Towards Free Trade in the Pacific? The Genesis of the ‘Kava-Biscuit War’ between Fiji and...

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Geographical Research

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March 2007

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45(1):1–12

doi: 10.1111/j.1745-5871.2007.00425.x

Blackwell Publishing Asia

Original Acticle

Geographical Research • March 2007 • 45(1):000–0000

Towards Free Trade in the Pacific? The Genesis of the ‘Kava-Biscuit War’ between Fiji and Vanuatu

JOHN CONNELL

School of Geosciences, University of Sydney, NSW 2006, Australia. Email: [email protected]

Received 11 November 2005; Revised 14 September 2006; Accepted 25 September 2006

Abstract

Contemporary movements towards trade liberalisation have influenced economicdevelopment in Pacific island states, where opportunities for growth have alwaysbeen restricted. The new free trade, centred on comparative advantage, is especiallychallenging for countries producing sugar, where diversification is difficult, andfor the smallest states where trade options have always been limited. Newregional trade agreements have been introduced in the Pacific as a step towardsglobal free trade, but have emphasised trade rivalry and conflict, characterisedby the ‘kava-biscuit war’ between Fiji and Vanuatu, rather than complementarytrade and cooperation. Movement towards free trade poses acute problems forisland states, yet international agreements have not recognised their particulardisadvantages, and continue to stress benefits that are nowhere apparent in thePacific.

KEY WORDS

trade

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Pacific islands

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kava

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biscuits

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conflict

ACRONYMSACP Africa, Caribbean and PacificADB Asian Development BankEEZ Exclusive Economic ZoneGATT General Agreement on Tariffs and TradeGDP Gross Domestic ProductMSG Melanesian Spearhead GroupPACER Pacific Agreement on Closer Economic RelationsPICTA Pacific Islands Countries Trade AgreementPIF Pacific Islands ForumPNG Papua New GuineaSIDS Small Island Developing StatesSPARTECA South Pacific Regional Trade and Economic Cooperation

AgreementWTO World Trade Organisation

Introduction

Accelerated globalisation has been measured inincreased international cultural, social, politicaland economic linkages, characterised by growingpressures for the liberalisation of cross-bordertrade (Dicken, 2003). The uneven benefits and

costs of these processes have made it difficultfor governments, particularly in small island devel-oping states (SIDS), to formulate an effectivecourse of action to negotiate global pressures,in a climate of unrelenting change led by suchglobal and regional organisations as the World

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© 2007 The AuthorJournal compilation © 2007 Institute of Australian Geographers

Trade Organisation (WTO) and the EuropeanUnion (EU). In the Pacific islands, part of thispressure has been channelled through, andsometimes exerted by, the Pacific Islands Forum(PIF) which includes 14 Pacific island states andalso Australia and New Zealand. This paper pro-vides an overview of the shift towards a newtrading regime in the Pacific, examines howrecent trends in trade liberalisation have influ-enced national development in Pacific SIDS,with particular reference to Fiji and Vanuatu,and focuses on how the difficulties involved inimplementing new international strategies andagreements have brought increased tensions,rather than accelerated development. By focus-ing on emerging outcomes in two Pacific statesit emphasises the distinct and substantial con-temporary challenges facing Pacific SIDS withinthe new regime.

Trade has long been a feature of small Pacificisland economies, many of which began coloniallife as plantation systems for agricultural com-modities such as sugar, coconuts and bananas.Favourable trade agreements have often beencritical to protecting and promoting local exports,but many regional and global agreements haverecently declined or expired. The limited abilityof small countries to respond to internationalchanges has been particularly evident in theCaribbean, where island states are more involvedin global trade, especially amongst sugar andbanana producers (Connell and Soutar, 2007).Nonetheless, free trade has been widely promotedas the most appropriate means of enhancingglobal development and reducing poverty indeveloping countries, in line with global aims toreplace aid with trade.

Many studies have emphasised the consider-able development problems of Pacific SIDS, andthe constraints of small size (Easterly and Kraay,2000; Winters, 2005). Most, including Fiji andVanuatu, are fragmented, with numerous popu-lated islands. Prospects for economic growth arelimited. Five states, including Vanuatu, are offi-cially classified as least developed countries.Well-known constraints include: remoteness andisolation (resulting in high transport costs tomarkets, and more costly tourism); diseconomiesof scale (because of small domestic markets);limited natural resources and a narrow pro-duction base; substantial trade deficits; few localskills; vulnerability to external shocks andnatural disasters, and a disproportionately highexpenditure on administration. Political systemshave sometimes been fragile, ecological struc-

tures vulnerable and economies lacking diver-sity. Natural hazards and a paucity of naturalresources have further hampered the ability ofisland states to compete in the global economy.

Few Pacific SIDS generally suffer the abso-lute depths of poverty experienced in some partsof the developing world, but there are real socialand economic problems (Abbott and Pollard,2004), and economic growth has been dis-appointing since independence, usually aboutthirty years ago. This has resulted in a series ofimposed attempts at restructuring, includingstructural adjustment programs in various coun-tries, urged by such institutions as the AsianDevelopment Bank (ADB). Aid and remittanceshave played a critical role in supporting develop-ment (Connell and Brown, 2005), enablingSIDS to run large current account deficits,maintain substantial bureaucracies and under-take relatively large public investment programsthat could not otherwise be financed. On a percapita basis the Pacific is one of the most heavilyaid-assisted parts of the world. The public sectorincreasingly dominates formal economic activityalmost everywhere, despite efforts at restructuring.

