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The Conflicting Interests within PACER Plus

May 17, 2017
The Pacific Agreement for Closer Economic Relations (PACER) Plus revisits an original PACER agreement signed in 2001. This original PACER agreement existed as Australia and New Zealand’s response to the Pacific Island exclusive Pacific Island Countries Trade Agreement (PICTA), also signed in 2001, in an effort to include themselves in a free trade agreement with the region. Since April 20th of this year, Fiji and Papua New Guinea have refused to sign the finalized agreement, indicating that regional interests have not been equally represented.

The Pacific Agreement for Closer Economic Relations (PACER) Plus differs from typical free trade agreements in its emphasis on developing institutional and procedural structures to facilitate future trade and economic agreements. Most plans demand substantive reform in the present without setting up agencies to aid further development in the future. [1] PACER Plus, involving the fourteen Pacific Island Forum countries in addition to Australia and New Zealand, plans to be different by developing an economic platform for future negotiations. [2]

Even the negotiations for various aspects of PACER Plus demonstrate a push towards developing the Pacific Island Countries’ (PICs) limited economic and strategic capacity. [3] It may be argued that the PICs are inherently disadvantaged due to their small size, resulting in little to no economies of scale. Their distance and isolation from major markets also contributes to the challenges faced by businesses in PICs attempting to lower costs.

An independent advisory office, the Office of the Chief Trade Adviser (OCTA), was established to support the PICs in their capacity to negotiate for provisions of PACER Plus. [4] The office helps by commissioning research on PACER Plus and training trade officials from the Forum Island Countries to be able to better negotiate. [5] Funded by Australia and New Zealand but completely owned and under the control of the 14 PICs, the OCTA claims that PACER Plus will be beneficial for all participating members. [6]

However, the agreement does not guarantee that the various members’ interests are equally represented. Indeed, it has been argued that PACER Plus was formed by Australia and New Zealand in response to the PICs negotiating with the European Union for an Economic Partnership Agreement, forming the Pacific Island Countries Trade Agreement (PICTA). [7] Australia and New Zealand’s desire for the first and best access to the Pacific markets likely motivated their push for the PACER Plus agreement in order to maintain and strengthen their economic influence over the smaller islands.

Map of the Pacific Island Countries, courtesy of the United Nations University.Map of the Pacific Island Countries, courtesy of the United Nations University.

Pacific Island Countries

While it is debatable to what extent PACER Plus aligns with the PICs interests, the provisions of the agreement seem to aid rather than detract from the PICs’ economic development. According to the agreement, New Zealand and Australia would help PICs implement the agreement and develop their economies by committing to provide both financial and technical assistance. [8] The assistance attempts to address supply-side constraints that have previously prevented PICs from taking advantage of market access under other trade agreements such as South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA). [9] With the assistance, the PICs would be able to utilize the greater access they would have to the Australian and New Zealand markets under PACER Plus. This would lower import costs for markets in PICs, and, in turn, benefit their economic development, lowering business as well as consumer costs.

Furthermore, while PACER Plus requires eventual tariff elimination, [10] PICs are not required to take the same level of liberalization as Australia and New Zealand initially, and the gradual period of implementation will differ for each PIC, taking into account their specific case. [11] Therefore, PICs do not have to face an unhealthy amount of competition and open up their markets prematurely. The level of competition will rise, which will increase the quality of goods and services while lowering the prices for consumers. This would stimulate further innovation in PICs as a result of the free trade agreement.

Due to the collective nature of the PACER Plus agreement, PICs that normally would not attract substantial independent foreign investment would begin to receive more investment. [12] Therefore, PACER Plus does indeed benefit PICs, even if not to the extent that PICs like Fiji desires.

In fact, Fiji threatened to withdraw last year in September from the agreement as it did not feel like the negotiations sufficiently addressed its interests. [13] Instead, it felt negotiations were being oriented towards Australia’s and New Zealand’s interests. During negotiations last fall, Fiji remained firm on its stance, stating that the agreement had to address enough of their concerns for them to sign it. [14]

Australia and New Zealand

Due to the controversy, much of the public promotion of PACER Plus focuses on how the agreement may benefit PICs. However, it is also important to note how Australia and New Zealand may benefit from the agreement in a variety of ways, especially as the agreement focuses more on creating a platform for future free trade expansion and features relatively little direct monetary investment from Australia and New Zealand. [15]

Reduction of export costs of goods and services are a straightforward way Australia and New Zealand plan to benefit from successful implementation of the PACER Plus agreement. PACER Plus relies primarily on attempting to improve and clarify customs procedures and trade requirements between the PICs, along with a “gradual removal” of import duties among the PICs, Australia, and New Zealand. The aim would be to lower production and import costs in a mutually beneficial manner, while assisting the PICs by integrating them into the global economy. [16]

Under this agreement, consumers and firms in the PICs can gain access to cheaper goods from each other and Australia and New Zealand, reducing production costs. Subsequently, the agreement has potential to help grow small, nascent business in the PICs. However, Australian and New Zealander consumers will also have access to cheaper goods and services, from the PICs. [17] Removal and streamlining of import duties and trade regulations between these countries also opens up the smaller, emerging PICs markets to bigger corporations from Australia and New Zealand. [18] To an extent, larger corporations’ access to the smaller PICs markets would be mutually beneficial, as PICs consumers can gain access to a wider range of goods. This move would become questionable if larger corporations’ subsequent benefits become disproportionate to smaller PIC firms’ benefits. 

