Indonesia will improve supervision of the resources sector, an official says

The Indonesian government says it plans to strengthen oversight of the resources sector after the US Department of Labor declared the presence of forced labor in the country’s nickel industry.

On Friday, Yuli Adiratna, a senior official at the Ministry of Labor, said told Reuters that the government would investigate the report’s findings and improve “oversight of regulations and international standards” in the resources sector.

Yuli did not provide details on what this would entail, but the US ruling, handed down on September 10, could have significant implications for Jakarta’s goal of transforming itself into a global hub of electric vehicle (EV) production.

Indonesia is one of the world’s largest producers of nickel, a crucial component in the production of the large lithium-ion batteries that power electric cars. Most nickel mining and processing takes place on the island of Sulawesi, in large industrial parks dominated by Chinese companies. According to Benchmark Mineral Intelligence, 80 to 82 percent of Indonesia’s battery nickel production this year is expected to come from mostly Chinese-owned producers.

On September 10, the Ministry of Labor added Indonesian nickel to its policy list of goods produced by child or forced labor, citing “multiple reports of adults being forced to work in nickel production in Indonesia.”

The report stated that Sulawesi’s industrial parks employ an estimated 6,000 Chinese migrant workers in various capacities. The ministry cited NGO reports stating that these workers are “often deceptively recruited in China” and receive “lower wages than promised, along with longer working hours.”

“Workers regularly have passports confiscated by employers and experience arbitrary withholding of wages, as well as physical and verbal violence as a means of punishment,” the report said. It also said that a number of other indicators of forced labor, including restriction of movement, isolation, constant surveillance and forced overtime, were “allegedly common practices in nickel production in the industrial parks.”

The ruling has major consequences. As Cullen Hendrix wrote in these pages last week, the forced labor ruling “deals another blow to the country’s aspirations to reach a critical Minerals-Specific Free Trade Agreement (CMS-FTA) with the United States.” Such an agreement is a prerequisite for the inclusion of Indonesian nickel in the supply chains recognized by the Biden administration’s Inflation Reduction Act (IRA).

Under the IRA, Washington has required that a certain amount of crucial minerals in EV batteries be produced or assembled in North America or in a country with which the US has a free trade agreement, so that EVs sold in the United States qualify for tax breaks. The credit will not apply to electric vehicles that contain batteries and essential minerals sourced from “foreign entities of concern,” including some companies with more than 25 percent Chinese ownership.

For more than a year, Jakarta has been negotiating a CMS-FTA pact with Washington in an effort to qualify for IRA subsidies, modeled on the deal struck with Japan in March 2023. The dominance of the industry by Chinese companies and the poor labor, environmental and social safeguards associated with China’s large mining and smelting operations in Sulawesi have complicated matters.

In October last year, nine US senators sent a message twofold letter addressed to the U.S. Trade Representative and the Secretaries of the Treasury, Energy, and Commerce, expressing concerns about the proposed CMS FTA with Indonesia. They cited not only China’s dominance of the country’s mining industry, but also the poor working conditions and harmful environmental impacts that have been associated with these Chinese activities. Cullen argued that the Labor Ministry’s ruling on forced labor does not apply any pressure, but will now make the issue of forced labor “the starting point for any further discussion on a CMS-FTA between Indonesia and the United States.” To that extent, this probably makes such an agreement less likely.

There are signs that the Indonesian government is recognizing the problems in the nickel industry and is trying to address them. President Joko Widodo has promised on several occasions to improve the standards of Indonesia’s nickel mining and smelting activities. In July the Financial Times published published a report claiming that the Indonesian government is “trying to reduce Chinese investment in new nickel mining and processing projects to help the industry qualify for US tax breaks”

Whether any of these efforts will be enough remains unclear, but the current list is likely to complicate matters. As so often, US policy in this area presents a mix of moral and strategic goals: support for high standards in extractive industries and a desire to erode China’s dominant position in electric vehicle supply chains. U.S. policymakers might argue that these two objectives are mutually reinforcing in the case of Indonesia, because Chinese mining companies operate to much lower standards than companies from alliances and partner countries.

But to the extent that the listing complicates Indonesia’s ability to negotiate a CMS-FTA with the US government, and thus attracts Western companies eager to take advantage of IRA tax breaks, it will also hamper Indonesia’s ability to diversify its nickel industry complicate. The paradoxical result, Cullen concluded, “will be that Indonesia will become further dependent on China and Chinese companies.” At this point, meaningful progress on forced labor becomes much less likely.