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PICTA, PACER AND EPAs: where are we going? [Appeared in Islands Business, April 2004]

28/03/2012

It has been a relatively easy matter for Pacific Island Country (PIC) governments to sign regional trade agreements, such as PICTA (Pacific Island Countries Trade Agreement-excluding Australia and NZ;) and PACER (Pacific Agreement for Closer Economic Relations- including Australia and NZ.)

The PICs are also negotiating Economic Partnership Agreements (EPAs) as part of the Cotonou Agreement (CA) with the European Union (EU).  The EPAs will replace the trade agreement part of the Lome Agreement after 2007.

The stated objective of all these agreements has been to accelerate PIC people’s sustainable development- creating jobs, higher incomes, and improving standards of living all round.

But are PIC governments prepared for the very serious economic adjustments which will be required in the future by PICTA, PACER, the EPAs and the WTO?

PICs are focused on the EPAs, but are essentially negotiating from weak bargaining positions, and are unlikely to get more resources.

More substantial long term benefits could accrue from PACER- closer economic relations with Australia and NZP: access to Australia and NZ for PIC unskilled labour, flexibility with Permanent Residence requirements, and other advantages such as Super 12 participation.  But PICs currently do not wish to trigger PACER discussions.

In the Pacific, Australia and NZ have lost the high ground to the EU, largely because of the “Jekyll and Hyde” relationships with the PICs.

The expectations on PICTA

PICTA is supposed to lead to a Free Trade Area amongst the ratifying PICs.  Tariff and non-tariff barriers to PICTA trade are to be gradually removed, over the next ten years, for products which have at least 50% of PIC value added.

There is supposed to be a larger market size, greater competition, greater investment, economies of scale, lower unit costs, and increased efficiency all round.

PIC governments are supposed to come to terms with necessary fiscal reforms, and new regulations and legislations covering product standards, phyto-sanitary measures, quarantine and customs

PICTA is also supposed to give political advantages: a stronger united voice to many small nations; the “locking in” economic reform measures so that weak governments are unable to “backslide” under pressure from lobby groups; and the possibility, under WTO regulations,  that the EPAs may be more favourable if the PICs negotiate as a FTA.

In total, PICTA is seen by its creators as an economic “stepping stone” to the eventual integration with the harsh WTO-driven world order.  But will it be?

And PACER?

  PACER is the agreement signed by all PICs and Australia and NZ.

Article 6 states that if any PIC “commences formal negotiations for free trade arrangements” with another developed country, then they must commence similar FTA negotiations with Australia and NZ.  In any case, the PICs must begin PACER negotiations at most eight years after PICTA comes in.

If the PICs grant significant tariff reductions to the EU (through the EPAS) and hence also to Australia and NZ under PACER, almost certainly, imports from Australia and NZ will become much cheaper, and flood the PIC markets. PIC consumers will gain, of course.

But a very large proportion of all the manufacturing companies in the PICs will have to close down.  Thousands of jobs will be lost.  And PIC governments will lose a large part of their import duty revenues.

So are PICs, in their negotiations on the EPAs, correct in not wanting to trigger PACER?

And the EPAs?

  While the Cotonou Agreement (CA) is supposed to be an equal development partnership to assist the ACPs with sustainable development there is also an insistence on the “gradual integration of the ACP countries into the world economy” and “regional and sub-regional integration processes” which foster such integration.

The PICs are hopeful that the preferential Lome terms will continue post 2007, but the CA states, paradoxically, that the EPAs will have to be “equivalent to their existing situation and in conformity with WTO rules”.

While the PICs can hope for the former (and there are many optimists around) what will be the reality?

Current non-reciprocal Lome Arrangements are covered by a waiver obtained by the EU from WTO.  The EU claims that WTO regulations will not allow discrimination between different groups of LDCs;  Hence EU unlikely to obtain extension of waiver

Hence EPAs will probably require “reciprocity” by the ACP states.   Question:  how easy or harsh will this “reciprocity” be?

PICs will probably have to eliminate duties from a large percentage (perhaps 90%) of imports from EU. This in itself is is not a problem for most PICs- because we import so little from the EU.

But if the EPAs trigger PACER, and PICs have to grant Australia and NZ the same tariff reductions, then a number of PIC governments will lose a large part of their import duty revenues, threatening their budgetary positions.  They can adjust their tax systems, but at great social and political cost.  The PICs are therefore asking the EU for extra resources to cover these costs.

But the EU does not stand to gain economically from the EPAs (except in fisheries- and that is another kettle of fish).  They are also unlikely to make concessions to PICs (however minimal in direct cost to them) in case they are used as precedence by other larger ACP states or developing countries (with greater cost to the EU).

So why should they grant the PICs anything extra?  And they have said they won’t.  Yet we keep asking.