Conceptually, it would also be reasonable to imagine Australia and New Zealand pursuing PACER Plus on the grounds of seeking political leverage, domestically and abroad. Establishing – or at a minimum, reaffirming – partnership with the PICs would extend the reach of Australia and New Zealand’s influence abroad. If PACER Plus proves successful, the diplomatic fruits of such a strengthened relationship may provide a stronger platform for profitable future trade agreements, as the PICs countries grow. PACER Plus may also work as a political tool both domestically and within a larger international context, as its success would improve Australia’s and New Zealand’s image as benevolent, effective, free-trade actors.

As the PACER Plus agreement attempts to improve the PICs’ trade capacity, it focuses a lot on directly developing business opportunities that can lead to longer term growth. In this sense, Australia and New Zealand’s stakes lie in setting up the foundations of growth and attracting foreign direct investment (FDI). If Australia and New Zealand successfully implement PACER Plus, there would be much to gain on their end. The agreement, on the most fundamental level, opens up trade and flow of goods and services throughout all of the countries involved, allows Australian and New Zealander consumers to gain access to specific goods and services offered by the PICs at lower costs, and gives larger firms greater access to the PICs markets. PACER Plus, if successful, will create growth in the region that, as a result, opens up opportunities in the future for more agreements that might help compound on the benefits gained through PACER Plus.

Conclusion

On balance, based on the provided evidence, while the PICs may stand to benefit from the PACER Plus agreement, Australia and New Zealand, stand to gain more. Most significantly, their larger firms can more easily penetrate the PICs market, and the PICs would encounter short term losses of government revenue with the gradual lowering of tariffs that would be more hurtful relative to the size of the PICs than the losses Australia and New Zealand would face. Whether the PICs are willing to take on the benefits of PACER Plus at these costs lies in the judgement of their leaders.

Recent actions have suggested that the continued negotiations did not fulfill those desires. As of April 20th this year, Fiji and Papua New Guinea, two of the largest PICs, have opted out of signing the final text for PACER Plus while the other countries have concluded negotiations. [19]

References

  [1] http://dfat.gov.au/trade/agreements/pacer/Pages/pacific-agreement-on-closer-economic-relations-pacer-plus.aspx

  [2] https://www.mfat.govt.nz/en/trade/free-trade-agreements/agreements-under-negotiation/pacer/

  [3] http://www.octapic.org/pacer-plus-benefits-for-pacific-island-countries/

  [4] http://www.octapic.org/about/general-information/

  [5] http://www.octapic.org/wp-content/uploads/2016/06/Status-of-the-PACER-Plus-Negotiations-.pdf

  [6] http://www.octapic.org/wp-content/uploads/2016/06/Status-of-the-PACER-Plus-Negotiations-.pdf

  [7] https://nccur.lib.nccu.edu.tw/bitstream/140.119/33958/12

  [8] http://www.octapic.org/wp-content/uploads/2016/06/Status-of-the-PACER-Plus-Negotiations-.pdf

  [9] http://onlinelibrary.wiley.com/doi/10.1002/app5.34/full

  [10] http://www.octapic.org/wp-content/uploads/2016/06/Status-of-the-PACER-Plus-Negotiations-.pdf

  [11] http://www.octapic.org/pacer-plus-benefits-for-pacific-island-countries/

  [12] http://www.octapic.org/pacer-plus-benefits-for-pacific-island-countries/

  [13] http://www.abc.net.au/news/2016-09-15/fiji-says-it-has-not-withdrawn-from-pacer-plus/7849834

  [14] http://fijisun.com.fj/2017/02/01/australian-govt-confident-on-pacer-plus-negotiations/

  [15] http://dfat.gov.au/trade/agreements/pacer/Pages/pacific-agreement-on-closer-economic-relations-pacer-plus.aspx

  [16] http://www.octapic.org/pacer-plus-benefits-for-pacific-island-countries/

  [17] http://www.octapic.org/pacer-plus-benefits-for-pacific-island-countries/

  [18] http://www.bilaterals.org/?10-reasons-to-challenge-pacer-plus

  [19] http://www.sbs.com.au/news/article/2017/04/20/fiji-and-png-opt-out-pacer-plus-trade-deal-reached

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