growth. In contrast, Chang’s protectionist stance supports the idea of nurturing infant industries, which may not initially have a comparative advantage.

Bhagwati’s critique may not apply to Indonesia as the country has significant nickel reserves, which are essential in producing lithium-ion batteries for EVs and other applications. Using domestic nickel resources, Indonesia can reduce costs associated with importing raw materials, giving it a competitive advantage over countries that rely on imports for battery production. Indonesia has a large and relatively low-cost labour force, which can help reduce production costs in the battery industry. Lower labour costs can make it more competitive than countries with higher labour costs. As Indonesia’s population of over 270 million people grows, demand for EVs and energy storage solutions is expected to rise, creating a potentially large domestic market for batteries. A large domestic market can help the battery industry scale production, reduce costs, and improve competitiveness.

However, there are also challenges that Indonesia must overcome to fully realize its comparative advantage in the battery industry. Indonesia lacks advanced technological expertise in battery manufacturing, particularly in producing high-quality lithium-ion batteries. Developing a competitive battery industry requires significant investment in manufacturing facilities, research and development (R&D), and infrastructure such as power supply and transportation networks. To overcome this challenge, Indonesia may need to form partnerships with foreign companies or invest in R&D to acquire the necessary technology. Indonesia must attract domestic and foreign investments to finance these developments. Nickel mining and processing can have negative environmental impacts, such as deforestation, water pollution, and greenhouse gas emissions, and Indonesia must address these environmental challenges to ensure sustainable development by implementing and enforcing appropriate regulations and investing in cleaner technologies.

Indonesia has implemented local content requirements (LCRs) in various sectors to encourage domestic industry development and job creation. In the context of battery development, Indonesia introduced Presidential Regulation Number 55 in 2019 on the Acceleration of Battery Electric Vehicle Programs for Road Transportation, which sets out guidelines for developing the EV industry. This regulation requires a minimum of 35% local content for hybrid cars and 40% local content for battery EVs to qualify for tax incentives. Indonesia has implemented policies to encourage the domestic processing of its abundant nickel resources, a crucial component in lithium-ion batteries. In 2014, the government banned the export of unprocessed mineral ores to stimulate domestic nickel refining industry investment. While not an LCR per se, this ban aims to add value to Indonesia’s resources and create opportunities for battery manufacturing and related industries.

2. Overview of Trade and Investment Rules and Their Impact on Domestic Policies

Newmont Mining Corporation, an American multinational mining company, filed an arbitration claim against the Indonesian government in 2014 under the BIT between Indonesia and the Netherlands, where its subsidiary was registered (van der Pas & Damanik, 2014). Newmont claimed that the export ban constituted a breach of the BIT, particularly the provisions related to FET and expropriation of investments.

In response to the arbitration claim, the Indonesian government and Newmont negotiated, eventually reaching an agreement in September 2014. Under the agreement, Newmont committed to building a copper smelter in Indonesia and received a temporary export permit to continue exporting copper concentrate while the smelter was being constructed. In 2016, Newmont sold its stakes to an Indonesian consortium called PT Amman Mineral Nusa Tenggara (PTAMNT). As part of the divestment, PTAMNT took over the responsibility for constructing the copper smelter. The construction of the copper smelter started in 2018. As of April 2023, the smelter is still under construction, with the commissioning phase targeted for 2024.

The Newmont case highlights the potential risks and disputes that can arise when governments implement policies that impact foreign investors, such as the export ban on unprocessed minerals. Currently, the Government of Indonesia is implementing an export ban on nickel. This ban has been a subject of a WTO dispute settlement proceeding involving the European Union (WTO, 2022).

Trade and investment treaties, such as BITs and FTAs, govern international trade and investment relationships between countries. These agreements often contain provisions restricting or prohibiting domestic policies, including LCRs. Indonesia is a party to several BITs and FTAs that impose such restrictions.