Note the kava debacle

  Donors keep telling us: focus on your comparative advantage, what you are good at, especially exports.  Well we don’t have too many such products, but kava is one of them.

But because kava products were competing only too well with EU pharmaceutical MNCs, suddenly, imports of kava from PICs were banned; jobs, incomes and an entire export industry in PICS decimated.  While the EU development partners watched.

And the bans are proving difficult to reverse, according to EU authorities.  Really?

PICs should note that whatever may be the kind rhetoric of the donors in aid, the trade negotiations are not likely to be conducted in the warm spirit of human kindness for  PIC peoples.

PICs would do well to plan for the worst.

What will PICTA bring?

  Many international studies have concluded that small developing countries gain little by setting up free trade areas amongst themselves.

PICs are no exception:  small market size; similarity in resources; low per capita incomes; lack of regular communications links; lack of developed infrastructure; and manufacturers largely not geared for exporting.

If any PIC exporter  does take  advantage of PICTA, there will probably be one monopoly firm, probably from a larger PIC (such as Fiji and PNG), which will use economies of scale to supply the whole market, driving out small producers elsewhere.

Effective competition may be neither feasible nor desirable, especially if smaller scale and inefficient competition is encouraged by protection or subsidies.  And the monopolists (rather than consumers) may capture the benefits of trade diversion

The investment benefits also look doubtful.  If new investment requires high tariff barriers towards the non-PICTA countries, the costs will be paid by consumers.  And PICs may compete with each other to attract investment through tax incentives, reducing their net benefits altogether.

The protectionist PICs
Let there be no illusions.  PIC manufacturers are by and large vehemently opposed to PICTA, PACER, WTO or any agreement that threatens to bring competition to their turfs.

Look at the Melanesian Spearhead Group agreement.  The moment a few exports (soap, canned meat, ice cream) went from PNG and Fiji to Solomon Islands and Vanuatu, there were complaints from the local manufacturers, silly references to “balance of payments” problems, and the trade stopped through the imposition of “injury” tariff rates.

PNG manufacturers themselves, who one would expect to benefit from PICTA, are totally opposed to PICTA trade, to the extent of denying data.

Even in Fiji, manufacturers have been able to reverse Government decisions to reduce protection on industries which barely add any value, and certainly would not satisfy the minimum 50% value added requirement of PICTA.  Witness the exercise books case after the 2004 Budget, when a Minister was praised by the businessman for “visionary leadership” after he had reversed a correct policy decision.

In the smaller PICs, while the macro effects of PICTA may be small, some industries will collapse, with the loss of scores of jobs and incomes.  With few employment alternatives, it would not be surprising that governments resort to knee-jerk reactions and become protectionist again.  Regardless of their signatures on the PICTA.

PIC governments have not analysed the long-term viability of industries/firms  affected by PICTA.  They are hardly even thinking of PACER or what the WTO will bring.

They have not weighed up the trade-offs (some difficult but some extremely easy to make) between jobs/incomes/taxes, and loss of consumer surplus/consumer choice.  Nor are they prepared for “rules of origin” issues which will arise.

And if PACER kicks in?

  Paradoxically, if PICTA succeeds in the medium term, and PACER also comes into effect, then the PICs may end up wasting a lot of resources and energy.

If  PICTA works, some industries will have expanded their investments, outputs, employment and incomes.

But investors, afraid of the PACER that is looming ahead, may invest their scarce capital, only if they can have a fast turn-around of their capital- before their industries eventually collapse under competition from Australia and NZ  (under PACER) or under global pressure from WTO.

So consumers will pay through the nose in any case.

Example: the PIC tobacco industries

  It should be simple.  One company- British American Tobacco (BAT) operates in PNG, Solomon Islands, Fiji and Samoa.

The employment generated is significant in the PIC formal sector context: PNG: 255;  Fiji:132; Solomon Is: 161; and Samoa: 46. There are also some 197 persons on Fiji farms, mostly on a part-time basis.

All the subsidiaries operate as monopolies under high tariff protection, with high excise duty revenues for government, and high salaries and wages for staff.  All paid for by consumers.

Only Fiji grows its own tobacco and so only Fiji cigarettes would be able to be exported under PICTA rules of origin.  As far as the parent company is concerned (unless the other countries begin growing their own tobacco), BAT would expand production (output, employment and incomes) in Fiji, and close down all the others.

But no PIC government is prepared for the demise of their cigarette “industry” and associated jobs- despite the lack of any genuine value adding.  None of these cigarette companies will ever become internationally competitive.  Yet they are protected by their host  governments, at great public expense.

And if PACER comes in, BAT would close down all the PIC factories and supply the entire PIC market from one of their Australian or NZ factories- a few days’ production would provide the entire annual demand for the PICs.

