Mitigation of Import Tariff Impact: Fiscal Policy as an Economic Buffer

by Bayu Septiawan, a Directorate General of Taxes officer

The United States' 32% tariff increase on Indonesian products represents a protectionist policy with multidimensional implications for Indonesia's national economy. An in-depth analysis of the economic dynamics resulting from this policy reveals a complex and interconnected chain of effects.

The United States is a strategic trading partner for Indonesia, with bilateral trade valued at USD37.4 billion in 2024, of which Indonesian exports to the US reached USD24.7 billion. The US position as Indonesia's third-largest export market (after China and Japan), contributing approximately 10.5% of total national exports, makes this protectionist policy highly influential on overall export performance.

The structure of Indonesian exports to the US, dominated by manufactured products (76.3%) such as textiles, footwear, and electronics, concentrates the impact of this tariff increase on labor-intensive sectors. This differs from Indonesia's export pattern to other countries, which remains dominated by primary commodities, meaning that export market diversification cannot immediately resolve the issue.

In the short term (0-6 months), Indonesia faces three main challenges: decreased product competitiveness with potential export volume reduction of up to 54.4% based on demand elasticity of -1.7; erosion of exporter profitability where profit margins of 15-18% are threatened if they absorb more than 50% of the tariff burden; and liquidity disruptions due to reduced export values of USD3.2-7.9 billion affecting companies' operational capabilities.

Regional competitive challenges exacerbate this situation, with Singapore being subject to only a 10% tariff and several other countries enjoying lower preferential tariffs. The 22 percentage point tariff disparity with Singapore creates significant competitive inequality, especially for products with low profit margins and high substitution rates. Indonesian products now face not only price pressure but also the risk of trade diversion to countries with better market access to the U.S.

The Indonesian government has mitigated these challenges with strategic fiscal incentives through Minister of Finance Regulation Number 10 of 2025, effective since February 4, 2025. This regulation establishes a government-borne Income Tax Article 21 facility (PPh Article 21 DTP) for workers in labor-intensive industries most affected by US protectionist policies. This incentive directly targets four main sectors—footwear, textiles and apparel, furniture, and leather and leather goods—which also have the highest exposure to U.S. tariff increases.

The implementation of the PPh Article 21 DTP incentive creates a dual buffer mechanism for affected industries. First, from the workers' perspective, net income does not experience reduction due to tax payments, maintaining the purchasing power of 2.4 million direct workers threatened by potential wage reductions or layoffs. Second, from the company perspective, this policy allows the reallocation of resources that would have been used to bear employees' PPh Article 21 (in a gross-up scheme) to strengthen operational liquidity and maintain export competitiveness.

This fiscal incentive becomes an important component of short and medium-term mitigation strategies against the impact of US tariff increases. In the context of regional competition with countries enjoying lower tariffs such as Singapore, this policy can provide a temporary buffer to maintain competitive operational costs, particularly labor costs. However, for long-term effectiveness, this policy needs to be integrated with efforts to accelerate bilateral trade negotiations with the US, improve supply chain efficiency, and structural industry transformation to reduce dependence on the US market.

The implementation of this policy creates a protective effect against labor cost pressures. For labor-intensive industries such as textiles, which have labor cost components reaching 15-20% of total production costs, the absorption of this tax burden is equivalent to an effective production cost reduction of 0.9-1.2%. In a situation where industry profit margins range only from 5-8%, this cost reduction provides critical breathing room to maintain operations without having to make significant workforce reductions.

Fiscal policy plays an important role as a shock absorber when a country faces negative impacts from international policies, such as the imposition of high import tariffs. In the case of the 32% tariff on imports from Indonesia to the United States, fiscal policy can function to reduce these impacts and maintain domestic economic stability. The government can increase expenditure to support directly affected sectors, such as manufacturing, by providing incentives or assistance to maintain competitiveness. Additionally, tax reductions or tax incentives for affected companies can alleviate their burden, allowing them to continue operating efficiently.

Fiscal policy can also be directed to encourage economic diversification by providing support to new sectors with potential for development in the global market, reducing dependence on export markets subject to high tariffs. The government can also strengthen social safety nets through increased direct assistance or training programs for affected workers, maintaining public purchasing power. Furthermore, strengthening infrastructure and improving logistical efficiency will help reduce production and distribution costs, enhancing the competitiveness of Indonesian products. Through these various fiscal measures, Indonesia can mitigate the impact of high import tariffs, maintain economic growth, and build resilience in facing external challenges.

*)This article is the author's personal opinion and does not reflect the attitude of the agency where the author works.

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