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Brief analysis of PACER Plus legal text
10:55 pm GMT+12, 12/06/2017, United States

By Daniel Gay
 
Overview

The most positive thing that can be said about the eventual conclusion of PACER Plus negotiations after 16 years since the signing of PACER in 2001 is that it must be seen in light of broader efforts to improve regional coordination. The end of talks enables the 12 Forum Island Countries (FICs) that are part of the agreement to continue regional integration and permits them to concentrate on more pressing matters. Several technical trade-related issues have been brought up to date.

This is faint praise, however. For most FICs, the significant time and effort devoted to negotiations are not worth the limited trade-related benefits that will result from the agreement. The hoped-for gains will not materialise. Labour market access for Pacific workers to Australia and New Zealand (ANZ) is disappointing. Only small sums of official development assistance are promised. Rules of origin (RoO) fall short of what could have been achieved and do not confer developmental advantages. The services agreement appears unlikely to be of much benefit to the island nations.

The sunk costs of negotiating the agreement have been overlooked – in the form of the significant travel costs, drain on officials’ resources and diversion of emphasis away from the vital task of building capacity for domestic production and export. The very fact that the negotiations have taken so long, that Vanuatu decided not to sign, and that the region’s biggest members, Papua New Guinea and Fiji, are not signatories (arguing among other things that it did not permit them to protect infant industries) suggests that PACER Plus does not meet expectations. In some ways the agreement took so long to negotiate that events have now overtaken it.  

More broadly, the model is based on an increasingly questionable form of economics which naively imagines that national economies will adapt automatically to enhanced price signals from liberalised international markets from which 'distortions' are removed. This is not the case in developed countries. The benefits of deregulated trade are currently under question in the United States and Europe, where distributional issues have been neglected. This model is certainly not relevant in tiny, isolated islands featuring permanent shortfalls of domestic demand, inadequate capital stocks and extremely inflexible factor markets. Moreover, as has been demonstrated in both the developed and developing worlds, even if a case can be made that reduced trade barriers create aggregate gains, those gains are likely to be appropriated by a minority, leaving most people no better off. This is not an anti-trade position; on the contrary, it recognises that trade is important to these tiny economies with their very small domestic markets, but that more proactive national measures are needed to stimulate exports and to replace imports. Market access is not everything.
 
This said, the agreement is unlikely to have a severely negative impact on the economies of most FICs. The purported risks associated with the loss of ability to protect domestic industry have been exaggerated. Tariffs are mostly already low and falling, limiting further revenue losses. Other trade agreements are beginning to render PACER Plus less relevant. The conclusion of negotiations leaves governments free to pursue the more important issues of boosting the domestic economy using active measures – in particular targeted infrastructure investment – to raise the sustainable supply of goods and services.
 
Intra-regional goods trade

Trade agreements are increasingly about non-tariff measures, given that global tariffs have already fallen to such low levels and that limited gains can still be made from tariff liberalisation. PACER Plus appears unlikely to increase intra-regional goods trade, which was originally touted as a benefit. The majority of Forum Island Country (FIC) trade is with non-Pacific island countries – increasingly China and East Asia, as well as Australia and New Zealand. The MSG Trade Agreement already covers most trade between the Solomon Islands, Vanuatu, Papua New Guinea and Fiji. Solomon Islands, Vanuatu and Papua New Guinea hardly trade at all with Polynesia.   

In itself the absence of Papua New Guinea and Fiji drastically limits the potential for PACER Plus to raise intra-Pacific trade given that the annual output of these two economies together is worth approximately $21.3 billion compared with a collective $4.1 billion for the remaining Pacific island economies, meaning that Papua New Guinea and Fiji are together worth more than five times the remainder of the Pacific’s economies combined. Without the two regional heavyweights, any purported gains from intra-regional trade are negligible. The absence of these two countries in effect also works against regional integration, contrary to the purported aim of enhancing regional cohesion.
 
Goods Trade with Australia and New Zealand

The agreement therefore in effect concerns trade in goods and services between the islands and ANZ. The Pacific Island States already have duty-free, quota-free access to ANZ markets via the South Pacific Area Regional Trade and Economic Cooperation Agreement (SPARTECA).  This market access will remain, with both Australia and New Zealand reducing tariffs on Pacific island imports to zero when PACER Plus enters into force.

