Vanuatu Government Trade Policy Framework

1. Mainstream trade into Vanuatu’s national development strategy including the Priority Action Agenda (PAA) or any future agreed national priorities;

2. Establish a policy platform that builds upon and coordinates sectoral priorities for the ultimate purpose of enhancing development through increased exports of goods and services;

3. Create the pre-conditions for the smooth and effective workings of Vanuatu’s National Trade and Development Committee;

4. Play a vital role in articulating Vanuatu’s trade interests and ensuring that these are reflected in trade negotiations; and

5. Facilitate increased inflows of Aid for Trade (AfT) for the purpose of implementing trade policies and assisting Vanuatu to fully exploit the opportunities offered by trade agreements and broader trade frameworks. The TPF has undergone a comprehensive process of national consultations with Government stakeholders, private sector representatives, Donor Partners, and with a number of non-state actors. A list of those consulted is included in Appendix A.3. The framework was finally validated at a national workshop held in Port Vila on the 12 April 2012. CHAPTER 01 | 2 1.2 Structure The TPF is structured as follows. Chapter 2 discusses growth trends over the past decades and presents a brief analysis of the sources of growth to identify whether economic fundamentals are strong enough to lay-down sound foundations for a successful trade policy. Chapter 3 discusses trade performance in goods and services. It identifies the trends and patterns of trade by making use of a number of complementary data sources. Adequate care has been taken to address data consistencies and changes in accounting frameworks in consultation with relevant data agencies. Chapter 4 summarizes key aspects of trade-related sectoral policies with a view to identify their major objectives and evaluating the extent of trade mainstreaming. The survey provides useful information on the constraints faced by the various economic sectors, in particular on Barriers to Trade (BTT). Chapter 5 builds upon the survey undertaken in Chapter 4 and highlights the key BTT emerging from extensive national consultations. It recommends that national stakeholders jointly focus their interventions on addressing those barriers. Chapter 6 is devoted to the analysis of Aid-for-Trade (AfT). It provides a brief summary of AfT trends in Vanuatu, at both aggregate, donor, and purpose code level. It also presents some recommendations for Donor Partners to increase AfT’s effectiveness in addressing BTT. Chapter 7 briefly discusses how BTT could be overcome via trade negotiations. It also provides policy recommendations on the formulation of a pragmatic agenda for trade negotiations. Chapter 8 concludes by providing a broad summary of the TPF and presenting high- level recommendations that were accepted by national stakeholders and which therefore can be seen as representing the emerging National Trade Constitution. This section presents an economic outlook of Vanuatu over the last decade. It also summarizes the sources of economic growth and indicates whether Vanuatu’s current trends appear sustainable over the short to medium term. The Trade Policy Framework aspires to become the National Trade Constitution which will create the pre-conditions for the smooth and effective workings of Vanuatu’s National Trade and Development Committee (or Vanuatu’s Trade Parliament). VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 3 | CHAPTER 02 | ECONOMIC OUTLOOK 2.1 Economic Activity and Performance Vanuatu hosts a population of approximately 250,000 people comprising mainly of Ni-Vanuatu on a total land area of 12,190 square km. Over the last decade, the annual population growth rate has been 2.3 percent. The recently drafted National Population Strategy proposes options to lower this trend rate. Agriculture is the economic activity which directly supports around 75% of the local population, whilst the services sector makes-up most of its Gross Domestic Product (GDP). Over the last decade Vanuatu’s economic growth has been based on two sectors: services and constructions. These are: (i) the islands are widely scattered and As others countries in the region, Vanuatu faces a number of structural socio- mountainous; (ii) highly vulnerable to natural disasters; economic constraints . Despite this, over the last decade the growth rate of (iii) long distance from major Vanuatu’s real GDP has averaged 3.4 percent (see Figure 2.1). By regional markets; (iv) dependent on small domestic market; and standards, this is commendable if we consider that other major Pacific Island (v) faces volatile trade prices with Countries (PICs) only averaged 2.1 percent over the same period . Vanuatu’s narrow export base. These include: Fiji, Tonga, Western Ministry of Finance and Economic Management (MFEM) estimates a growth Samoa, Papua New Guinea and rate of 2.5 percent in 2011 and subsequent acceleration through to 2015. the Solomon Islands. Source: UN National Accounts (2012). Figure 2.1 Figure 2.1 8 REAL GDP, 6 ANNUAL GROWTH RATE, 4 PERCENTAGE CHANGE 2 Source: MFEM (2012) 0 -2 -4 -6 CHAPTER 02 | 4 2.2 Supply and Demand The sectoral composition of GDP over the period 2000-2011 is presented in Figure 2.2. Although agriculture is the economic activity which directly supports around 75% of the local population its contribution to national GDP is just around 20%. Most of Vanuatu’s GDP is service oriented (69% on average over the period 2000- 2011). Figure 2.2 Within the industry sector (10 percent of GDP on average over the period 2000- 2011), Vanuatu has a very narrow manufacturing base (4 to 5 percent of GDP). The small contribution of agriculture and manufacturing, in general, indicates that value addition activities are still at an early stage. As noted by the Vanuatu’s Industrial Policy this also indicated a substantial failure of the import substitution policy followed by the Government since independence. A closer investigation to the services sector shows that about 15 percent of GDP is generated by wholesale and retail trade and 12 percent by government services. Transport, communication, financial, real estate and food/accommodation services each generate a proportion of GDP between 4 and 7 percent. The MFEM data also show that the services sector also happened to be the largest contributor (68%) to economic growth between 2000 and 2010. The agricultural contribution to economic growth (about 15%) was mostly imputable to crop production, whilst the industrial contribution was mostly due to constructions. Analysis of aggregate expenditure using data from the UN National Accounts (2012) shows that over the period 2000-2011 the bulk of spending (68%) was on private consumption. Investment’s share was 23%, whilst the share of Government recurrent expenditure was 14%. The share of merchandise exports was 49%, whilst the share of merchandise imports was 55%: this highlights Vanuatu’s structural imbalance in merchandise trade, something that will be further analyzed in the following chapter. From a dynamic point of view, public expenditure steadily reduced its contribution to GDP growth, although it continued to increase in absolute values. The same is true for private consumption. On the other hand, the contribution from public and private investments almost doubled over the relevant period (from 17% in 2001 to 30% in 2010). 70 Figure 2.2 60 COMPOSITION OF GDP, PERCENTAGE 50 Agriculture, Source: MFEM (2012) Fishing, Forestry 40 Industry 30 20 Services 10 0 VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 5 | 2.3 Other Economic Fundamentals Other macroeconomic fundamentals are also relevant when gauging Vanuatu’s development prospects. These can be summarized as follows:

1. A prudent mix of fiscal and monetary policy allowed Vanuatu to stem inflation and improve its fiscal position. Vanuatu has also maintained a healthy level of foreign reserves.

2. Financial sector reforms have seen the entry of a new commercial bank and an increase in credit to the private sector. Year-on-year credit growth reached almost 50 percent in February 2009 before stabilizing from February 2010 onwards at a relatively strong average of around 14 percent. Credit growth in Vanuatu has therefore remained relatively robust in the face of the global financial crisis through to 2012. Market-oriented microfinance programs were also implemented over the past decade which helped to further increase liquidity in Vanuatu.

3. Deregulating access for international airlines has improved competition and resulted in increased tourism activity (trade in services) which has played a crucial role in maintaining the trade deficit at an acceptable level.

4. The opening up of the telecommunications sector has provided greater and cheaper access to mobile phone communications and improved Vanuatu’s business environment. The continuation of a positive outlook for the medium to long term is crucially dependent on the implementation of sound policies for self-sustained growth not only in the services sector, but also in agriculture/forestry/fisheries and manufacturing, in particular through value addition.