Most Pacific island states have largely agricul-tural economies and retain substantial subsistencecomponents. Export agriculture has remainedimportant, despite problems of dependence onworld prices, which have earlier resulted in adecline in banana and copra production in moststates. Island states have traditionally special-ised in a narrow range of agricultural exports,such as sugar, while seeking to develop nicheeconomies (Murray, 2000; 2001). Those fewprimary and agricultural commodities in whichsmall island states were deemed to have a com-parative advantage, including sugar or coconutproducts, are prone to unpredictable fluctuationsin the world market, making them unreliable assustainable sources of national income in con-ditions of limited diversity, without some degreeof protection. Export diversity in the Pacificislands region is less than in any other worldregion. ‘Dependence on a few agricultural pro-ducts that experience either price or supplyshocks on a regular basis is the principal reasonfor merchandise exports instability’ though ‘thedismal performance of manufacturing exports[has] contributed most to the declining relativeimportance of small states in world merchandiseexports’ (Grynberg and Razzique, 2004, vii–viii,ix). Set against this range of disadvantages, thecomparative advantages of smallness and iso-lation are few. Consequently, the establishment

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of free trade relations has not been warmlyreceived and concerns have been raised aboutthe potential for new trading mechanisms tohave negative impacts on Pacific SIDS.

The genesis of the ‘new free trade’

Since the Second World War there has been agradual but accelerating shift to greater tradeliberalisation and the removal of tariffs, withmultilateral negotiations through GATT (estab-lished in 1948), and more recently the WTO.This transition accelerated with the rise of themarket as the dominant economic mechanismfor economic management from the 1980s on-wards, sustained opposition to protectionismand the parallel Uruguay Round of trade negoti-ations, and a series of regional agreements thatconstituted the most comprehensive attempt toopen global markets. By the end of the twentiethcentury some 90% of all trade was within theliberal WTO framework. This so-called ‘secondwave of globalisation’ only reached Pacific SIDSin the late 1980s, as Fiji, following the militarycoups of 1987, sought neo-liberal economicadjustment, embracing the IMF recommendedstructural adjustment policies, in part to gainaccess to overseas aid (Grynberg, 2001; Murray,2001, 138; Narayan and Prasad, 2003, 3–4).Since then it has become pervasive in the region.

Growth and development, derived from freemarket reforms, are widely touted as justificationfor reducing trade barriers, and pressures to achievesuch reforms have come from the World Bank,ADB, and key aid donors, including Australia,New Zealand and Japan. Policies to encourageoverseas investment, reduce government expendi-ture and stimulate exports have been sought asmeans of securing the economic viability of SIDSin a more liberalised global economy (Murray,2001, 139). Although the apparent alternative ofdomestic isolation has been widely rejected inthe Pacific as being too precarious, for exampleby the Prime Minister of Fiji (Qarase, 2002), theconsequences of greater integration and liberal-isation are of almost equal concern.

In the global arena, the WTO is much themost forceful proponent of a commitment tocollective liberalised trade security. The pro-visions necessary for nations to accede to theWTO emphasise the goal of mutual advance-ment: ‘The goal is to improve the welfare of thepeoples of the member countries’ (WTO, 2003).However, this mutuality has often effectivelyacted to expand markets, as was the goal, ratherthan serve the needs of the global poor (Sen,

2002), hence it has long been evident that coun-tries benefit unevenly, with smaller states beingrelatively disadvantaged (Connell and Soutar,2007). Even 40 years ago trade between develop-ing and developed countries was a particularlysensitive issue, hence the United Nations Com-mission on Trade and Development (UNCTAD)was established in 1964 to protect the interestsof poorer countries. This later became essentialwhen WTO took a ‘rule-oriented’ and universalapproach to trade, rather than one based on out-comes (for example, market share and volumeof trade): ‘WTO rules do not entirely remove theinequality in the power of nations. It remains thecase that countries with big markets have agreater ability than countries with small marketsto secure market access and to deter actionsagainst their exporters’ (Sampson, 2001, 8).Many of the world’s poorest countries, and thusmost SIDS, are marginal to the global economy,and ‘the usual prescription for those developingcountries poorly integrated into the global systemis that they should open their economies more,for example, by positively encouraging exportsand liberalising their regulatory structures’(Dicken, 2003, 574). It has been argued thatremoval of various forms of preferential treat-ment will provide impetus to improve productquality, enable diversification based on localstrengths and build trade through competitiveexposure in open markets, and this will transcendthe short-term costs of collapsing production inan open market (Pascal Lamy, 2001 cited inDecloitre, 2002).

As countries reduce barriers to trade, and openup to international capital flows, the expectationwas that economic growth would occur, povertybe reduced and the quality of life improve.However, there is ‘no convincing evidence thatopenness, in the sense of low barriers to tradeand capital flows, systematically produces theseconsequences’ (Rodrik, 1999, 136–137). More-over ‘openness’ is a somewhat variable pheno-menon, where protection and trade disputes arecommon, as are subsidies (for example, to agri-cultural producers in such rich world regions asthe United States and the EU). Consequently,even in the wake of great shifts towards tradeliberalisation, any concept of a ‘level playingfield’ is imaginary rather than real. As Kofi Annanhas said: ‘governments all favour free trade inprinciple, but too often they lack the politicalstrength to confront those within their owncountries who have come to rely on protectionistarrangements’ (cited in Dicken, 2003, 588).