The goods chapter contains the standard most-favoured nation (MFN) clause, meaning that the terms of any agreement negotiated with other parties must automatically be extended to PACER Plus members. The language originally proposed by the FICs in the text leaked in 2016 has been largely been excluded, with the ANZ language retained.  
 
Tariffs for non-LDC developing countries must fall to zero by 25 years after the date of entry into force of the agreement. The tariff reduction schedule is reasonably slow for the four Pacific island least developed countries (LDCs) -- Solomon Islands, Vanuatu, Tuvalu and Kiribati. The agreement states that ‘year 1 LDC’ for tariff reductions shall become the calendar year following that of the date of its graduation from LDC status, so for Vanuatu year 1 LDC will be 2021. This means domestic tariffs will begin to fall that year (from broadly already low levels) according to the schedule set out in the agreement, and will be at zero by 2046. Several tariff lines are unbound. For most goods tariffs will fall to zero after ten years, meaning that these lines will be at zero by 2031 in Vanuatu. There are a number of exceptions in each of Vanuatu and Solomon Islands such crude oil, cocoa, certain foodstuffs, perfumes and toiletries, certain items of clothing, machinery and vehicles. The slower tariff reduction schedule for these goods appears to be mostly aimed at preserving government revenue.
 
Assuming Solomon Islands is recommended for graduation in 2018 and therefore graduates three years later in 2021, tariffs on all goods will be removed by 2047, with most tariffs at zero by 2032. Whilst the LDC graduation date for Vanuatu has already been decided, for Solomon Islands it  depends on the decision at the next triennial review in March 2018 of the UN Committee for Development Policy, when Solomon Islands is expected to have met the criteria for graduation for a second time, rendering it eligible for graduation three years later. This is subject to ratification by the UN Economic and Social Council and the General Assembly. Although 2021 is the earliest possible graduation date for Solomon Islands, it is possible that the government will request a delay for reasons of economic or environmental vulnerability, following the precedent of the Maldives, Samoa, Vanuatu, Tuvalu and Kiribati. This would obviously have the effect of delaying the start of tariff reductions.

The reduction in tariffs will have revenue implications, particularly for countries whose governments relies on import duties and value-added tax. It is partly for this reason that Vanuatu is already considering the introduction of income tax. Whilst the introduction of a progressive tax structure should be welcomed, and Vanuatu is less and less reliant on import tariffs for revenues, the move from an easily-collectable border tax to a more sophisticated domestic tax will take time and administrative resources.
 
Rules of origin


The islands did not take full advantage of SPARTECA for two main reasons: firstly, they lacked the productive capacity and consistency and quality of supply for export. This has long been the biggest issue facing regional trade – not only market access. Secondly, the SPARTECA rules of origin (RoO) were too onerous. Despite calls for greater simplicity on RoO in PACER Plus, insufficient progress has been made. Whilst it is a welcome development that the SPARTECA requirement for 50% of the value of a finished product to be added in the islands has been reduced to 40% for most goods, and that a change in tariff classification requirement has been introducted, 40% is still quite high. Several organisations, including the Tony Blair Commission for Africa and the World Bank, have argued that a change in tariff classification or value-addition requirement of as low as 10% would most benefit developing countries. If PACER Plus were genuinely development-orientated, it would have further eased RoO.
 
It also appears that the text proposed by the Forum Island Countries included in article 5 of chapter three (on cumulation) of the draft which was leaked in 2016 has not been included. The FICs had proposed a specific relaxation of the strict requirement that goods originate within their own borders. The denial of this request again adds to the impression that the RoO are unlikely to constitute a big enough advance on SPARTECA.  

The language proposed by the FICs in the leaked text on de minimis, under article 7, also appears to have been excluded from the final negotiated text. This would have allowed FICs a higher threshold for origination than Australia and New Zealand in the event that a good did not undergo a change in tariff classification.  

Better RoO, however, would probably have been too late to have much impact in any case, given that the ASEAN Australia New Zealand FTA (AANZFTA) will eliminate tariffs on 99% of trade with key ASEAN markets by 2020, eroding any relative benefits of any improved market access for the islands – be it through enhanced RoO or otherwise. In this sense PACER Plus could only have been beneficial – and only for a limited time – if negotiations had been concluded much earlier. There will soon be little incentive for ANZ to source goods from the Pacific islands when they can import them duty free from the larger and more competitive ASEAN nations.  
 
