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Free trade in paradise

November 17, 2010

The Pacific  island countries are currently negotiating trade deals amongst themselves and with Europe, Australia and New Zealand. I’m sceptical.

The classic case for unilateral trade liberalisation is weak. Given that most domestic markets are oligopolistic, tariff reductions wouldn’t get passed on to the consumer. Tariff cuts would just mean a transfer from government to businesses. If the islands thought that lowering tariffs was in their own interests, they’d do so according to their own timetable; it just doesn’t make much sense to force them to do it in trade talks with experienced international negotiators who will probably screw them. Few Pacific Island governments have the resources or the negotiating nouse.

A lot of free-trade doubters fret about the revenue that governments will lose from import duty cuts. Small island developing states find it easier to collect taxes at the border, and Pacific governments typically get about a fifth of their revenues from trade taxes. But the question of revenue losses is less thorny than many imagine. Most governments would simply be forced to convert import duties to excise taxes, meaning that trade agreements become an exercise in bureaucracy.

There’s nothing wrong with better market access, but these trade deals are a bit irrelevant, tackling an issue that isn’t really critical. More trade-related challenges are on the supply side than the demand side. It isn’t tariffs or market access that are the main obstacle to trade development, it’s productive capacity. Most of the islands simply can’t produce enough to meet foreign demand. For instance the coffee producer in Vanuatu once came back from a trade show in Japan saying that a customer asked for 20 containers. “We might be able to ramp up production to that level over the year” the coffee producer answered. “No, we want 20 containers a month,” the Japanese customer replied.

Most countries haven’t really woken up to the Internet or services trade in general. It’s clear that tourism is the industry with the biggest potential – certainly in Tuvalu, Kiribati and the Solomons, and maybe in the Federated States of Micronesia. If tourism growth is anything like Vanuatu’s experience, it’ll dwarf goods trade. And it’s already the biggest industry in Fiji and the Cook Islands.

The various trade deals on offer might offer some sort of services liberalisation, but it’s not only liberalisation per se that is needed. The islands need credit, infrastructure, better international and domestic transport systems, and help with reform. Breaking down barriers to incoming services investment is of limited use if there aren’t any roads, or if electricity and water supplies are intermittent. Enabling tourists to visit the islands is no good if there aren’t any hotels or if you can’t travel anywhere.

Ultimately these trade deals are taking up huge amounts of time, so they’re far from costless. In some countries the department of trade devotes literally its entire time travelling to meetings and performing consultations.

Regional collaboration is good, but not if it just means trying to follow the global fashion for freer trade. The islands should tailor regional integration to their own needs, pooling resources in ways that are strictly useful and raising an eyebrow at attempts to force them into a free-trade straitjacket.

2 Comments leave one →
  1. Wesley Morgan permalink
    February 15, 2012 3:10 am

    Wholly agree with this blog piece. Free trade negotiations like PACER-Plus represent, at best, a considerable opportunity cost to the islands as limited resources are diverted away from other priorities.

    That said, the issues involved in growing exports are not all to do with ‘supply-side capacity’. There is considerable room for improvements in market access to Australia and New Zealand. Improving the rules of origin requirements of SPARTECA, expediting the quarantine assessment of Pacific fruit and vegetables entering the Australian market, and continuing to expand labour mobility schemes for Pacific workers would all be good for economic growth in the Pacific.

    A standard FTA is however, as you say, likely to have few benefits and considerable costs.

  2. February 15, 2012 12:58 pm

    Thanks Wesley. Yes, true, rules of origin, quarantine and especially labour mobility are all important, especially the latter. I probably should have made more of this. When I said that more trade-related challenges are on the supply side than the demand side I didn’t mean all of them were. But I have long thought that the general development and trade paradigm should shift from liberalisation to building productive capacity in areas that the islands can actually succeed: again, labour, as well as services, particularly tourism and ecommerce. I wrote about working abroad here:

    It is, as i’m sure you’re aware, largely a matter of ideology. Some of the external (and internal) influences on policy are possessed with a mindset in which markets will solve everything and government should just get out of the way. But this is just wrong: as so many other development experiences show, governments need to actively get involved in building trade and the economy in general. Donors can help. This is particularly the case in small island developing states.

    Even those who agree that governments should be interventionist don’t always tailor their policies to the Pacific. Industrialisation like in East Asia just isn’t going to happen. The world’s not going to make its computers in Kiribati. But there are lots of unique things that the Pacific can trade in: like its natural environment. And it doesn’t matter where you are online — Apia or London — you can still sell certain services online.

    Anyway, thanks again for the comment.

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