By : Mario F. Pinheiro
A brief analysis
The Trump administration’s latest tariff of 25% to 40% on ASEAN exports is forcing ASEAN countries to negotiate for more favorable trade terms and search for low-cost re-export options. While Indonesia and Vietnam have negotiated reduced rates (19% and 20% respectively), it is quite clear that any new deals are unlikely to be better than the pre-Trump 2.0 trade deals.
Trump’s latest tariffs have increased trading costs for ASEAN nations, inadvertently making Timor-Leste a more attractive re-export option for ASEAN exporters targeting the US market.
Timor-Leste’s current trade terms with the US are highly favorable for international commerce, yet significant untapped potential remains. In 2023, the country exported just $2 million worth of coffee to the US while importing $14 million in meat products. Given its significantly lower tariff, Timor-Leste can capitalize on this advantage and position itself as a low-cost re-export hub to attract foreign investments and grow its industries.
Recent reports indicate that Indonesia’s Chamber of Commerce (KADIN) is exploring potential re-export options via Timor-Leste to mitigate the impacts of Trump tariffs. A Timor-Leste government official has reportedly acknowledged preliminary discussion on this matter, with formal negotiations and implementation planning expected to follow. This underscores the growing appeal of Timor-Leste’s untapped potential.
If adopted, such a strategy could prove transformative for both Timor-Leste and Indonesia.
What’s at stake and potential benefits of re-export
For Indonesia’s export-driven economy, this strategic shift would minimize tariff-related losses while preserving its trade balance and strengthening competitiveness against regional rivals like China, Bangladesh, Vietnam, and others in the crucial U.S. market. As America represents Indonesia’s second-largest export destination (receiving over $28 billion worth of goods in 2024), the new 19% tariff poses serious macroeconomic risks, including reduced economic output, pressure on employment, and erosion of the trade surplus Indonesia has consistently had with the USA since 2015. These growing challenges create powerful incentives for Indonesian manufacturers to diversify operations into lower-tariff countries like Timor-Leste. The urgency for such a shift will only intensify in the coming months as the full impacts of reduced demands from America start to kick in.
For Timor-Leste – a country with a long-dormant industrial development aspiration, the choice should be clear. With $28 billion in Indonesian exports to the US facing new tariff pressures, Timor-Leste has a unique opportunity to negotiate value-added manufacturing partnerships with KADIN. At a minimum, any agreement forged with KADIN should include significant local value-addition or relocation of strategic supply chain segments (i.e., footwear and furniture assembly, or textile finishing, and/or processing and packaging of processed seafood – collectively valued at over $7 billion of Indonesian exports to America in 2023).
Such a deal serves two interrelated purposes. First, it can help kickstart Timor-Leste’s manufacturing industry in sectors where the country holds natural advantages and can integrate into relevant industries’ value chain with relative ease, such as in footwear, textiles, furniture, or seafood processing. Secondly, it can position Timor-Leste as a legitimate trading partner with the US by meeting the 35% value-added threshold required under the Generalized System of Preferences (GSP) Rules of Origin (ROO).
The establishment of substantial valued-added industries for re-export would have far-reaching impacts on Timor-Leste’s economy. It will boost domestic production capacity, support economic growth, and advance the government’s macroeconomic objectives such as reducing unemployment and the persistently high trade deficit. Additionally, it could position Timor-Leste as an attractive destination for foreign direct investment and a growing regional processing hub. This, in turn, could spur further investment in non-re-export manufacturing sectors.
Timor-Leste holds significant real leverage to attract foreign investments in the current international trade environment. Beyond tariffs, labour costs and skills are quite competitive and can be further enhanced with minimal investments. The country also offers a range of tax exemptions for qualifying foreign investments.
The potential of the latter is already evident in real-world successes. Heineken’s establishment of local beer production proves the viability of manufacturing in Timor-Leste. Also, the full takeover of Bayu-Undan oil & gas processing and sales after 2018 maritime boundary settlement with Australia demonstrates the country’s ability to secure and manage large-scale industrial operations. These success stories underscore Timor-Leste’s capacity to design and structure incentives to attract investment and support medium-to-large-scale manufacturing.
In addition, Timor-Leste’s infrastructure readiness is further accentuated by Tibar Bay Port, a brand-new, world-class container seaport. The port offers a strategic complement to the country’s FDI incentives. With state-of-the-art handling equipment, advanced operating systems, and an annual capacity of one million TEUs, this modern facility features a storage capacity of 20,000 containers and 252 fridge plugs. This giant piece of infrastructure can handle all cargo types and vessel sizes. Currently operating at less than 20% capacity, the port can absorb immediate and dramatic surge in demand, offering additional competitive advantage for export-oriented manufacturing.
Half-measure and potential downsides
Given these considerations, Timor-Leste’s negotiating position must be unequivocal. It must reject any passive re-export arrangement as transshipment. A transshipment-based re-export model carries significant risks, particularly the potential violation of the US ROO, which could trigger sanctions. Such an outcome would not only harm our trade relations with the US but also undermine our long-term export growth potential.
The economic gains of a transshipment-based re-export model are limited at best. While it may generate some revenues for the logistics sector through port fees, transport charges, and warehousing services, it does little to create jobs or build industrial capacity. If transshipment volumes exceed the existing infrastructure’s carrying capacity, it could create bottlenecks, increasing costs for genuine import-export activities and potentially driving up prices for domestic consumers. Such an arrangement might also trigger demands for reciprocal import quotas from the US despite offering minimal real benefits to Timor-Leste. Additionally, it distorts trade statistics, presenting a misleading picture of our actual economic performance in the international market.
Beyond its limited economic benefits, passive re-export also creates substantial administrative burdens. While Customs may collect some fees for cargo overstays, these marginal gains rarely justify the operational costs. This is because intensive tracking and additional documentation and compliance checks required for temporary imports can put enormous strain on the existing workforce, potentially degrading overall customs efficiency and service quality for legitimate trade.
In conclusion, re-export offers a strategic opportunity to kickstart our industrial development aspiration. However, maximizing its potential hinges entirely on our ability to forge a major win-win deal between Timor-Leste with KADIN, Indonesia. This requires a wholesale rejection of passive re-export deals and insistence on significant local value-addition for any potential re-export agreement. A half-measure deal risks compromising our long-term industrial development ambition for short-term gains. (*)
