Free trade in paradise
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.