Pacific island countries and global trade
1.1
The Pacific island countries (or PICs) are the independent island member countries of the Pacific Islands Forum, namely Cook Islands, Fiji, Federated States of Micronesia (FSM), Kiribati, Republic of Marshall Islands, Nauru, Niue, Palau, Papua New Guinea (PNG), Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. Timor-Leste is classified as both a Pacific and Asian country, and is also included by the Australian government in the seasonal worker programs.
1.2
Pacific island countries share a number of characteristics, according to the Department of Foreign Affairs and Trade, including their scale, geographic remoteness from major markets, narrow economic bases, dispersed population and vulnerability to natural disasters. But DFAT also highlighted the economic and cultural diversity between Pacific island countries.
For example, Papua New Guinea has more than twice as many people (with a population of 8.6 million in 2018) as the remaining 15 Pacific island countries combined (with 3.4 million people) and significant natural resources.
1.3
DFAT submitted that the Pacific island countries represent a very small percentage of trade and investment in global terms, accounting for just 0.05 per cent of total world goods and services trade in 2018. The trade flows with the PICs are relatively concentrated, with five trading partners in Australia, China, the EU, Japan and Singapore accounting for 65 per cent of total two-way trade.
Pacific island countries are highly aid-dependent. Several international partners provide substantial contributions to the Pacific island countries, such as New Zealand, Japan, the United States, China, the European Union, the United Kingdom and France. Some of these partners have been present in the region for many years.
1.4
DFAT outlined that almost all Pacific island countries have import-oriented economies, except Papua New Guinea, importing more than they export, reflecting their small economic bases.
Trade flows between Pacific island countries are limited. The overwhelming majority of trade flows, in value and volume, occur between Pacific island countries and larger economies, including Australia, China, Singapore and the EU.
1.5
Most countries export in order to import, according to the Australian National University’s Development Policy Centre, but Pacific island countries are different. For most, ‘…exports are not their major earner of foreign exchange’ when compared to remittances or official development assistance (ODA), as shown in Figure 1.1.
Other very or more important sources of foreign exchange for the Pacific are foreign aid, remittances, and fishing licence revenue. The figure below shows the dollar values of exports, aid and remittances for a number of PICs. Exports are the major source of revenue only for the larger countries of Vanuatu, Solomon Islands, Fiji, and PNG.
1.6
DFAT detailed the differences in the pattern and structure of exports across Pacific island countries.
Papua New Guinea and Solomon Islands both rely heavily on natural resource exports (gas, oil and gold from Papua New Guinea and logs from Solomon Islands). Export industries in Fiji, Vanuatu and the Cook Islands are more strongly oriented towards tourism. Agricultural and fishery products are also important exports for Pacific island countries, including coconut products, kava, cocoa, coffee and tuna.
1.7
The Development Policy Centre submitted the importance of non-conventional sources of foreign exchange for the Pacific by looking country-by-country at the top three sources of foreign exchange. To identify the top three, the Centre considered the following: tourism, remittances, fishing licence revenue, aid, and other merchandise exports, as shown in Table 1.1.
Aid is a top-three source for ten of the countries; tourism for seven; frozen or fresh fish exports for four; remittances, fishing licence revenue and resource exports (gold, gas or timber) for three.
Table 1.1: Top three sources of foreign exchange
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Fiji
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Tourism, remittances, aid
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Federated States of Micronesia
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Aid, fishing licence revenue, frozen fish
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Kiribati
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Fishing licence revenue, frozen fish, aid
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Marshall Islands
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Boat registrations, aid, fishing licence revenue
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Palau
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Tourism, aid, fresh fish
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Papua New Guinea
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Gas, gold, aid
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Samoa
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Tourism, aid, remittances
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Solomon Islands
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Timber, aid, tourism
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Tonga
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Remittances, aid, tourism
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Vanuatu
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Tourism, aid, frozen fish
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Source: ANU Development Policy Centre, Submission 52, p. 6 – World Bank 2017, Lowy Institute Aid Map 2017, Pacific Islands Forum Fisheries Agency 2016 & Observatory of Economic Complexity.
