PNG embraces free market principles, maintains international trade deals

 

Papua New Guinea’s market is remarkably open in terms of trade. Over the past two decades the country has gone from being a high-tariff jurisdiction pursuing 1970s-style goals of protection and import substitution, to one that embraces free market principles. The tenets of the Washington Consensus were accepted and implemented in a phased approach over several years.

The country remains open and, so far, the rates hold. However, in recent years questions have been raised about the liberal policies that were taken on. As the country faces slower economic growth, tariff rates are being brought into question and more interventionist economic policy is being considered to promote domestic industry. In the next phase of liberalisation free trading groups and trading blocs are in the spotlight. PNG is being careful about what it signs, trying to ensure everything it agrees to is good for the economy.

In Agreement 

Historically, the country has adopted an internationalist outlook and a policy of positive engagement. It has signed six trade treaties in total with Australia, China, Germany, Japan, Malaysia (which is not yet in force) and the UK. PNG is party to many multilateral agreements, groups and conventions, including the General Agreement on Trade in Services, the agreement on Trade-Related Aspects of Intellectual Property, the agreement on Trade-Related Investment Measures, the World Bank Investment Guidelines, the APEC Non-Binding Investment Principles, and UN Guiding Principles on Business and Human Rights.

In 2007, due to the expiry of the Cotonou Agreement, the EU and PNG signed an interim economic partnership agreement (EPA) which became effective in 2011, whereby PNG receives duty-free and quota-free access to the EU markets while agreeing to reduce tariffs on imports from the EU over a 15-year period. Europe hopes to sign an EPA with 14 countries in the region.

For years PNG has aggressively targeted import duties. It started lowering them in 1999 under its Tariff Reduction Programme (TRP). Before the TRP, the prohibitive rate, which was in place to protect certain industries, was as high as 100%. The policy was undertaken on the advice of the World Bank to make industry more productive and competitive. While rates were being lowered, a goods and services tax was introduced to balance the loss of revenue.

Dynamic Environment 

The international context is significant. The global trade environment is dynamic, especially given the political changes in Europe and the US. Tariff agreements and trade preferences are at risk. PNG is gaining and losing as countries reassess their trade policies and commitments. The country has received assurances from the UK that trade preferences currently available would not be lost after the UK leaves the EU. Most importantly, PNG will retain duty-free access for canned tuna and oil. The government is seeking to add items to the list, especially cocoa and coffee. Once the UK is allowed to set its own trade policy, further concessions could be possible. Prime Minister Peter O’Neill has said that the US exit from the Trans-Pacific Partnership will not impact PNG. The opposition, however, notes that the country will be affected by the US decision to leave the Paris Climate Accord, under which PNG was set to receive $7.5m from the US Agency for International Development.

Off Pace 

PNG’s market remains open, but concerns have been building. The TRP itself has been seen as a mixed success. It was supposed to be implemented with a number of counterbalancing initiatives: training was to be provided, the law and order situation was to be improved, physical infrastructure was set to be upgraded, the price of utilities was to be lowered and the bureaucracy was to be made more efficient. This did not happen, and industry has been disappointed. It has been especially concerned as inexpensive goods have arrived in large quantities from Asia. Local industry cannot compete due to the persistent issues related to doing business, and manufacturers in PNG have asked that the reductions be halted or even reversed.

Beyond basic tariff numbers, the country is carefully considering its options with regard to open trade and investment. PNG has said that it will not join the Pacific Agreement on Closer Economic Relations Plus (PACER Plus), despite having been in negotiations for a decade. PACER Plus covers most aspects of trade and investment between and among Pacific nations. Included are provisions on trade in goods (including tariff schedules), trade in services, rules of origin, Customs procedures, sanitary measures, investment and movement of natural persons. It also includes a document on the mobility of labour. PACER Plus itself was a compromise. Under the original PACER agreement the participants were supposed to move towards a full free trade agreement (FTA), But because of the lack of progress the goals were modified and PACER Plus was introduced.

A total of 11 nations, in addition to Australia and New Zealand, signed the agreement. Groups opposing PACER Plus said that it favoured the larger, more advanced nations. PNG has said that it will sign bilateral agreements with Australia and New Zealand rather than the multilateral document. In addition to PNG, other nations decided not to sign. Fiji is still contemplating the accord. In June 2017, in a surprise move, Vanuatu also chose not to sign, saying it wants to take more time to assess the costs versus the benefits of the agreement.

Spaghetti Bowl  

For years, the Pacific nations have tried to achieve some sort of economic unity. While PNG is fundamentally different from the region’s small island states (it is large, has a sizeable population and is resources focused), it has joined with them nonetheless. The Pacific Islands Forum was founded in 1971 as the South Pacific Forum. It is an intergovernmental organisation with a wide remit, but much of what it does touches on economic cooperation.

Some of its plans have been particularly ambitious. The idea of a Pacific Union has been floated for some time, but an EU of the region has never been seriously negotiated. Intermediary agreements, such as a single currency, have been given support by several of the larger participants in the union.

The Pacific Island Countries Trade Agreement is an FTA focused on trade in goods. Ratified by 11 countries in the region, it was signed in 2001 and became effective in 2006. It is open to 14 members of the Pacific Islands Forum (all the members minus Australia and New Zealand). The Cook Islands, Fiji, Kiribati, Nauru, Niue, PNG, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu have so far signed it. It is set to be broadened to trade in services and movement of natural persons.

The Melanesian Spearhead Group (MSG), founded in 1986 as an intergovernmental body, signed a wide-ranging trade agreement in 2016. Known as MSGTA3, it is set to come into force in 2017. It covers not only trade in goods, but also services, labour and investment. The group hopes to expand the agreement to include other economies in the region. Other agreements include the South Pacific Regional Trade and Economic Cooperation Agreement, which was signed in the 1980s, and allows for duty free access for goods from most Pacific states to Australia and New Zealand. Each of these agreements, while sound in principle, has a weakness. Some are not strong enough, some are too ambitious and some do not seem to have a purpose today. The MSG, while one of the more successful regional blocs, is more than just economic, and its other priorities could conflict with its economic agenda. The group is also political and cultural. Its aim is to represent all Melanesians regardless of where they live. Membership has been extended to the Kanak and Socialist National Liberation Front – a New Caledonian pro-independence political party – and is being considered for the United Liberation Movement for West Papua, a pro-independence group. Indonesia has observer status in the MSG and opposes the addition of the West Papuan group.

Most of all, observers have commented that the region has too many trade deals. Like many parts of the world, it suffers from the “spaghetti bowl effect”, whereby agreements overlap, contradict and ultimately make business more difficult rather than easier. This is resulting in increasing trading costs and may potentially lead to confusion in the private sector. It has been suggested that all the agreements be unified into one.

Dispute With Fiji 

Even with trade agreements in place, local issues can hamper their effectiveness. In 2016 Fiji banned the import of Ox & Palm corned beef, Trukai rice and Lae Biscuits from PNG on biosecurity grounds. In response, PNG threatened to cut off all trade with Fiji. The mini trade war was quickly resolved, with Fiji lifting the ban in early 2017, but the dispute brought existing tensions to the surface.

Trade between the two countries is not balanced, with PNG buying roughly 10 times more goods from Fiji than Fiji buys from it, and this has led to charges of unfair trading and market domination. Fiji has said that it never discriminated against goods from PNG and that the biosecurity ban was implemented in the normal course of applying standards by its quarantine authority. However, PNG has asserted that the ban was an attempt by Fiji to protect its local products.

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The Report: Papua New Guinea 2017

Trade & Investment chapter from The Report: Papua New Guinea 2017

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