Pacific Agreement on Closer Economic Relations (PACER Plus)

The Pacific Agreement on Closer Economic Relations (PACER Plus) launched in Tonga on 14 June 2017. The trade agreement, covering goods, services, investment, labour, sanitary and phytosanitary (SPS) measures, aid and other issues, brings to a close eight years of negotiations between Australia, New Zealand and eight of the Pacific Island countries. The three least developed signatories, Kiribati, Solomon Islands and Tuvalu, face a delayed timetable for tariff reductions. Vanuatu, the region’s other least developed country (LDC), initially delayed but later decided to join. Papua New Guinea and Fiji (which are not LDCs) chose not to sign up.

For signatories, PACER Plus replaces a previous one-way agreement known as SPARTECA, the South Pacific Area Regional Trade and Economic Cooperation Agreement, which provided the Pacific islands with duty and quota-free access to Australia and New Zealand. PACER Plus, a reciprocal arrangement, maintains this market access but obliges Pacific island members to reduce import tariffs over time and to liberalise incoming services trade and investment.

Tariffs in the eight regional non-LDC developing country signatories must fall to zero by 25 years after 2017, the date of entry into force of the agreement, with most tariff reductions taking place in the first 10 years. The tariff reduction schedule is slower for the three LDC signatories — Solomon Islands, Tuvalu and Kiribati – with reductions beginning in 2028 unless the country graduates from LDC status.

The agreement states that ‘year 1 LDC’ for tariff reductions will be the calendar year following that of the date of its LDC graduation. Solomon Islands, for example, will be considered for graduation at the next triennial review of the UN Committee for Development Policy in March 2018. If Solomon Islands were recommended for graduation and such a recommendation endorsed by the UN Economic and Social Council and the General Assembly, the country could graduate as early as 2021, though later dates are also possible. Tariff reductions could therefore begin in 2022. Most tariffs would be at zero by 2032 and tariffs on all goods would be removed by 2047.

Tariff cuts would have minor implications for government revenue in Solomon Islands, where about 6% of total revenue comes from import duties. A number of products in the schedule of goods commitments are unbound, meaning that they are not subject to tariff reductions. Some goods tariffs will be lowered more slowly.

Countries like Vanuatu, whose governments have narrower tax bases and rely to a greater extent on import duties, stand to lose more. Partly in anticipation of the possible signing of PACER Plus, Vanuatu was already considering the introduction of income tax. Whilst the introduction of a progressive tax structure should be welcomed, and Vanuatu is less and less reliant on import tariffs for revenues, the move from an easily-collectable border tax to a more sophisticated domestic tax will take time and administrative resources.

Fiji and Papua New Guinea, however, cited the most-favoured nation clause as a reason for not signing. This clause means that PACER Plus members pledge to extend to Australia and New Zealand any terms negotiated with another region or country – in effect counteracting regional integration. All three non-signatories also said they were concerned about losing the ability to protect infant industries, although this concern may be less warranted.

PACER Plus makes a small provision for technical assistance and aid. The Australian Government will provide A$19 million in total to fund the management and delivery of a development and economic cooperation work programme aimed at helping the islands benefit more from trade. New Zealand will provide NZ$7 million. Australia pledges an Aid for Trade funding target for the Pacific of 20 per cent of Pacific Official Development Assistance (ODA). New Zealand will approve an Aid for Trade funding target for the Pacific of 20 per cent of total ODA.

The chapters of PACER Plus which deal with international movement and labour mobility, despite requests by the developing island states, do not permit access for low-skilled workers to Australia and New Zealand. Pacific island states had sought legal formalisation – with a set number of workers – of the successful seasonal worker schemes launched in Australia and New Zealand in recent years. The absence of legal certainty on labour mobility could potentially allow the schemes to be halted in future.

One of the reasons that Forum Island Countries (FICs) did not take full advantage of SPARTECA was that the rules of origin (RoO) which determined what qualified as a Pacific island product were too onerous. Half of a product’s value had to be added in-country. Despite calls for greater flexibility on RoO in PACER Plus, the value-addition requirement has only been reduced slightly for most goods as well as the introduction of a so-called change in tariff classification.

Another obstacle to trade between the islands and their larger developed neighbours was sanitary and phytosanitary (SPS) measures, or animal and plant health. Many island states could not meet the challenging requirements for agriculture or livestock exports. A dedicated chapter attempts to put in place a more predictable SPS regime.

However, despite better RoO and SPS measures, relative market access conditions for Pacific countries may still worsen, given that the ASEAN Australia New Zealand Free Trade Area (AANZFTA) will eliminate tariffs on 99% of trade with key ASEAN markets by 2020. There will soon be fewer incentives for Australian and New Zealand companies to source goods from the Pacific islands when they can import them duty free from the larger and more competitive Asian nations.

Ultimately, while the delayed tariff reductions for LDCs allows greater flexibility, and SPS and RoO are slightly better, the overall impact of PACER Plus is likely to be minimal given the low levels of productive capacity in regional economies. One of the major tasks facing the less developed Pacific island economies is to expand sustainable goods and services production and to raise the rate of investment – particularly in infrastructure.

Resources and references:

PACER Plus legal texts