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Indeed, despite increased global integrationand an unprecedented rise in the volume of trade‘there are indisputable concerns that some coun-tries have failed to derive significant benefits fromthe ongoing process of trade liberalisation andglobalisation. This is particularly so for smallstates’ (Grynberg and Razzaque, 2004, vii). Forthe past 50 years the rate of growth of exportsfrom small states has been inferior to that oflarger states. At the start of this century SIDS,especially, were in a relatively more unequalposition than two decades earlier. Thus far liber-alised trade had not advantaged them.

Moreover, the present context is one wherenot only have preferential trade margins forsmall states decreased as a result of worldwidetrade liberalisation, but the WTO has also madecertain preferential schemes that benefit smallstates, incompatible with a free trade regime(Grynberg and Razzaque, 2004, 52). The reformsrequired to meet WTO regulations threaten tocompletely remove preferential treatment.Thus under the EU’s Lomé Convention manysmall states enjoyed preferential trade marginsthat are now incompatible with the WTOregime, though some trade preferences will berolled over until the end of 2007. Commodityarrangements with the EU cover exports thatwould be uncompetitive on world markets butare of major economic importance in thesecountries, such as sugar in Fiji. Under theCotonou Agreement, which superseded the LoméConvention in 2000, all special arrangementswill expire by 2008.

All SIDS presently qualify for at least onepreference scheme, including that with the EU,and some benefit from several, including theSouth Pacific Regional Trade and EconomicCooperation Agreement (SPARTECA) that haslinked island states to Australia and NewZealand. (SPARTECA is a non-reciprocal tradeagreement signed in 1980 where Australia andNew Zealand offer duty free and concessionalaccess for several products from 14 Pacific islandstates; it has been particularly beneficial to Fiji,a significant exporter of textiles). However,while SIDS have benefited considerably fromvarious preferential schemes in terms of exportincome (and employment), none has gainedfrom these trade preferences in terms of eithergreater levels of investment or export diversifi-cation, and open markets may make this no easier.The outcomes of these changes for Pacific islandstates, and the implications for future liberalisation,can now be briefly examined.

Island economies in transition

Fiji and Vanuatu are relatively large PacificSIDS, the former having a population of about800 000 and the latter 220 000. Fiji is one of themore developed Pacific Island economies. Itsmain export income derives from sugar andgarment manufacturing, with sugar being 23%of the value of all exports and garments 19%.Tourism contributes around 20% of GDP. Thesugar industry has been in decline for some yearsdue to high production costs, low investmentlevels and disputes over land and rents, and thetextile industry is experiencing a sustained crisis.Sugar is one of the most crucial components ofthe Fijian economy, and effectively the largestemployer, hence its future is crucial.

Vanuatu is the smallest and most fragmentedof the Melanesian states, with an economy thatrelies heavily on tourism and agriculture, despitea small offshore finance sector. Agriculturalproducts constitute 80% of the value of exportsand consist mainly of copra and small amountsof kava, beef and coffee. The Reserve Bank hasnoted that ‘we should be more aggressive inpromoting new export markets for organicbeef, root crops and others where Vanuatu hasa comparative advantage’ (

Islands Business

,July 2005, 25). Tourism offers further potentialthough the industry is subject to the samefluctuations as that of Fiji.

Proponents of liberalised trade argue that it isvital for SIDS to expand upon and diversifytheir economies and increase both volume andquality of output, to modernise and competeeffectively in the global economy. Trade liberal-isation is considered the most effective meansof achieving this in the region, its advocatespredicting ‘faster economic growth due toimproved trade performance, through enhancedspecialisation and greater economic efficiency’,as well as greater levels of employment andincreased investment (PIFS, 2002, 5). Experi-ence in achieving economic growth and widermarket access, however, has been at best variableand has challenged any Pacific consensus on thepositive value of trade liberalisation.

The notion that free trade will benefit allcountry participants relies on the theory of com-parative advantage. Thus the Pacific IslandsForum argues that liberalisation will encouragethe development of new products specific to theregion and yet to be fully exploited as exports,such as kava, noni juice and coconut oil, attract-ing resources from inefficient industries unableto succeed in open-market competition (Qalo,

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2002). Hitherto, such niches have played only atiny role in national economies, as crops withlarger world markets have been dominant, butmust play a larger future role as presently pro-tected exports, including textiles and sugar, losetheir protection and markets.

One of the most successful agriculturalexports in the Pacific region, in terms of incomeand employment, has been sugar from Fiji.Sugar cultivation occupies about 40% of theagricultural land and some 42 000 workers aredirectly supported by the sugar industry, with4000 in ancillary activities (Narayan and Prasad,2003, 17). However, in recent years sugar hasfaced considerable difficulties and its contribu-tion to GDP fell from about 46% in 1994 to 30%in 2001 mainly because of land lease problems(and unharvested cane). Most sugar productiontakes place on land leased from Fijian landownersby Indo-Fijian farmers, for whom sugar cultiva-tion has long been a way of life. Agriculturalleases began expiring in large numbers after1997 when the Agricultural and Landlord andTenants Act (ALTA) expired. Fijian landownershave been reluctant to renew leases to largelyIndo-Fijian cane farmers. Since 1997 over 4000cane leases have expired and barely 20% renewed;hence many Indo-Fijian families have had tomove off the land and the area under productionhas declined (Lal, 2004, 289). Many formerfarmers and cutters have moved into expandingsquatter settlements on the fringes of the capital,Suva. Moreover, uncertainty over leases andpolitical instability have meant that fewer than10% of farmers have planted new cane in con-trast to almost 80% before the coup of 1987.Others have failed to apply fertiliser, and banksare unwilling to grant loans to sugar farmers,hence productivity has fallen significantly (Lal,2004, 291).