Development assistance

Development assistance, labour mobility and services were touted as some of the main attractions of the agreement for the Pacific Island Countries (FICs), but the text disappoints in each of these areas. If ANZ wished to provide additional development assistance these countries should do so regardless, outside a trade agreement. Aid should not be used as a bargaining chip in negotiations. Australia in particular has cut additional development assistance in light of domestic fiscal austerity and the move to reassimilate AusAID within the Department of Foreign Affairs and Trade.  
 
The Australian Government will provide A$19 million to fund the management and delivery of the Work Programme, while New Zealand will provide NZ$7 million. The combined sum is very small – and amounts to the equivalent of around $2.4 million per developing FIC signatory. Australia and New Zealand also commit to providing 20% of required Pacific regional Aid for Trade. Should development assistance be administered and delivered by the Pacific Islands Forum Secretariat? Some argue that the Forum has an institutional agenda – indeed this was the motivation for the creation of the Office of the Chief Trade Adviser (OCTA) – and that providing additional development funding in the context of a trade agreement compromises the Forum’s own behaviour in negotiations. Has the Forum acted neutrally and will it distribute funds according to need?  

While travel assistance to trade meetings can be a helpful form of development assistance, per diems have long been an attraction for low-paid regional officials, and if not administered carefully and strategically, can distort incentives and create unnecessary absences from already understaffed trade ministries. Travel support can thus undermine capacity rather than building it, which should be the focus of development assistance.
The components of annual development expenditure in the development assistance chapter are better prioritised than appears to have been the case in the leaked draft text from 2016. The major and pressing priority in most FICs is investment in productive capacity, and the chapter includes a useful focus on economic infrastructure, which remains an urgent priority – perhaps the biggest priority – for the region. The need for productive capacity building is mentioned as a sub-heading under Attachment B of the implementing arrangement on Development Cooperation: Summary of FICs’ Trade-Related Needs Assessment, as part of ‘Broader Trade and  
 
Investment-Related Assistance’.  

 
Although it is useful that the issue of productive capacity is recognised here, the issue is much more important and should be given greater prominence. The UN Conference on Trade and Development (UNCTAD) and the UN Committee for Development Policy identify the promotion of productive capacity as one of the most critical issues facing least developed and structurally weak economies, arguing that it is key to structural transformation. Productive capacity is defined much more broadly than in the PACER Plus text: as the productive resources (natural, human, physical and financial), entrepreneurial and institutional capabilities, and production linkages that together determine the capacity of a country to increase production and diversify its economy into higher productivity sectors for faster growth and sustainable development.  Developing productive capacity requires integrated polices in five areas: development governance; social policies; macroeconomic and financial policies; industrial and sectoral policies; and international support measures.
 
Movement of natural persons and labour mobility  
 
The draft texts are similarly disappointing on international movement and labour mobility. It is good that the temporary movement of natural persons has been addressed, but, as expected, commitments by Australia and New Zealand do not extend to low-skilled workers. Australia’s schedule features no horizontal commitments. Categories included, with associated conditions, are intra-corporate transferees, independent executives, business visitors, contractual service suppliers and spouses. New Zealand has no horizontal commitments and a very limited number of commitments for professionals with associated conditions; namely intra-corporate transferees, installers/servicers and independent professional service suppliers.  

Other FIC governments have made much broader commitments, presumably reflecting their greater desire to attract labour, both skilled and semi-skilled. Some are concerned about brain-drain and competition from incoming workers. It should be remembered, however, that services commitments in a trade agreement do not automatically translate into practice; they are ‘merely’ legally binding agreements not to backtrack. FIC governments are already free to attract required labour, irrespective of PACER Plus, in whatever form they wish.  

The (highly successful) recognised seasonal employer and seasonal worker programme schemes in Australia and New Zealand feature in a dedicated chapter, which aims to “strengthen labour mobility cooperation.” The chapter establishes a Pacific Labour Mobility Annual Meeting, obliges Pacific island governments to provide among other things a “ready pool of workers of good health and character that can be sourced at short notice”, provides some support for travelling workers, requests ANZ to provide institutional support, and seeks improvements in visa procedures, education, recognition of qualifications and technical cooperation. These paragraphs are welcome.

