OCTA Replies to VCCI Statement

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The OCTA welcomes discussions on PACER Plus by all stakeholders, as it believes it is through such discussions and engagement that the Parties can come up with an Agreement that will provide a platform for the Forum

Island Countries (FICs) to achieve robust economic growth and sustainable development. However, the OCTA wishes to point out some inaccuracies in the recent statement by the Vanuatu Chamber Commerce Industry (VCCI) and clarify certain aspects of the PACER Plus Agreement.

Background

PACER Plus provides a framework for a more economically-integrated Pacific region, with the expectation that it will improve the trade prospects for the FICs both at the regional and global level. It will also facilitate the inflow of foreign investment into the FICs. While it is true that the PACER Plus Agreement alone cannot enhance FIC economies, it can provide a platform for them to introduce the necessary reforms that would inject dynamism into their economies and enable them to achieve robust economic growth and sustainable development.

With respect to Papua New Guinea (PNG), it is not clear what the ‘net loss’ refers to, as PNG already has one of the lowest set of applied MFN import duties in the region, and thus PACER Plus itself would have been unlikely to lead to much, if any, further liberalisation. The PACER Plus Agreement contains provisions which would have enabled PNG to give adequate protection to its nascent industries.

Trade in goods

When considering the level of tariff liberalisation that each PACER Plus Party will commit to, the percentage figure used (e.g. 80%) generally refers to the value of that country’s imports from (exports of) Australia and New Zealand. This figure would include the binding of some, not all tariff lines that are already duty-free (0%). In this regard, it should be noted that a third of the value of Vanuatu’s recent imports from Australia and New Zealand were products that have 0% duty rates. It is also very important to note that even if Vanuatu were to commit to an ‘80%’ offer (its most recent offer was around this level), there are many nascent industries whose products would be among the ‘excluded’ 20%. So to claim that this level of commitment would necessarily affect many nascent industries does not incorporate a detailed analysis of Vanuatu’s offer and the many very important products and industries excluded from it.

For products that would be liberalised under PACER Plus, the tariff cuts will only commence after Vanuatu graduates from LDC status (currently envisaged in December 2020, but could potentially be later). Put differently, Vanuatu is not to be expected to make any tariff cuts within the first 10 years of the entry into force of the PACER Plus Agreement. After this period, tariff liberalisation will be gradual, and spread over a 25-year period.

Critically, any reductions in Government revenue that arise from tariff liberalisation under PACER Plus will not mean that this money disappears from Vanuatu’s economy. Most, if not all, of the amount of Government revenue reductions would simply be transfers of money away from taxes paid to Government by ni-Vanuatu consumers/businesses, and instead towards ni-Vanuatu consumers/businesses themselves. In other words, the money that the Government may ‘lose’ is money that ni-Vanuatu consumers/businesses would gain, through the removal of the import duty and lower prices of imported goods.

OCTA’s calculations are that by the end of Vanuatu’s PACER Plus tariff reductions (at least 35 years from now), import duty revenues may be roughly 550 million Vatu (closer to US$ 5 million) lower annually than the current levels, though it is very challenging to forecast this amount so far into the future. The amount of 550 million Vatu is equivalent to only 1.7% of the total of 32.585 billion Vatu expected to be collected by the Government of Vanuatu in 2016 (including external grants). It is also equivalent to less than 10% of the amount expected to be collected through VAT in 2016. The amount also needs to be compared to the extra amount of money that ni-Vanuatu businesses may be able to earn through being more competitive as a result of Vanuatu being part of PACER Plus – including through lower-priced inputs, more flexible rules of origin for exporters, targeted support to remove SPS and other technical barriers for exporters, more competitive (and therefore cheaper) provision of services within the economy, greater inward investment, and enhanced development assistance towards productive sectors. These benefits should be of magnitudes higher than 550 million Vatu, and would not necessarily be available without PACER Plus. It is also incorrect to assert that PACER Plus will ban internal taxes imposed in connection with the importation and exportation of goods. Vanuatu and other Parties will be free to impose internal taxes such as value added tax and excise taxes on all goods, provided they respect the non-discrimination principle. Under this principle, countries cannot use internal taxes to further the consumption of domestic products over imported like products. As a WTO Member, Vanuatu cannot impose import bans as the VCCI seems to suggest.

