Trade Deals and Trade-Offs in the Pacific

Written by Terence Wood

There was a time when trade liberalisation was all the rage in development. Literally. Events such as World Trade Organisation meetings were frequently encircled by rioting ‘anti-globalisation’ protesters and police. In the media, those on either side of the debate let loose with salvos of argument and accusation — each side claiming the other was pushing policies that promoted poverty and harmed development.

For those in favour, lowering the formal barriers to international trade was the best available means of tackling global poverty. To those against, trade liberalisation meant sweatshops, developed country hypocrisy, the loss of national sovereignty, and more — not less — poverty.

Things were never quite as heated in the Pacific, but the debate played out here too, in the form of arguments around the proposed regional trade agreements PICTA and PACER. On one side of the debate, supporting the agreements were a range of economists, organisations like the (now defunct) Trade Liberalisation Network [pdf]and the Foreign Ministries of Australia and New Zealand. On the other side were NGOs like Oxfam New Zealand, organisations like such as AidWatch [pdf], Pacific Network on Globalisation (PANG), and – by means of full disclosure – people like me.

Those supporting trade liberalisation in the Pacific appealed to economic theory, arguing that barriers to trade were, in effect, barriers to the efficient allocation of resources and impediments to the ability of countries to specialise in what they did best. Tariffs, they argued, punished poor consumers who had to pay more for imported goods. Supporters of liberalisation also argued that the small island states of the Pacific needed to integrate with the global economy if they were ever to experience sustained economic growth. They argued that government revenues lost through tariff reduction could be recouped by the implementation (or raising) of consumption taxes. (This [pdf] paper by Duncan and Quang notes many of these points and discusses the debates; for a discussion of the potential for consumption taxes to offset GST see this paper [pdf] by Kaufmann).

Meanwhile, opponents of liberalisation also appealed to economic theory (so-called New Trade Theory which provided a theoretical basis for infant industry protection), and to historical evidence showing that the world’s developed countries became developed whilst shielding their industries from international competition (the book ‘Kicking Away the Ladder’ by Ha-Joon Chang was often the source of these arguments — you can read a summary here). Moreover, they claimed, the evidence mustered to illustrate the supposed growth benefits of free trade were questionable (here there arguments were based on papers such as this one [pdf] by Rodriguez and Rodrik). They also argued that consumption taxes were an inadequate substitute for tariffs particularly as they were more regressive, falling not only on imported goods but also on locally grown staples that formed a major share of poor people’s consumption. Finally, they argued that PICTA and PACER were being forced on reluctant Pacific governments by the overly assertive duo of Australia and New Zealand. (Many of these arguments can be found in this paper [pdf] by two members of PANG.)

Thanks both to the perennially stalled of Doha round of the WTO and also to the rise of competing issues such as the War on Terror and Climate Change much of the heat has gone out of the global trade liberalisation debate. In the Pacific the issue still remains relevant though: progress continues, albeit slowly, towards to the realisation of the PICTA and PACER agreements; and the various protagonists continue the debate, in more muted tones perhaps, through various media.

Who’s right? Or, at least, who do I think’s right?

I’m less certain than I used to be but, on balance, I think the critics of PICTA and PACER are more right than the proponents. The critical term here being ‘on balance’. The pro-liberalisation arguments do have merit: as five minutes in Honiara’s China Town will show you, it isn’t just wealthy elites in the Pacific who consume imported goods — the welfare costs of the tariffs are real, and might possibly be better allocated across the economies of Pacific Island countries via consumption taxes.

Yet, the ability of many (although not all) Pacific governments to effectively levy consumption taxes isn’t great — it’s unlikely that they would actually be an effective replacement for lost tariff revenue. Similarly, in small island economies, the transition costs associated with lost jobs in currently protected areas, where such jobs currently exist, aren’t insignificant. Labour markets in most Pacific Island Countries are not dynamic, unemployment is already high, and opportunities for the newly-unemployed few. Moreover, the historical evidence for the infant industry argument (that tariffs are necessary to allow new industries to develop) is reasonably persuasive.

So on balance I still side with the critics. However, I’m also not that sure that the stakes in the debate are actually that high.

In the case of job losses, the issue is real but my guess is that they won’t be numerous. And in the case of lost government revenue, in many Pacific Island states the tax revenue lost is likely to be small compared to aid related revenues and not necessarily spent that well anyhow. Likewise, infant industry policies may have worked in South Korea, but the internal economies of most Pacific states are tiny: is there really much scope for industries to actually develop shielded by tariffs? And do any of the Pacific Island states actually have the capacity to effectively follow industrial policy? None were able to under the lenient, tariff-friendly, SPARTECA trade regime of old.

Similarly, if it’s the trade liberalisation skeptics who are wrong and the pro-trade liberalisation camp who are right, it’s unlikely that the stakes would be any higher. As I mentioned there are some potential static welfare benefits that could come with reduced tariffs. But with respect to actual long-run economic growth, tariffs aren’t likely a major barrier. The inefficiencies associated with them are, it seems to me, trivial when weighed up against the other impediments to economic development in the Pacific: geography, human capital, and the interaction of informal institutions and economic incentives.