So all the investment in Fiji (and increased output, employment and incomes), to take advantage of PICTA, would eventually have to be reversed, at greater social cost.

Could PICs afford (socially and politically) to throw their redundant workers on the unemployment dust-heap?

There are many such “industries” in PICs.

None of the PIC governments,  companies and employees (unions) are preparing for the job massacre that lies ahead.

Example 2:   The beer industries in PICs

  The possibilities for the beer industries in the two large countries- Fiji and PNG are a bit more complex,  but involve similar issues, with much larger employment than the tobacco industries.

Under PICTA, the two larger breweries (in Fiji and PNG) would normally tend to drive all the smaller breweries out of business, leading to moderate losses of jobs in Vanuatu, Solomon Islands and Samoa.

But the majority shareholder in the Fiji brewery (Carlton Brewery Fiji Limited) is Carlton United Brewery and Fosters International of Australia.  The Fiji brewery also has controlling interest in the Samoan brewery (Samoan Brewery Limited).  So CUB Australia only gets part of the profits from every pint of Fiji or Samoan beer sold in the PICs.

CUB Australia is a major exporter of Australian brands (VB and Fosters) to the PICs, from which they get a 100 percent of the profits.  There is therefore a direct conflict of interest between the PIC breweries in Fiji and Samoa, and their parent Australian company, for the PIC export markets.

If PICTA becomes operational for beers, will CUB Australia allow Fiji beers to replace Fosters and VB in the PICs?

Or, given that they make more profit per litre of Australian beer sold in the PICs,   may they produce the Australian brands under license in Fiji (and take out the bulk of the profits as license and management fees)?

In either case, in the short term, Fiji production of beer (and employment and incomes) will increase while those in other PICs will decrease.

And if PACER comes in, will CUB Australia bother to maintain any PIC brand at all, given their huge export drive throughout the world based on the Fosters brand?

Or, as is more likely, will the PIC breweries then all close down, as small breweries have tended to close down all over Australia, NZ and elsewhere in the world?

Unless the PIC governments are “encouraged” to provide protection and subsidies to maintain the PIC breweries, at even greater cost to consumers and the taxpayers.

Sadly, a very similar situation exists in the spirits industry, where a rare world-beating Fiji product (Bounty Rum) produced by another Fosters controlled company (SPDL) is kept as a Cinderella in the Fiji kitchen, while the ugly sisters (the Australian products), are pushed through the PIC region and internationally.

PICs should trigger PACER

  Given that Australia and NZ stand to enjoy substantial advantages if import duties are removed from their exports to the PICs, it makes far more sense for the PICs to negotiate with Australia and NZ for specific benefits.

It is pointless talking about a common currency or a formal Pacific Economic and Political Community, as some academics are.  PIC leaders are unlikely to make the required concessions which would dilute their discretionary powers in their economies- what they call “national sovereignty”.  The interests of PIC political leaders are not the same as those of their common people.

While there has been interesting debate about the supposed failure of Australian aid to the Pacific, what is not debated is that for decades, skilled and qualified people desperately needed in PICs have been sucked out to Australia and NZ by their points system of immigration.

Economic growth and standards of living in PICs are seriously at risk, with the loss of doctors, nurses, teachers, engineers etc. While Australian and NZ aid programs try to plug the perpetually created holes in the dyke with triply expensive Technical Assistance from Australia and NZ, and HRD programmes of assistance.

Yet the most crucial and substantial of the benefits PICs should argue for under PACER is access for PIC unskilled labour to Australia and NZ.

It is extremely odd that Australian expert advisers, such as Helen Hughes and Helen Ware, are opposed to schemes giving access to PIC unskilled labour, when it could be a “win win” situation.

Australian and NZ labour shortages in low wage, high hardship areas could be filled by importing PIC labourers, which would not result in the Asian floods that Australian and NZ authorities have feared for decades.

For PIC workers, the wages would be still higher than in the PICs, which would benefit from the workers’ remittances.  While the PICs would reduce their unemployment and crime rates, and make their own environments more attractive for investment.

Australia and NZ could also allow PIC citizens to obtain their Permanent Residence rights in Australia and NZ but allow them flexibility as to the timing of their actual residence in Australia and NZ.

Many skilled and professional PIC citizens may choose to remain in PICs during certain parts of their life cycle, thereby assisting PICs in their development effort, while reducing the costs for Australian and  NZ aid programmes.

And even without a formal Pacific Economic and Political Community, the PIC peoples would choose real integration with Australia and NZ:  witness the attitudes of Cook Islanders and Niueans to NZ.

And trade liberalisation in Super 12?
Of course, PICs have comparative advantage in rugby: the PIC stars have taken the Super Twelve by storm.   Super 12 talent scouts now annually scour the PICs.    But while individual PIC players can play for the Super Twelve teams, PIC teams are themselves denied entry.

