Lost at sea - Exporting free trade policy to the Pacific

Australia is currently trying to export to the Pacific its love of free trade. Understandably the Pacific is not totally sold.

All the textbook theory on free trade is in stark contrast to the practical reality of Pacific lives. Small populations, long distance from markets and low economies of scale, all put the Pacific at a disadvantage when it comes international competitiveness. Of course the Islands have a long history of trading and still manage to make use of their resources, but this speaks more to their resilience and ingenuity than it does to the theories of economic rationalism.

Currently, Australia and New Zealand are negotiating a free trade agreement with the Pacific (the 14 Island nations of the Pacific Islands Forum except Fiji) known as the Pacific Agreement on Closer Economic Relations Plus (PACER-Plus). This agreement has been accompanied by much rhetoric by the Australian Government about how this is in the Pacific's interest. Yet, what's being asked of the Pacific is to forgo the development options that Australia has used to build its trade capacity.

Free trade agreements aim to bind the levels of government intervention into the operation of markets. This includes a range of policy tools that governments can use including tariffs, subsidies, regulations, custom operations and government procurement, amongst others. The limiting of these policy options is done in the name of treating foreign providers the same as locals with the aim of ensuring that only the most efficient survive, resulting in maximum benefits for consumers.

Anyone who has lived in the Pacific can tell you about how expensive imported goods are. As such, one of the key arguments for the liberalisation of trade for the Pacific is that it will see prices for consumers come down. As the theory goes, the lowering of tariffs will see the costs of goods reduced, benefiting both consumers as producers. The reality however isn't that simple. A UN study in 2007 found for Vanuatu that despite reductions in its tariff lines, lower prices as a result of trade liberalisation didn't eventuate. Given the low populations and lack of competition between importers, any benefits of lower tariffs ends up in the pockets of the importers, not passed on to consumers.

For many Pacific governments, cutting tariffs also undermines their revenue streams. It has been estimated that for some Pacific countries they stand to lose up to 18% of their government revenue from tariffs cuts under any PACER-Plus agreement. Whilst Australia has argued that it can recover some of that revenue from other means like GST-style consumption taxes, bodies like the International Monetary Fund have produced studies that suggest the opposite.

The IMF has reported that for small countries like the Pacific, they only make up thirty cents out of every dollar lost from tariff cuts. For small governments trying to provide services to remote populations, this undermines the ability of people to access essential services.

For the sectors that the Pacific has established, few, if any, are ready to be exposed to full blown competition from the region's bigger neighbours. No country, with the exception of Hong Kong and China, has been able to industrialise without going through the infant-industry-protection phase, yet that is what could be on the cards for the Pacific. Infant industry protection allows developing countries to move up the value chain as their capacities increase, protecting at first the simple production of goods and then moving to nurture the transition into the production of more specialised, high value products.

Government procurement is another way that the Pacific governments can support their sectors, however that has previously been targeted by trade liberalisation. Australia's decision to open itself up to competition has only come after it has been prepared to either compete or support a transition from that industry to another. For the Pacific, they are being asked to give up the protection that other industrialised countries have used to their advantage.

There are a number of other problematic areas that arise when free trade gets applied to the Pacific. Locking in the regulatory capacity of developing countries removes their ability to utilise the increased capacity to regulate that comes with any development. Furthermore, all Pacific countries are net importers of Intellectual Property. Having to abide by TRIPS and even TRIPS-Plus commitments will see increased medicine prices be borne either by the government or by the consumer.

Although PACER-Plus is being billed as a "development agreement," the "plus" is supposed to deal with many of the issues mentioned above. The reality however is that it is not happening. Australia has ample opportunities to show good will to the Pacific and support them in their market access and development. But, instead it is choosing a reciprocal free trade agreement as the medium, making it hard to believe that there indeed is nothing in it for Australia.

The real problem for free trade theory and the Pacific is that it doesn't relate to the Pacific way of life. With significant numbers of Islanders still engaging in subsistence farming, practising Kastom and maintaining customary land practices, the individualised free market does not meet up with the 'Pacific way'. Trying to promote such systems goes against the very grains that make up Pacific culture and society and as such has been met by resistance. One only has to look at Vanuatu to see the opposition to becoming a member of the World Trade Organisation.

The Pacific should be free to choose how they interact with the global economy. Islanders are the great seafarers of the Pacific Ocean and have always engaged with trade, benefiting from their long history of sharing goods and ideas. Whilst there may be some benefits from liberalisation, Pacific governments can do so unilaterally, they don't need to be locked into a trade agreement.

The Pacific is now critically rethinking its future, a future that isn't locked into the dichotomy of full integration or full insulation. Instead they wilfully discuss a future that reflects the Pacific way and incorporates any other aspects that support their right for economic self determination.