Trade Negotiations Insights • Volume 8 • Number 5 • June 2009

Putting Substance into PACER Plus

by Pacific Institute of Public Policy

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In August 2009, the Pacific Island countries will begin negotiations toward a new free trade agreement with Australia and New Zealand. Coming on the heels of the troubled Economic Partnership Agreement (EPA) talks with the European Commission, the deal heralds new opportunities and hazards for the islands.

The existing Pacific Agreement on Closer Economic Relations (PACER) obliged regional governments to commence discussions toward an agreement with Canberra and Auckland as soon as the Pacific started negotiations with an outside party. EPA talks have now triggered a deal to be known as ‘PACER Plus’.

Australian leaders say they want the deal to be wide-ranging, covering more than just goods liberalisation. “The whole purpose is to put the substance to the Plus,” said Trade Minister Simon Crean on 2 April 2009. “Part of the policy… is making sure that nations are competitive, they are productive and they are able to take advantage of the market liberalisation.”

Two issues look set to dominate PACER Plus discussions: first, whether an existing arrangement will be formalised, whereby Pacific islanders are allowed to work temporarily as fruit-pickers in Australia and New Zealand; and second, how much, if at all, governments will be compensated for import tariff revenue losses.

Pacific Island Ministers lobbied hard for labour access under the EPA negotiations, realising that any agreement on mode 4, or the temporary movement of natural persons, would set a precedent in subsequent talks with their regional neighbours. Few islanders are likely to get jobs on the other side of the world, but plenty want to work in Queensland or Hawke’s Bay.

This negotiating strategy failed, which is partly why only two of the 14 regional governments signed interim EPA agreements. These two, Fiji and Papua New Guinea, are the only countries that rely substantially on European demand for their exports, and they faced punishing tariff increases if they refused to sign.

In the meantime, New Zealand pioneered an arrangement with Vanuatu under which a select group of labourers would travel for a short period to work on fruit farms. Farmers enjoyed cheap labour; workers took back much-needed earnings to their communities - and crucially, most returned home. This unmitigated success led Canberra to follow suit, and the agreement was extended to other Pacific Island countries.

Having failed to establish a precedent with Europe, governments now want the temporary fruit-picking arrangements to be formalised in the new trade agreement and possibly extended to other industries. Pacific islands fear removal of privileges in the event of political changes in Canberra or Auckland. Even Canberra’s new, purportedly more development-friendly administration may succumb to domestic pressures to limit inward migration under the temporary labour scheme. Moreover, the general antipathy of developed countries towards mode 4 at the WTO augurs a difficult battle ahead.

Whilst the establishment of new job opportunities under PACER Plus presents an opportunity - albeit a slim one - many island governments worry about the costs of the agreement. Under WTO rules the deal must cover ’substantially all trade’. The precedent set by the interim EPA with Fiji and Papua New Guinea means that this is likely to mean tariff reductions on most imports by value. Australia and New Zealand have signalled they will take full advantage of this opportunity.

Lowering import tariffs on Australian and New Zealand goods, where most Pacific imports originate, could lead to big tariff revenue losses. According to a 2008 report commissioned by the Australian Government Overseas Aid Program (AusAID), the total revenue losses could total up to 17% of annual government income. The tax bases of these tiny administrations are already vulnerable - and some are tax-havens. They will struggle to establish and collect new revenues.

Australia and New Zealand will want any tariff concessions by one island nation to be granted everywhere, to avoid the prospect of goods entering one state at a lower rate than another. This means that any agreement is likely to be the same for the whole region. Canberra and Auckland also have an eye on Asia. They will negotiate hard with the Pacific in order to pave the way for cheaper goods access in the likes of Taiwan, Thailand, and Singapore.

The negotiating capacity of Pacific island governments is so limited that they will probably again succumb to the demands of their bigger neighbours. This is unlikely to be catastrophic. The islands will maintain market access to Australia and New Zealand, even if this is increasingly worthless owing to preference erosion. Further, any tariff cuts by the island governments are likely to be gradual and may be back-loaded by up to 10 years.

But like many poorer developing nations, the islands have very little to export, meaning that the upside is limited. After more than a decade of trade liberalisation, resulting in broad-ranging goods market access, most regional countries continue to run trade deficits, as they have since independence. Poor infrastructure, unreliable transport, limited access to credit, and growing social inequalities all restrict the development of productive capacity in both goods and services. In this woefully under-developed environment, new foreign competition will do little to generate growth.

Mode 4 represents a way of tapping one of the islands’ very few exportable resources - people. If Auckland and Canberra really want to “put substance to the Plus” they should at the very least formalise access to jobs in their own countries. In addition, they should invest in infrastructure, fund financial institutions, and enact measures to combat inequality. This would all go some way to ensuring a brighter trading future for the islands. Freer trade is not a panacea.

Author:

The Pacific Institute of Public Policy is an independent, non-partisan and not-for-profit think tank based in Port Vila, Vanuatu and exists to stimulate and support policy debate in the Pacific.