Evaluation of Regional Trade Agreements in the Pacific Islands

Biman Prasad

Professor of Economics and Dean of the Faculty of Business and Economics

Source: Satish Chand

PICS, ANZ & the three M’s

CountryLand area (sq

km) Population

(‘000) (2004)Pop'n density

(sq km)

GDP per capita (PPP,

2004$)

Aid per capita (2003US$)

Life expectancy

at birth (2003)

Cook IslandsFiji 18270 848 46 6092 61 70Kiribati 730 98 134 191 63Marshall Islands 181 60 331 1600 991 70Micronesia, Fed. Sts. 702 127 181 2000 923 69Naurua 21 13 619 5000 63Niuea 260 2 8 3600Palau 460 20 43 1295Papua New Guinea 452860 5625 12 2564 40 57Samoa 2830 179 63 5694 186 70Solomon Islands 27990 471 17 1773 70Tonga 720 102 141 7236 270 71Tuvalua 26 11 423 1100 68Vanuatu 12190 215 18 2893 154 69

ANZ Australia 7682300 20120 3 30116 80New Zealand 267990 4061 15 22912 79

The 3MsMaldives 300 300 998 3900 61 69Malta 320 401 1253 18954 25 79Mauritius 2030 1234 608 11943 20 72 S

ourc

e:

Sati

sh C

hand

Percent change 1995 - 2005: selected PICS

Agricultural land (% of land area)

Agriculture, value added (% of GDP)

Exports of goods and services (% of GDP)

GDP (current US$)

Industry, value added (% of GDP)

Merchandise trade (% of GDP)

Population, total

Services, etc., value added (% of GDP)

Workers' remittances

Fiji0.00 -28.63 -7.22 52.15 -9.88 0.52 7.83 14.64 457.58

Kiribati0.00 -65.52 .. 44.27 39.35 25.94 23.75 15.74 0.00

Marshall Islands7.69 .. .. 37.17 .. -16.89 24.05 ..

Micronesia, Fed. Sts.

0.00 .. .. 10.96 .. 12.90 2.65 .. ..

Palau0.00 -45.70 432.97 51.90 104.44 .. .. -7.95 ..

Papua New Guinea12.82 .. .. 7.48 .. 14.06 28.91 .. -16.81

Samoa1.09 -26.75 .. 101.60 -7.52 -5.08 9.27 13.84 -98.22

Solomon Islands11.84 .. .. -8.33 .. -2.26 30.57 .. ..

Tonga-9.09 .. .. 32.28 .. 8.71 2.00 .. ..

Vanuatu1.38 -15.18 -13.13 61.47 -23.04 -9.87 25.05 7.86 -21.43

Economic data

Source: ADB

PIC export marketsPIC Export Markets (% total exports), most recent year

  Market 1 Market 2 Market 3 Market 4Share 4 markets

Intra-regional

share

Cook Is. Japan 30.8 NZ 12.9 Australia 7.1 50.8 20

FSM Japan 21.4 USA 20.9 Guam 3.4 45.7 0

Fiji USA 19.1 Australia 16.5 UK 11.9 47.5 16.5

Kiribati USA 26.2 Belgium 24.6 Japan 16.4 Australia 8.6 75.8 8.6

Nauru S. Africa 56.7 India 15.4 Canada 5.9 Australia 1 79 1

Niue N/A 0

RMI N/A 0

Palau USA N/A Japan N/A Singapore N/A 0

PNG Australia 29 Japan 8.7 China 5.4 43.1 29

Solomon China 39.7 Korea 15.1 Thailand 6.7 Australia 1.3 62.8 1.3

Samoa Australia 65.5 USA 8.2 A. Samoa 3.5 77.2 65.5

Tonga Japan 33.3 USA 26.6 NZ 11.1 Australia 2 73 13.1

Tuvalu Germany 62.1 Italy 20.7 Fiji 7 Australia 2.7 92.5 9.7

Vanuatu Thailand 47 Malaysia 18.6 Poland 8.3 Australia 1.5 75.4 1.5

Average   65.71 11.8

Agreements (regional and International

• PICTA- Pacific Islands Countries Trade Agreement• PACER- Pacific Agreement on Closer Economic

Relation• EPAs Economic Partnership agreement with the EU-

trade side of Cotonou agreement• MSG- Melanesian Spearhead Group Trade

Agreement (Fiji Papua New Guinea, Solomon Islands and Vanuatu

• SPARTECA- South Pacific Countries and ANZ

PICTA

• PICTA- All Pacific Islands Countries • Australia and New Zealand were excluded• PICTA signed in 2001• Came into effect in 2003• 6 Countries ratified- Fiji, PNG, Solomon Islands,

Tonga, Samoa, Cook Islands, Niue, Nauru and Kiribati

• US Compact countries were given a grace period (to seek waiver from US on their MFN relationship

PICTA-trade liberalisation

• Gradualist approach to reduction/elimination of tariff or other non-tariff trade restrictions (over10-12 years)

• Clearly defined rules for trade and fair competition• PICTA – ROO (50% local content)• Objective to create a single regional market of 8

million people• Grace periods for manufacturers and infant

industries

PICTA-Stepping stone

• View that trade under PICTA will help countries to face steeper competition from other developed countries

• Learning by doing first amongst themselves

• Governments also will learn from this as far as monitoring and regulations are concerned

• Allow governments to promote fiscal reforms to ensure that they adjust better when there is a more open environment.