5. A number of reforms have been undertaken to create an environment that is more conducive to business and to remove barriers to business start- ups and operations – such as streamlining the process to obtain a business license, to approve foreign investments, to register foreign companies, etc.

6. Funding from the Millennium Challenge Corporation ($66 million over a five year period) boosted Vanuatu’s infrastructure development. Donors are further increasing their focus on infrastructure development, and a series of major infrastructural projects are being implemented or are in the process of being implemented - urban infrastructures, shipping, road and air transport. As a result, investments (and the contribution of constructions to GDP growth) are set to increase over time – as acknowledged by the Vanuatu 2011 Budget statement.

7. A cornerstone of solid macroeconomic performance has been good governance - Vanuatu has improved on political stability, rule of law, and corruption (see Kaufmann and Mastruzzi, 2008). CHAPTER 02 | 6

8. The Vanuatu’s Labor Market Assessment (2011) indicates the formal economy is growing at approximately 1500 jobs per year, whilst around 4000 people enter the labor market each year. The move away from traditional to modern society requires even faster rates of economic growth in sectors where a relevant number of locals can be productively employed - agricultural processing, tourism, etc. – and possibly the opening of increased overseas employment opportunities.

9. Vanuatu’s vulnerability to sudden withdrawals of Donor Partners’ funds appears to be high. It is agreed that in addition to domestic factors, the impressive growth and macroeconomic performance is also due to significant foreign aid, which is at around 8.2 percent of GDP in 2009. A quick look at the 2011 Budget reveals that most of the economic growth forecasted for the next 3 years is related to the construction sector, an area whose performance is strongly dependent on the amount of donor support. In absence of polices for self-sustained growth, the continuation of current positive trends can therefore be at risk in the medium term.

