Why a free trade agreement with our big brothers could hurt us
By Online Editor
4:42 pm GMT+12, 31/03/2009, Fiji
The Australian Trade Minister Simon Crean and Parliamentary Secretary for Aid Bob McMullan will tour the Pacific this week to meet with national counterparts to discuss a possible free trade agreement with Australia and New Zealand. Here, Maureen Penjueli and Wesley Morgan explain why such a deal might come with many costs for the region.
For the first time in fifteen years, Australia will this year host the Pacific Island Forum Leaders meeting in the first week of August. At this meeting, the Australian government wants Pacific leaders to agree to begin negotiations for a free trade agreement between Forum Island Countries and Australia and New Zealand, known as PACER-Plus. Australian Trade Minister Crean says PACER-Plus would be a “development deal for the Pacific region”. He insists that such a deal would help the Pacific “engage the global economy” and should not be seen as a threat, but as an opportunity.
The reality is that many people in the region have concerns whether a free trade agreement is the best way to achieve improvements in health, education and sustainable development, and are worried about the wisdom of opening markets to our biggest trading partners. Given increasing pressure for the region to enter into a new deal, it is important to take stock of some of the implications of PACER-Plus.
Potential implications of a free trade deal with Australia and NZ include:
PACER-Plus could lead to a substantial loss in government revenue
Many governments in our region are struggling to provide public services paid for through taxes (like health, education, water, electricity, police and emergency services). One of the ways Pacific countries collect these taxes is through a tax on imported goods (often luxury goods). PACER-Plus will force Pacific governments to stop collecting some of these taxes, which means governments will have difficulty supporting already struggling public services.
A report commissioned by the Pacific Islands Forum Secretariat, and completed by Washington-based consultants Nathan Associates, found that under PACER-Plus, Pacific countries stand to lose tens of millions of dollars each year. That report found Vanuatu stands to lose around 17% of its annual government revenue, as does Tonga, while Samoa and Kiribati stand to lose around 14% of their revenue. The same study found the Solomon Islands could lose up to 6% of government revenue (around $31 million Solomon Dollars). Even bigger countries like Fiji and PNG stand to lose more than $10 million each year .
It is unclear how Pacific governments would continue to provide services to their people if they lose this much revenue. One of the ways they might save money is to downsize their public sector - putting more people out of work. Any loss of jobs for nurses, teachers and public servants would place an added burden on women who work in these sectors.
PACER-Plus could lead to higher taxes for the poor
If Pacific governments sign on to PACER-Plus they will have to look for other ways to raise money they need to provide public services. This usually means introducing a new tax in the form of a value-added tax (VAT) or goods and services tax (GST). Governments that already have these taxes will be forced to raise them.
Taxes on goods and services can unfairly penalise the poor. This is because everybody pays the same amount of tax, regardless of how much income they earn. A poor person buys bread, cooking oil or other basic goods (and pays tax on them), just as much as a rich person.
Even if these taxes are introduced, it is unlikely that Pacific governments will be able to recover the money lost through PACER-Plus. Studies by the International Monetary Fund have found that over the past 25 years, low income countries have failed to recover government revenue lost from the reduction of import taxes (and that introducing VAT has had little impact on meeting the shortfall). There are recent examples of this in our region - when the Asian Development Bank forced Vanuatu to lower tariffs and introduce a VAT as part of conditions for a new loan in the late 1990’s for example, the country suffered massive revenue losses that it took many years to recover from.
PACER-Plus could lead to business closures and job losses
Businesses and industries in the Pacific face considerable constraints to doing business (distance from markets, costs of inputs, small economies of scale, lack of human resources etc.)
Opening Pacific markets to well-established corporations in Australia and New Zealand may not necessarily make Pacific businesses more efficient - it may instead wipe them out.
Wadan Narsey, Economics Professor at the University of the South Pacific, has previously predicted that under PACER-Plus up to 80% of Pacific manufacturing would close down, leading to unemployment for thousands of workers. Pacific countries have little or no social ‘safety net’ to retrain these unemployed workers or support them with welfare benefits while they look for other job opportunities.
PACER-Plus could undermine access to essential services
Services like health, education, water, electricity, post, waste management etc. are important services that should be available to everybody in society. These services play a social role, and it’s only recently that they have been thought of as ways to make profit. Some of these services (like health and education) represent basic human rights, and under international treaties governments are obliged to provide these services to everybody at accessible prices.
PACER-Plus will require Pacific governments to open service ‘sectors’ like health, education or tourism - allowing Australian and NZ companies to compete to provide certain services in their country. There are two main reasons why this could undermine access to services (especially for women, the unemployed and the rural poor).
Firstly, opening service ‘markets’ could allow foreign companies to pick and choose where they provide services, and who they provide them to. Companies might provide water, health, education, or power services to wealthy people in the cities and towns, but not extend these services to rural areas or to outer islands. This is especially a concern in the Pacific, where in some countries there are no regulations in place to ensure everyone has a right to access these services.
There are already examples of this in the region - in Vanuatu a subsidiary of the world’s largest private water utility corporation (French-based Suez) provides water at some of the highest prices found anywhere in the Pacific, to people in the capital Port Vila. While Suez is making healthy profits delivering water to the better-off in Vila, provision of safe drinking water to the majority of ni-Vanuatu remains a responsibility of government (who cannot cross-subsidise the extension of water services into rural areas with money made from water provision in the capital).