Economic overview of Pacific island countries
1.8
The ANU Development Policy Centre outlined that the economic structures of Pacific countries vary. Most have a large agricultural and rural sector, with a high level of subsistence, according to the Development Policy Centre. Using World Bank data, 70 per cent or more of the population of the Federated States of Micronesia, Papua New Guinea, Vanuatu, Samoa, Solomon Islands, Timor-Leste and Tonga reside in rural areas.
1.9
Despite differences in economic structure, the Development Policy Centre described the economic growth across the Pacific as disappointing. In recent decades Pacific island countries are generating only very modest levels of growth, as shown in Figure 1.2, when compared to countries in East Asia.
1.10
Professor Stephen Howes, the Director of the Development Policy Centre at the Australian National University described these Pacific nations as some of the ‘…very smallest countries in the world’.
…economically it’s a relatively poor but diverse region. Some of the economies of the Pacific are as poor as sub-Saharan African countries. You see Kiribati and Solomon Islands in the bottom 20 poorest countries in the world. Others are more middle-income, such as Fiji.
Overall their economic growth is disappointing. This is, again, very different to Asia in the Pacific, where you see a very solid growth trajectory. That GDP per capita is much more a flat variable over many decades in the Pacific. I think the biggest economic problem is the lack of employment opportunities. There just aren’t enough jobs being created for the number of people who are coming onto the labour market, particularly bearing in mind rapid population growth—so very young countries.
1.11
Pacific island countries face strong competition in attracting the attention of private sector investors and traders, according to DFAT. Table 1.2 highlights the scale of markets competing with Pacific island countries for Australian sourced trade and investment.
Table 1.2: Selected countries and region share of global GDP and population
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United States
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25
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330m
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China
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14
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1,400m
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Japan
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6
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127m
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India
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3.5
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1,300m
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ASEAN
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3.5
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620m
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Australia
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1.7
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25m
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Pacific
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0.05
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12m
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Source: DFAT, ACIAR, Austrade & Export Finance Australia, Submission 14, p. 13
1.12
Apart from rural commonality, the Development Policy Centre noted there is considerable economic divergence between PICs as shown by Table 1.3.
We can distinguish between three types of economies. Economic rents (unearned profits or income) are important sources of income for all Pacific economies. There are five for whom they are particularly important relative to the overall economies. These ‘rentier economies’ include Kiribati and Nauru (for whom aid and fishing licence revenues are very important); and PNG, Timor-Leste, and Solomon Islands, whose rents derive from petroleum and/or minerals and/or forestry.
1.13
The Development Policy Centre believed aid and fishing licence revenues are also important, but so too are remittances and/or, more generally, migration opportunities for five other Pacific nations: these are the Marshall Islands, Federated States of Micronesia, Tuvalu, Samoa, and Tonga.
Finally, there is the group of more successful Pacific economies who benefit from tourism as well as rents and migration: namely, Fiji, Vanuatu, Cook Islands, and Palau.
Table 1.3: An economic typology of the Pacific
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Rentier economies
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Kiribati, Nauru
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Aid and fisheries
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PNG, Timor-Leste
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Minerals and/or petroleum
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Solomon Islands
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Forestry
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Rents & migration
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Marshall Islands, FSM, Tuvalu, Samoa, Tonga
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Aid, fisheries and/or migration
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Rents & migration & tourism
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Fiji, Vanuatu, Cook Islands, Palau
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Aid, fisheries, migration, tourism
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Source: ANU Development Policy Centre, Submission 52, p. 2.
1.14
Professor Howes explained the three categories of Pacific economies.
…those that are rentiers, so they rely largely on rents, aid, fisheries, minerals; those that have those rents but also have migration opportunities; and then those that have the rents and the migration opportunities but are also tourism destinations.
1.15
The ANU Development Policy Centre contrasted the low growth over the last few decades in the Pacific with the much higher growth in East Asia.
Regardless of differences in economic structure, economic growth has been disappointing across the Pacific, with PICs generating only very modest levels of growth in the past few decades…Projected growth rates from current levels are also low, with per capita income levels in 2040 projected to be only moderately higher than at present.
1.16
The Centre submitted two explanations as to why development performance had been so poor in the Pacific – their remoteness and their small, widely dispersed populations. Pacific island countries dominate the Top 10 of global remoteness ranking shown in Figure 1.3.
