FIJI-AUSTRALIA BUSINESS FORUM RADISSON, DENARAU, 4 DECEMBER 2007 SPEECH BY HE JAMES BATLEY AUSTRALIAN HIGH COMMISSIONER TO FIJI  PACER PLUS: WHAT BUSINESS NEEDS TO KNOW

1. What is PACER?

Economic integration has been part of regional Leaders’ vision since the first South Pacific Forum in 1971, but the region didn’t really get down to business until 1999, when Forum Trade Ministers tasked officials to negotiate a free trade agreement. The Pacific Agreement on Closer Economic Relations - PACER - was concluded in 2001.

PACER commits all members to begin negotiations on free trade by 2011 at the latest. Current trade arrangements – such as SPARTECA – are to remain in force for each island country until replaced by “new and/or improved trade arrangements providing equal or better access to their markets”. The agreement imposes no deadline for the conclusion of negotiations.

The PACER Plus negotiations are to be brought forward from 2011 if any party enters into negotiations for free trade arrangements with any other developed party – or concludes FTAs with developing or least developed countries. The earlier condition, ie commencement of FTA negotiations with another developed country, has been met by the ongoing negotiations between PACPs and the EU for an interim and/or final EPA.

In view of that, Trade Ministers agreed earlier this year to hold initial consultations on the way forward on PACER Plus. Those consultations will be held early next year in New Zealand. Australia and New Zealand, on one hand, and the Forum island countries, on the other hand, will begin the process of preparing a roadmap for PACER Plus for Forum Trade Ministers to consider. Negotiations are yet to start.

2. Why do some people think PACER Plus would not be a good thing?

Many people see PACER Plus not in terms of opportunity, but in terms of challenge and threat. The most commonly voiced objections to the idea of greater regional economic integration seem to be as follows:

• First, that Pacific governments depend on revenues from tariffs and duties - so a genuine free trade arrangement would be unaffordable.

• Second, that local industries cannot compete with more efficient foreign industries, so locally-owned companies would be driven out of business, and unemployment would rise under a genuine free trade agreement.

• Third, that while big countries like Fiji and Papua New Guinea have export sectors which might benefit from greater liberalisation, smaller FICs simply have nothing to sell and therefore have no interest in a free trade agreement.

I propose to respond to those objections in turn.

3. Why PACER Plus mightn’t be a bad idea after all

First to the question of revenue. We have the benefit of some objective analysis here, in the form of a revenue implications study which was commissioned by the Forum, and which is available on the Forum’s website.

The study finds that, for example, Fiji would lose, at most, 4% of government revenue from the adjustments to tariffs required from PACER.

Both Cook Islands and Samoa have already made successful transitions to alternative non-tariff-based revenue structures and have demonstrated immediate economic benefits – there’s no reason why Fiji can’t do the same. In fact, the study concludes that “the data would suggest that by and large the Government of Fiji has already implemented adequate strategies to deal with the potential tariff/revenue loss from the forthcoming trade agreements”.

Not only that, both Australia and New Zealand have indicated that we are mindful of FICs’ needs and resources and constraints, including the need to manage carefully the transition to alternative taxation methods.

What of the second common objection, that freer trade would wipe out local industry, and reduce economic growth rather than promoting it?

Here, a second study commissioned by the Forum Secretariat is relevant. Known as the “Joint Baseline and Gap Analysis Study”, this draft report was considered by Trade Ministers in August, and a final report is scheduled to be publicly available later this month.

The draft report confirms experience around the world that globally-oriented countries tend to grow faster than inward-looking ones, and that even small countries stand to gain disproportionately from trade liberalisation and access to global markets. The study found there are risks – of course there are risks - but that strategies could be formulated to manage the risks and take advantage of the opportunities.

Naturally, a policy of continuing to shelter FIC economies from external competition will benefit some individual firms. But as businessmen and women let me ask you this: are you satisfied with the historic rate of economic growth in these markets? I’d be surprised if the answer to that question was yes.

Finally, what’s in it for the smaller island countries which allegedly don’t trade? Well, even if they will never be large exporters of goods, all can – and do – export services. I expect PACER Plus to be a comprehensive trade agreement, also covering trade in services. It will be important that all FICs be involved in PACER Plus negotiations to ensure the agreement meets their needs. Also, as the Joint Baseline and Gap Analysis Study points out, trade liberalisation results in consumers and producers having access to a greater range of goods at lower prices – another benefit for smaller island countries.

4. What PACER Plus is not

Some might ask, instead of a PACER Plus agreement, why not just modify SPARTECA, for example by changing the rules of origin?

It’s clear that time is running out for SPARTECA. It was an agreement designed for a world of preferential trade and that world is getting smaller every day. Since 1988 Australia’s average tariff has fallen from 15 per cent to 3.5 percent, eroding the value of SPARTECA. And, since signing SPARTECA, Australia has entered into, or is negotiating, free trade agreements with a very wide range of trading partners.

In these circumstances it makes no sense to seek to modify an outdated agreement that covers only goods, especially when Fiji’s economy – like that of many of the PICs - relies on services trade. There would be little return for the effort required.

Rather, in our view Fiji – indeed the whole Pacific – needs to position itself to take advantage of the opportunities which more open trade and liberalised access to global markets present, through a comprehensive free-trade agreement, covering goods and services and potentially other issues such as investment, under which important issues such as the movement of natural persons and rules of origin can be properly addressed as part of an overall package.

There have been some suggestions that PACER Plus should provide for Australia and New Zealand to “compensate” island countries for entering into a free trade agreement, through increased aid. We think that such suggestions miss the point and are unnecessarily doom-laden. It is self-defeating to think that the future of the region depends on more and more external support.

Yes, Australia (and New Zealand) are prepared to assist FICs with transition, negotiation and adjustment costs; and yes, we are prepared to take careful consideration of issues like timeframes for implementation.

But ultimately we are convinced that greater regional integration through trade liberalisation will bring its own rewards.

Continuing on my theme of what PACER is not, it is not a panacea for any country’s economic problems. We recognise that for trade to thrive, trade liberalisation must be accompanied by a supporting policy environment, including:
• sound macro-economic management and microeconomic reforms;
• effective health and education systems
• robust and well maintained infrastructure and
• political stability.

Australia will continue to work Pacific island countries, both bilaterally and through the Forum, to assist in such areas. But ultimately it will be up to each country to ensure that it is able to, and in fact does, take advantage of the opportunities offered by a PACER Plus agreement.

5. Conclusion

Let me stress again that we are in the very first stages of this process. Australia’s approach to negotiations, and the form we envisage any free trade arrangements as having, are still to be considered by the government.

Even so, the trends we are seeing in world patterns of trade and economic growth, coupled with the underperformance of FIC economies over recent decades, points to the need for greater and more effective regional economic integration.

The membership of the FABC, by its very nature, has a large stake in this process and I hope we can not only remain closely in touch but also work closely with the Business Councils to progress discussion on the scope, format and timetable for PACER Plus negotiations. We intend to commence the usual more formal and structured pre-FTA consultations with business in early 2008, once the pathway towards negotiations is a bit clearer. In the meantime I would encourage you look upon regional integration in terms of opportunities, not threats, and to speak to your government in similar terms.

I say this because I believe that the alternative for Pacific Island Countries is not simply to sit on the sidelines; the alternative is to risk even further decline, both relative and absolute, in standards of living.

The alternative for PICs is not avoiding change; the alternative is having change forced upon them.