Islands Business | September 2007
Trade/ PACER: A PLUS OR NEGATIVE?
Islands could lose $10m anually in revenue: report
Islands of the Pacific have the unenviable task of striking a PACER (Pacific Agreement on Closer Economic Relations) that ensures the benefits of free trade with Australia and New Zealand will not only accrue for the exclusive pleasure of their two Trans-Tasman neighbours, a report commissioned by the Secretariat of the Pacific Islands Forum has warned.
By its own calculations, author of the report—Nathan Associates, based in Washington DC—says some islands countries stand to lose up to US$10 million annually in revenue due to trade liberalisation.
Such a loss may spell disaster for economies that currently impose high import tariffs.
For Tonga and Vanuatu for instance, tariff revenue makes up 33.3% and 27.1% respectively of their total revenue.
“The risk of revenue loss as a result of PACER-Plus tariff reductions is a substantial concern for many FICs,” said the report titled the Pacific Regional Trade and Economic Cooperation-Joint Baseline and Gap Analysis.
“Fiji, PNG, Samoa and Vanuatu each stand to lose upwards of US$10 million annually in tariff revenues currently collected on imports from Australia and New Zealand (ANZ).
“Perhaps more significantly, however, a number of FICs will lose more than 10% of their overall government revenues when PACER-Plus eliminates duties on imports from ANZ.
“We note that the current share of revenues accounted for by import duties on goods originating in ANZ are as follows: Cook Islands (12.2%), Kiribati (14.3%), Samoa (14.0%), Tonga (17.2%) and Vanuatu (17.5%).
“In addition, Compact Countries (Palau, Federated States of Micronesia and Marshall Islands) must extend PACER-Plus tariff preferences to goods coming from the United States.
“As these countries currently bring in a significant share of their imports from the United States-45%, 36% and 65% of total imports respectively-the impact on government revenues could be quite substantial.”
The report shattered any hope that PACER-Plus will result in the free movement of unskilled labour into Australia and New Zealand.
Current FTAs (free trade agreements) struck by the two bigger neighbours with other regions, the report said, point to the unlikelihood of the Pacific islands getting their demands on Mode Four (labour mobility scheme) heeded.
“Characteristics of the demand for labour in ANZ will drive PACER-Plus labour mobility negotiations,” the report predicted.
“There is a high demand for skilled labour in ANZ (especially New Zealand, which has had a net outflow of 10,000 skilled workers who migrated to Australia.)
“At the same time, there is an abundance of unskilled labour in ANZ.
“Thus, we believe it is unlikely that PACER-Plus negotiations will encompass free movement of unskilled labour.”
Concessions offered by Australia to the US under AUSFTA should point to the possibility of new conditions concerning trading in services and foreign direct investment, for instance.
This should be particularly worrying for trouble prone members of the Forum like Fiji and the Solomon Islands.
“FICs should expect investor-state dispute settlement to be excluded.
“They should expect that special provisions for compensation in the event of an armed conflict or civil strife will be included in PACER-Plus.”
The islands’ textile, clothing and footwear industry will be particularly sensitive in any free trade pact with Australia and New Zealand, report believes.
Each FTA struck with other regions of the world will mean preference erosions for FICs in ANZ. Increasing trade between ANZ and China will not benefit FICs as well.
“The margin of preference for FICs in ANZ and elsewhere will decrease with each FTA negotiated by either Australia or New Zealand.
“For example, under the New Zealand and Thailand Closer Economic Partnership Agreement, New Zealand duties on imports of Thai textiles, apparel, footwear and carpet products will drop to zero by 2015, eliminating a margin of preference of close to 20% that has long existed for FIC goods in these product lines sold in the New Zealand market.
• On impact of heightened trade with China, the report said:
“Australia and New Zealand are both engaged in FTA negotiations with China.
“Once concluded, those agreements can be expected to induce Australia and New Zealand to shift production to higher value-added goods to accommodate an expected influx of lower-value manufactures from China.
“This coincides with FIC producers’ efforts to move to value-added processed products-thus making it harder for FIC producers to find value-added niche products for export to ANZ.”
• On closer integration of FICs with ANZ:
“The bilateral FTA between Australia and New Zealand (ANZCERTA) has substantially integrated their markets in goods and investment. Negotiations on an Investment Protocol to ANZCERTA will further liberalise investment flows.
“FICs are an extra-regional party and therefore excluded from the benefits of closer economic integration between Australia and New Zealand.”
• On services:
“FICs should expect negative lists in ANZCERTA to be maintained in PACER-Plus.Under ANZCERTA, Australia retains six items on its negative list; air services, broadcasting and television, third-party insurance, postal services and coastal shipping.
“New Zealand retains air services and coastal shipping on its negative list.