Using the World Bank’s remoteness ranking, 7 PICs – Tonga, Fiji, Vanuatu, Samoa, Tuvalu, Solomon Islands, and PNG – are ranked in the top ten most remote economies, measured by their distance from major economic markets.
1.17
The Development Policy Centre also highlighted in Figure 1.4 the challenges presented by the isolation of many Pacific islands countries, and the limitations of such small populations.
PICs also have some of the smallest and most dispersed populations in the world. Four are in the smallest 20 countries in the world; all are in the smallest 100, except for PNG which stands out with a population of nearly nine million. Smallness is not necessarily a disadvantage, but dispersion is. The small populations of the Pacific reside on hundreds of islands that are spread across an area that is equivalent to 15 per cent of the earth’s surface. In the case of PNG, inland (highland) areas are often inaccessible as well.
Pacific trade architecture
1.18
Pacific island countries are engaged in the global trading system to varying degrees. Six Pacific island countries are members of the World Trade Organization (WTO): Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu.
1.19
A number of trade agreements exist in the region, including the WTO-recognised Melanesian Spearhead Group (MSG) Trade Agreement between Fiji, Papua New Guinea, Solomon Islands and Vanuatu. The Pacific Island Countries Trade Agreement (PICTA) has 11 parties. The PICTA agreement consists of two treaty instruments for regional economic integration open to Pacific island countries that are members of the Pacific Islands Forum.
Australia’s economic partnership with Papua New Guinea
1.20
While Australia and Papua New Guinea, one of the largest economies in the Pacific region, do not have a bilateral Free Trade Agreement, the Prime Ministers of Australia and PNG both signed the Papua New Guinea-Australia Comprehensive Strategic and Economic Partnership (CSEP) on 5 August 2020. The CSEP is described by DFAT as a high-level bilateral arrangement that provides structure to, and formally recognises, the deep relationship between the two countries.
The CSEP provides an enduring and overarching framework for deepening bilateral cooperation across security, trade and investment, governance, development cooperation, health, education, gender equality, climate change, people-to-people and institutional links, underpinned by a commitment to achieving concrete outcomes by 2030.
1.21
Australian and PNG officials remain in discussion on the text of the partnership and practical actions to fall under it.
1.22
Australia and Papua New Guinea also have a bilateral investment treaty which entered into force in 1991. Goods trade is covered by the PNG-Australia Trade and Commercial Relations Agreement (PATCRA II) and the South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA)—under which Australia and New Zealand provide non-reciprocal duty-free access for nearly all products of 13 Forum Island Country SPARTECA Parties.
Foreign Policy White Paper and Pacific Step-up
1.23
According to the Australian Government, the prosperity, stability and security of the Pacific region is at the forefront of Australia’s foreign policy. The Government’s 2017 Foreign Policy White Paper (White Paper) recognises that Australia needs to take its longstanding partnerships with Pacific island countries to a new level to pursue its common interests and respond to its region’s fundamental challenges.
Encouraging trade, investment and private sector development, particularly in Pacific island countries, is central to the White Paper’s core themes of opportunity, security and strength.
1.24
Through its ongoing and sustained bilateral engagement with Pacific island countries, the Department of Foreign Affairs and Trade (DFAT) states Australia is helping to promote economic prosperity through ‘…ambitious new initiatives to support economic integration, strengthen economic resilience and unlock new sources of growth’.
1.25
Australia’s initiatives across the Pacific include:
the $2 billion Australian Infrastructure Financing Facility for the Pacific (AIFFP) and an extra $1 billion in callable capital for Export Finance Australia across the Indo-Pacific;
the Pacific Labour Scheme and Seasonal Worker Programme;
the Australia Pacific Training Coalition (APTC), the University of the South Pacific (USP) and bilateral skills programs to support quality education; and skills through investments; and
the Coral Sea Cable, which will deliver high-speed telecommunications to Papua New Guinea and Solomon Islands.
1.26
DFAT submitted that Australia expects its Pacific Step-up initiative will further enhance efforts to ‘…support long-term economic development, deeper security cooperation and closer personal connections between Australians and Pacific islanders’.
1.27
DFAT believes the Pacific Step-up will provide the additional momentum and focus to build on Australia’s existing trade and investment activities, both through the private sector and its aid program.
It is in both the Pacific and Australia’s interests to strengthen our trade and investment relationship. This will support regional prosperity, security and stability.
