How PACER-Plus undermines the Peoples Plan for Development

The recently released ‘Vanuatu 2030 The People’s Plan: National Sustainable Development Plan 2016-2030‘ is the perfect lens with which to evaluate PACER-Plus and what it means for Vanuatu’s development aspirations to determine whether PACER-Plus should be signed or not signed.

The People’s Plan very clearly states that for Vanuatu, development is defined as being “more than just acquiring material wealth”. It goes on to state that “The country was founded on Melanesian values of respect, harmony, unity and forgiveness. These values shape our cultural heritage, which is the country’s strength…. Our development must be firmly anchored to these values that holds our society together.”

Further, “Ni-Vanuatu resoundingly called for a balance between the social, environmental and economic pillars of sustainable development, with our cultural heritage as the foundation of an inclusive society.”

Free Trade doesn’t match the Vanuatu Reality

Free trade however pushes a view of the world that prioritises economic outcomes which is the antithesis to Melanesian indigenous values as outlined in the Peoples Plans. Traditionally ‘free trade’ is applied to food and goods but it also includes many other aspects like services and investment. It requires all countries (including Vanuatu) to open their doors to every other country’s products and remove any protections for their own. Free trade theory argues that government support for industries or taxes on imports artificially changes the price of goods or services and ultimately make everyone worse off by protecting inefficient industries.

Loss of Government Revenue will Undermine many Development Goals

Under PACER-Plus Vanuatu is scheduled to make cuts to its import taxes. These cuts will kick in when Vanuatu graduates from being a Least Developed Country, currently scheduled for 2020. Current estimates have these cuts wiping out USD$6million to USD$8million per year of government revenue when they come into effect, the equivalent of the 2014 budgets for the Ministries of Land and Natural Resources and Tourism, Trade, Commerce and Ni-Vanuatu Business.

The People’s Plan makes many references to ensuring that limited resources are used most effectively, ensuring that essential services like health, education, and infrastructure are provided to all. Yet, but agreeing to PACER-Plus and the cuts that Vanuatu will be forced to make to border taxes will make those laudable goals even harder to achieve.

Already there are ongoing discussions about raising government revenue in Vanuatu, PACER-Plus will make those discussions even harder by cutting tariff revenue and putting more pressure on already resource strapped government departments.

Make it Harder to Grow and Support Ni-Vanuatu Businesses

Policy Objective ECO 1.7 aims to “Stimulate economic diversification to spread the benefits of growth and increase economic stability”. Government intervention in the economy can help diversify the economy and allow infant industries to grow and mature until they are ready to stand on their own.

The ability of governments to support and nurture local industries has been a key development right for all industrialised countries. As the former Head of the Macroeconomics and Development Policies Branch, United Nations Conference on Trade and Development (UNCTAD) notes, no country (except Hong Kong, China) has managed to industrialise without going through the infant-industry-protection phase.

Tariff policy is part of a dynamic industrial policy, and tariffs vary depending on the level of development of a country and the needs of various domestic industries. For instance, at an early stage of development, tariffs on labour intensive and resource intensive products are generally raised selectively, after which tariffs move down but tariffs increase on low-technology intensive products.

However, PACER-Plus is fixing a maximum applied level of ALL tariffs, even those that are not being liberalised. This will severely hamper any attempt for a tariff policy supportive of industrialisation and building domestic value chains. This is unacceptable for a ‘development agreement’ and challenges government’s right to develop.

Furthermore there are still ongoing discussions around the proposed Infant Industry Protections in PACER-Plus with Fiji unhappy with the level of protections on offer. Fiji is expected to not sign PACER-Plus because their demands have not been met, a position that Vanuatu should consider in the interest of building a dynamic and vibrate economy.

Policy Objective ECO 4.4 in the People’s Plan aims to “Improve and expand the range of sustainable tourism products and services throughout Vanuatu and strengthen links to local production”. There are many ways to do this but under PACER-Plus Vanuatu will be restricted in its ability to ensure that benefits from investment (like in tourism) are maximised by mandating the use of local inputs. Many developed countries have made investors use local resources (both people and materials) as a way to ensure that the gains and the development of skills and industries are widespread. This means that local content policies that directly or indirectly favour domestic products will be outlawed under PACER-Plus.

PACER-Plus will restrict the use of such policies for investments in both goods and services, removing a pro-development policy for Vanuatu to use.

PACER-Plus ‘benefits’ aren’t enough

Policy Objective ECO1.6 aims to “Require all new trade agreements to demonstrate tangible benefits in the national interest” and this should be applied stringently to PACER-Plus.

Proponents like the Office of the Chief Trade Advisor say it will “inject dynamism into the economies of the PICs” and give them the “significant benefits from international trade”. It is argued that PACER-Plus will lower costs of business through lower tariffs and thus make Ni-Vanuatu companies more competitive allowing them to take advantage of the changes to ‘Rules-of-Origin’ and export more. Even if there are generous changes to the Rules-of-Origin rules goods from ASEAN countries will most likely out compete goods from Vanuatu. Further the quarantine restrictions still place the burden on Vanuatu to prove that they meet Australian and New Zealand standards, something Vanuatu may struggle to do.

As mentioned above, there are many threats that PACER-Plus poses to Vanuatu’s ability to implement the People’s Plan. Even if you take at face value the promises of increased exports and investment (the latter being shown to have little links to signing trade deals) it would signal a prioritisation of the economic pillar over all others.

Creating a stable business environment and regulatory framework (Policy Objective ECO 4.1) is possible without PACER-Plus. Increasing labour mobility (Policy Objective ECO 4.7) to Australia and New Zealand is already happening and currently sits outside of PACER-Plus, and holds no guarantees with the schemes being employer driven.

Any tangible ‘benefits’ that PACER-Plus may appear to provide are greatly outweighed by the costs that will be borne by Vanuatu as it deals with loss of government revenue, loss of policy space to support Ni-Vanuatu industries, and the loss of the right to protect its people and natural resources.

Vanuatu needs to make a decision on PACER-Plus that supports its plan for development. Australia and New Zealand, our neighbours who are key sources for tourism and investment and donor countries, must respect our ability to make these decisions for ourselves.

There will be a Meeting on PACER-Plus Trade Agreement, MSG TA3, China Trade Agreement with Pacific Island countries including Vanuatu, and Vanuatu New Caledonia Trade Agreement, at VCCI in April 2017. Any manufacturers, exporters, any businesses of any economic industry sectors, and all businesses interested to hear more about these trade agreements PACER-Plus Trade Agreement, MSG TA3, China Trade Agreement with Pacific Island countries including Vanuatu, and Vanuatu New Caledonia Trade Agreement and ask their questions, are welcome to come to VCCI to attend this meeting on Thursday 20 April 2017 at 3pm. For more information, you can contact VCCI at 27543 or by email reception@vcci.com.vu