Australia and NZ see themselves as paragons of economic and trade deregulation.  Yet in rugby, they ignore the fundamental principle of efficient capitalist markets requiring the free entry and exit of producers.

At the end of the season in the English soccer premier league, the bottom five are relegated and replaced by the top five from the lower division.  With the expected salutary impacts on team profits, player salaries, and team and player motivation.  But not in Super Twelve.

This is not too different from the colonial era, when colonial raw materials were allowed into the developed countries duty free, but higher duties were charged on value added products.  The result, colonies only exported the raw materials, while the value added, the jobs, and incomes were created in the developed countries.

In the Australia and NZ version of rugby colonialism, PIC raw materials (individuals) are allowed to play in Super 12 teams.  But the finished products (the PIC teams themselves), are kept out of the “Big Business” which is Super Twelve.  In the process, PICs economies are denied major economic benefits.

For instance, if there was a combined Pacific Super 12 Team- I would call it the Pacific Quita (octopus)- then “home games” rotated between Fiji, Samoa and Tonga would significantly boost their tourism industries.

Not just from the visiting teams and fans, but the international television exposure would be tremendous for the domestic tourism industries.  And tourism is probably one of the few long-term sustainable growth areas for PIC economies, not susceptible to WTO developments.

So what are our Australian and NZ “big brothers” doing about it?  Nothing much.   While the Super 12 competition on television is probably the most madly watched programmes in the PICs.

And in investment?

  Neither are Australia and NZ doing much directly to boost investment.  It is well documented that all the PIC economies have a history of poor growth rates.  There is increasing poverty, and massive problems of unemployment, especially in the Melanesian countries.

For decades, the Australian and NZ aid programmes have focused on trying to create an enabling environment for investment: improving education, health, good governance, etc.  This is all praiseworthy and does have positive effects.

But the bottom line is that even in countries which have had reasonable education and health systems, and good governance, there just has not been the levels of private investment which can lift the countries out of their underdevelopment.  Because of lack of entrepreneurship; and lack of collateral and finance for potential entrepreneurs.

None of the donor aid programmes give direct assistance to foster private investment in the PIC areas of comparative advantage.  Often the advantages of so doing might even  directly address other donor concerns.

In Melanesia, for instance, there have been consistent and legitimate complaints by Australia, NZ and the EU, about the unsustainable rates of harvesting of forests.

Yet part of the reason (apart from brown paper bag deals) is that PIC governments must balance their budgets (another donor concern) and logging revenues are one of the few avenues available.

What would it take for donors to foster private direct (or joint venture) investment in downstream timber processing which could generate jobs, incomes, and taxes that would support government revenues, and encourage the reductions in rates of harvesting?

There is a similar lack of focus of aid programmes in foster investments in value adding in the other few areas of comparative advantage for PICS- tourism, marine resources.

The “Jekyll and Hyde” relationships

Both PICs and the donors exhibit Jekyll and Hyde characteristics.

 

Many PICs and PIC regional organisations are financially dependent on Australia and NZ aid but deeply resent donor attempts to influence PIC policies or key appointments.

 

PIC national budgets talk of encouraging foreign investment, but nationalists decry foreign economic exploitation and loss of national sovereignty.

 

PIC governments and ministers oppose a formal SPEPC, largely because of the loss of their own discretionary powers, which they perceive as loss of “national sovereignty and identity”.

 

But most PIC citizens, especially the unskilled and unemployed, if asked in a referendum, could not care less about PIC “sovereignty” as long as they and their families could have access to Australian and NZ labour markets  and all the benefits of residence.

 

Australia and NZ also have a Jekyll and Hyde problem.  While they easily talk about development partnerships, they ruthlessly extract all the very skills and professional people needed by PICs for economic growth and development, whose momentary value is far greater than the aid programmes.

 

And just as callously, they refuse access to PIC unskilled labour, which PIC economies can do without, and which Australia and NZ need.

 

Neither have Australia and NZ taken the lead with the PICs in regional and international integration, not even in a common sport such as rugby.

 

Yet negotiated closer economic relations, starting with access for PIC unskilled labour, could be the thin edge of the wedge that ultimately force PIC leader to accept the Pacific Economic and Political Community of the future.

 

When Australia and  NZ could speak in international forums with the votes of a score nations behind them.  When they could speak for a regional grouping whose EEZs cover a quarter of the world’s globe.

 

The very fact that PACER is a “reactive” agreement- waiting for PICs to do a better deal with other developed countries, suggests that they have given up the high ground to the EU.

 

But it is not too late.  And it does not have to be choice between the EU and Australia and NZ on the other.

 

Both groups have much to offer.

 

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