And ultimately this is where I differ from both sides of the trade debate in the Pacific: compared to other development issues, I don’t think the differences between the competing trade regimes are actually that important. Compared to climate change, governance, aid effectiveness, and the potential benefits of migration schemes, the development ramifications of trade deals are unlikely to be significant.

Terence Wood is a PhD student at ANU. Prior to commencing study he worked for the New Zealand government aid programme.

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Terence Wood

Terence Wood is a Research Fellow at the Development Policy Centre. His research focuses on political governance in Western Melanesia, and Australian and New Zealand aid.

9 Comments

  • As an extension to the discussion, it should be noted that a New WTO Procurement Deal is close.

    Forty-two countries are now close to agreeing an upgrade of their Government Procurement Agreement (GPA), a reform that could unlock tens of billions of dollars of commercial opportunities, and many times more if China gets on board.

    The GPA, a voluntary agreement within the World Trade Organization (WTO) opens a wide spectrum of public contracts in member countries to bidders from other members, improving competition and efficiency as well as providing massive new markets in areas such as infrastructure and transport. By upgrading the existing 1996 agreement, its members hope to bring their rules into the internet age, deepen market access and offer special treatment for developing countries.

    If the GPA members reach agreement, it would rescue trade ministers from a potentially embarrassing WTO meeting in December, since the 153 members have failed to clinch a deal on the Doha round of talks aimed at further liberalizing trade. The GPA talks, which had also taken 10 years so far, stood a better chance of success than Doha because they involved “a coalition of the willing” rather than the full WTO membership.

    The GPA is to date, the only legally binding agreement in the WTO focusing on the subject of government procurement. The GPA is a “plurilateral” agreement, which means that it applies to a number of WTO Members, but not all Members. The GPA’s membership is limited to the 40 WTO Members that specifically signed the GPA or that have subsequently acceded to the Agreement. Several countries, including China, Jordan, and Moldova, are currently negotiating accession to the GPA.

    The GPA establishes an agreed framework of rights and obligations among its Parties with respect to their national laws, regulations, procedures and practices in the area of government procurement.

    An important cornerstone principle in this regard is non-discrimination. In respect of procurement, Parties are required to accord to the products, services and suppliers of any other Parties treatment “no less favourable” than they give to their domestic products, services and suppliers.

    In order to ensure that the basic principle of non-discrimination is followed and that access to procurement is available to foreign products, services and suppliers, the Agreement places considerable emphasis on procedures for providing transparency of laws, regulations, procedures and practices regarding government procurement. There is also a general requirement to publish laws, regulations, judicial decisions, administrative rulings of general application and any procedures regarding government procurement.

    The Agreement contains a number of detailed procedural obligations which procuring entities have to fulfil to ensure the effective application of its basic principles. In many respects, these provisions codify recognised good practices in the area of government procurement aimed at ensuring efficiency and value for money. In the context of the GPA, they also serve the purpose of guaranteeing that access to procurement is open and that an equal opportunity is given to both domestic as well as foreign supplies and suppliers in competing for government contracts.

    The Agreement covers the use of tender notices; the use of various tendering procedures; when negotiations can be held; minimum deadlines that must be allowed for the preparation, submission and receipt of tenders; the provision of all necessary information related to the procurement in question; obligations on technical specifications; procedural rules for submission, receipt and opening of tenders; evaluation and award of tenders; that information must be provided, after the award of the contract; and the mandatory requirements for the establishment of a domestic bid challenge system.

    Whilst no developing countries are either members or observers, the Agreement recognizes the development, financial and trade needs of developing countries, in particular least-developed countries, and allows special and differential treatment in order to meet their specific development objectives.

    The Agreement and its provisions provide an excellent starting point for developing countries that are reforming government procurement.

    The Agreement is comprehensive and again, the provisions codify good practices in government procurement.

    E. John Blunt is a Procurement and Institutional Expert with extensive experience in leading public procurement reforms in a variety of international development environments. he is currently working with the Southern African Development Community Secretariat in Botswana.

  • Thanks Derek.

    I agree insomuch as that I think that, if migration were to be on the table in these agreements, then there really would be development ramifications.

    cheers

    Terence

  • The fundamental problem with PACER is that it continues to be pursued through the narrow confines of a trade negotiation. My reading is that the Pacific leaders wanted a broader, more in-depth agreement much like the economic partnership between Australia and New Zealand (ANZCER).

    Trade is only one part of the equation. Regional integration requires a broader consideration, one that also encapsulates the aid program, the investment debate and the migration debate. One that considers the depth of history, social, cultural and political affiliations between countries.

    Added to the protracted fiasco of PACER Plus is the obsession to hard-wire a ‘regional’ solution. Have we not yet learnt that this only leads to more regional disunity? Before we can cooperate on a regional basis, first each country has to know and own the agenda. We are nowhere close to such country buy in.

