Question And Answer Brief

admin's picture

SOUTH PACIFIC FORUM SECRETARIAT Suva, Fiji Islands

April 21, 1999

Forum Trade Ministers will meet in Suva, Fiji June 1-2 to consider establishing a Pacific Islands region free trade area.

1 Why do we need a Free Trade Area?

We must prepare ourselves for the changes in global trade now underway. These changes are inevitable as is the need for us to respond or else we get left further behind. We are mostly small and isolated and lack any influence as individual countries. A free trade area creates a larger economic unit or bloc that gives us a stronger foundation for responding to globalization and universal trade liberalization.

2 What are these global changes ?

* the end of the cold war and the resulting decrease in aid to developing countries has affected many of the aid dependent economies of the region

* Asia Pacific Economic Cooperation heads of government have agreed to eliminate tariffs for all developed country members of APEC by 2010 and developing countries by 2020. These changes require an appropriate response.

* the creation of APEC and the Bogor Declaration creating a free trade area in the Pacific has had global effects. Europe is responding by developing its economic relations with Asia. Simultaneously, the North American Free Trade Area will become the FTAA (long version?), and Europe is proposing FTAs with the entire African continent.

* these changes are eroding some of the economic foundations of the region (aid in Polynesia and Micronesia and trade preferences in Melanesia).

* the information revolution is making possible global and regional systems of organization that were not possible ten years ago, particularly in the Pacific Islands.

Whether we create a regional free trade area or not, we have to adjust to a more open global economy or face stagnation and even greater marginalization.

3 Why bother with regional trade - all we can sell to each other is coconuts?

There is potential for trade growth among island countries. For example, the Melanesian Spearhead Group Trade Agreement has revealed benefits to small island states from regional trade and specialization e.g. Vanuatu's small beef industry could supply the entire island region. No politician or government official can see all of the opportunities that will be created by trade integration over the next 20 years - but business people will find them.. A free trade area creates more potential for business people and provides them with a much larger 'home market'.

Free trade is not about what our businessmen can sell today - it is about what their children will be able to sell once we develop and our productive capacity expands. A free trade area is not a one-off measure but is part of a process of regional economic integration.

4 Why waste our time with the Pacific Islands and not go for the big Asian markets?

Given our small production potential we do not necessarily need big markets, sometimes small markets are exactly what our exporters need. When our exporters go overseas to Europe and North America they sometimes find that they are unable to penetrate markets because their production runs are too small.

This question of dealing with Asia and larger markets goes to the very heart of why this arrangement will be good for our Pacific Island members. In a world that is dividing into regional entities to try to deal with other regional trading and economic entities, such as the European Union or the North American Free Trade Area Countries, working individually makes no sense. It is better for us to deal with them as a group.

5 Some Forum members prefer to integrate with APEC and just lower tariffs. Surely this strategy makes more sense than a legal arrangement?

What we propose does not go against what APEC is doing or the rules of the World Trade Organization. For example, the ASEAN countries have a free trade area called AFTA. The North Americans have NAFTA and Australia and New Zealand have Closer Economic Relations. Yet they are all members of APEC. In fact, we are pursuing what is called unilateral liberalization through the FEMM (Forum Economic Ministers Meeting) process. Three countries - Vanuatu, Samoa and Cook Islands - have made substantial strides in trade liberalization. Papua New Guinea is a member of APEC as well as the Melanesian Spearhead Group trade agreement, so our proposal does not upset the process set in place by APEC.

There is another reason for doing this. The European Union wants to negotiate a free trade area with all the regions of the African, Caribbean

and Pacific group. These negotiations are scheduled to begin in February 2000. I f we do not form an FTA or some sort of arrangement, either through existing arrangements or through a Forum FTA, then we will not be in a position to negotiate an arrangement with the EU. We would also lose our preferential access for tuna fish into the EU market, thereby costing us jobs as well as the opportunity to develop the one resource we have in abundance.

6 Is the European Union driving our free trade proposal?

No. When the South Pacific Forum, and its administrative arm, then known as the South Pacific Bureau for Economic Cooperation (now the South Pacific Forum Secretariat) was formed in the early 1970's, the original agreements setting up the organization included an obligation to consider the creation of a free trade area. This has been studied, but this latest proposal was initiated in early 1997 - long before the EU made its position clear. Our members want to first decide to proceed with our own regional integration, at our own pace, and only then consider integration with our trading partners when we are ready.

We feel the free trade area option is the best way for our members to deal with the many issues being raised by globalization. This option is being pursued because we believe it is good for us.

However, it is fair to say that without the creation of an FTA, we will not be in a position to respond to the EU's request for negotiations on an FTA, should the Forum leaders chose to do so.

7 Will free trade with other island countries destroy our domestic industry?

Most small island countries don't have an import substitution industry because their domestic markets are too small - so there is nothing to destroy. We hope free trade will create opportunities in some of the small island countries because it increases the size of the market.

