By ABC's Catherine McGrath

Photo: The Indonesian leadership is demanding an apology and is starting to wind back bilateral cooperation. (Getty Images: Putu Sayoga)

What works at home as political rhetoric doesn't work overseas and only serves to cement the view in Indonesia that Australia isn't prepared to consider their concerns. Australia needs to adopt a more cooperative approach, writes Catherine McGrath.

While the argument continues over whether or not Australia should apologise to Indonesia over the recent spying scandal, the real message is this: Indonesia's anger is not only about the spying but also about what is perceived as Australia's patronising attitude to our northern neighbour.

In diplomacy the rules are pretty simple: be nice, be friendly, be tough when necessary. Oh yes, and spying is part of the game too. Make sure you don't get caught.

The Prime Minister's big mistake in the Indonesia-Australia standoff has been in not realising earlier that Indonesia had concerns about his Government's policies and was prepared to act on those concerns if it felt pushed.

What is more, if Indonesia did act, then this would cause problems for the relationship and Tony Abbott's policy goal of stopping asylum boats.

Over recent times Indonesia has been listening and watching with concern the Coalition's policy pronouncements on asylum seekers, such as the promise to tow back the boats, buy back boats in waiting and to pay off village leaders in the hope of tackling people smugglers.

When Foreign Minister Julie Bishop said soon after the September election, "We're not asking for Indonesia's permission, we're asking for their understanding," Indonesia was concerned again. What works at home as political rhetoric doesn't work overseas and only serves to cement the view in Indonesia that Australia just wants the boats out of its neighbourhood for domestic political reasons and isn't prepared to consider their concerns.

Rightly or wrongly, Indonesia wants to feel listened to and respected. The Indonesian Government can't afford to allow its voters to get the impression that Australia is dictating terms on the asylum issue.

So trouble and tension was brewing anyway when the current problems started. Flashpoint one came when the first spying allegations were raised and flashpoint two came two weeks ago with the standoff in the seas off Indonesia over the question of whether or not a group of asylum seekers once rescued could be returned. Indonesia's answer was no.

Flashpoint 3 came this week. The list of who Australia had spied on in 2009 was made public. At the top of the list were President Yudhoyono and his wife. This was the tipping point.

Indonesia was always ready to whack Australia if it felt it was necessary or worthwhile to show its will to its domestic audience. The time for whacking has begun.

Now we have parties at opposing corners. The Indonesian leadership is demanding an apology and is starting to wind back bilateral cooperation. How far will this go? President Yudhoyono took to Twitter, as any respected leader does in 2013, and said Prime Minister Abbott had "belittled this tapping matter on Indonesia, without any remorse".

Prime Minister Abbott continues to decline to apologise and is instead saying, "I deeply and sincerely regret the embarrassment that media reports have caused."

This is not the answer Indonesia's leadership is looking for, so it won't stop their current negative responses.

The argument is fanning out from the political level to the general public where its intensity is growing. On the streets of Jakarta some commuters told ABC correspondent George Roberts they were angry and embarrassed, another talked of reopening the wounds of East Timor.

In Australia some of the responses are just as heated although split: some call for an apology, others just as stridently say no. Some talk of corruption in Indonesia assisting people smugglers, others of human rights and West Papua.

Either way our relationship with Indonesia is in trouble and it looks as though the PM's office and Mr Abbott himself didn't see this coming.

In Australia at times one might think we can afford to take our relationship with Indonesia for granted. After all we are a big economy and more technologically advanced. But that situation won't continue forever. Indonesia has a booming economy and is currently the world's sixteenth biggest. By 2030 it will be the seventh largest.

Most of Indonesia's business interests are not focused on Australia but to its north, into South East Asia, towards China, Europe and America. This is a competitive world and most of the economic action is happening away from us. Australia actually needs to do more on a business level to be noticed and to become more active in Indonesia. In two-way investment Indonesia is not in Australia's top 10 partnerships.

But it's not just about business. If Australia wants to be part of Asia, Indonesia is the key and to some extent is the country that can open or close the door to our greater participation.

If Indonesia turns away from us, we will be the losers.

So what should Australia do? Listen to Indonesia's concerns and work with them rather than patronise.

Catherine McGrath is the ABC's Asia Editor and Political Editor of Australia Network. View her full profile here.

Spy scandal repercussions could get worse - The Drum (Australian Broadcasting Corporation)