Underlying leasing issues is the shift towardfree trade, which has meant that the protectionafforded to ACP countries through the ACPLomé Convention is soon to disappear. Hencethe high price for Fijian sugar within the EUwill no longer exist, and Fiji will be forced tocompete on equal terms with other producers.Fiji presently has 13% of ACP quotas and sellsat a fixed price over three times the world marketprice. Consequently:

the biggest threat to the sugar industryappears to come from uncertainty aboutthe future of the EU’s sugar protocol withthe sugar-exporting ACP countries … But

Australia, Brazil and Thailand have mounteda challenge to EU sugar subsidies through theWorld Trade Organisation (WTO) therebythreatening the preferential agreements withthe ACP sugar-exporting countries of whichFiji is the largest (EIU, 2003, 25).

Moreover, the EU seems set to continue to sub-sidise European producers since some 21 of the25 countries in the extended EU produce sugar.After considerable expansion in the 1960s, Fijinow has a very inefficient system, in terms ofproductivity, research, transport (both truck andrail) and milling (Prasad and Narayan, 2004),which makes competition extremely difficult.Protected sugar has extended on to land not wellsuited to its cultivation, and there has beenminimal modernisation of the industry. Until veryrecently the income and employment generatedthrough this protection have substantially out-weighed the costs of non-existent rationalisationand modernisation, and the lack of diversification.To cut costs the Fiji Sugar Corporation ceasedall extension work at the start of the century andstopped giving cash advances; even so it has runat a loss since 1999, but ‘reorganising the [FijiSugar Corporation] is like rearranging deckchairson the Titanic’ (Lal, 2004, 296, 301), despite aseries of studies and recommendations (Lal, 2000;Lal and Reddy, 2003; Chand, 2005a; Lal andRita, 2005). In such circumstances the loss ofpreferences would be devastating, and there isgrowing concern within Fiji that sugar mayvirtually disappear within a couple of decades,after a century of being the mainstay of theeconomy.

Although it was evident more than a decadeago that the Lomé Convention would probablybe terminated (Grynberg, 1993), unlike Mauritiuswhere modernisation was undertaken, Fiji choseto resist this probability, make legal objectionsand not restructure. The impending decline ofthe sugar industry will thus be catastrophic forboth employment and national income, and thushas been argued to constitute a case for the con-tinuation of preferential arrangements (Prasadand Akram-Lodhi, 1998; cf. Chand, 2005b), acase that has also been strongly argued in theCaribbean (Rawlins, 2003; Connell and Soutar,2007). Fiji has recently opposed the reform ofthe EU sugar regime with the Minister forForeign Affairs and Trade stating that ‘Fiji isvery concerned about the adverse impact of thereform’ and thus requesting the proposed pricedrop of some 37% to 42% being much more

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gradual – over eight years rather than the pro-posed three (

Fiji Times

, 2 July 2005, 21). TheEU has offered some degree of financial supportto Fiji (and 15 other ACP states where sugar isimportant) for them to increase the competitive-ness of sugar production, promote diversificationin sugar dependent areas and address broaderimpacts of the adaptation.

Necessarily, throughout the Pacific, nationaldevelopment goals have been to enhance com-petitiveness through developing new niches inglobal trade systems, especially by seeking outnon-traditional agricultural exports. In Fiji it hasmeant an intermittent focus on crops such asginger and kava, the latter having considerablepromise (Murray, 2000) until it was banned inits main European markets, though these bansare being rescinded. In Vanuatu it has includedpumpkins. Elsewhere there have been attemptsto develop vanilla, squash, noni and other crops,sometimes in an organic context, to meet nichemarkets. The critical issue for niche agriculturalproduction remains the manner in which othercountries are better placed economically andgeographically than Pacific SIDS to developniches, such as kava in Mexico, when it becomesapparent that there is a significant global market.Moreover, almost by definition, niches are likelyto remain small.

Seemingly promising niches, such as vanillaand squash (in Tonga) and ginger (in Fiji) haveall too often been shortlived. In Tonga, farmershave made three significant switches in the pastdecade, as prices have fluctuated, from vanilla tokava and from kava to squash. Prices fell forvanilla because of overseas competition as itbecame successful, and squash productionbrought new problems of land tenure, inequality,environmental degradation alongside increasedcompetition from other Pacific SIDS (Murray,2001; Malua, 2003; van der Grijp, 2004).Bananas, which appeared to have a comparativeadvantage in the region, are no longer exportedin significant quantities since they are unableto compete in overseas markets with greatervolumes from south America, and strict overseasquarantine regulations make marketing of organicproducts difficult (Malua, 2003). Niue’s taroexport industry barely proved viable even whenthe Samoan export industry was crippled withdisease, and was purchased at very high prices byoverseas Niueans, in large part to help the families‘back home’ (Murray, 2001, 144). Vanuatu hasnever found a successful, overseas agriculturalniche. More generally, as international regulations

change, most countries ‘lack the awarenessand human resource capacity to develop theappropriate institutions and systems. In Samoa,the Agriculture Department has very littleknowledge of what it is expected to do under itsWTO obligations, and the same goes for Tonga’(Malua, 2003, 192). Niche production is highlyvulnerable to subtle global shifts in demand and,therefore, prices, and small states where thecosts of production and marketing are greatestare the most affected. Almost all agriculturalproducts produced in the region thus experiencedifficulties in access to markets either becauseprotection is disappearing, or because competitionfrom better-placed nations occurs as soon as aniche is identified.