10. Since 2008 Vanuatu’s fiscal position has been slowly deteriorating. Fiscal deficits during periods of economic expansion are not advisable as they endanger macro-economic stability – a precondition for sustainable economic growth. Figure 2.3 shows that the increase in ODA flows has been coupled with increasing deficits over the last 3 years. When computing fiscal balance by just considering primary recurrent government revenue (excluding grants), the deficit figures looks worrisome, at around 6 percent of GDP in 2011. Recent government deficits requiring domestic financing through issuing government bonds have also highlighted the need for better coordination with the Reserve Bank to ensure liquidity conditions (and in turn interest rates and inflation) are not adversely affected. Figure 2.3 21 Figure 2.3 18 FISCAL BALANCE 15 AND OFFICIAL DEVELOPMENT 12 ASSISTANCE, 9 PERCENTAGE OF GDP 6 Source: MFEM (2012 3 and OECD (2012) 0 -3 -6 ODA Fiscal Balance VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 7 | 2.4 Conclusions Over the last decade Vanuatu’s economic growth has been based on two sectors: services and constructions. Vanuatu’s geographical isolation, together with the inability to increase supply and the lack of significant value adding activities have contributed to the marginalization of agriculture/forestry/fisheries and manufacturing. Within services, tourism-related activities are responsible for a significant share of growth. Vanuatu’s financial services remain significant, but stable, whilst the share of value added by telecommunications has increased by 50% as a result of liberalization policies. Constructions have benefited from both public and private investments. Whilst private investments have been focused on tourism related activities, public investments have targeted infrastructural projects which are instrumental to the elimination of key economic constraints. Equally important, prudent fiscal and monetary policy and a series of key reforms opening up previously restricted markets (noticeably air transport and telecommunications) have been crucial to sustain strong economic growth. With public and private investments set to continue in the context of an improved business environment the short-term economic outlook for Vanuatu is therefore positive. The continuation of a positive outlook for the medium to long term is crucially dependent on: 1. the re-establishment of a prudent fiscal policy and enhanced coordination with monetary policy; 2. further pursuit of the economic reforms to improve business environment; and 3. the implementation of sound policies for self-sustained growth which build upon the enhanced infrastructural endowment to foster private sector development, not only in the services sector, but also in agriculture/ forestry/fisheries and manufacturing, in particular through value addition. Given the limited size of the domestic market, private sector development ultimately calls for the need to increase export of goods and services. A description of merchandise and services trade is addressed in the following chapter. CHAPTER 02 | 8 CHAPTER 03 | TRADE IN GOODS AND SERVICES 3.1 Overview Data on Vanuatu’s trade performance are reported in Table 3.1. Over the period 2002-2010 Vanuatu’s merchandise exports increased by 77% while imports increased by 115% leading to a significant deterioration of balance on trade in goods, from a deficit of VT 8 billion in 2002 (59% of total merchandise trade) to VT 18 billion in 2010 (65% of total merchandise trade) . Import trends were due to both economic growth and the rapid pace of economic expansion of import- intensive sectors (tourism and constructions). Observed trends in goods indirectly reflects the existence of a number of Barriers to Trade (BTT) whose details will be discussed later in the report. On the services side, the situation is completely opposite. Whilst export of services increased by 115% during the period 2002-2010 (from VT 13 billion to VT 27 billion), services import grew by a more modest 71% (from VT 7 billion to VT 12 billion). As a result, trade surplus increased from VT 5 billion in 2002 to VT 14 billion in 2010. During this period, export of tourism services averaged 70% of total services export. Telecommunications, financial, and business services also recorded positive, although less significant growth rates. Favorable trends in services, coupled with a substantial balance of the Income Accounts (which, inter-alas, records currency movements originating as a result of assistance from Donor Partners) contributed to counterbalance the structural deficit originating from trade in goods and to maintain Current Accounts deficits at an average level of around VT 4 billion. Table 3.1 Table 3.1 VANUATU’S TRADE PERFORMANCE, VT MILLION Source: Reserve Bank of Vanuatu (2012) 2002 2003 2004 2005 2006 2007 2008 2009 2010 Balance on Trade -8,117 -7,949 -8,398 -10,215 -11,459 -14,993 -22,641 -20,482 -18,583 in Goods Exports 2,793 3,249 4,264 4,166 4,166 3,040 4,230 5,887 4,947 Imports 10,910 11,198 12,662 14,381 15,625 18,033 26,871 26,369 23,530 Balance on Trade 5,342 5,741 6,282 6,941 8,055 11,633 12,342 14,622 14,506 in Services Services credit 12,707 13,664 14,226 16,094 17,435 20,910 23,594 26,094 26,743 Services debit 7,365 7,923 7,944 9,152 9,380 9,277 11,252 11,472 12,237 VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 9 | 3.2 Trade in Goods: Exports Analysis of exports data is problematic. Whilst national export data are substantially unreliable, the use of mirror data is affected by the current open- registry fishery policy which artificially inflates export values of Vanuatu’s fish (Harmonized System (HS) chapter 3), machinery, vessels and parts thereof (from HS chapter 70 to 96). On balance, it was agreed that mirror data depurated from the inflated chapters (HS 3, and HS 70 to 96) provide a more reliable picture of Vanuatu’s exports and these have therefore been used for the purpose of this analysis. Data are presented in Appendix A.1. Over the past decade exports of services generated foreign exchange receipts which were around five times higher than those generated by goods. Copra still remains Vanuatu’s main export commodity, although as a percentage of total exports it declined substantially, from 39% in 2000 to 21% in 2010. The decline in the relative weight of copra was matched by an increased visibility of coconut oil, whose share increased from 3% in 2001 to 19% in 2010, to become Vanuatu’s second most important export commodity. Whilst the joint share of copra and coconut oil remained stable at around 40%, export dynamics highlighted above clearly show that Vanuatu was able to add value in this area. The coconut oil exported from Santo crucially contributed to this positive trend of value addition. Kava, cocoa beans, seaweed, meat, and timber represent the other main export commodities, with average shares of 10.5%, 10.3%, 7.0%, 5.6% and 2.1% respectively. Whilst shares for kava, cocoa beans, and seaweed followed an upward trend over the observed period, the shares of meat and timber steadily declined. It is worth noting that prices for cocoa beans, meat and to a lesser extent kava showed sharp increases over the past 10 years. However, ironically, Vanuatu was not able to benefit from these trends as shown by the decline in exported quantities. This finding clearly highlights serious capacity constraints that need to be overcome if Vanuatu is benefit from trade. Aggregate trends (index numbers) for cocoa beans and for meat are shown in Figure 3.1. 3.0 Figure 3.1 2.5 AGGREGATE TRENDS FOR 2.0 Price COCOA BEANS AND FOR MEAT, INDEX 1.5 Qty NUMBERS 1.0 Source: elaborations from WITS (mirror data) 0.5 0.0 CHAPTER 03 It is also worth noting that none of the higher value-added products presents a | 10 significant export share. On the other hand, many of these products registered above the average growth rates over the last decade. Fast-growing products include essential oils, meal of root crops, coffee, medicaments, food preparations, and art crafts. Amongst the five top export destinations Europe detains the bigger share (29.5%) followed by Japan (9.5%), New Caledonia (8.5%), Philippines (7.5%) and Fiji (7.3%). 3.3 Trade in Goods: Imports Vanuatu’s imports are shown in Appendix A.2. Trends show that imports have increased from all major sources. Five countries of origin provide Vanuatu with around 75% of its imported goods. The last decade saw a substantial stability of Australia and New Zealand’s positions (average shares of 37% and 17% respectively), a decline of France (average share of 4.1%), and an increase of China and Fiji (average shares of 8.0% and 7.8% respectively). Statistics on imported goods reflect the Vanuatu’s limited manufacturing base. On average, import of appliances represents 17% of total imports, followed by chemical products (15%), and food/beverages (12.5%). These three categories make up around 50 percent of Vanuatu’s total imports. It is also worth noting the significant import share detained by vegetable products (8%), an area with significant linkages to the tourism industry and where Vanuatu might wish to explore options to increase domestic supply capacity. The upward trend in total imports is unlikely to change as Vanuatu does not have either the capacity or the resources to substitute many imported goods. From a longer-term perspective, it is also clear that indiscriminate policies of import substitution have substantially failed to achieve any significant result. Over the past 30 years, tariff protection and duty exemptions for manufacturing businesses without linkages to the primary sector have failed to transform those businesses in leading exporters. As acknowledged by the Vanuatu’s Industrial Policy (2011), the Government needs to move away from indiscriminate import substitution and towards targeted support to sectors with significant growth potential (those linked to domestic primary production and with adequate production factors). Some of those truly infant industries3 were identified in section 3.2 of this policy framework. A more comprehensive treatment of Vanuatu comparative advantages can be found in Pacific Institute for Public Policy (2009). 3.4 Trade in Services: Tourism Tourism services are the main contributor to Vanuatu’s exports. Tourism expenditure as percentage of GDP increased from 26 percent in 2002 to 33 percent 3 The term truly infant industries refers to high growth and export in 2010 (RBV, 2012). Over the past decade exports of tourism services alone potential activities with strong generated foreign exchange receipts which were around four times those generated linkages to the primary sector and where process of value addition is by merchandise exports - VT 15 billion on average over the period 2002-2010, see still at an initial stage, or has still to Figure 3.2. Moreover, average growth in tourism receipts (10%) was much higher be fully explored. than that of receipts from merchandise exports (6.6%). VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 11 | Data on export earnings are mirrored by trends in visitor arrivals – see Figure 3.3. Over the period 2000 to 2010 total visitor arrivals doubled from just fewer than 110,000 in 2000 to over 240,000 in 2010. As receipts more than doubled over roughly the same period this indicates an increased sophistication and value addition of the Vanuatu’s tourism product. Figure 3.2 Figure 3.2 25,000 EXPORT OF TOURISM SERVICES, 20,000 Transport VT MILLION of passengers 15,000 Source: Reserve Bank of Vanuatu (2012) 10,000 Travel related services 5,000 0 160,000 Figure 3.3 140,000 Arrivals by Air TOURISM ACTIVITY, 120,000 ARRIVALS AT THE 100,000 BORDER Day visitors 80,000 Source: Vanuatu National Statistical Office (2011) 60,000 40,000 20,000 0 Vanuatu also increased its relative tourism attractiveness during the observed period. This can be captured by noting that whilst world tourism air departures increased by around 29% between 2000 and 20094, Vanuatu’s arrivals by air increased by a remarkable 75% over the same period. It is noted that dynamics for same-day visitors (cruise ship visitors) were even more favorable than those of arrivals by air. On a less positive note, Vanuatu’s tourism appears to be highly concentrated as arrivals from the three main countries of origin added up to 84% of total visitors in 2000. Australia dominated the market with a share of 64%, followed by New Zealand (14%), and New Caledonia (7%). Concentration remained broadly unchanged in 2010. It is also noted that the greatest majority of tourism 4 World Bank Development activities currently take place in the urban areas (notably in Port Vila), although Indicators (2011) current statistics are unable to provide an accurate picture of rural tourism. CHAPTER 03 | 12 In this context, policies to reduce tourism concentration by capturing visitors from new potential markets (notably Asia) need to receive due attention from the tourism industry. Strategies to further increase value addition by increasing linkages between tourism and the local economy should also be actively pursued, including options to increase tourists’ consumption of local products. The recent project of waterfront regeneration for Port Vila appears to provide good opportunities for increased value addition. Any waterfront upgrades and beautification in Luganville, Santo, may also provide similar opportunities. The future tourism performance will be dependent on the ability to reduce concentration and to create stronger economic linkages with the local economy. The performance of other services will be crucially dependent on the ability to design and implement an overarching services policy. 3.5 Trade in Services: Labor Mobility and Remittances Temporary labor mobility schemes have become an important development tool for Vanuatu. The country is currently part of two labor mobility schemes related to the agriculture/horticulture sector: the New Zeeland’s Recognized Seasonal Employer (RSE) scheme and the Australian Pacific Seasonal Workers Pilot Scheme (PSWPS). Vanuatu joined the RSE scheme in 2007. The number of contracts awarded under the scheme (proxy for the number of workers involved) increased steadily from 306 in 2007 to a record 2380 in 2011. According to the Vanuatu’s Annual Development Report 2010 (2011) two surveys were conducted to estimate net remittances from Ni-Vanuatu participants to the RSE. The results of the surveys indicated in between VT 425,530 and VT 270,298 the mean net returns from RSE participants. Using the average of the two figures (VT 347,914) it is therefore estimated that RSE remittances grew from VT 106 million in 2007 to VT 828 million in 2011. The PSWPS was announced by the Australian Government in 2008. The Pilot will run until 30 June 2012. The recent PSWPS review has resulted in the confirmation 5 It is worth noting that figures reported in the Vanuatu’s of the scheme and its pilot extension to a numbers of new sectors. Balance of Payments are significantly lower than TPF The number of contracts awarded to Ni-Vanuatu under the Australian scheme has estimates. 6 Tourism expenditure been very disappointing over the first two years (six in 2009 and four in 2010). The is estimated at around VT 22 billion in 2010. Assuming 23% of number of contracts increased to 58 in 2011. Using estimates for the RSE scheme, that expenditure goes towards remittances from PSWPS increased from around VT 2 million in 2009 to around wages, this returns benefits of around VT 5 billion. The 23% VT 20 million in 2011. figure has been calculated by estimating the percentage of Based on the above estimates labor mobility is currently generating around VT national wages over total output. 850 million per year to Ni-Vanuatu workers5. This already represents a significant According to the 2001 Business Survey the proportion of GDP source of revenue, as it broadly corresponds to around 20% of the total benefits represented by wages is 33.3%. generated by the tourism industry6. Applying this percentage to the 2010 GDP (VT 67 billion), we can estimate 2010 total wages Tourism and fishing activities may also provide significant opportunities for labor (VT 22.3 billion). We can finally mobility. Consultations revealed that that a substantial number of Ni-Vanuatu divide estimated wages by the sum of 2010 GDP plus Imports workers are currently employed by international cruise liners and foreign fishing (VT 95 billion). This returns a vessels. Unfortunately, statistical information for this type of labor mobility could percentage of around 23%. not be obtained by relevant Government Departments. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 13 | Vanuatu trade in goods exposes the substantial failure of indiscriminate import substitution policies, whilst calling for targeted support to enhance productive capacity and add value of goods with significant export potential. 3.6 Trade in Services: Other Services Financial, telecommunication and business services generated average export earnings of around VT 2 billion over the period 2002-2010, roughly 50% of the earnings generated by merchandise exports. However, with the exception of telecommunications, average growth rate was either nil (financial services) or negative (other business services). These findings suggest two main observations. First, the liberalization policy pursued in respect to telecommunications has not only improved Vanuatu’s business environment, but was also crucial to enhance Vanuatu’s export base. Second, the lack of an overarching service policy setting the foundations for a successful export performance in respect to services where Vanuatu enjoys a comparative advantage risks undermining development perspectives of a number of sectors able to generate significant value added and employment opportunities for Ni-Vanuatu. 2000 1800 1600 1400 Figure 3.4 1200 EXPORTS OF 1000 OTHER SERVICES, 800 VT MILLION 600 400 Source: Reserve Bank of 200 Vanuatu (2012) 0 Telecommunications, computer Financial services Other business services and information services 3.7 Conclusions Whilst the contribution of services to Vanuatu’s GDP is around two times higher than the contribution of goods (70% versus 30%), over the past decade exports of services generated foreign exchange receipts which were around five times higher than those generated by goods. Tourism contributed for around 80% to Vanuatu’s export of services. The future tourism performance will be dependent on the ability to reduce concentration and to create stronger economic linkages with the local economy. The performance of other services will be crucially dependent on the ability to design and implement an overarching services policy, which is currently missing. Vanuatu trade in goods continues to be focused on primary products. This exposes the substantial failure of the indiscriminate import substitution policy followed so far, whilst calling for targeted support to enhance productive capacity and add value of goods with significant export potential. CHAPTER 03 | 14 CHAPTER 04 | SECTORAL POLICIES AND PRIORITIES The Vanuatu Government has already in place a significant number of trade-related policies. A quick review of those polices is provided below. This review, together with extensive national consultations, has been instrumental to identify the key constraints, or barriers, preventing the further expansion of trade in goods and services. Barriers to Trade (BTT) will be illustrated in the following chapter. The 2011 update of the Priority Action Agenda has initiated the process of mainstreaming trade. 4.1 Priority Action Agenda (2003 and 2011 update) Vanuatu’s development priorities were agreed in 2003 and are summarized in the Priority Action Agenda (PAA). These are:

1. Private sector development

2. Macroeconomic stability

3. Good governance

4. Primary sector development

5. Better basic health services

6. Improved access and quality of education

7. Improved economic infrastructure and support services The 2003 PAA has been recently updated. It is important to note that the 2011 update has initiated the process of mainstreaming trade into national policy by adding an explicit trade strategy under priority No. 1 and by incorporating trade- related performance indicators in priorities No. 4, 6, and 7. This follows from the recognition that trade in services has gained primary economic significance in Vanuatu and that the possibilities to further expand primary and manufacturing production ultimately rely on the ability to penetrate foreign markets. Trade-related sectoral policies stemming from the PAA are summarized in the following sections. 4.2 Foreign Policy (2012) Vanuatu’s Foreign Policy is guided by the principles of non-alignment, mutual cooperation, respect for international law, sustainable development, sovereign equality of states and promotion of international peace and security. Vanuatu has pursued cooperation with the other Pacific Island States as reflected by its membership of the Pacific Islands Forum (PIF), the Pacific Community, and the Melanesian Spearhead Group (MSG). The Vanuatu Ministry of Foreign Affairs fully acknowledges the strategic importance played by trade agreements in fostering healthy international relations as demonstrated by the significant space reserved to the treatment of those agreements in the pursuit of Vanuatu’s Foreign Policy objectives. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 15 | In addition, it is important to note that that the Council of Ministers has endorsed in March 2011 a Strategic Policy that would guide the opening of new representations globally. Trade opportunities represent one of the key criteria to determine the opening of strategic representations. Vanuatu’s diplomatic missions are currently located in Canberra, Australia; Brussels, Belgium; Beijing, People Republic of China; Suva, Fiji; United Nations, New York; Consular Generals are in Noumea, New Caledonia; Auckland, New Zealand; Shanghai, Peoples Republic of China; and Consulates (Headed by Honorary Consuls) in Sydney, Australia; Manila, Philippines, and South Africa. The consultation team noted that the Ministry of Foreign Affairs would be willing to provide office space in its diplomatic missions to host representatives from trade-related agencies - notably, the Vanuatu Investment Promotion Authority (VIPA) and the Vanuatu Tourism Office (VTO). However, it was noted that lack of funds in line agencies has so far prevented this policy from being implemented. There is high potential for VIPA/VTO to work very closely with the Ministry of Foreign Affairs and Vanuatu’s diplomatic missions: lack of resources in trade-related agencies to fund participation in diplomatic missions is therefore felt to act as a barrier against increased foreign investments and tourism development. Recommendations from the Overarching Productive Sector Policy, the Vanuatu’s Industrial Policy, and the Vanuatu Tourism Action Programme are fully in line with those of the Trade Policy Framework. 4.3 Productive Sector Policy - Scoping Report (2010) As of today, the Productive Sector Policy Scoping Report (PSPSR) represents the key policy document setting strategic directions for the primary sector. According to the PSPSR, primary sector policies should be focused on achieving the following objectives:

1. Improved access to domestic and foreign markets

2. Improved quality and safety

3. Increased productivity and competitiveness

4. Enhanced value addition

5. Improved training

6. Better coordination and monitoring Enhancing productive capacity, value addition, and improving market access crucially respond to the need of eliminating Barriers to Trade (BTT) and are therefore in line with the thrust of the Trade Policy Framework. In terms of capacity enhancement, the PSPSR recommends that high-value and strategically important sectors (those which have high GDP ratios, support larger population, and have high employment prospects) should be prioritized. As for foreign market access, the PSPSR further recommends that export strategies need to focus on agricultural products for which Vanuatu has a comparative advantage. A follow-up mission to finalize the overarching policy for the primary sector is currently underway. A quick look at the draft document reveals that emerging recommendations are fully in line with those of the TPF. CHAPTER 04 The PSPSR’s recommendations are also in line with the thinking of the current | 16 administration. At a recent retreat of senior government officials the Prime Minister of Vanuatu laid emphasis on the development and the manufacturing sector. He emphasized the need to link the manufacturing sector to the primary sector including agriculture, forestry and fisheries. These sectors have the potential to increase production and contribute to exports. 4.4 Forestry Policy (2011) The recently drafted Forestry Policy (FP) takes into account some of the new challenges facing the sector. The FP’s directions which are more relevant to trade development are summarized below:

1. Forest Management - in particular the need to roll out an extensive reforestation program and to protect non-wood products with high trade potential such as nuts, medical herbs, etc.