As hinted at above, a key difference between SPARTECA and PACER Plus will be the more flexible rules of origin under the latter agreement. Therefore ni-Vanuatu exporters can expect to increase their exports to Australia and New Zealand through PACER Plus, even without any changes of import duties. The existence of other trade agreements that Australia and New Zealand have in place, including for example with Asian countries, means that greater market access for ni-Vanuatu exporters through improved rules of origin (under PACER Plus) is needed more than ever – to stick with SPARTECA would widen, not diminish, the gaps between ni-Vanuatu exporters and Asian exporters wishing to access the Australian and New Zealand markets. In any case, SPARTECA, a unilateral preference scheme, could theoretically be removed at the whim of Australia and New Zealand at any time, whereas PACER Plus commits them to provide market access to Pacific exporters in the long-run.

Under PACER Plus, Vanuatu and other FICs will have access to a transitional safeguard mechanism which can be invoked in the event of a surge of imports from any PACER Plus Party during the transitional period for the elimination of tariffs. The measure will be available for 3 years, but it can be extended for another 2 years. The FICs will also have access to a global safeguards mechanism, under which they can impose import restrictions on all their trading partners, including PACER Plus Parties. In addition, they can withdraw or modify their tariffs whenever deemed necessary by them upon the payment of compensation in the form of reducing tariffs on products of export interest to the countries whose products will be affected by the measures. They will also have access to an infant industry clause for up to 8 years. In the first two years of the imposition of the measure, they will not be required to provide compensation to countries. Under the modifications/withdrawals article, it is not a requirement for the FICs to prove serious injury to a domestic industry producing a like or directly competitive product.

Investment and Services

Vanuatu can use PACER Plus as a signal to investors in the region (not only in Australia and New Zealand, but the FICs as well), and beyond, that Vanuatu is a great place to do business. Ultimately, this is good for job creation for ni-Vanuatu people. However, it is true that the agreement itself cannot be the only signal for investors – the Government also needs to show, through its policy choices, that Vanuatu’s economy is strong, safe, and has long-term potential. Investment commitments through PACER Plus would not ‘make it harder for governments to direct investment to the sectors and places it is needed’ – in fact, the exact opposite would be true, as Vanuatu would signal its key sectors through its PACER Plus schedule.

Commitments on services through PACER Plus offer an opportunity to stimulate greater regional competition in key services sectors, but Vanuatu will not have to make commitments in any sensitive sectors. Services commitments will not result in a free-for-all for huge foreign corporations to run amok in Vanuatu’s economy as is hinted by some commentators. They simply indicate two principles: first, the level of market access that regional services providers will have in some, but not all, sectors; and second, that foreign services providers will not be discriminated against vis-à-vis local services providers through Vanuatu’s laws and regulations, again in some, but not all, sectors.

The right of Vanuatu and other FICs to regulate in the national interest is explicitly recognised under the PACER Plus Agreement. In exercising this right, the Parties are required not to undermine their market access and national treatment obligations. Thus, it will be open for Vanuatu to adopt prudential rules to protect the integrity of its financial system. However, Vanuatu can adopt regulations which, for example, give an advantage to one bank over the others. It is important to point out that the provisions on the “right to regulate” in PICTA and the revised MSG Trade Agreement are identical to the PACER Plus provision.

Labour Mobility

Labour mobility schemes provide outstanding opportunities for ni-Vanuatu workers to earn money and skills that they could not necessarily do easily in Vanuatu. The fact that Australia and New Zealand have expanded their labour mobility schemes for Pacific workers over the years is part and parcel of the demands of the FICs, notably including Vanuatu. While these schemes are indeed good for Australian and New Zealand employers/businesses, it is unlikely that their Governments would have as been willing to expand these schemes if it had not have been for the FIC demands in the PACER Plus negotiations. Vanuatu and other FICs are of the considered view that since the schemes are employer-driven, it would not make a difference from a practical point of view if they are legally binding or not.

Development Assistance

Australia and New Zealand have been the major development assistance providers to most FICs, and certainly Vanuatu, for many years. They cannot escape their geography – the Pacific will always be important to Australia and New Zealand, and aside from any altruistic sentiments, they have vested interests in seeing the FICs have strong and resilient economies. The inclusion of this chapter in PACER Plus means that, regardless of exact language used, the FICs can point to the PACER Plus agreement in the unlikely event that Australia and New Zealand may ever attempt to reduce their commitments towards trade- and investment-related development assistance towards the FICs in the future. Assuming that such commitments are forthcoming, Vanuatu and the other FICs can expect to use PACER Plus as a cooperation framework for trade-and investment-related development assistance that would ensure that the most important barriers facing ni-Vanuatu businesses are always given priority.

By Len Garae

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