Category: News, Oceanic Currents

Title: Addressing the Challenge of US Trade with Pacific Island Countries

Author: Alan Tidwell
Date Published: March 2, 2023
Gregory Melle, Fiji’s Lautoka Harbour with view of the P&O cruise ship Oriana in 1984, CC BY-NC-SA 2.0

Testimony given before the United States International Trade Commission, “U.S.-Pacific Islands Trade and Investment: Impediments and Opportunities,” February 14, 2023, by Professor for the Practice, Alan Tidwell, Director, Center for Australian, New Zealand and Pacific Studies, Walsh School of Foreign Affairs, Georgetown University

 

I want to thank the United States-International Trade Commission for the opportunity to present my testimony on the impediments and opportunities of United States-Pacific Islands trade. Opportunities for improved trade between the Pacific Islands and the United States certainly exist, and some of the impediments to expanding that trade can be addressed by United States government action. An underlying assumption in my testimony is that growing United States attention to and concern for the Pacific is driven by the combined interests in climate change and contesting the influence of the People’s Republic of China. Small islands developing states (SIDS), no matter where they are, have costs imposed on them by their very nature. Economies of scale are often difficult to achieve because people are separated by water, and most infrastructure is not designed to work across vast stretches of water. Economies of scale are further tested by the small populations living in most SIDS around the globe.

It is my general contention that 1) the modest trade the relationship with PICs can be expanded and improved, 2) small gains have big consequences in the Pacific, and 3) the essential ingredient to growing trade in the region is political will in the United States.

In my comments I put the Pacific Islands in context, briefly characterize trade with the Pacific Island Countries (PICs), layout seven constraints of trade with the PICS, and end by offering suggestions on actions the United States could take to improve trade.

Context

Pacific Island trade faces numerous hurdles. PICs – the Cook Islands, Federated States of Micronesia, Fiji, Kiribati, the Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu are all classed as SIDS. They reflect a diversity of economic development including three least-developed-countries and four lower middle- income countries, but regardless of where they fall, they all share common trade challenges. Factors such as distance from key markets, small population sizes, and limited access to financial resources all constrain the development of export industries.

These are among the most aid dependent countries globally. Many rely heavily on grants and other development assistance, for example. In addition, as Becker (2012) notes, their small population means that their fixed costs equates to a high share of national income. This is because their total income (and tax base), is so small that the fixed costs related to the provision of public goods and services must be spread over a narrow base. The net result of this is that despite some “middle income countries” seemingly having a sufficient basis to provide for infrastructure, they are in fact quite challenged.

Natural disasters and climate change make these SIDS vulnerable. They also have limited economic opportunities and even modest improvements in trade can significant impacts by moderating some of the vulnerabilities and supporting the growth and development. The United States can support the PICs by addressing impediments to trade and supporting PIC export industries.

Current state of trade with the United States

Analyzing the trade relationship between the United States and the PICs, the data provided by the United States Trade Representative (USTR) is instructive. In the year 2020, the total value of two-way trade between the PICs and the United States was $968 million. Of this total, Pacific Island exports to the United States were valued at $420 million, with fish being the largest good exported to the United States by value, totaling $130,398,190. Among the Pacific Island nations, Fiji stands out as the largest exporter to the United States, with its largest export being water, valued at $105 million, followed by processed fish at $83.8 million.

The Commission’s focus is often on large trading partners, but it is important to note that even small increases in trade can have a significant impact on the PICs. Supporting Pacific Island trade will help people in this aid dependent region. It will also advance United States interests. It is vital that the Commission, just like other parts of the United States government, understand the importance of the region, PIC vulnerability, and just what a big difference the government can make.

While sharing many characteristics, it is worth keeping in mind the specific qualities and trade profiles of individual PICs. Papua New Guinea, for example, differs from the other PICs. It has a land border with Indonesia, high mountains and a population of nine million. Whereas, Tuvalu, with a population of twelve thousand, has no land border and at its highest elevation is fifteen feet. Therefore, while my comments are general in nature, the Commission should take into account the specific context of each nation.