Secondly, opening service ‘markets’ can lead to two levels of services in the country, where the rich get good services, but most people don’t. Listing health services for example, would allow the building of foreign hospitals, clinics and dental clinics. This could lead to an internal ‘brain drain’, where the most skilled health staff are drawn away from the public sector (by means of higher pay) leaving poor or remote areas without the people they need to run essential healthcare facilities.
Any loss of services would place an increased financial, emotional and time burden on families and communities, and in particular women, who often provide care, education and source necessary resources (including water and firewood) for their family’s needs.
PACER-Plus could undermine policy space needed for development
PACER-Plus is likely to prevent Pacific governments from making a range of policy choices that could be used to stimulate Pacific industry, tourism and agriculture, and create local jobs.
A free trade deal would force Pacific governments to bind their tariff rates at a low level - removing forever the ability to protect local producers from foreign competition while they become established and internationally competitive. This takes away our right to use development strategies that have been used successfully by developed nations (like Australia and NZ) and other developing countries.
PACER-Plus would also make it difficult for Pacific governments to favour local companies or agricultural producers. Under the terms of a new deal, Pacific governments may not be able to support local firms with things like time-bound tax breaks, preferential credit, input subsidies, or training grants without extending those same treatments to an Australian or NZ corporation interested in establishing a similar enterprise. It is likely to be more difficult to provide price subsidies to farmers as well - a policy option used by many Pacific countries in recent years to stabilise fluctuations in the price of key commodities like copra.
Providing support to agricultural producers (through subsidised fertilizer and equipment for example) could become even more important in the future, as Pacific countries look to improve domestic food security in the face of world-wide price rises for key staples like rice.
PACER-Plus is also likely to reduce the ability to regulate new investment in a way that creates local employment - by removing the ability to require Australian and NZ investors hire local workers and managers, train local workers, partner with local businesses or use local inputs and suppliers.
PACER-Plus is not necessary for trade and development in the region
Mr Crean insists that PACER-Plus would help the Pacific to “engage the global economy”, but the truth is that a free trade deal with Australia and NZ is not necessary for Pacific countries to benefit from international trade.
If Pacific governments want to lower tariffs on imports, open service sectors to increased competition, or offer incentives to foreign investors, they can do so at any time they like. PACER-Plus would only have the effect of forcing Pacific governments into a particular development model, and tying their hands if something went wrong or they wanted to change their policies as circumstances change. In recent years, Pacific governments have had to intervene directly in the market following major natural disasters (as when Samoa paid farmers to replant crops following cyclones in the 1990s), or when the privatisation of a government service has gone wrong (as happened when Tonga decided to re-nationalise its electricity services). PACER-Plus could remove some of this important policy flexibility.
There are a number of ways Australia and NZ could help to develop trade in the Pacific - but none of these need to be linked to a potentially harmful free trade agreement. Australia and NZ could provide assistance to Pacific exporters trying to meet their strict quarantine standards, or help to meet key infrastructure challenges (improving roads and access to port facilities), or introduce programmes to improve the marketing of Pacific tourism and niche agricultural exports (in Australia and NZ). Australia and NZ could review the Rules of Origin requirements under SPARTECA so Pacific nations qualify for exporting more finished products to Australia and NZ duty-free. Australia could also review the impact of Australian non-tariff barriers to trade (such as the public health restrictions on imports of commercial quantities of kava to Australia which have damaged a key export opportunity for countries like Vanuatu and Fiji).
Australia and NZ can also continue to open their labour markets to unskilled and semi-skilled Pacific workers under temporary labour mobility schemes (as they have done under the Recognised Seasonal Employers scheme in NZ, and the Pacific Seasonal Worker Pilot Scheme in Australia). Again, this shouldn’t be done in the context of a regional free trade deal.
Little to gain
While there is considerable risk of harm from PACER-Plus, potential gains for the region are likely to be small. Mr Crean says that trade volumes could increase by up to 30% under the deal, but fails to mention that the overwhelming majority of this increase would be in exports of Australian and NZ products into the Pacific. Pacific countries already have duty-free access to Australian and NZ markets for most of their products. Australia and NZ might try, however, to lure Pacific governments into a deal with promises of ‘aid for trade’ or by linking PACER-Plus to new labour mobility schemes.
Some also argue that PACER-Plus will lead to lower prices for consumers in the region, but experience suggests that in many cases exporters and distributers (‘middle men’) tend to increase their prices almost back to the same level after tariffs are removed, and fail to pass on the benefits to consumers. Certainly this has happened before in the Pacific. Following tariff reductions on consumer items in Vanuatu, a report commissioned by the United Nations Development Programme found that a fall in retail prices was not evident, attributing this to “domestic market imperfections and high cost inter-island transportation”. Consumers may also face a higher sales tax that is likely to cancel out much of any possible price decreases in any case.
What’s the rush?
The Australian government wants to launch PACER-Plus negotiations at the 2009 Forum Leaders’ Meeting. But the idea that Pacific governments should rush into a free trade deal to meet the political goals of the Australian government is simply unacceptable.
Furthermore, our governments should view the implications of PACER-Plus in the context of the global recession. At this time nations around the world are looking at ways to stimulate their local industries to maintain employment, is it really a good time for Pacific countries to be losing government revenue, or opening our markets to competition that would lead to local job losses?
Pacific governments need to continue to develop national-level trade policy that meets the needs of our economies and people. This means maintaining the policy space required to pursue national development strategies, and taking the time to consult with all stakeholders when making trade policy
Maureen Penjueli is Coordinator of the Pacific Network on Globalisation (PANG). Wesley Morgan is the PANG Communications Officer.