1.28
While economic links between Australia and Pacific island countries are longstanding, DFAT claimed there is significant room for growth.
The Pacific Step-up has increased momentum towards economic integration with Pacific island countries and there is strong, mutual interest in further strengthening our relationships.
1.29
Deputy Head of Mission in Canberra for the Kingdom of Tonga, Mr Curtis Leonard Tuihalangingie, told a parliamentary roundtable he accepted that the Australian Government was ‘…conscious of the need to be fair and to promote trade under the current Pacific Step-up’.
Nevertheless, to make the Pacific Step-up policy more relevant, we hope that the federal government, the Australian parliament and the state level will continue to work together to pass policies and regulations to really benefit the Pacific.
1.30
The Australian Government submitted it is well placed to work in partnership with its Pacific island neighbours to capture opportunities. Australia, according to DFAT, would boost its efforts to strengthen trade and investment with the Pacific by:
Continuing to grow participation in Australia’s labour market through the Pacific Labour Scheme and Seasonal Worker Program;
Supporting effective implementation of the PACER Plus agreement;
Strengthening efforts to build a strong business and investment enabling environment to encourage investment;
Being an active regional and global player on trade and economic issues;
Increasing engagement with other donors to and trading partners of Pacific island countries;
Working to leverage the economic benefits of Australia’s new infrastructure investments;
Supporting an inclusive approach to economic development and sustainable economic growth;
Supporting industries where the Pacific has a comparative advantage; and
Developing an integrated Australian Government Pacific Economic Strategy.
1.31
The Director of the Asia Pacific Division at the Kiribati Ministry of Foreign Affairs and Immigration, Mr Teata Terubea, acknowledged the potential benefits of the Pacific Step-up for Kiribati and other countries during challenging times.
Kiribati strongly encourage the Australian government to strengthen its step-up programs to assist some our issues at this time of unprecedented challenges and difficulties of the COVID-19 pandemic.
1.32
Deputy Head of Mission in Australia for the Kingdom of Tonga Mr Curtis Leonard Tuihalangingie compared Australia’s relations with the Pacific islands with a Tongan proverb ‘pikipiki hama kae vaevae manava’. Mr Tuihalangingie told a parliamentary roundtable with Pacific diplomatic representatives the proverb’s meaning that underpins the ‘…methodology of our friendship, centering values of relationality, connection and reciprocity’.
‘Pikipiki hama’ means to bind together to the outrigger of a seafaring vessel; ‘vaevae’ means to share; and ‘manava’ means breath. It represents working together for a shared purpose and good consequences. Let us be ‘pikipiki hama kae vaevae manava’ for the benefit of Australia and the Pacific islands—our people and our future.
1.33
His Excellency Mr John Ma’o Kali, High Commissioner in Australia for Papua New Guinea declared that like Tonga, ‘…we also have a saying that goes something like this: the pole at the back of the canoe is the most powerful because that’s the pole that steers the canoe’.
As the biggest country in the Pacific region with the biggest land mass and with almost 50 per cent of the Pacific island population, Papua New Guinea must be listened to.
1.34
High Commissioner Kali recalled when the Papua New Guinea Prime Minister Hon James Marape MP came to Australia in July 2019 on his first official visit outside of PNG, he came as a guest of the Australian government and met with Prime Minister Hon Scott Morrison MP.
I believe that was the starting point of what was to be different, a step-up and an elevation of the relationship of Papua New Guinea and Australia. I encountered the first moment when the two leaders came together. I believe the personal touch at the top needs to be translated and must cascade all the way down to the rank and file of the government and the bureaucracy. Almost a month ago, that transpired into a comprehensive strategic economic partnership (CSEP).
1.35
PNG, which had opted against becoming a signatory of PACER Plus agreement, had preferred a bilateral agreement with Australia and on 5 August 2020 both countries agreed to a 10 year Comprehensive Strategic and Economic Partnership (CSEP).
History has been kind to us, because we have very common geographic proximity. Some might want to say that we are joined at the hip by geographic proximity. We have common strategic interests. We have deep people-to-people links. We have mutual respect and cooperation across all spheres. I believe that CSEP…is really crucial to developing and enhancing the connections which have been shared over decades between Australia and Papua New Guinea.