• On quarantine:
“Quarantine compliance is one of the most formidable barriers for FIC food exports to ANZ. FICs should expect ANZ to maintain stringent quarantine regimes under PACER-Plus. Even so, several ANZ agreements may be instructive with respect to functional approaches to ameliorating quarantine impediments.”
The report however is not all about the minuses of PACER-Plus. Any trade pact between islands nations of the Pacific should indeed bring a plus to their economies in the area of investment for instance.
Precedents offered by Australia’s FTA with the US (AUSFTA) said the report could substantiate FIC demands for protection of communal land, industries of national interest and the environment.
“AUSFTA provisions governing screening of foreign investments in urban land provide a basis for FICs to demand similar screening rights for communal lands within PACER-Plus.
“Australia maintains foreign investment limits in sectors of national interest such as the media and national airlines. FICs may or may not want to maintain similar protections, but within PACER-Plus negotiations should be compensated if they liberalise in areas for which ANZ maintains protection.
“AUSFTA provides a broad exception for parties to condition investment activity in a manner consistent with environmental concerns.
“Based on this precedent, the FICs should seek an identical exception in PACER-Plus.”
Of relevance particularly for islands countries is the exception on indigenous people provisions accorded in FTAs like the proposed PACER-Plus.
Australia, the report noted, “has reserved the right to adopt or maintain any measure that accords preference or provides favourable treatment to indigenous persons or organisation” in its FTA with Singapore.
New Zealand similarly took a reservation in its closer economic partnership with Thailand in order to “accord more favourable treatment to the Maori” under its Treaty of Waitangi.
“These exceptions maintained by both Australia and New Zealand deal with fundamental obligations of the government with respect to indigenous peoples and have been the subject of recent interpretations by the courts that are more forthcoming in protecting the rights of Aboriginals, Torres Island and Maori peoples.
“These exceptions may have more relevance for FICs than other ANZ FTA partners because of connections among the tribal people in the region including diaspora groups working in ANZ.”
PACER report wasn’t ‘leaked’: Urwin
Australia and New Zealand had a prior look at the Nathan Report on a proposed free trade agreement between them and the smaller members of the Pacific Islands Forum, Greg Urwin, Forum Secretary-General confirmed.
And he has defended this arrangement saying the two bigger members of the Forum needed to look through the possible costs of implementing the Pacific Regional Trade and Economic Cooperation-Joint Baseline and Gap Analysis report. At least one smaller member of the Forum had questioned the arrangement when senior government trade officials met in July in Vanuatu.
“Fiji raised it in the form of a question during the session, as to why the report was first given to Australia and New Zealand and then circulated to the rest of the Forum member countries later,” a member of the Fiji delegation told this magazine.
“As far as we know, this was a departure from the usual practice about reports that are commissioned by the Secretariat.
“It was our view that all members of the Forum should be treated equally.”
When this was put to the Forum Secretariat, Urwin said the selected release of the report was done for a very good reason.
“The secretariat discussed the report of the Pacific Regional Trade and Economic Cooperation - Joint Baseline and Gap Analysis Study Report with Australia and New Zealand prior to the Forum Trade Ministers Meeting in Port Vila, because of the possible resource repercussions of the recommendations in the report,” wrote Urwin in his electronic response to this magazine’s query.
“The secretariat felt it necessary to do this to solicit support from Australia and New Zealand should recommendations need extra resources for their successful implementation.
“Nothing was “leaked” to anybody,” he added. He also denied suggestions that the development aspect of the Nathan Report had been “doctored” or “amended” since its selective release.
“The report that has been circulated to the FICs for comment is the same in every particular as was discussed with Australia and New Zealand.
“FICs now have the opportunity to submit their views on the report before it is discussed further at the next Forum Trade Ministers meeting.
“Further material subsequently provided by the consultants on the development dimension will also be used as a basis for discussion.”
Urwin said he personally supported the idea of PACER-Plus having a “robust development dimension”.
He made a strong appeal about this at a speech he delivered in Auckland during the last week of August.
“As it currently stands, PACER confines itself to establishing a two-way free trade in goods between Australia, New Zealand and the Forum Islands Countries.
“This is, of course, a completely inadequate expression of the totality of the relationships among those entities-nor was it meant to be so.”
To Urwin, the PACER-Plus development may be the best way to ‘etch in stone’ the extra special relationship Australia and New Zealand have with the islands of the Pacific.
“In other words, a final recognition by New Zealand and Australia that for them the Pacific region is special and like no other and that it is not some kind of unavoidable responsibility but a community of which they are part of and which their own destinies are intimately bound up with.
“When I say this, incidentally, I do not for a moment imply that New Zealand and Australia stand in the same position in relation to the Pacific region.
“By almost any demonstrable measure, New Zealand has accepted to a much greater extent than Australia that it is actually a part of the region.
“Given the difference between the two countries, perhaps that will always be the case and perhaps there may be advantages for all of us in that.
“But for both, and even if in different ways, it is the principle which needs to be etched in stone.”