While the liberalisation of trade and loss ofpreferences mainly influence agricultural pro-duction (since agriculture is the dominant exportorientation of Pacific SIDS), the dismantling oftextile and clothing quotas under the Agreementon Textiles and Clothing of WTO is particularlysignificant. Manufacturing has largely failed todevelop much beyond basic import substitutionindustries – such as bread and beer – in the Pacificdespite attempts in several countries, such asTonga, to set up manufacturing zones withgenerous concessions. The critical transitionfrom agriculturally-based economies to manu-facturing has thus failed to occur. Though therehave been dramatic success stories, notably thatof Fiji Water, which has established a massive(and protected) presence in the American marketin less than five years (Connell, 2006a), suchniche successes are exceptional and difficult toreplicate. High wages, competition from Asia,expensive services (such as electricity and trans-port) and insurance costs have all discourageddevelopment.

Only in Fiji has a manufacturing industrybeen relatively successful, but largely withinprotective trade agreements such as the LoméConvention and SPARTECA, and mainly confinedto the garment industry. At its peak towards theend of the 1990s the industry employed about19 000 people (and garment exports were valuedat 33% of all exports in 2000, a drought year).Some three quarters of all manufactured exportswere garments. Since the 2000 coup and thegradual reduction in protection in Australia andNew Zealand (Manueli, 2000; Storey, 2004;Firth, 2005), several factories have closed (andothers relocated to Pakistan and China), wageshave stagnated and employment has fallen toaround 10 000 people (Weller, 2006). In the first

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few months of 2005 one company closed gar-ment factories in three towns, with the largest inLautoka losing 3000 workers (

Fiji Sun

, 25 April2005). Over the same period the industry lostUS$60 million in exports because of lost quotasin the United States (through the lapse of theMulti-Fibre Agreement) and increasingly restric-tive clauses within SPARTECA (

Pacific IslandsReport

, 29 April 2005). As Fiji 1 News hadrecorded when the agreement lapsed: ‘The USState Department says in this era of free trade,it’s either you compete or you perish. With pro-tective trade barriers eroding fast, the industrywill now just have to learn to survive the hardway, focusing on the basics of business if it is toclaim its place on the international marketplace’ (

Pacific Islands Report

, 10 December2004). The outcomes were most severe amongstrelatively poor households in urban areas, wherewomen are the key employees and householdwage earners (Harrington, 2000; 2005).

For many Pacific SIDS fish are a key sourceof foreign exchange earnings (though the bulkof fisheries revenue comes from the leasing offishing rights in EEZ waters) and the loss of fishpreferences under the Doha round of negotia-tions would result in further preference erosion.Apart from specific niche markets, such asaquarium fish, few SIDS have fishing fleetslarge enough to meet international competition(Inama, 2004, 45), and the present concentrationin the aquarium fish market has almost certainlybecome unsustainable in several Pacific SIDS.Further concentration would have serious con-sequences for subsistence fisheries.

The movement towards free trade has alreadysubstantially eroded most preferential agree-ments, and island states are increasingly beingforced to compete on the world market, a taskthat has already proved to be extraordinarilydifficult. Further complications will arise, espe-cially in Fiji, as preferences decline even furtherand especially for sugar exports. The PacificSIDS have been caught up in the neo-liberalembrace of trade liberalisation and structuraladjustment, and have had to devise regionalmeasures to implement change.

Regional stepping stones to global trade

In 1988 the three Melanesian states – Vanuatu,Solomon Islands and Papua New Guinea (laterjoined by Fiji) – formed an initially politicalcommunity known as the Melanesian Spearhead(MacQueen, 1989). In 1994 they signed theMelanesian Spearhead Group (MSG) Trade

Agreement to accelerate trade within the regionand ensure that it operated both in the spirit of‘Melanesian Solidarity’ and on a Most FavouredNation basis and thus be consistent with WTOrequirements. Primarily because of limitedpotential for reciprocity, trade between theMelanesian states was always limited, and theimpact of the MSG on subregional change wasslight.

At the end of the century, under growingexternal pressure, the Pacific island states withinthe PIF committed themselves to negotiating aregional free trade area, and eventually concludeda Pacific Islands Countries Trade Agreement(PICTA) that came into force in 2003. PICTAwas followed by the Pacific Agreement on CloserEconomic Relations (PACER), both interimsteps towards full integration into the globaleconomy. Some forms of regionalisation thuspreceded globalisation.

PICTA’s aim is to enhance trade between the14 island states and it has set out a program forregional liberalisation, which reduces tariffbarriers to zero between member states overthe next ten years, allowing a longer period ofprotection for selected products in order tosupport weak and infant industries. Currentlyonly covering trade in goods, it will eventuallyexpand to cover services (Qalo, 2002, 23). PACERhas a more industrial orientation, seeking topromote greater co-operation between states inareas such as knowledge sharing, financial andtechnical assistance, trade promotion and struc-tural adjustment (von Strokirch, 2002, 432). Thethen PIF Secretary-General, Noel Levi, has out-lined the role of PICTA:

[Forum island countries] must face the realitythat they can no longer isolate themselves,nor are they immune to globalisation and itseffects ... regional integration provides a train-ing ground where we can be more efficientthrough increased economies of scale beforethey are subject to the rigours of full globalcompetition (cited in von Strokirch, 2002,432).