    A broader conversation could bridge the gap, give us an indication of what the people of the Pacific aspire to, and ultimately establish the architecture that will lead to deeper regional integration.

  • Thank you Wesley and Arnie,

    Those are very interesting points.

    Wesley, your point about other avenues through which Australia and New Zealand could assist with trade is excellent – I agree completely. If the govts. of Aus and NZ were really serious about aiding trade in the Pacific these are the areas they ought to be looking into, rather than worrying about PIC tariffs.

    Thanks

    Terence

  • Creating a tidy conclusion to the development/trade issue in Pacific is a bit like a Rubik’s cube, particularly when we begin to work out the various sides. Where green may = climate change; blue = private investment; red = development aid; yellow = militarization; white = independence/decolonisation; orange = food/water security.

    As we begin to spin the cube, the various issues collide until we begin to sort through them, unraveling the system that the cube represents. I personally see Pacer and Picta and FTAs as representing just a part of the cube, neglecting green, orange and white, for example. These agreements are a two-dimensional attempt at justifying its assertion of economic hegemony to pacific island peoples and resources.

    Do these agreements allow for peoples to steward their lands, labor and resources? How do these agreements allow for Pacific Island governments to profit long-term from exploiting deregulated environmental protections?

    Part of this problem is that large countries economic growth is generally much faster than small countries, as large countries have greater control over markets, commodities and assets. When Pacific Island’s resources are included in the larger countries economies, our potential for growth is even more stunted when we can only include a small percentage of our resources as part of our economic output. If this were in any way a reasonable assessment of the situation, how might we re-frame the problem so that small countries trade with other small countries with expectations of low economic growth?

    It should be of some interest that large countries with high growth also suffer from high debt, and that small countries should not be further punished by the large countries to pay for a system that is not inherently sustainable.

    There are unexplored routes for Pacific peoples and nations, and agreements that seemingly purport integration while in reality funnel revenue streams to transnational investments, ought to be put on hold rather than bundled into regional cooperations like APEC.

  • Great blog Terence. Well summarised overview of the debate around trade policy in the Pacific.

    With regard to SPARTECA, it should be pointed out that Pacific states did develop some export industry under the preferential access offered to Australian and New Zealand markets. Exports of car parts from Samoa and textiles from Fiji are a case in point.
    However, SPARTECA isn’t as lenient as is often suggested. Both the car parts and textile exports to Australia relied on ad-hoc derogations from the Rules of Origin (RoO) requirements of SPARTECA. Hence SPARTECA’s restrictive RoO may have acted as a brake on the development of other export industries. So SPARTECA evidently needs to be improved, and the Island countries have called for this for some time.

    Similarly for agricultural exports, Australian quarantine authorities have been notoriously slow at assessing the entry of new Pacific produce to Australian markets. Certainly there are more export pathways for Pacific tropical fruits and vegetables to New Zealand. So new export pathways are needed for Pacific island agricultural goods.

    And of course in recent years Pacific island countries have also exported labour to Australia and New Zealand as part of short-term labour mobility schemes in the horticultural sector. So we know that, if designed well, labour mobility schemes can be mutually beneficial.

    The point is, even if PACER-Plus is less relevant today, there are a number of alternative ways that Australia and New Zealand could help Pacific island countries benefit from trade – if there is sufficient political will.

  • You are heading in the right direction with these views. Having worked in the aid supported trade and investment promoting regional I can confirm the following:
    1. There is a huge amount of hot air, papers, meetings, reports etc that achieve nothing, cost a huge amount and are an extremely inefficient attempt at promoting development. Over 30% of the time and money spent in aid supported trade & investment bodies can be spent on reporting rather than achieving.
    2. The Pacific is made up of island micro nations with micro economies while most economic theory is based on experience in large developed continental nations. The exception is PNG where the arguments can be made either way – a successful job creating sugar industry has survived thanks to its granted monopoly and export trade benefits yet PNG suffers from overpriced cement and fuel due to open ended protectionism offered to foreign investors. PNG often offers overly generous terms to attract FDI.
    3. Often the cost of delivering trade assistance, aid, and support far outweighs the value and benefit of what is delivered. Money is spent on activities that deliver nothing and when there is a tangible delivery the delivery cost is much too high.
    4. The Pacific can’t afford inefficiency with its limited resources. Costs of goods and materials need to come down but this is difficult in micro markets that can only support limited competition in many areas. Inefficient and wasteful governance is seen in government, trade and aid bodies, and regional organizations.
    5. The economic text books and theory need to be rewritten to suit isolated micro island micro economies. Officials in Canberra, Wellington,Geneva & New York needs to understand that we don’t live in a one size fits all world.

  • Terence, I don’t agree with all you say, but you’re spot on with your conclusion. PACER Plus is an irrelevance. Unfortunately, neither Australia nor NZ nor any of the island economies appear prepared to come out and admit to this.

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