2. Climate Change - in particular the opportunities to generate foreign exchange earnings through carbon trading.

3. Forest Industries - in particular promoting domestic value addition for wood and non-wood products. Consultations with the Department of Forestry revealed that those strategic directions are being successfully implemented, and that trade has been substantially mainstreamed into policy-making. Opportunities for carbon trading are perhaps worth being explored further given that Vanuatu is likely to enjoy some comparative advantages in this area. All in all it appears that the Vanuatu’s forestry sector is on the right track to provide a very positive contribution to trade and national development. 4.5 Livestock Policy (2012) A Livestock Policy (LP) is currently being finalized. It provides a series of recommendations to enhance supply capacity of pigs, chickens, goats, and cattle. The single most important factor of production limiting optimal pig and chicken production is feed and feeding. Concurrently, the present genetic make-up of the village chickens and pigs does not carter for fast growth, high meat and/or egg production and reproductive efficiency. Injection of new genes into the present gene pool is identified as the way forward. On goats the LP recommends an aggressive educational programme on the socio-economic benefits of the goat. On cattle, rehabilitation of the pasture is recommended as a way forward, together with enhanced farmer education in the arts of breeding. Whilst the TPF acknowledges the need to focus on the domestic market for livestock in respect to which Vanuatu is not yet self-sufficient – notably, pigs, chicken, and goats – it is also noted that the treatment of cattle would have benefited from an increased focus on export/market access strategies. The treatment of BTT in respect to cattle is somewhat lacking and exclusively focused on tax issues. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 17 | 4.6 The need for a national Fisheries Policy The Vanuatu Fisheries Act mandates the development of management policies to preserve Vanuatu’s rich fisheries resources. Despite a number of Fisheries Management policies are now in place, a comprehensive fishery development policy laying down strategic foundations to maximize development opportunities from fisheries resources is currently missing. Whilst fisheries contribution to Vanuatu’s GDP is still limited, national fisheries (coastal, aquaculture, and oceanic) have the potential to further enhance Vanuatu’s development through options such as on-shore processing and enhanced linkages to the tourism industry. In regards to regional and international fisheries, the Maritime Act established Vanuatu as an open registry nation soon after independence, with the intention of establishing a means of revenue generation for the country. The open- registry policy generates around 0.5 percent of total Government revenues. The high number of registered Vanuatu-flagged fishing vessels affects mirror data on exports. According to those data, Vanuatu emerges as the largest Pacific exporter of fish (VT 19 billion in 2010), flagged fishing vessels, and parts thereof. At the same time national statistics only records VT 300 million of fish exports in 2011. These data suggest the need to implement strategic options to take full advantage of regional and international fishing activities for the purpose of increasing value added from Vanuatu’s fisheries sector. The Trade Policy Framework recommends that a comprehensive fishery development policy be drafted to maximize social and economical benefits to the people of Vanuatu. 4.7 Industrial Policy (2011) The Industrial Policy (IP) targets to attain: (i) improved economic diversification and enhanced domestic value addition; (ii) enhancement of the linkages among the economic sectors; (iii) creation of an enabling environment for the private sector growth; and (iv) increased contribution of manufacturing to merchandise trade. The IP recognizes that in the face of volatile international markets, reliance on primary exports will fail to bring about sustainable benefits for Vanuatu. The proposed solution is to move up the value-added chain, where markup and income elasticity of demand are higher and the international markets are relatively more predictable and stable. In addition, the IP advocates for Vanuatu’s international competitiveness to be enhanced through branding, marketing and product differentiation. Quite encouragingly, the IP policy recommends that trade protection, if any, should only be based on the performance of the productive sector and the gains from trade. It is plain to say that trade considerations have been fully mainstreamed into the Vanuatu’s IP. The key challenge facing the Department of Industry is now moving on policy implementation, and in particular on the ability to selectively apply trade protection based on Vanuatu’s comparative advantages. CHAPTER 04 | 18 4.8 Tourism Action Programme (2008) Tourism has become the leading economic activity in Vanuatu. Visitor arrivals are at record levels and the industry contributes around 20-30% of GDP. The development of the Tourism Action Programme (TAP, 2008) incorporates recommendations from previous strategic documents, in particular the Vanuatu Tourism Master Plan (2004). The objectives of the TAP which are more relevant to trade include:

1. Promote strong economic growth;

2. Reduce the regional imbalances (urban/rural tourism);

3. Generate foreign exchange earnings, local incomes and employment;

4. Minimize income leakages; and

5. Promote greater Ni-Vanuatu participation Recommendations to achieve those objectives fall into five thematic areas

1. Planning and Institutions, notably the establishment of a Department of Tourism, Provincial Tourism Councils, and Provincial Tourism Plans. All of these recommendations have already been implemented.

2. Tourism Marketing, notably re-branding of the Vanuatu’s tourism product (implemented), and enhanced marketing efforts (ongoing).

3. Investment and Product Development, notably zoning policy, support to SMEs in outer islands, encourage competition in utility/telecommunications, address tourism leakages, support commercialization of indigenous arts and music, and develop/implement a Cruise Ship strategy. Support provided so far to tourism SMEs (truly infant industries) appear insufficient and should be scaled up given the high potential for those activities to support inclusive tourism growth. A zoning policy has yet to be drafted and implemented. Studies into tourism leakages have failed to stimulate comprehensive implementation plans, whilst a Cultural Policy linking tourism and indigenous art/music, as well as a Cruise Ship strategy, are still missing. Tourism leakages are still significant due to weaknesses of local agriculture and agro-industry.

4. Infrastructure and Transport, notably the upgrade of tourism wharves/ airports, the provision of electrification, telecommunications, and roads to key tourism destinations, and the opening of air connections with new markets. Whilst significant infrastructural projects are ongoing, the opening of new air connections is lagging behind and should be prioritized.

5. Education and Training, notably, to establish an Education and Training Strategy for the tourism industry and a mentoring/training program for SMEs in rural areas. None of these programs have so far been established or implemented. Whilst Vanuatu’s training institutions appear to be adequate to satisfy the needs of major resort operators, lack of training is evident for Ni- Vanuatu operating SMEs in rural areas. Lack of a comprehensive set of data to guide Vanuatu’s tourism policy is striking. Current datasets are only focused on urban tourism and fail to capture key variables such as length of stay, value addition, supply capacity etc. Policy prioritization calls for a robust system of data collection. The establishment of such a statistical system is therefore strongly recommended by the Trade Policy Framework. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 19 | Whilst the TPF concurs that efforts need to scaled up to develop sustainable tourism in the outer islands, it is important not to forget that urban tourism currently contributes for 80% to international arrivals. Efforts to improve value adding in urban tourism should focus on ambitious programs of waterfront regeneration and enhancement of the natural environment. The TPF welcomes the current NZ initiative on waterfront rehabilitation for Port Vila, whilst at the same time advocates the piloting of creative initiatives on environmental education akin to those successfully rolled-out in cities such as Bogotà, Colombia. 4.9 National Investment Policy (2005) The 2005 policy framework for investment promotion simply describes the current investment landscape. The National Investment Policy document aims to clarify and enhance investors’ understanding of the Vanuatu Government’s policies whilst failing to set out strategic directions for investment promotion. It is therefore recommended that this policy be drafted as a matter of priority. The importance of the Broadband Submarine Cable project highlighted by the Vanuatu Infrastructure Strategic Investment Plan is also echoed by Vanuatu’s Universal Access and ICT Services Policies. 4.10 Vanuatu Infrastructure Strategic Investment Plan (2012) With the growth in the scale and breath of economic activity, demand for infrastructure and utilities has increased. Recently, a large proportion of aid had been devoted to the establishment of new transport infrastructure in Vanuatu, whilst the Government has been tasked to fund maintenance costs. A Vanuatu Infrastructure Strategic Investment Plan (VISIP) is currently under draft. Priority projects under the plan have been recently identified using a multi- criteria assessment methodology. The methodology fully mainstreams trade considerations into infrastructure development. In particular, the following criteria assure that infrastructure policies are closely linked to trade facilitation.