Constraints Affecting Pacific Island Trade

Considering the challenges facing trade between the United States and the PICs, it is important to recognize that the limitations of SIDS are a product of the inherent biases of capitalism towards larger markets. The result is that SIDS are often left at a deficit when engaging with the global economy. The seven primary limitations to SIDS participation in trade include:

Capacity to manage trade – Successful trade with the United States requires compliance with the federal and state regulatory regimes. One way the ways exporters gain knowledge about getting their products into the United States is to engage with Department of Commerce’s U.S. Commercial Service. However, the thirteen PICs are served by only six embassies, four of which are staffed by two or three people. Effective management of logistics is also a critical aspect of successful trade. The World Bank’s Logistic Performance Index (LPI) sheds light on the challenge, as the United States ranks 14th in the 2018 LPI, while Solomon Islands, for example, is ranked 104th, and Fiji is 133rd. In these SIDS, getting goods to market requires significant effort and time.

An associated issue concerns the unintended consequences of United States regulatory regime that may be well handled by larger countries but become unmanageable for small states. Fiji makes a good case study of how United States regulations have the unintended consequence of limiting Pacific Islands exports. For example, the International Labor Organization reports that since the 1990s Fijians have made significant contributions to elder care industry in the United States. According to a recent Brookings Institution presentation, migrants will form a large part of elder care in the United States. Yet, Fijians who work in this industry often do so on an ad hoc and even informal basis. Creating a labor mobility program (H1-B, allocate unused E-3 visas, or Congress could create or modify an existing visa program) would formalize what is informal and would also allow for greater planning and preparation in Fiji. The United States already has labor mobility agreements with the three freely associated states – the Federated States of Micronesia, Palau and the Republic of the Marshall Islands.

Access to finance – The Pacific Islands have limited access to finance. In 2021, the World Bank described most PIC financial systems as “under-developed”. That same report noted that “…a significant proportion of the population has no or limited access to bank accounts or payment services.” CGAP echoes this sentiment, finding in 2018 that only 41% of Pacific Island adults had access to financial services. Finally, across the Pacific Islands availability of private sector credit is limited. Despite these limitations, both the IMF and World Bank find that the financial sector was resilient during the COVID lockdowns, but now shows signs of growing risk reflected in declining profitability and an increasing number of nonperforming loans.

Limited correspondent banking – An ongoing challenge is the global decline in the availability of correspondent banking. The global decline in correspondent banks has been driven by the compliance costs of meeting United States requirements in anti- money laundering and countering the financing of terrorism (AML/CFT). An unintended consequence of AML/CFT erodes the profitability of banking in the Pacific Islands. The Pacific Islands Forum (PIF) wrote that the impact on the region has been acute, affecting remittances and commercial conditions. The PIF warn correspondent banking is essential in accessing the global financial system, and without it “…the ability to perform the basic payment and currency exchange transactions which facilitate remittance and trade…” are at risk.

Capacity to create value added goods – Exports from the Pacific Islands are dominated by natural resource extraction. The value-chain is short. Efforts at creating value added goods has been challenging. The UN Food and Agriculture Organization (2021) has worked to create value added agricultural products, for example. They describe the challenges being insufficient technical knowledge and poor access to equipment and technology.

Natural disaster risk – Most Pacific Islands are subject to several different natural disaster types. Earthquakes, volcanoes, and tsunamis have all impacted the Pacific Islands. In 2022 the Hunga-Tonga-Hunga-Ha’apai volcano erupted causing a 15 meter high tsunami, an extensive ash cloud, disruption of communication and extensive economic damage. Cyclones in the region are gaining in intensity and shifting towards the Central Pacific. These natural disasters risks can imperil economic stability in the region and directly impact trade.

Climate change risk – Low lying atolls are at risk from inundation, water salination, crop destruction, and erosion. Even islands with greater elevation will nonetheless experience many of the same effects. Climate change modeling also suggests that tuna stocks will migrate further east towards the high seas. Tuna moving out of Exclusive Economic Zones will result in the loss of tuna licensing revenue. This presents an existential financial threat. For example, Conservational International shows that tuna licensing fees make up over half of government revenue for the Federated States of Micronesia and two-thirds of government revenue for Kiribati. As above, these climate change risks can imperil economic stability in the region and directly impact trade.