PICTA-political advantages

• PICTA will give international voice

• Lock in effect expected from the implementation of the PICTA- harmonised policies

• Aid packages from ANZ could facilitate further trade

PICTA- can it deliver

• Evidence on RTAs around the world suggest that it promotes trade

• Some advantages- lower prices for consumers, greater consumer surplus and better quality products

• Benefits to both Governments and exporters

PICTA- can it deliver (2)

• Without PNG total population is less than 2m

• All have low income per capita

• All have poor communications links

• All lack developed infrastructure

• All have similar resource endowments• Very few geared to exports

PICTA- can it deliver (2)

• Larger firms from bigger countries could take advantage

• driving out smaller producers and suppliers

• Monopolists may capture the benefit

• Effective competition may not be possible

PICTA- can it deliver (3)

• Much of the exports are simply re-exports• Investment benefits are doubtful• Fiji potentially the biggest beneficiary- trade

disputes- Vanuatu Kava to Fiji• Powerful lobby groups don’t allow the full

liberalisation• Government officials unable to understand and

reduce the influence of lobby groups

EPAs,

• EPA with the European Union- Most Pacific ACP states derived preferential access to the EU market

• EPA was to replace the Cotonou agreement• Negotiations begin in 2002 and concluded in 2008• 10 Pacific Island Countries engaged in negotiations

with EU but only Fiji and PNG signed in 2007• Fiji and PNG signed to avoid the disruption to trade

in their principal exports- sugar and tuna• PNG tuna worth about 40 million pounds

EPAs (2)

• EPA with Fiji and PNG contains the following:– Trade in goods- prohibition of new export taxes except

environment or infant industry support– ROO- subject to review in 5 years– Safeguards- available to PICs for 10 years– Customs and trade facilitation- protcol on customs

cooperation– TBS and SPS- enhanced cooperation amongst national

authorities and identification of priority products for regional harmonisation

– Dispute settlement– Rendezvous Clause

EPAs (3) Implications

• Displacement- has the potential to replace intra regional trade frameworks such as PICTA and MSG

• Diversion- potential to divert PICs imports from ANZ to EC

Benefits of PACER plus- this section is based on a presentation by Peter Callagher on behalf of the team

Regional trade benefits

– PACER offers significant trading benefits for ANZ and PIC consumers (ignored factor)

– Up to 30% increase in merchandise trade (based on Prasad study)

– Unquantified but likely fundamental gains from commercial services

– Labor liberalization gains could be biggest

For both sides (PIC share = 80% if unskilled included)

Deepening the economy

Regional share of exports to top 4 markets

Costs of PACER Plus

•Tariff revenue

•Costs of adjustment

•Diversion a potential cost to PIC consumers/growth

•Planning, implementation are major national projects for PICs

– We recommend substantial ANZ assistance

•Tariff revenues are a surmountable problem

– more difficult for small PICs

Adjustment & diversion need more attention

Tariff revenues in 3 PICs

Fiji ($m)PNG(Km)

Solomon Is. ($m)

Avg. imports 21054 4257 806

Tariff revenue @ simple avg. tariff rate

147.4 255.4 177.4

Limits of PACER plus

Most of the PIC population (80% in PNG) depend on rural incomes. A substantial improvement in their welfare can only come from higher agricultural productivity or more productive employment in other sectors. PACER alone, even with labour market access will not provide this...

...But it can help anchor a broader strategy

Integration demands & promises more

• Integration = trade + investment + standards + 'facilitation' + institutions

• These days there are 'many recipes' for global market integration

–But no recipe for growth turns away from integration

• Distance and borders the great 'disintegrators'

Timing

• All PACER parties are committed, the trigger has been tripped

– There are other reasons (global economy, demographic, environmental?) for an early start

• If work starts now, negotiations could start ... in 2 years?

– Planning, collaboration, data collection, setting priorities

• End-date suggests itself

– Coincident with the final PICTA date

• Possibly an additional two years for 'sensitives' designated in EPA

– Incidentally consistent with WTO

The biggest challenge: coherent strategy• Integration is more than a decade away

– Short term (private) losses loom larger than economy-wide gains

• Gains will be difficult to see, except remittances

• Analysts usually call for 'leadership'

– ... because they don't have to face the political dilemma

– Collaboration is more practical

• Essential that information about plans flows in both directions

– Public-private collaboration on trade negotiations and agreements ensures lower costs, better capture of the benefits

• Requires deliberate action by governments to make it work; see International Comparative Study published by ITC

Planning• Trade agreements are not recipes for economic planning

– A good trade policy starts with other decisions about economic management

– Those decisions need data and political choices

• Example: land and workforce policy objectives

• Example: substituting for lost tariff revenues

• We recommend action to improve data collection

• Agreements are not a puzzle with a 'solution'