For example, the WTO Trade-related Investment Measures Agreement effectively prohibits LCRs, as evidenced by Indonesia’s experience with its national car program (WTO, 1999). The program, which required automotive manufacturers to use a certain percentage of local content, was revoked after Indonesia lost a WTO case with Japan. This example illustrates the potential risks and limitations free trade agreements can impose on domestic policies.

In addition to investment treaty restrictions, domestic laws with extraterritorial reaches, such as the U.S. IRA EV provisions (Internal Revenue Service, 2023) and the EU Green Deal (European Commission, n.d.), can also impact Indonesia’s battery and EV industry. These regulations may require compliance with foreign standards and norms, potentially affecting the competitiveness and attractiveness of the Indonesian battery and EV market to international investors.

3. Strategies for Navigating Trade and Investment Treaties: Technology transfer

Given the challenges of investment treaties and trade rules, Indonesia must adopt alternative strategies to encourage growth and innovation in its battery and EV industry without violating its international obligations. Potential strategies include technology transfer and joint ventures, R&D subsidies, carbon credit systems, and special economic zones.

Technology transfer is the process of sharing or exchanging knowledge, skills, and technological innovations between different entities, such as countries, organizations, or individuals. In the context of the EV and battery industries, technology transfer can be crucial in helping developing countries like Indonesia access the expertise and advanced technologies they need to establish a competitive and sustainable domestic industry. There are several ways that technology transfer can be facilitated, including through licensing agreements, joint ventures, research collaboration, and technical assistance.

Intellectual property (IP) rights are the core of the technology transfer debate. The primary purpose of IP rights is to incentivize inventors and creators to innovate by granting them temporary exclusive rights to use and commercialize their creations. However, this exclusivity can also create barriers to technology transfer, mainly when IP owners refuse to share their technology or demand exorbitant licensing fees (Tundang, 2020).

As a barrier, IP rights may limit access to knowledge and technology, especially for developing countries that may not have the financial resources or technical capacity to build their advanced technologies. In some cases, IP rights can also hinder the dissemination of innovations that could benefit society, such as environmentally friendly technologies.

Some possible approaches to mitigate the barriers created by IP rights include:

1. Compulsory licensing: Governments can grant compulsory licences that allow third parties to use patented technology without the patent holder’s consent under certain circumstances. This measure can be particularly relevant in cases where the IP owner refuses to share their technology or charges unreasonably high fees. Compulsory licensing can help ensure access to essential technologies, such as green technologies.
2. Technology pools and clearinghouses: Technology pools or clearinghouses can facilitate sharing IP-protected technologies by providing a platform for IP owners and potential licensees to negotiate terms and access technologies. These mechanisms can help reduce transaction costs and improve access to protected technologies, especially for small and medium-sized enterprises that may not have the resources to negotiate individual licensing agreements.
3. R&D subsidies: R&D subsidies are a form of government support provided to firms or industries to encourage innovation and technological advancements. There are several examples of successful R&D subsidies in the EV and battery industries globally:
4. Advanced Research Projects Agency-Energy (ARPA-E) in the United States: ARPA-E is a government agency that funds high-risk, high-reward research projects in the energy sector. It has supported several breakthrough technologies in the EV and battery industries, including high-energy density lithium-ion batteries and novel battery chemistries.
5. EU Horizon 2020 Program: The Horizon 2020 program is the EU’s most extensive research and innovation funding program, with a nearly EUR 80 billion budget for 2014– The program has supported various projects in the EV and battery industries, including research on advanced battery materials, energy storage systems, and charging infrastructure.

Indonesia must foster innovation to become a more service- and manufacturing-oriented economy (Mercurio & Tundang, 2023). The country should prioritize knowledge accumulation through higher education and targeted skill acquisition to leapfrog the learning curve. In this context, Indonesia needs to develop an integrated system encouraging innovation and invention, focusing on creating a solid upstream industrial base followed by downstream industries. This perspective is relevant as it highlights the need for a balanced approach that respects IP rights while promoting domestic innovation in industries like batteries and EVs.

Author

Ronald Eberhard Tundang is an International Law Advisor at IISD.

Bibliography

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