The proposed trade agreement will have a negative list of industries that are very sensitive and which governments do not want to see subject to immediate competition. However, for the public to benefit from trade liberalization, the negative list must be phased out and these industries will have to be competitive. If they are unable to adjust to competition from other FICs, within say eight or ten years, what hope would they have in competing with Asia? Or in a global market?

Industry assistance schemes may be necessary for sensitive sectors to help them adjust. This could be done with low interest loans and special government programs.

The proposed draft framework document has a 'safety provision' which would permit countries to slow imports in the event that they were injuring a local industry. So if there is a surge in imports we can stop our domestic industries from being destroyed.

8 Most FICs are totally dependent upon import duties. Won't the FTA proposal bankrupt governments?

Our studies indicate that the loss of revenue to most of our governments will be small because the volume of trade between island countries is small. Only a small proportion of tariff revenues will be from tariffs on FIC products even after liberalization. The actual statistics make inter-island trade bigger than it really is. For example, oil going to Tuvalu from Fiji is counted in Tuvalu as Fiji exports, even though Fiji produces no oil. This is a re-export and so it would still be taxed in Tuvalu. Several countries have to adjust the way they clear imports to make sure they differentiate between country of consignment and country of origin.

If we are to liberalize to our larger trading partners then there will be a need for tax reform. Many of the countries that are dependent upon import duties will have to introduce value-added tax or sales tax as a substitute to import duties. Five of our countries have done this already. This VAT will, in the case of most revenue, be collected at the border just like import duty and will have very little effect if, as in the case of Fiji, agriculture and the export sector are exempted. A free trade area with the introduction of an appropriate VAT could be completely revenue neutral for most FICs.

9 What's in it for the Smaller Island States ? They don't get much and most benefits go to Fiji or larger economies.

The benefit to SIS, e.g. Kiribati and Tuvalu, is in enlarging the boundaries in which their nationals operate. This is a visionary goal that could take time to provide tangible economic benefits in a particular small island state. In the past, SIS benefited mostly from trade in labor and their access to bigger and richer markets. This is true of I-Kiribati in Nauru and Micronesians in America and Polynesians in New Zealand.

At the moment the SIS have only the most limited range of exports, but the FTA creates opportunities for business many years from now. We can not possibly predict what they may be exporting, but countries that do not join the FTA will be blocking future generations of business people from those countries in an FTA.

10 I still can't see what is in it for the SIS. The investment that the SIS would have been getting will just go to other countries.

Most SISs get almost no investment at all and the reason is that they are too small and isolated to develop bankable projects. We can't do much about our isolation but we can start by breaking down the economic barriers that our colonial history created, and make ourselves a little bigger. Smallness is something that our history imposed on us - it is not inherently true of the region.

This proposal may be exactly what some of the smaller states need to get some investment and three or four moderately sized investors may change the entire situation

11 What about the MSG and the other bilateral trade proposals?

For at least 8-10 years, during the transition to a free trade area, the Melanesian Spearhead Group agreement and the various bilateral treaties between Forum Island Countries will be very crucial as they spearhead trade liberalization in our region. The rest of the FICs must follow suit or risk being left further behind. Over time, the MSG agreement and the other bilateral trade agreements will be superseded by a more inclusive regional trade agreement.

12 This sounds too hard - why bother?

Many of the changes have to happen as the world moves towards greater trade liberalization. This process is not of our making but we cannot sit there and do nothing while the foundations of our economies are being removed. Many of the reforms that will follow the creation of a free trade area would have to happen if we are ever to join APEC.

The real reason the free trade area should happen is that it is a strong political message that would help arrest the political and economic marginalization. The more the region acts as a group, the more political influence it will have. A regional trade agreement will be important both economically and politically.

13 If this is such a good idea, why didn't the Forum do this ten or 20 years ago?

Ten years ago this proposal would not have been possible because the economies of the region were inward looking. This will have to change because of what is happening on the global scene.

The information revolution is also changing what is possible in the islands. Telecommunication costs are falling dramatically and the Internet is bringing people together in the Pacific in ways we could never have dreamed of ten or fifteen years ago. The information revolution has shrunk the distances between island states and creates amazing possibilities for the way we govern ourselves in the next generation.

For further enquiries, contact:

Iosefa Maiava, Deputy Secretary General tel: (679) 220 204, fax: (679) 301 102 or email iosefam@forumsec.org.fj

Jaindra Kumar, Director, Trade and Investment Division tel: (679) 220 342, fax: (679) 312 226, or email jaindrak@forumsec.org.fj

Roman Grynberg, Multilateral Trade Policy Adviser tel: (679) 220 362, fax: (679) 312 226, or email romang@forumsec.org.fj

Ulafala Aiavao, Media Adviser

Rate this article: 
No votes yet

Add new comment