Given these limitations how can the United States facilitate imports from the Pacific Islands?

To effectively address the trade challenges facing the PICs, it is essential to build capacity for effective trade management. The United States should take a leadership role in providing training to would-be entrepreneurs and logistics managers in trade management practices that are well-suited to the SIDS environment. This should include training in regulatory compliance for exporters, as well as the provision of practical assistance, such as the presence of the United States Commercial Service, to help would-be exporters navigate the necessary regulatory regimes.

The United States should conduct a critical path analysis of agricultural trade flows to better understand where action could be taken to improve exports from the region.

Labor mobility programs should be considered and targeted to industries most in need. The aforementioned elder care industry seems well suited to welcoming workers from the Pacific.

In addition, the United States should actively support the expansion of corresponding banks in the region, providing both credit and access to foreign exchange. This is critical for the PICs, as the lack of access to finance remains a significant constraint to their participation in trade.

Ensuring the long-term viability of Pacific tuna fisheries, the United States should also support climate adaptation efforts. This could include promoting the creation of value-added fish processing in the Pacific. In the United States USAID and the National Oceanic and Atmospheric Administration should be tasked with better understanding the impacts of climate change on fish stocks. As for promoting value added processing of fish in the region, USAID should partner with either the private sector and/or non-profit sector to support the creation of fish processing plants in the region. The United States Congress should consider extending tax incentives to the creation of fish processing plants in the Pacific.

The United States should also support niche product development, such as the promotion of kava production internationally. The United States should work with the PIF, the Pacific Community, Georgetown University, the University of Guam, the University of Hawaii and the University of the South Pacific to identify other niche products for development. These efforts will help to create new economic opportunities for the PICs and support their participation in global trade.

In line with the development of new economic opportunities, the United States, along with Japan and Australia, have invested in new undersea internet cable connectivity in the Pacific. While cables provide greater bandwidth, to their point of landing, the myriad islands of the country in question still struggle with bandwidth. Providing assistance in resolving this challenge will help to include the PICs more firmly in the 21st century digital economy.

Conclusion

United States trade with the PICs can be enhanced, and it will require some attention and political will. Improving trade with the PICs is good for the United States, and good for friends in the Pacific. Improving trade will help deliver greater capacity to stave off some of the ravages of climate change. It will also give the PICs alternatives to trading with the PRC.

It’s not that the United States has been beaten in trade relationships in the Pacific, but rather the United States has chosen not try. China’s success in economically out-competing the United States among the PICs flows from America’s ceding ground to Beijing.

References

Becker, Chris, IMF Working Paper, Office of the Executive Director for Asia and the Pacific, “Small Island States in the Pacific: The Tyranny of Distance?”, September 2012.

Conservation International, Sustaining Pacific Island Fisheries, https://www.conservation.org/projects/sustaining-pacific-island-fisheries

“Correspondent Banking Issues in the Pacific,” Forum Economic Officials Meeting, Pacific Islands Forum Secretariat, 13-14 July 2021, Virtual, Agenda Item 9c. https://www.forumsec.org/wp- content/uploads/2021/07/Correspondent-Banking-in-the-Pacific.pdf

D’Hulster, Katia, Geof Mortlock and Owen Nie, “Strengthening Pacific Island Countries’ Financial Sector Amid COVID-19,” June 25, 2021. https://blogs.worldbank.org/psd/strengthening-pacific- island-countries-financial-sector-amid-covid-19

Larson, Liz, “Financial Inclusion in Paradise,” CGAP, 15 November 2018 https://www.findevgateway.org/blog/2018/11/financial-inclusion-paradise

Labor Mobility in the Pacific Island Countries, International Labor Organization, 2019, https://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/—ilo- suva/documents/publication/wcms_712549.pdf

Pacific Islands Monitor, sia & Pacific Department, International Monetary Fund, Issue 17, October 2022. https://www.imf.org/-/media/Files/Countries/ResRep/pis-region/small-states- monitor/pacific-islands-monitor-issue-17-october-2022.ashx

SIDS Solution Forum 2021, Food and Agriculture Organization of the United Nations, Bangkok 30-31 August 2021, https://www.fao.org/3/cb6228en/cb6228en.pdf