Updated February 26, 2017 14:43:04

Photo: The leaders said "our common interests mean we will be much stronger if we work together". (ABC News: David Spicer)

Indonesia and Australia will fully restore military ties in the wake of talks between the two nations' leaders.

Prime Minister Malcolm Turnbull and Indonesian President Joko Widodo have held formal talks in Sydney, discussing trade, defence and counter-terrorism.

The leaders agreed to fully restore military cooperation, less than two months after Indonesia suspended cooperation with Australia over "insulting" posters at a Perth training base.

Mr Turnbull said the nations had much in common and were committed to stability in the region.

"We are both vibrant democracies that stand for mutual respect and diversity," he said.

"We share a commitment to democracy, freedom and the rule of law and a rules-based international order."

A joint statement from the two leaders emphasised the importance of cooperation.

"Our common interests mean we will be much stronger if we work together in our rapidly changing region," it read.

"Risks and uncertainties only make it more critical we have a strong partnership that enables us to tackle challenges and seize opportunities together."

Indonesia suspended all military cooperation with Australia in early January, several weeks after an Indonesian officer complained about the "insulting" training posters at the SAS headquarters in Perth.

Indonesian Special Forces group Kopassus trains with the Special Air Service at the unit's Campbell Barracks in Perth.

New consulate, lower tariffs

Mr Turnbull also announced Australia would open a consulate in Indonesia's second biggest city, Surabaya, in east Java.

The Indonesian President hears first-hand the challenges Australian businesses face in investing in his country.

Trade talks between the leaders also saw Indonesia agree to lower tariffs on Australian sugar imports to 5 per cent — in line with many other South-East Asian nations — a development which follows reports that Australia's second largest sugar milling company is struggling with more than $200 million of debt.

Australia will in return reduce barriers to imports of Indonesian pesticides and chemical products.

Two-way trade between Australia and Indonesia is currently worth about $15 billion, with the latter not among Australia's top 10 trading partners despite its growth and proximity.

Both leaders agreed trade links were yet to reach their full potential, citing increased efforts towards the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) in their joint statement.

"Our vision for IA-CEPA goes beyond a traditional free trade agreement," it read.

"It will face the challenges and seize the opportunities of the current trading environment building on the special Indonesia-Australia relationship.

"Negotiations are progressing well, with the last round of talks held just last week. Leaders recommitted to concluding a comprehensive deal this year."

Topics: defence-and-national-security, foreign-affairs, international-aid-and-trade, world-politics, government-and-politics, australia, indonesia

First posted February 26, 2017 13:27:04