Understanding trade – Pacific way. PiPP has published a series of briefing notes on Pacific trade issues.
When European powers left the region in the 1970s, they bequeathed a legacy of preferential market access arrangements and subsides. For a long time after independence, additional aid, particularly in Melanesia, went into established commodities such as copra, coffee, palm oil and cocoa. There was little incentive for Pacific governments to expand product ranges or look for new markets, as the subsides encouraged the export of traditional commodities duty-free and at above world market prices. In Fiji and Papua New Guinea the focus was on sugar exports to Europe; in Vanuatu and the Solomon Islands it was the copra trade.
Today, Pacific island governments can rely less on special treatments for exports to traditional destinations. Big trading partners like Europe, Australia and New Zealand are expecting the fledgling economies of the Pacific to liberalise, and quickly. Despite the existence of agreements among the Pacific island states, intra-regional trade has been low, mainly due to the massive distances and the lack of products to sell one another. In the words of an official of the Pacific Islands Forum Secretariat: The islands are hardly going to sell a lot of coconuts and fish to each other.
Yet opportunities exist for increased intra-regional trade, particularly in services, and especially among the geographically clustered and more diversified economies of Melanesia. Despite the concessions of reduced tariffs, the free trade agreement between members of the Melanesian Spearhead Group has failed to significantly increase trade. New Caledonia’s pro-independence Kanak Socialist National Liberation Front (FLNKS) has observer status in the Melanesian alliance. The potential contribution of these territories to regional economic growth is underestimated. The GDP of New Caledonia and French Polynesia is roughly the same as the 14 Pacific islands countries combined. A small amount of trade would make a big difference to the region.
Pacific countries can capitalise on further engagement with the global economy. The islands have had duty and quota-free access to Australia and New Zealand since 1981 under South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA). Marketing assistance to Pacific producers has been available, but meeting quality, consistency and quarantine standards has been a challenge. If a free trade agreement comes out of the imminent PACER Plus negotiations, it will supersede existing SPARTECA market-access arrangements. Opening up to Australia and New Zealand, where most imports originate, could endanger import tariff revenue – in some cases up to 30 per cent of government income. Fears also exist about protecting domestic industries. As both development and trading partners, Australia and New Zealand can support the emerging Pacific island economies by ensuring PACER Plus negotiations do not focus solely on market access. In fact, Pacer Plus does not need to be considered as just a trade agreement, rather an economic partnership arrangement of which trade is one component.
Imports from Europe are small and diminishing, so direct tariff revenue losses and trade effects from the controversial Economic Partnership Agreements (EPAs) are likely to be minimal. The main issue for Pacific countries is the precedent that EPAs set given the most favoured nation clause, which requires countries to extend conditions no less favourable than that provided to others. So an EPA would effectively prevent Pacific island countries from doing different deals with other trading partners. So far the only Pacific nations to sign up to the new trade agreement with the EU have been Fiji and Papua New Guinea, and that was to keep preferential access for sugar and tuna exporters. These agreements now set a precedent for other Pacific countries should they wish to enter into EPAs in the future.
Papua New Guinea, Solomon Islands, Fiji and Tonga are members of the WTO. Vanuatu and Samoa are in the process of acceding. Vanuatu nearly completed its accession negotiations in 2001. At the time it would have been the first Least Developed Country (LDC) to join the WTO, but baulked when asked for more liberal commitments for goods and services than existing members, including Australia, European countries and the United States. The WTO General Council has since agreed to provide more flexibility on the accession of LDCs. It remains to be seen if Samoa and Vanuatu will benefit from this special treatment. In the case of Tonga, which joined in 2005, it appears not. Tonga liberalised services extensively, was required to abandon prohibited industrial subsidies and bound its tariffs at the very low average rate of under 20 per cent. Graduation from LDC status has further implications, with Samoa on course to graduate in 2010 and Vanuatu in 2013. Graduation may affect the privileges and preferences and the prospect of losing these advantages makes it all the more important to promote export development and to make the economy more internationally competitive.
Confronting the challenges of globalisation is no easy task, especially when small, developing nations are at a clear disadvantage in terms of negotiating power. But Pacific island countries can move beyond fish and coconuts and capitalise on a more liberal trading environment.
Each country could benefit from export-oriented trade policy that focuses on a few select areas in which each country has an actual or potential comparative advantage such as tourism, food processing, fisheries and certain agricultural products. Doing nothing is not an ideal strategy as the region cannot continue to rely on past arrangements and high tariffs. Given the limited negotiating capacity of tiny island states, being prepared is essential. To leave everything undecided until the end is to play into the hands of the powerful.
This is an edited version of the Pacific Institute of Public Policy briefing note, ‘Beyond fish and coconuts: trade agreements in the Pacific islands’ first published in 2008. The full series of trade briefing notes can be downloaded HERE
