Free trade agreements fail to deliver anticipated benefits in Papua New Guinea

 

A signatory to a large number of free trade agreements, PNG is in the process of negotiating accession to others. However, it is perhaps not as well integrated with other Asia-Pacific economies as it might have hoped, and its existing trade deals do not seem to be doing much to strengthen the economy. Furthermore, there is growing concern regarding the nature of future trade agreements and how they might be manufactured to deliver better outcomes.

Connecting The Dots

PNG has several trade agreements in effect with developed countries. The Australia-PNG Trade and Commercial Relations Agreement allows duty-free access for PNG goods to Australia, with the exception of items such as sugar, footwear, textiles, beverages and tobacco. PNG also has an economic partnership agreement with the EU, as well as bilateral investment treaties with Australia, China, Germany, Japan and the UK. Prime Minister Peter O’Neill has also said PNG could become a signatory to the Trans-Pacific Partnership, with press reports suggesting that other APEC countries, including PNG, could be invited to join the pact.

PNG also belongs to trade deals specific to the region, such as the Melanesian Spearhead Group (MSG), which includes Fiji, Solomon Islands and Vanuatu, and the South Pacific Regional Trade and Economic Cooperation Agreement. Furthermore, it is a signatory to the Pacific Island Countries Trade Agreement, which allows free trade between its 12 member states. The deal only covers goods, but the group has also mooted the addition of chapters related to services and the movement of people. Lastly, PNG is a member of the Pacific Island Forum, which comprises 16 states. The formation of a Pacific Union has been discussed by the group to bring the region together in a trade, currency and political accord.

The effectiveness of these agreements appears limited, however, as intra-regional trade has not grown and glaring imbalances exist. Some observers believe the region, like in many parts of the world, is home to simply too many different agreements, leading to higher costs and inefficiencies. The consolidation of some agreements has been suggested as a remedy to the problem, but other issues remain related to the nature of trade in the region, the terms of the agreements and the economic status of the various Pacific economies.

Pacific Islands

Intra-regional trade has been slow to develop in the Pacific due to logistical complications, costs and other barriers. In 2015 the “Pacific Islands Trade Report 2010-14”, conducted by the EU-funded Increasing Agricultural Commodity Trade project, was published in order to provide a statistical basis and foundation for the development of trade across the islands. The publication showed that intra-regional trade totalled only $329.8m, with Fiji being the only economy to have developed a Pacific Island market for its goods, which account for 96% of intra-regional exports.

PNG’s sales to the other Pacific Islands are minimal, reaching only $5.4m in 2014, while its regional imports were valued at $23.9m. Tonga, Tuvalu and Kiribati topped the list for regional imports, while PNG placed seventh. In the Pacific region, only Solomon Islands and PNG record trade surpluses. Historically, PNG is the largest exporter in the region, and by some distance, selling six times more goods overseas than the next largest exporter, Fiji. Furthermore, PNG is the only nation in the region recording a trade surplus with both Australia and New Zealand.

Tensions With Fiji

Issues with trade imbalances in the Pacific have resulted in raised tensions between countries in the region. PNG’s trading relations with Fiji, with which it has run a persistent trade deficit, are particularly contentious. In 2014 PNG’s internal trade statistics showed that it only exported PGK4.4m ($1.5m) of merchandise to Fiji, while its imports from it totalled PGK48.6m ($16.6m). Fiji disputes the figure, saying that according to its Customs data, the gap is not nearly as wide as PNG claims, with the strong kina largely to blame for a lack of PNG imports. Following a trip to Fiji in January 2016, Richard Maru, PNG’s minister of trade, commerce and industry, told local media that he would like to see Fiji purchase more canned goods, sugar, coffee, beer and fisheries products from PNG, while his Fijian counterpart, Faiyaz Siddiq Koya, voiced concerns about a tendency for the two nations to source goods from countries further afield, despite the availability of certain goods in both Fiji and PNG. During his visit, Maru also proposed the opening of a trade office in Fiji to assist PNG businesses looking to sell goods there and to help address the trade imbalance.

Months later, however, national media reported on Maru’s strong criticism of Fiji for confiscating PNG food products being carried by passengers travelling to the country. The goods included Ox and Palm corned beef and Trukai Rice, which are sold to Australia and Japan in commercial quantities but have been barred from Fiji on biosecurity grounds, the minister said. He also objected to PNG being listed on Fiji customs forms as a “biosecurity threat”.

New Developments

In June 2016 Fiji, PNG, Solomon Islands and Vanuatu, signed the third MSG Trade Agreement (MSGTA3). The deal is set to come into effect on January 1, 2017, and will include provisions for trade in services, as well as agreements on the mobility of labour, government procurement, telecommunications, e-commerce and investments. The first MSGTA was signed in 1993, with Fiji coming on board in 1998. Three major categories were liberalised under the original agreement: tea, beef and canned tuna. Within three years of Fiji joining, 180 products were tariff-free.

Pacer Plus

The Pacific Agreement on Closer Economic Relations (PACER Plus) is a proposed free trade agreement between member states of the Pacific Islands Forum. The prospective deal has been in negotiation since 2009, with a conclusion to talks expected before the end of 2016. The pact, however, has not been warmly received by many in PNG, with the government saying the agreement does not offer sufficient access to the markets of the more developed nations privy to the deal.

“In terms of PACER Plus, it is important to make sure that the interests of all parties are considered, and that they can all work together,” Ivan Pomaleu, managing director of the Investment Promotion Authority of PNG, told OBG. “In the past, we have had problems with other agreements. There was full access to the Australian market, but there was no mechanism in place to help PNG capitalise on it; no one except the Australians were able to,” he added.

In Theory

Critics contend that the theory behind the agreement is flawed. The idea underpinning PACER Plus is that by exposing the islands to greater competition, they will have access to cheaper goods and will, as a result, become more competitive themselves. However, the Pacific Network on Globalisation (PANG), a regional NGO, argues that while these dynamics may work for larger markets, they are probably not suited to the Pacific, where transport costs are high, populations are small, distances are great and land is held in customary fashion.

Prior to the latest round of PACER negotiations in June 2016, critics of the agreement in PNG, including its government, had complained that the terms were unfavourable to smaller Pacific nations. Maru stated in early 2016 that PNG could lose PGK6bn ($2bn) in exports if the deal were signed, adding that Fiji and PNG are united in their resistance to the pact. PANG, meanwhile, has warned that the pact will have weak protection for fledgling Pacific businesses and will outlaw policies that favour domestic products and local inputs. Export subsidies – useful in helping new exporters establish themselves – will be also be limited under the agreement, according to PANG.

While PACER Plus does have safeguards, critics say that they are much weaker than those offered in other agreements, such as the interim Economic Partnership Agreements with the EU. Additionally, the use of safeguards under PACER Plus requires an investigation, a step that is unusual, according to PANG, as it places the burden of proof on the nation seeking protection. PANG has also noted that despite offering only temporary safeguards to PACER Plus signatories, Australia and New Zealand themselves have permanent safeguards for their own markets negotiated through other deals.

Critics are particularly concerned about the agricultural sectors of the developing nations, as they could easily be overrun by an influx of products from large farming operations in Australia and New Zealand. Furthermore, analysis conducted by PANG suggests that tariff revenues, which would be dramatically reduced under the agreement, would see PNG losing $95m a year, while Fiji, Vanuatu, Tonga and Solomon Islands would lose $71m, $6m and $1m, respectively.

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The Report: Papua New Guinea 2016

Trade & Investment chapter from The Report: Papua New Guinea 2016

Cover of The Report: Papua New Guinea 2016

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