The Departments of Trade of both Vanuatu andFiji believed that the greatest potential benefitsto the region from liberalisation agreementswould be increased access to larger markets inthe Forum, such as Australia and New Zealand,in competitive products such as Vanuatu primebeef and Fiji’s garment and sugar industries(Qalo, 2002). However, the converse is morelikely to occur, because both Australia and New

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Zealand are highly efficient producers of bothsugar and beef. When Australia gains marketshare in these countries they could displacelocal producers.

Since PICTA is designed to break down tradebarriers, the volume of trade between PacificIslands is an important factor influencing itseffect. However, trade between island countriesis less than 5% for Fiji (and little more for anyother island states), suggesting that inter-islandtrade is ‘unlikely in the foreseeable future toaccount for more than a small share of totalFIC (Forum Island Country) trade, even if itincreases substantially as a result of the estab-lishment of a free trade arrangement’ [hence]‘the economic effects are likely to be very small,and may be negative for some FICs’ (Scollay,2002, 8, 22). The limitations of the agreementare evident in the lack of consideration forcurrent trade realities amongst Forum states. Themajor obstacles to inter-island trade are notprimarily trade barriers. Transportation is amajor constraint due to distance, low volumes,union disputes and rising costs making manycommercial shipping lines unviable (Qalo, 2002,8). Much more important is the lack of com-plementarity between island states; there is littleto exchange between them. PICTA will changelittle in the way island economies work, exceptperhaps to concentrate breweries and tobaccomanufacturers in fewer countries (Narsey, 2004a).This lack of complementarity has contributedto increased tensions between countries as theyhave sought to develop new structures of trade,and was instrumental in the genesis of the‘kava–biscuit war’.

Both PICTA and PACER were developed inorder to satisfy the demands of more powerfulmembers of the Pacific Island Forum, Australiaand New Zealand. Indeed, given the limited roleof PICTA within the region, its negotiation was‘to reassure aid donors and the institutions ofglobal governance that they are adapting to thenew global trading order’ (Firth, 2005, 4), ratherthan through anticipation of real gains. In devel-oping these trading bloc agreements, the PacificSIDS initially intended to keep Australia andNew Zealand out, but that proved impossible.Their presence is critical since it effectively inte-grates island economies with these two muchlarger economies in a comprehensively liberal-ised trade and investment regime. Australia andNew Zealand will thus have markets opened upto them much earlier than the Pacific statesintended. Conceivably this will then trigger

mechanisms within the WTO which will resultin the EU, United States and Japan all seekingfull access (Scollay, 2002, 27).

Some Pacific island leaders have been scepti-cal about the merits of integrating with theglobal capitalist economy ... However, thefull weight of the European Union, Australia,New Zealand, the Asian Development Bank –all major aid donors – and the Forum Secretariatwas thrown behind the Pacific free-tradeagenda, not to mention the authority of AsiaPacific Economic Cooperation and the WorldTrade Organisation. PIF governments hadlittle option but to conform (von Strokirch,2002, 433).

Since Pacific countries are highly dependent onall these bodies for finance and aid, it is scarcelysurprising that critics have described PACERas an imposition and nothing less than ‘therecolonisation’ of the Pacific by ‘free’ trade(Bedggood, 2004; Kelsey, 2004).

Advocates of PICTA and PACER argue thatliberalisation will give local producers a larger‘domestic’ market within the region to increasetheir chances of becoming successful exporters(PIFS, 2002), yet small domestic market pro-ducers will face serious exposure to larger, betterresourced and stronger producers from largerSIDS like Fiji or even Australia. Consequently,‘exposure to global competition requires smallfirms to invest heavily just to survive in theirnational market and more so in order to export’(Qalo, 2002, 23). In a state such as Vanuatu,where any private enterprise creating jobs ishighly valued, and there are relatively few jobsin the formal sector, even the few jobs createdin an internationally inefficient industry areimportant. While the Forum Secretariat acknow-ledges that domestic industry and job losses willoccur, it has still argued that ‘expanding sectorswill provide new employment opportunities’(PIFS, 2002). However, the evidence fromrecent trade wars in the region suggests thatsuch optimism is misplaced.

The ‘kava–biscuit war’

Not only is there a lack of complementaritybetween countries, but trade liberalisation hasresulted in bitter disputes between countiesseeking to protect infant industries within thenew trading regimes. Seeds of subsequent dis-putes were evident in the 2002 ‘ice cream war’(Callick, 2005), when exported ice cream froma large manufacturing company in Fiji undercut

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locally made Vanuatu ice cream, where pro-duction was in its infancy. This caused a ‘rudeawakening’ in Vanuatu where ‘it is difficult tocomprehend the benefits of trade liberalizationwhen what you get first is pain and more pain’(Pareti, 2002, 19). Following lobbying by localproducers Vanuatu simply reimposed tariffs andpriced the Fijian exporter out of the market.

Similar issues and regional differences wereparticularly evident in the year-long ‘kava-biscuit war’ of 2004–2005, when Fiji bannedkava from Vanuatu (officially on health grounds,but Vanuatu prices were lower) and Vanuatusought to protect its biscuit industry from themore developed Fijian industry. Both practicescontravened PICTA regulations and earlier freetrade regulations established by MSG agree-ments, but reflected the acute sensitivity of tradebetween neighbouring states, when both havelittle to trade and few markets.

