regional trade?
p. 54 · Read in the full issue
Opinion
Will FlAs fire up regional trade?
THE possibility of a free trade arrangement (FTA) among Pacific island countries, which has been talked about since 1987, comes to the fore again this month when Forum trade ministers meet in Suva.
It is an issue that promises to feature importantly at next month’s Forum Economic Ministers’ Meeting in Apia and again at this year’s Forum summit in Palau in October.
The ministers will have before them a number of studies on a number of proposals. At last count, at least five different FTAs were being talked about - among FICs only, between FICs and Australia and New Zealand, between some FICs and the European Union, between some FICs and the United States and with all countries on a Most Favoured Nation (MFN) basis.
This alone demonstrates the complexity of the issue and the difficulty the island states face in coming up with a final pact, or pacts, that best suit their needs. Throw in the fact that free trade means the states, whose economies are fragile to say the least, will lose significant amounts of tax revenue if import duties are abol ished, and it’s obvious no one can expect any quick decisions.
But decisions will nevertheless have to be made and they are critical to the island nations’ futures in a fast-moving world seem ingly hell-bent on global trade liberalisation.
In recent years, there has been a proliferation of regional free trade arrangements and bilateral agreements. The Asia-Pacific Economic Cooperation (APEC) grouping, which has embarked on a process of voluntary trade liberalisation, is heading for a make or-break summit in Auckland and we could be on the verge of a Millennium Round of world trade negotiations.
Pacific island countries can no longer stand apart from the trends and an FTA offers a prime opportunity to consolidate their voice in dealings with the rest of the world. As other nations seek economic cohesion in trade pacts, fragmentation in the Pacific is no longer viable. The issue is irrevocably bound up with the need for wide-ranging reform - embraced at least in principle by most states - which is critical to lifting the states’ economic perfor mance and living standards. Looking at new trade arrangements was forced on the island nations by the diminishing value of
SPARTECA preferences as New Zealand and Australia cut their tariffs to other countries and the looming end of the European Union’s Lome IV arrangements in February next year.
Two years ago, the Forum secretariat commissioned a report on a possible preferential ETA among member countries. Its archi tect, Robert Scollay, of Auckland University’s APEC Study Cen tre, reported a year ago that the quantifiable economic benefits to the FICs would be relatively small, but an ETA would act as a stepping stone to complete liberalisation.
He noted “substantial economic benefits” would flow from a supporting programme of trade and investment facilitation mea sures and the size of the market covered could be more than dou bled by inclusion of the French and American Pacific territories.
And Scollay said all FICs would gain more if they reduced their MEN tariffs at the same time as a preferential ETA. He warned the benefits of freer trade are not achieved without costs and particularly noted that alternative sources of government rev enue - that is, a value added tax (VAT) - would have to be devel oped.
There is very little trade between the FICs and another study, by Australia’s Centre for International Economics, said the overall gain would be increased 40 times if an ETA included New Zealand and Australia - countries that provide nearly half their total imports. Papua New Guinea and Fiji, as the largest economies in the Forum, would gain most, it said, while as a proportion of GDP the Solomon Islands, Kiribati, Fiji and the Cooks would come out best. Again, this report referred to the revenue losses stemming from cuts in import duties. These account for up to two-thirds of government revenue in Kiribati, Tonga and Tuvalu, according to the latest draft report on the issue by Australians R.J.Filmer and Tony Lawson.
It noted moves throughout the region in the direction of a con sumption tax regime, regardless of the ETA debate. By now five FICs (the Cook Island, Fiji, Papua New Guinea, Samoa and Van uatu) should have a VAT in place, while the Solomons, Tonga and Tuvalu have a sales tax system. The report advocated a New Zealand-style goods and services tax, broad-based with a single tax rate and minimal exemptions. So-called “sin” goods like alco hol and tobacco products should also have an excise tax.
The report concluded that loss of tax revenues should not be a significant barrier to any regional FTA, saying they could readily be replaced by shifting some or all the tax base from imports to consumption.
It noted, however, a continuing lack of real interest in new regional trade arrangements in most FICs, reflecting a belief that they have few export opportunities and SPARTECA and Lome have not fired economic activity.
The argument really comes back to whether the Pacific nations, now moving towards economic reform, including cutting back the public sector and encouraging private enterprise, want to continue that process and embrace the principles of globalisation. As Filmer and Lawson said: “A vitalised private sector is more likely to be in a position to take advantage of any trading opportunities eventuat ing from a regional trade arrangement.” ■
David Barber