From Deficit to Tariffs: Indonesia’s Journey in the World’s Top 3 Footwear Markets

In 1971, the then British Education Minister and future Prime Minister of the country, Margaret Thatcher, began to forge her reputation as the Iron Lady after eliminating the free milk program in primary schools. The move, the newly appointed minister’s first, was intended to save up to £9 million at the time, and earned her what would become the first of her nicknames, after the press began to popularize the slogan Thatcher, Thatcher, milk snatcher. In Indonesia, the president elected a year ago, Prabowo Subianto, is facing a reputational crisis similar to Thatcher’s then, also related to child nutrition, but stemming from a completely opposite policy: a free meal program for more than 20 million schoolchildren and pregnant women, the second largest in the world.

The civil rejection is based not so much on Prabowo’s proposal, but on its cost, estimated at some 30 billion dollars. The project has ended up being part of the battery of government decisions that, despite wanting to boost the Indonesian economy, have pushed the country’s budget deficit to record levels. All this, together with the added stress of the global trade war, the fall in purchasing power and the threat of becoming the Southeast Asian country with the highest unemployment rate, finally erupted at the end of August in a series of social protests that took to the streets and resulted in several deaths.

If running a country is a complex task, heading the presidency of the 17,000 different islands that make up Indonesia, the largest archipelago country in the world, multiplies the difficulty of the task. With 280 million inhabitants, Indonesia is also the fourth most populous country in the world, and the third largest democracy behind India and the United States. The territory also has more than 200 ethnic groups and 300 different languages.

Indonesia’s Gross Domestic Product (GDP) exceeded 1.39 trillion dollars in 2024, according to the CIA World Factbook, while GDP per capita was close to 5,000 dollars, up 2.3% on average over the last five years. Historically, Indonesia has grown at a steady rate of 5% per year since the beginning of the century, especially in the heat of foreign investment in industry and technology. According to the latest forecasts of the International Monetary Fund (IMF), Indonesia’s GDP growth will remain at 4.7% in 2025 and 2026, slightly above the 4.5% that the group of emerging Asian economies as a whole will post. The organization, however, set off alarm bells in its estimate of unemployment in the country, which it warns could reach 5% by the end of this year, and continue to climb to 5.1% in the following year. The figure, the IMF warned, would be the highest rate ever recorded in Southeast Asia.

The rise in unemployment, in a country where two thirds of the population are of working age, together with the high investment in the President’s priority programs, has led to an increase in Indonesia’s budget deficit, which at the end of the first half of the year was estimated at 2.78% of GDP, very close to the legal limit of 3%. With regard to inflation, the IMF does expect prices to slow down their rise in 2025, to 1.7%, far from the 2.3% rise recorded by inflation the previous year, but warns of a new and higher increase forecast for 2026, up to 2.5%.

Tariff impact

Just a few months after taking office, Subianto had to deal with the tariff hit imposed by U.S. President Donald Trump of up to 32%. Despite the fact that, after months of negotiations, the government has managed to reduce this tariff to 19%, the tax has not failed to take its toll on Indonesia’s economy, which is dependent on its manufacturing industry.

The country’s exports reached US$264.705 billion in 2024, according to data from the World Trade Organization (WTO), with coal, palm oil and nickel as the main products sold abroad. Imports, meanwhile, stood at US$233,436 million, with oil derivatives being the three main products purchased abroad.

Within fashion, Indonesia has carved out a niche for itself in global sourcing especially thanks to footwear manufacturing, rising in 2024 as the fourth largest manufacturer worldwide, to score a market share of 4.1% of global production. It is overtaken by China, which dominates the board with 62.2% of global footwear manufacturing, and Vietnam, with another 10.7%. In absolute terms, Indonesia manufactured 601 million pairs of shoes last year.

The territory also ranks high in the apparel segment, specifically as the world’s ninth-largest exporter of garments, valued at the close of last year at more than $9 billion, according to WTO data, up 5% from the previous year.

China stands as the main destination for Indonesian exports, receiving 23.6% of the total, or 62,439 million dollars at the end of 2024. The Asian giant also stands as the territory’s main supplier, with imports from China worth US$72.729 billion. This trade relationship that China has established with many of the Southeast Asian countries is the new focus of the White House, which this month announced an extra 40% tariff, to be applied to the already imposed base rate of 19%, for all those products that, although they leave Indonesian territory, are mostly manufactured in China.

The measure threatens part of Indonesia’s export muscle, which at the end of 2024 had the United States as its second largest buyer, accounting for 9.9% of the country’s total exports, which translated into 26,313 million dollars. Japan, with 7.8% of the total, and India, with another 7.7%, rounded out the top clients. The European Union, meanwhile, is in fourth place, receiving 6.5% of total Indonesian exports, valued at $17.32 billion. Recently, and after more than a decade of talks, Brussels and the Asian country’s Executive closed a first draft of a free trade agreement between the two territories, which will begin to be implemented in 2027 and involves eliminating almost all tariffs on imports to the European continent.

Fashion sourcing

According to the latest data from the Atlas of Economic Complexity produced by Harvard University, Indonesia exported fashion-related products worth more than €20 billion to the rest of the world in 2023. In terms of exports as a whole, footwear alone is the eighth most important product sold abroad by Indonesia, accounting for just over 25% of the total.

Of the total fashion sold abroad, 13.54% represents leather footwear, the main product category, followed by fabric shoes, with another 11.14%. Both categories are well above the share of the total of the following products, among which are women’s and men’s ready-made garments, with more than 3% of total exports each, and fabrics for automobiles and furniture. Despite occupying one of the highest positions in terms of footwear production, Indonesia ranks eighth in terms of consumption, with a total consumption of 471 million pairs by the end of 2024.

Given Indonesia’s weight in global footwear production, the fashion giants whose businesses have been most affected by the imposition of tariffs on the country have been the two kings of sport: Nike and Adidas. Specifically, in the case of the German company, it concentrates up to 20% of its production in Indonesia, along with another 27% that is located in Vietnam. Nike, for its part, also depends mainly on Vietnam, with 25% of its production located in the country, while Indonesia has a much lower share, 8.13%. In between, however, is China, with 24% of the US giant’s production, which has led it to raise the cost that tariffs will have on its business by the end of the year to 1,000 million.

Among the highlights in the sector this past year, the closure of Sritex, one of the largest textile suppliers for international fashion in the country, also stands out. The company announced the cessation of its operations in March, after months immersed in an insolvency proceeding, and being unable to maintain production. Its client portfolio over the years has included companies such as H&M, Inditex and Uniqlo.