Early in 2004 the largest biscuit manufacturerin Fiji added additional capacity to the biscuitproduction line with the aim of gaining a newA$780 000 market in Vanuatu, but, as it haddone with ice cream, Vanuatu responded bybanning biscuit imports to protect the sole localmanufacturer that employed around a dozenpeople. Fiji responded to the biscuit ban bybanning imports of Vanuatu kava, regarded asthe most potent in the Pacific (Callick, 2005),and whose price in Fiji was significantly lowerthan that of local kava.

Vanuatu’s cabinet then came under pressurefrom the kava growers and initially relaxed theban on biscuits. By then, however, Fijian kavafarmers had increased their own plantings andoutput in order to meet local demands, and theFiji Kava Council asked the Fijian governmentto retain the kava ban. The Council alleged thatbanned Vanuatu kava of low quality had infil-trated the market and caused liver and kidneyproblems, a parallel tactic to that previouslyused by the EU to exclude Fijian kava fromEuropean markets (Narsey, 2004b, 52). Therewere also threats to reduce airline servicesbetween the two countries. The kava ban wasnot lifted and the biscuit ban was replaced. Ayear after the war had begun, in October 2005shipments of Vanuatu’s kava were sitting onwharfs in Fiji, while local farmers were stillbeing encouraged to take advantage of the banto plant more kava (

Fiji Times

, 4 October 2005),as, in the words of the Fiji Kava Council chair-man, Ratu Josataki Nawalowalo, ‘the fact that60 tonnes of banned Vanuatu kava would flood

our local market is not in the best interests of thelocal suppliers’ (quoted in

Fiji Times

, 5 October2005). However, by the end of October theVanuatu biscuit ban had ended and the Fiji kavaban was rescinded in December as the year-longwar appeared to be over.

In the meantime, by mid-2005, a corned beefwar between Fiji and Papua New Guinea (PNG)added to regional tensions. A substantial cornedbeef canning business in PNG sought to exportto Fiji, under the terms of the MSG agreement.Fiji, however, banned corned beef imports, onthe grounds that they failed to meet certainsanitary and quarantine requirements, and PNGretaliated by threatening to ban imports of thecanned beef, mutton and chicken products ofa Fijian company. By mid-October 2005 Fijihad still not lifted its ban on PNG corned beefdespite the MSG having requested it to do so bySeptember, and Fiji not having justified its posi-tion (

Fiji Times

, 10 October 2005). In February2006, Fiji demanded that the beef should beshown to have come from areas free of ‘madcow’ disease (

Fiji Times,

23 February 2006).In each of these contexts, disputes have partly

been shrouded in technical issues of quarantineand health regulations, yet the real issues con-cerned access to small markets and the priorityattached to employment and protection, thusemphasising the most basic challenges to theopenness and regional integration required toimplement trade agreements. As the Chairmanof the PNG Manufacturers’ Council has said: ‘Ifwe can’t trade amongst ourselves, quite franklyI think that we have a major concern within thePacific. And as far as regional integration wouldbe concerned that would be extremely difficult’(quoted on ABC Radio, 10 October 2005).Above all, the disputes emphasise the limitedmarket size of the region, the presence of verysmall and infant industries, and the impact thatjust one producer can have on issues such asemployment when markets are liberalised.Moreover, as the manager of one Fijian foodcompany commented in the wake of the cornedbeef war: ‘We’ll end up buying from Australiaand New Zealand’ (quoted in Callick, 2005, 61).

In Fiji, in many circumstances, the govern-ment has been increasingly concerned over theimpact of trade liberalisation on such a smallisland state, especially for textiles and sugar. Yetthe ice cream, kava and biscuit wars haveemphasised how even ‘smaller countries typic-ally fear having free trade agreements withlarger countries like Fiji’ (Narsey, 2004b, 53),

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and how there is a hierarchy of discontent. Therestructuring of international trade agreementsmay actually be harmful to what economicactivity currently exists in the islands, includingthe potential for lost import revenue, the push-ing out of local industries and the fracturing ofrelations between island states.

Beyond these wars, there are wider concernsamongst smaller nations and producers that thePICTA agreement will be more beneficial tolarger countries, and the Forum has stated thatFiji will benefit more than other Island states(Simpson, 2002). Indeed, even earlier within theMSG, trade agreements broke down as it wasperceived that Fiji and PNG were ‘flooding themarket of the two other countries’ (Simpson,2003, 5), indicating the difficulties in developingan agreement between countries of differentsizes and economic strengths, which is exactlywhat is proposed within PICTA and PACER.‘Far from furthering cooperation among PacificIsland States, PICTA will encourage

competition

between them’ (Simpson, 2003, 5, emphasis inoriginal), now exemplified in relations betweenVanuatu and Fiji. This competition could alsoundermine the regional unity built up aroundnegotiations relating to shared resources such asfisheries. Such outcomes and concerns are simplya microcosm of structures that pit SIDS againstlarger metropolitan states.

Conclusion: kava, biscuits and conflicts

Pacific economies are strongly influenced bytransitions in international political and economicsystems. Free trade has seen the dismantling ofpreferential trade agreements. The challenges toisland economies remain the need to createemployment for growing populations with risingexpectations; cope with international fluctua-tions in demand, trade and economic growth;restructure and diversify domestic economies,and achieve greater international competitiveness.As preferences decline, there has been growingconcern over the scope and pace of the adjust-ment process, and the slow progress towardsspecial differential treatment for small vulner-able developing countries. Indeed, the collapseof the Doha round in mid-2006 meant that thegains previously made through Doha disappeared(Pareti, 2006).