– Expect to discover some answers and more questions as you prepare

• Process of ‘discovery’, especially examination of services regulations

– Another reason public-private collaboration is essential

'Winning' and 'losing'• Trade agreements are not a competition with foreigners

– If there's no mutual gain then you have the wrong agreement

• It doesn’t matter who gains the most as long as you are better off with the agreement than without...Looking at the ‘long-run’ result (when all profits are normalized)

• But trade negotiations have some contentious aspects

– Ensuring your priorities are acknowledged

• Especially in implementation schedules

– Making sure your costs are minimized

• Example: longer, back-ended tariff cutting schedules

• Example: Simplified (CTH) ROO or no ROO

– Making sure that surveillance & dispute settlement are fair

• Who determines non-compliance? Provision for compensation pending remedy?

PICs priorities(1) -- IIT assessment

• Preparation

– ANZ typically model the outcome of an RTA to refine the approach

• Not possible in this case

– Collaboration, capacity, data (statistics), RTA overlap

• Essential background work, some already underway (e.g. improvements in national statistics)

– We recommend assistance as part of a capacity building program

• Labour market liberalization

– Model suggests benefits crucially depend on the category of labour

• Costs to PICs of a scheme limited to skilled labor can reduce net benefits to zero (or less)

• Seems likely that ANZ will require some vocational skills (contain management + corollary costs)

• We recommend a sustained cooperative vocational training initiative to increase PIC supply

– There are many other challenges in this proposal

Labour market challenges

• Very high rates of population growth. –Workforce growth of almost 5% in PICS other than Fiji

• Employment share of feasible ANZ labour quotas will be relatively small and will shrink

• Poor standard of most unskilled labour–E.g. nearly 50% of PNG labour illiterate (Chand)

• Resource-rich PICS need to retain skilled and semi-skilled labour–But may find positive spillover effects (‘up-skilling’)

• Labour market access not a guarantee of growth–Marshalls have full access to US labour market yet economy

performs poorly

Source of wealth

• The key is total factor productivity

• The change in GDP that cannot be explained by changes in the quantities of capital and labour.

• Remittances increase income but not sustainable wealth. Only policies that sustain high levels of TFP growth reliably lead to greater output and wealth.

PIC Priorities (2)• The ‘fine print’

– Phase-in

• Highest PIC barriers seem to be on products traded among themselves (i.e. ‘sensitive’ in PICTA)

• Agreement in EPA suggests that 10 years from 2011 (IIT recommendation) is feasible for elimination of goods barriers

– ROO --- how much is needed?

• In small economies ROO can be a barrier to both importer and exporter benefits from FTA [why?]

• We recommend simplified CTH with sector provisions as necessary

• Possibility that ROO can be simplified further once regional RTAs are extended

– Avoiding diversion by making MFN barrier cuts

• Diversion cuts your benefits from an FTA [why?]

• There is a simple remedy: reduce the same tariffs on an MFN basis (eroding ANZ preferential margins)

– Dispute settlement

PICs priorities (3)

•Services sector•Why a negative list?

– Impact•Negative list means those service sectors not listed have market access (and possibly national treatment) restrictions within the region

– Integration with ANZ•The ultimate goal is region-wide integration. Since ANZ have a negative list in the ANZCER region, this strongly suggests PACER should have a negative list approach

– Challenge: keeping it short but not too short– Procedure: regulatory review of commercial services

•We recommend ANZ assistance during preparatory phase– A feasible plan

•Despite high services component of PIC GDP, largest commercial services sectors are already mostly open or strongly integrated with ANZ

– Possibly, start with a simulation

PICs priorities (4)

• Goods sector

– Industry ('competitiveness') survey, positive adjustment planning

• Not to ‘pick winners’ for negotiations but to identify sectors where adjustment costs are likely to be greatest (‘pick losers’)

• Depends in principle on data preparations

– Investment survey and promotion program

• Experience in Australian FTAs suggests that ‘head-turning’ investment impacts don’t occur without some explicit promotion

– Standards conformity and institutional links

• It is not possible to eliminate risk that SPS barriers will arise. But institutional links e.g. with FSANZ should reduce risk.

– Government procurement

• Our report does not examine, but experience shows this deserves specific consideration in design of the agreement

– Customs collaboration

• Often more valuable to business links than tariff cuts

How should ANZ respond?

Access for unskilled labour Dual citizenship for PIC migrants Use of PIC soldiers and naval personal in ANZ forces Investment in PIC infrastructure- water, roads, sewerage

etc Investment in social infrastructure, education and health Promotion of investment in WTO compatible industries

Summary

• An historic step that will help shape the economic environment of the Pacific over next decades

• Substantial trade benefits• ... expanded by labour market opening• But trade benefits do not guarantee growth or a better

distribution of income• Overall gain from integration depends on strategic

choices that complement market integration–Overall market environment, including peace & security,

transparency, good governance and political stability

–Continuing to build market-supporting institutions including accountable management of goods and services markets

thank you