Bloomberg Quint| 6 April 2017
Pacer-Plus has lessons for RCEP
Tucked away in the South Pacific, a near 10-year effort to wrap up an aid-for-trade pact provides a cautionary tale for China’s ambitions to help seal a blockbuster Asia deal this year.
The stop-start talks between countries ranging from Fiji to Australia show how tricky it can be to navigate trade pacts that combine tiny economies with big ones.
The Pacific Agreement on Closer Economic Relations Plus is set to be completed mid-year, but it’s taken eight years of talks, which started 18 months after the process was initiated in early 2008. In the meantime, Papua New Guinea has walked away.
It comes as China pushes the Regional Comprehensive Economic Partnership, a 16-nation pact that takes in Japan and India as well as small markets such as Cambodia and Laos. It involves the world’s biggest communist nation, the largest democracy, and a country under military rule.
"These agreements where you need all countries to sign onto everything, the smaller countries do effectively get veto power and the other countries sort of have to buy them off with better commitments," said Shiro Armstrong, an economist and fellow at the Crawford School of Public Policy at the Australian National University. "It’s better to miss a deadline than to get a bad deal."
Iman Pambagyo, trade negotiating committee chief for the RCEP, said recently that only 10 percent of the text for that deal had been completed, even as China talks up the potential to get it finished this year, in part to send a message against protectionism. The pact would cover almost half the world’s population and 30 percent of the global economy.
Pambagyo gave an insight at a forum in Singapore last month into the task of wrangling the disparate group, with the number of officials involved blowing out to 700 at the most recent talks in Japan. He has to chivvy smaller Southeast Asian states, while acting as mediator between larger countries that have preexisting tensions.
"At some points, I say you sit together there, why don’t you just talk together?” he said.
For the RCEP, Pacer-Plus offers a case in point on how motivations can affect negotiations, with the deal frequently sidetracked by tit-for-tat spats.
Papua New Guinea and Fiji feuded over canned corned beef imports, while Fiji and Vanuatu bickered over biscuits. Their direct trade makes up less than one percent of each country’s respective total trade flows, and the smaller island states as a whole only account for an estimated 0.05 percent of world trade.
"Often in those contexts you see politicians using the trade dispute in order to stir nationalism and gain popularity for the government," said Matthew Dornan, deputy director of the Development Policy Centre at the Australian National University.
Fiji’s political history meanwhile sparked trouble with Australia and New Zealand. It was kicked out of the Pacer talks shortly after they started as the fallout from Prime Minister Frank Bainimarama’s 2006 coup continued, and was only invited back in 2014.
PNG is now out altogether. The country refuses to take part in a deal that “takes jobs away from our people," Prime Minister Peter O’Neill told Bloomberg last week at the Credit Suisse Asian Investment Conference in Hong Kong.
"The biggest point of difference is some of the manufacturing industry that we have in our country will close down because of imports coming in which are going to replace locally manufactured products at very cheap prices," O’Neill said. His country will instead seek bilateral deals with Australia and New Zealand. The RCEP has its own idiosyncrasies. As well as the mismatch between economies, there are broader geopolitical tensions.
China and India have a protracted border dispute and are jostling for influence in South Asia. South Korea and China are sparring over a U.S. missile system being deployed by Seoul, as China and Japan tussle over disputed islands in the East China Sea. China and some Southeast Asian nations have overlapping claims in the South China Sea.
"Even though one tries to separate these things, there’s a heck of a lot of politics that is caught up in a free trade agreement," Charles Finny, a former New Zealand trade negotiator who was involved in deals with Singapore, Taiwan and China, said by phone.
Pacer-Plus is an upgrade to deals dating back to 1980 that gave Pacific island countries tariff-free access to Australia and New Zealand. It would solidify Australia’s A$27.5 billion ($20.8 billion) in annual trade with the region before the European Union completes an economic tie-up with island nations. China is also seeking increased trade with the Pacific.
The deal was expected to be signed last year, but Fiji pushed for changes, including tariff barriers to be extended to protect its nascent textile industry.
"Forum Island Countries have a defensive interest obviously for revenue reasons and also their desire to protect their domestic industries," Edwini Kessie, chief trade adviser at the forum’s Office of the Chief Trade Adviser, said by phone from Vanuatu. While Australia and New Zealand have made concessions, “the issue is whether it is adequate."
Overall, there is a net gain if Australia and New Zealand "live up to their commitments," said Kessie. But Pacer-Plus is not a "silver bullet" to address the region’s "unique challenges.”