What PACER Plus does not provide, and what was sought by the Pacific island states from the beginning, was legal formalisation of the labour mobility schemes. For many, this is the overriding disappointment of PACER Plus. Nowhere do Australia or New Zealand commit to providing a certain number of annual places for seasonal workers. ANZ retain the right to prioritise nationals. It appears that ANZ may still be free to rescind the schemes, creating a potential source of uncertainty. The whole point of including labour mobility in a trade agreement was to create legal certainty. All that has happened as a result of the PACER Plus labour mobility section is that labour market non-integration has been formalised.
 
Services
 
Services exports already dominate the economic activity of a number of Pacific island states and have significant future potential. One of the most important clauses of the services chapter states that the agreement does not apply to government services, government procurement, subsidies or grants, and air transport other than six particular activities, and that the chapter recognises the right to regulate in the national interest. A footnote states that: “For greater certainty, nothing in this Chapter shall be construed as requiring the privatisation of public services supplied in the exercise of government authority”. These are important statements, given that many feared that PACER Plus would lead to a new round of privatisations and foreign ownership of strategic economic activities. The chapter contains MFN and national treatment clauses.

The annex of commitments follows the General Agreement on Trade in Services (GATS) format. For WTO members in effect PACER Plus will make little difference. As in other areas, it is important to recognise that a trade agreement really only sets a limit from which there can be no stepping back. It does not guarantee incoming investment in services. Inward investment is in practice somewhat unregulated, so inward access is not inhibited anyway, reducing the point of a trade agreement. If anything, although progress is being made, more domestic regulation is needed not less (for instance improvement and enforcement of competition laws; regulations on foreign ownership of strategic public services; tighter building regulations and their enforcement – all things that are the responsibility of national governments). FICs are mostly free to export or import services as they always have, and it is not clear that the agreement would create any noticeable material advantage. The much more important tasks are to expand the provision of sustainable services and to make the economy a more attractive environment in which to invest for both foreigners and locals, as well as raising the rate of investment.
 
A quick perusal of the investment chapter shows that it differs from countries’ GATS schedules. Importantly, it appears that the agreement does not include investor-state dispute resolution (ISDR), which has proved extremely controversial elsewhere, notably in Australia, as well as with regards to the proposed Trans-Pacific Partnership the Transatlantic Trade and Investment Partnership. Australia has commendably stated that it will not seek ISDR in trade agreements with developing countries.
 
Concluding remarks
 
The enormous time and effort devoted to the negotiation of PACER Plus was not without cost, while the benefits are minimal. Calculations for one trade diagnostic study suggest that in one FIC as much as half of trade officials' time was devoted to travelling to negotiations -- all for an agreement that would likely result in almost no benefit to that country. A number of other studies have assessed the cost of trade negotiations and concluded that these often overlooked costs should be factored into the final equation. Costs are particularly high in small, under-resourced administrations. The time and effort spend on negotiations would probably have been much better spent addressing domestic economic concerns such as building sustainable productive capacity for import replacement and for export. Productive capacity (including in services) is the real issue, not only market access. Identifying ‘trade’ as solely about ‘trade agreements’ tends to compartmentalise it as an issue and create policy fragmentation, with Ministries of Finance, Economy and the productive sectors largely ignoring the issue. Trade policy should be an integrated, cross-governmental enterprise concerning both market access and the development of supply. The potential gains appear so limited, and in some cases have formalised such a sub-standard status quo or created unnecessary disruption, that it is even questionable whether it is worth the islands cashing in on the effort expended over those years.  
 
In the past decade the Pacific has experienced a boom in trade with Asia, which should, if anything, have been the region on which effort and time on negotiations was expended – indeed it may yet be. Although most FICs have either multilateral or bilateral access to Asia (including China), third parties are improving their own access to the world's rising economic region, reducing the Pacific's relative margins of preference.  
ANZ appear to have put their own interests ahead of those of the islands in an effort to get negotiations over and done with, prioritising the possible precedent for their ongoing or possible negotiations with other countries. Ultimately if 'development' was the intention, a refined and improved SPARTECA with enhanced provision for sanitary and phytosanitary measures, RoO and technical barriers to trade may have been a better solution – alongside long-term, formalised labour mobility -- rather than a reciprocal agreement, tied to Aid for Trade, with 11 countries which are of very little commercial importance to ANZ.
 
Daniel Gay, is the Inter-Regional Adviser on Least Developed Countries - UN Committee for Development Policy Secretariat in New York.
 

UNCDPS/PACNEWS


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