It is improbable that island states will ever beable to compete effectively with larger states infree market conditions, nor is it likely that asingle niche agricultural sector or industry couldsustain the economic development of an entire

island state. Even the most obvious commodityin which Pacific Island states appear to have anadvantage, fish, has not proved profitable orinternationally competitive due to insufficientinvestment funds and a lack of required skillsand infrastructure (Qalo, 2002, 22). Presenttrends emphasise why the shift towards globalintegration via trade liberalisation has beenexternally led. Even comparatively large stateslike Fiji and Vanuatu face severe economic up-heaval, leaving real doubt that smaller states inthe region, such as Kiribati or Tuvalu, can succeedwithin an unsheltered trading environment.

No study thus far has pointed unequivocallyto the gains that SIDS will make from the shiftfrom preferences to free trade, and even thosewho advocate free trade tend to use cautionaryphrases over difficult challenges ahead and awk-ward intervening periods (Connell and Soutar,2007). However, most analyses of global trendseither ignore SIDS and assume that the (morepositive) impacts of free trade in larger stateswill be universal, when it is evident that theextreme constraints to flexibility in SIDS makethem special cases, or conclude that specialagreements cannot be made for one group ofcountries at the expense of others.

At the same time that the Pacific SIDS havetentatively embraced liberalisation, the EUmaintains a Common Agricultural Policy of sub-sidies, guaranteed purchase, artificial pricing andcheap loans for its own agricultural producers, apolicy that the United Nations estimated cost thedeveloping world US$50 billion in lost exportrevenue (Thurow and Winestock, 2002), andwhich contributed to the collapse of the Doharound. While Pacific SIDS have lost preferentialtrading agreements such as SPARTECA, newpreferential agreements are being formed betweensuch blocs as East Asian countries and the USAthat discriminate against and exclude PacificSIDS (Scollay, 2005). Agricultural subsidies inrich world countries have long made importsfrom developing countries uncompetitive. Onlythe presence of alternative subsidies and quotashas enabled sugar producers in Fiji to survive.

Simply opening up a developing economy onits own will almost certainly lead to furtherdisaster. There is the danger of local busi-nesses being wiped out by more efficient foreigncompetition before they can get a toehold inthe wider world (Dicken, 2003, 575)

This is precisely what is happening, yet ironic-ally Pacific SIDS have no capacity to produce

J. Connell:


11


even enough for a ‘toehold’ in rich world mar-kets. They have so little impact on the globaltrading system that continued preferences couldnot be disruptive or an impediment to majorityfree trade (especially where the EU, the UnitedStates and other rich world nations substantiallysubsidise uncompetitive local producers).

In these circumstances, and despite the hesitantadvocacy of the Forum (and the more enthusiasticadvocacy of various international organisations),the perceived absence of real economic develop-ment opportunities beyond those that currentlyexist, has meant that in most states, as in Fiji,people and governments have found it so diffi-cult to conceive that such crucial components ofthe economy as sugar would be effectivelyphased out. Equally, they cannot comprehendthat they have acted too late to reform theseindustries, or find and develop new alternatives.Hence they now face a sudden, drastic andpotentially devastating restructuring. The sectorthat seems most promising is tourism, thoughtourism is one of the most volatile economicsectors, as its recent history in Fiji, in the wakeof coups, has shown. Diversification out ofagriculture has proved virtually impossible ina context of trade liberalisation, yet ironicallysuch attempts have ‘only revived the static com-parative advantage of primary commodities’(Grynberg and Razzaque, 2004, ix). At the sametime, even this advantage is illusory wheregeographical location is highly disadvantageousfor competitive trade, as both Fiji and Vanuatuexemplify.

Small and remote states thus pose an exceptionalchallenge to supposedly beneficial processes ofglobalisation:

increased integration and rising trade andinvestment in the world economy may notbenefit them substantially ... [and] only con-certed efforts both on the domestic front inthese countries and in the form of co-operationextended by the international community canhelp mitigate these problems (Grynberg andRazzaque, 2004, x).

Unfortunately, in a context of declining aid suchco-operation is largely absent, and it will not beuntil 2007 that the full costs of liberalisationwill become evident. Thus far small states haveplayed ‘only a marginal role in recent globaltrade talks, winning nothing more as yet than apassing concession to investigate their specialeconomic vulnerabilities’ (Payne, 2004, 634).Alongside trade liberalisation, the last few years

have witnessed an extraordinary ‘outward urge’in the structure of migration from both regions,and of both skilled and unskilled workers, and agrowing dependence on remittances from theisland diaspora (Connell, 2006b). Island states,individuals and various international agencieshave attached new and increased significance tomigration, remittance flows, return migrationand the role of the diaspora, in contexts where‘conventional’ development strategies haveachieved limited success. Power has shiftedupwards from weaker states to stronger stateswith a greater global reach. As this occurs smallnational economies, such as those of the SIDS,are less easily able to regulate their own economies.As the ‘kava-biscuit war’ has demonstrated,alongside corned beef and new conflicts innegotiations with the EU over fishing markets(Pareti, 2006), responses to more liberalised tradein the Pacific have involved the intensification oflocal competition at the cost of friction and disunityrather than cooperation. Meeting the demandsof trade liberalisation, in this early secondphase, already represent the greatest challengeexperienced in the Pacific since independence.

ACKNOWLEDGMENTI would like to thank Lindsay Soutar for her assistance ingetting this paper underway.

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