1. Impact on infrastructure users (reduce cost of doing business)

2. Government’s ability to meet ongoing costs (assures sustainability)

3. Service capacity and access to markets (facilitates trade)

4. Extent to which the project supports growth of the tourism (export promotion) The top-priority projects identified by the VISIP for each thematic area are presented in Table 4.1. Whilst Donor Partners’ funds for some of the projects identified have already been allocated (rural roads) or committed (Port Vila’s urban development) funding for most of the remaining projects are still lacking. The prioritization exercise is nonetheless very useful to attract future funding commitments on a selected number of priority projects. The Trade Policy Framework supports the projects identified as they can chiefly contribute to eliminate key Barriers to Trade. CHAPTER 04 In addition to the top-priority projects identified by the VISIP, a number | 20 of additional infrastructural projects are currently being implemented (renewable energy projects in outer islands) or are in the process of being implemented (an inter-island shipping program and a project to upgrade Ifira Port in the capital city). URBAN FOCUS RURAL FOCUS Table 4.1 Port Vila & Luganville Urban Development Series of rural road rehabilitation VISIP PRIORITY Project projects INFRASTRUCTURE Series of provincial water supply PROJECTS Bauerfield Airport Improvement projects Source: VISIP prioritization tool Efate Geothermal Plant Submarine Broadband Cable to Fiji Solid Waste Management Projects in Port Vila & Luganville Upgrading of Santo Main Wharf 4.11 Vanuatu Universal Access and ICT Services Policies (2011) The importance of the Broadband Submarine Cable project highlighted by the VISP is also echoed by Vanuatu’s Universal Access (UA) and ICT Services Policies. The draft UAP, developed in 2011 and expected to be reviewed and approved in 2012, stresses the centrality of this infrastructure to achieve the Government objective to provide broadband internet access to 85% of the population by 2015. The draft ICT policy gives a flavor of the number of growth and trade-enhancing objectives that such an infrastructure can be able to achieve, such as: cost-effective e-training, rural development, increased competitiveness for Vanuatu’s goods and services businesses, e-health, environmental protection, and good governance. The Trade Policy Frameworks echoes these remarks and fully supports the Government efforts to finalize an ICT Services Policy and to provide Vanuatu with Broadband Cable connection as a matter of urgency. 4.12 Vanuatu Education Sector Strategy (2006) and subsequent policies Although education is not conventionally considered a primary target of a trade policy, strong linkages actually exist between education and the ability to boost exports. For example the significant labor shortages existing in the Vanuatu’s domestic market coupled with a structural excess of labor supply clearly signal the need to better target educational policies. Moreover, the possibilities for overseas absorption of excess supply strongly depend upon the skills of those unemployed. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 21 | The Vanuatu Education Sector Strategy (VESS) drafted by the Ministry of Education (MoE) represents key policy document identified during national consultations. The VESS highlights a number of significant challenges facing the education system. Most worryingly, those challenges appear to be concentrated in secondary, tertiary, and vocational education, i.e. the areas which mostly can contribute to trade-based development. Key challenges include:

1. Lack of qualified teachers. According to the VESS the professional competence of teachers needs to be strengthened.

2. Inadequacy of the school’s curriculum. This is traditional and designed to educate a limited number of academically inclined students.

3. Tertiary education providers (VIT, Nursing College, Agricultural College, etc.) operate in isolation, and without clear control/coordination mechanisms. The possibility of bundling these institutions under the umbrella of a single University is considered by the VESS.

4. Accreditation of Technical and Vocational Education and Training (TVET) providers is not mandatory. The quality/suitability of TVET courses is therefore difficult to assess. The VESS argues for the need to strengthen the Vanuatu National Training council (VNTC) to monitor quality in the TVET sub-sector. Whilst accreditation is now mandatory and quality/suitability of TVET courses is being assessed, the limited resources of the VNTC imply that much more needs to be done in this area.

5. Lack of coordination between Donor Partners initiatives. As a consequence the sector has been developed around different agendas and the parallel offices and systems of donors, rather than around a national education sector strategy. An education Road Map was developed in 2009 by the MoE to implement the VESS’ recommendations. A TVET Policy by Ministry of Youth Development, Sports and Training (MYDST) was approved in 2010 to further guide the development of technical and vocational education in Vanuatu. A National Skills Development Strategy was finally developed in 2011 by the Prime Minister Office (PMO) to determine demand and supply of priority skills in the Vanuatu economy and to recommend options to deliver those skills. Whilst policy inflation and lack of coordination appears to be affecting the Vanuatu’s education system, the key areas of concerns identified by the VESS have yet to be successfully tackled. It has been pointed out by stakeholders that the lack of a Trade Policy Framework for Vanuatu itself represented a barrier to enhancing trade. It is hoped that this framework would at least be useful to fill that gap. For an effective TPF the identification of Barriers to Trade (BTT) is vital. National consultations and the review of sectoral policies revealed that significant barriers to both trade in goods and services exist in the economy. This chapter does not attempt to provide a comprehensive list of all the BTT, but wishes instead to focus on those barriers which emerged as the most binding to further enhance trade-based economic growth. CHAPTER 04 | 22 CHAPTER 05 | BARRIERS TO TRADE 5.1 Infrastructures The majority of stakeholders identified infrastructure constraints as the major BTT. On a positive note, it appears that the Vanuatu Government and Donor Partners are progressively increasing their commitment to infrastructural projects and that the Government is devising effective tools to prioritize its infrastructural needs, such as the VISIP. Consultations revealed that the Government’s capacity to absorb an increasing number of infrastructural projects is limited by its scarce human resources and the ability to source adequate funds for maintenance. These are themselves BTT which call for an appropriate staging of key infrastructural projects over the long-term. For an effective Trade Policy Framework the identification of Barriers to Trade is vital. In Vanuatu, these relate to infrastructures, business environment, SPS/TBT issues, productive capacity and education/training Provision of better roads was considered to be one of the key requirements for promoting agricultural production and delivery of produce to urban centers for sale or processing/value adding. It was revealed that roads in some outer islands (Tanna, Malekula and Ambae) are currently being upgraded with the support of AusAID within the context of a multi-year program of roads rehabilitation. After the completion of major road projects in Efate and Santo, it was generally felt that outer island roads should now receive priority. However, extension of the Santo road network was still deemed important to facilitate agricultural production. Since road maintenance is carried out by the Government, the maintenance budget should increase proportionally to the extension of the national road network. The Public Works Department indicated that no new allocations are made for maintenance and it is difficult to maintain roads. Besides roads, lack of electrification, water supply, good ports and airport facilities, and regular shipping were identified as major infrastructural BTT for outer islands. This is in line with the results of the prioritization exercise conducted by the VISIP. Whilst AusAID and the EU have projects in place to tackle electrification needs in outer islands NZAID and ADB is in the process of funding a major program of inter-island shipping. The provision of regular shipping services to the islands was felt as crucial to provide the connectivity necessary to transport people and goods from one island to another but more importantly to bring goods to Port Vila and Santo for exports. Effective and efficient shipping services would require the building of jetties, VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 23 | wharves and storage facilities. A recent study by UNECSAP (2011) for the Asia- Pacific region showed that about 25% of the changes in non-tariff trade costs are explained by the ‘line shipping index’7. Given Vanuatu’s geographical location and lack of good connectivity, attention and priority on improving shipping services and port facilities will help reducing trade costs and hence boosting exports and reducing costs of imports. The NZAID inter-island shipping program is expected to address key BTT concerning inter-island shipping – the program will support shipping services to routes considered uneconomical, build jetties, rehabilitate wharves, and build an inter-island terminal in Port Vila. A BTT that NZAID won’t be able to address concerns the reservation of inter-island shipping services below 80 tons to Ni-Vanuatu – a provision which appears to discourage the establishment of a healthy and transparent inter-island shipping service, and to create opportunities for rent-seeking. The TPF recommends this barrier to be removed by liberalizing inter-islands shipping services through an amendment to the Reserve List under the VIPA Act. Stakeholders were pleased with the progress being made in the provision of telecommunications services. On the other hand it was felt that underlying infrastructures for internet are still inadequate. The lack of provision of broad-band internet services still poses serious difficulties for the development of existing and prospective businesses in all economic sectors and this will have to be addressed urgently by the implementation of Broadband Submarine Cable project. 5.2 Business Environment Vanuatu ranks 76th out of 183 countries in respect to the World Bank 2012 Ease of Doing Business index. Whilst this suggests that Vanuatu’s business environment is relatively friendly, a closer look to the index components reveals areas for further improvement, and indirectly highlights a number of BTT:

1. Time to Start a Business (complex bureaucracy)

2. Getting Electricity (lack of infrastructures and competition)

3. Registering Property (land issues)

4. Trading Across Borders (customs procedures) 7 The index is calculated based With the exception of complex bureaucracy, all the above BTT clearly on five components (a) number of emerged during national consultations. Since infrastructures have already ships; (b) the container carrying capacity in 20 foot equivalent units been addressed, this section will focus on land issues, lack of competition, of those ships; (c) the number and customs procedures. The TPF understands that significant reforms to of companies; (d) the number of services; and (e) the maximum streamline bureaucratic producers for the purpose of starting a business were ship size, always referring to ships implemented in 2011 and more are expected in 2012. These reforms will be that are deployed to provide liner shipping services to an economy’s reflected in future editions of the Ease of Doing Business report. Bureaucratic port(s) UNESCAP (2011). procedures are therefore no longer deemed to represent a binding BTT. CHAPTER 05 5.2.1 Land Issues | 24 Land issues in Vanuatu have always attracted attention from investors and donors. While this represents a binding constraint for the attraction of domestic and foreign investments, Vanuatu has so far managed to maintain a positive investment climate thanks to its very friendly tax regime and a favorable macroeconomic management. According to the Vanuatu Investment Promotion Authority (VIPA) which was established in 1998, the difficulty of securing leases in a timely manner delays and sometimes stops investment in the country. The VIPA also believes that land availability in around Port Vila and in Luganville will become a major issue in the future. The Department of Lands felt that there should be a better coordination between different arms of the government dealing with land issues - Department of Lands, Department of Provincial Affairs, and Land Tribunal all play a role in land matters. The key BTT which emerged in respect to land are summarized below: 1 Lack of a zoning policy – customary ownership appears to prevent zoning from being implemented given the ultimate right of custom owners to decide over the use of their land. It is understood that the Mama Graon Project will help the Government to address the issue of zoning. Lack of zoning was indicated as a binding BTT by the Ministry of Agriculture, Quarantine, Forestry and Fishery (MAQFF) and by the Department of Tourism; 2 Difficulties in using the land as a collateral to secure a bank loan, in particular in the outer islands, due to lack of certainty over land values; and 3 Difficulties in leasing land for the purpose of foreign investments when this involves the creation of a new lease, due to uncertainties/litigation over land ownership. The TPF urgently recommends that land issues are urgently addressed via a comprehensive program of land registration and evaluation, and the introduction of legal reforms necessary to implement land zoning. 5.2.2 Lack of Competition Policy/Law/Authority While Vanuatu’s taxation structure makes the country very attractive, limitations to competition are still distorting economic efficiency. Lack of competition can be the result of explicit political directions or can simply be due to the lack of appropriate controls and sanctioning mechanisms in sectors which are theoretically open to competition (wholesale/retail trade, financial and other business services, domestic air transport, etc.). As for explicit limitations, whilst the protection of some economic activities where Ni-Vanuatu business have real potential can be justified on economic grounds (for example small tourism bungalows), it is plain that other restrictions have the potential to damage the country’s competitiveness and its ability to growth (inter- island shipping, stevedoring, etc.). As for de-facto limitations, these should be tacked without hesitation. In this context, the majority of stakeholders strongly felt that the drafting of a competition policy and law, and the establishment of a competition authority VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 25 | should be given priority. The main task of a competition authority would be that of enforcing competition in those sectors subject to de-facto limitations. It could also provide technical advice to the Government and generate public awareness on the implications of breaking explicit limitations which still exist in the country. 5.2.3 Customs Procedures and Stevedoring The ability trade across borders can be negatively affected by time and cost issues. Time issues mainly fall under the remit of Vanuatu’s Department of Customs and Inland Revenues (DCIR). Consultations with the DCIR revealed that biding BTT are currently affecting import procedures, whilst no particular problems were detected for export procedures. The key BTT identified by DCIR on the import side was the lack of training/certification systems for pre-clearance agents and inadequate port infrastructures for inspection. Interestingly, it was noted that prospective Free Trade Agreements (FTA) might have the potential to delay customs procedures by introducing provisions such as advance ruling, issuance of Rules of Origin (ROO) certificates and ROO administration, and penalties for administrative errors. Cost issues appear to be primarily affected by contractual arrangements in respect to stevedoring. Stevedoring services are currently operating under contractual arrangements which have pushed the costs to very high levels. The Vanuatu government should seriously consider renegotiating stevedoring concessions. Donor Partners could usefully support the Government in this respect through the provision of technical advice and adjustment funds. 5.3 Exchange Rate and Interest Rate Spread Some stakeholders mentioned that the current exchange rate policy is acting as a BTT. A country’s exchange rate can support or hinder its exports and have an impact on the price of imports. An overvalued exchange rate could mean cheaper imports and may help exports of goods which have significant import contents. On the other hand, overvaluation might reduce export competitiveness. Vanuatu’s exchange rate is pegged to an undisclosed basket of currencies of Vanuatu’s major trading partners. The 2011 International Monetary Fund Article IV report highlighted that Vanuatu’s exchange rate might be slightly overvalued. This aspect might deserve further consideration from the Reserve Bank of Vanuatu (RBV) and the MFEM. There are other issues that the RBV pays attention to ensure that an enabling environment is created to support investments. These include a close watch on the interest rate level and the loans-deposits interest spread. Despite seeing improvements in the interest rate spread since around 2000, this variable still appears be too high and not fully justified in the light of macro-economic fundamentals. As of the September 2011 the spread was approximately 8 percent. CHAPTER 05 5.4 Sanitary and Phytosanitary Issues and Technical Barriers to Trade | 26 Inadequate facilities and capacity in dealing with Sanitary and Phytosanitary (SPS) issues and with Technical Barriers to Trade (TBT, such as Standards & Conformance, Quality Assurance, etc.) can delay exportation, increase its costs, and even prohibit exports. SPS/TBT issues appear to represent a problematic area for Vanuatu which will necessitate substantial resources. It was noted that a comprehensive SPS/TBT policy is currently missing in Vanuatu. Stakeholders commented that an SPS/TBT policy would be necessary to clearly allocate responsibilities amongst the entities playing a role in this area8, identify and cost missing facilities etc. On a positive note, the Department of Quarantine is currently working on a Bio-Security Bill which, based on a regional template, will combine and streamline the existing pieces of legislation under the Department and is expected to facilitate exports. The Department of Quarantine pointed to a series of missing post-harvesting facilities to ensure that produce is not wasted and damaged, including facilities for bio-treatment (fumigation), inspection facilities (collection points for checking and certifying), quarantine laboratories (to test for pest and diseases). The Food Technology Development Centre currently lacks a food laboratory (to test food safety) as is therefore prevented from undertaking the very activity that justified its establishment. At institutional level, clear indications emerged about the need to implement the Act establishing a Chamber of Agriculture and/or strengthen existing intermediate organizations. This would allow Government authorities to structurally engage farmers on SPS/TBT issues, something which is currently very difficult. This message was widely supported by all Departments falling under the umbrella of the MAQFF. The Vanuatu Commodity Marketing Board (VCMB) also emerged as BTT in discussion with SPS/TBT authorities. The VCMB appears to simply duplicate functions currently undertaken by the Department of Quarantine with the result of increasing costs and reducing competitiveness of Vanuatu’s commodities. It was also revealed that the Department of Quarantine has been successful in negotiating a number of export protocols with New Zealand. These products included eggplants, sweet corn and pineapple. However, over the last four years no exports were recorded for these products. The issue of lack of production needs to be addressed. Request for market access/negotiations of export protocols must be better informed aligned with supply capacity. 5.5 Lack of Productive Capacity National consultations suggested that over the past decade policy interventions to increase supply capacity of Vanuatu’s goods were somewhat neglected. Data presented in Figure 3.1 for exports of cocoa beans and meat (increasing sale prices coupled with decreasing quantities sold) are there to remind us that trade facilitation cannot be successful in absence of something to trade. The extension services directly provided by the Department of Agriculture and Rural Development 8 Department of Quarantine, (DARD) are necessarily limited given its small operational budget. Enhanced Department of Heath, Department of Fisheries, efforts are underway by both the Vanuatu Government and Development Partners Vanuatu Food Technology to provide resources and assistance to increase production. However, in the light Development Centre VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 27 | of Aid for Trade data (chapter 6), funds do not appear adequate to reverse current downward trends. Both the DARD and the Department of Ni-Vanuatu Businesses see cooperatives as the best way forward to organize small farmers, provide training and extension services, and increase production. Given the strong linkage between agricultural production, improved livelihoods in outer islands, opportunities for value addition in areas of comparative advantage, and export performance, it is crucial to intensify efforts to increase agricultural production. The TPF agrees with the PSPSR that high-value and strategically important sectors and agricultural products for which Vanuatu has a comparative advantage should be prioritized including fish, coconut, cocoa, kava, meat, timber, sandalwood, root crops, and coffee. 5.6 Education and Labor Force Education and training of appropriate workforce will be crucial for enhancing exports, growth and employment. Technical and vocational skills will need emphasis. Vanuatu has already achieved some successes in this area, for example in the tourism industry. However, much still needs to be done. Despite the many educational policies in place, consultations revealed that the Government still lacks policy tools to identify its human resources needs. The Ministry of Education sees itself as the overall institution responsible for delivering the labor force of the future. It recognizes the need to coordinate this role with other departments and institutions such as the Vanuatu National Training Council (VNTC). Currently the Ministry of Education is working on implementing a National Curriculum Statement that covers trade and business considerations. In addition, the development of a National Qualification Framework by the VNTC should facilitate greater participation to the workforce including from individuals in the informal sector. At present Vanuatu’s school system has a significant number of untrained teachers and major efforts will be needed to fill this gap. The Ministry acknowledged that lack of properly trained teachers remains a key BTT in particular in areas such as Accounting, Economics, ICT, and Science. Vanuatu still needs to carefully assess its labor demand and then match it with what is being done in the schools in terms of curriculum, teachers and facilities. It will have to assess its population growth in light of its new population policy and then work out the numbers of primary and secondary schools and teachers it would need. Various Development Partners such as the NZAID, AusAID, and UNICEF have been actively involved in funding education, in particular at the primary level. The role of the Vanuatu National Training Council is important in supporting the development of technical and vocational training in Vanuatu. Their current work is guided by the VNTC Act. The VNTC has developed a national Technical and Vocational Education and Training (TVET) policy which provides direction for the management of the TVET system. The key BTT in the TVET sector appear to be:

1. Lack of tools to understand skills which are in high-demand in the labor market CHAPTER 05

2. Lack of capacity of training institution to deliver high-quality training and the | 28 right quantity. Most institutions currently deliver course at certificate 1 and 2 levels only. The VNTC is trying to overcome this limitation by piloting the introduction of vocational courses in secondary schools (from year 7). This could also help students who might be dropping out before they are ready for formal training in tertiary educational institutions.

3. Lack of career counseling It was also revealed that Vanuatu lacks a national language policy which if developed could help the country’s international attractiveness for trade and investment. About 40% of the population speak French but are not very fluent in reading or writing. It was suggested that a careful language policy to promote both English and French as international languages could provide Vanuatu with a competitive edge to trade with French territories in the Pacific and also to attract investment. Mauritius in the Indian Ocean can be used as an example to explore this option further. There is a strong feeling within the MoE that lack of coordination in the tertiary education system represents a binding BTT. Lack of coordination appears to be due to the lack of a centralized system to coordinate all the educational/training activities in the country. It was suggested that all different educational/training institutes should be amalgamated into a Vanuatu National University. The Fijian and Samoan models of amalgamation may provide examples of legislative framework which could be used to create such an entity. 5.7 Trade Policy, Trade Legislation, Trade Institutions All national stakeholders welcomed the formulation of the TPF. It was felt that a policy document coordinating trade-related aspects of sectoral policies and establishing a national consensus on the high-level priorities to boost exports was long overdue. It was also stressed that the priorities established by the TPF should guide the conduct of trade negotiations by the Department of External Trade (DET). Stakeholders also welcomed DET’s plans to re-convene the National Trade and Development Committee (NTDC) as the high-level inter-ministerial decision- making body on trade policy. The drafting of a Trade Act was seen by many stakeholders and the next logical step following approval of the TPF. It was felt that a Trade Act should formally allocate responsibilities for Trade Agreements under the Ministry of Trade, Commerce, Industry, and Tourism (MTCIT), propose changes to the ownership of some trade- related Acts which are currently under the remit of other Ministries and give legal status to the NTDC. Stakeholders did not see any problem with the current institutional setting seeing the DET under the portfolio of the MTCIT. It was noted that each option present advantages and disadvantages. It was felt that the best way forward to maximize advantages and minimize disadvantages of the current institutional setting is that good working relations are maintained between the MTIC and the Ministry of Foreign Affairs. The TPF does not recommend any change to the current institutional setting. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 29 | 5.8 Conclusions Extensive national consultations revealed a number of key BTT. These relate to infrastructures, business environment, SPS/TBT, productive capacity and education/training. Vanuatu needs to tackle those barriers if is to find its way out of poverty and into development by boosting exports. CHAPTER 05 | 30 CHAPTER 06 | AID FOR TRADE Aid for Trade (AfT) represents one of the main tools available to the Vanuatu Government to address BTT. The AfT initiative was launched at the 2005 WTO Ministerial Conference in Hong Kong. This chapter briefly reviews AfT performance in Vanuatu using data from the Organization for Economic Cooperation and Development (OECD). Aid for Trade is here defined according to OECD/WTO as Official Development Assistance (ODA) interventions whose purpose-code falls under one of the following categories9:

1. Enhance Trade-Related Infrastructure

2. Develop Productive Capacity for Trade

3. Trade Policy and Regulations

4. Promote Trade-Related Adjustments Aid-for-Trade allocated to Vanuatu was broadly aligned with Vanuatu’s comparative advantages and with the need to break Barriers to Trade. 9 For further information on 6.1 Aid for Trade in Vanuatu the specific AfT components see: http://www.oecd.orgdocument/ 21/0,3746,en_2649_34665_4323035 Before looking at AfT it may be useful to briefly observe trends of total ODA. 7_1_1_1_1,00.html 10 It is important to note that Table 6.1 illustrates dynamics for ODA at constant 2005 prices10. OECD data presented in Tables 6.1, 6.2, and 6.3 do not report Over the last decade ODA disbursements increased at a rate of 11% from around the substantial aid flows from USD 40 million in 2002 to around USD 100 million in 2010. Looking at shares and China as well as aid from multi-lateral donors. growth rates it can be said Australia and New Zealand’s commitments to support 11 Consultation with France reveals that some interventions Vanuatu remained unchanged over this period, whilst US and Japan increased may not have been captured their commitments. Support from France11 and the EU steadily declined. by OECD statistics Table 6.1 ODA DISBURSEMENTS, MILLION USD AT 2005 PRICES Source: OECD (2012) New Year Australia USA Japan France EU Others Total Zealand 2002 19 1 5 0 8 7 0 41 2003 24 1 6 3 4 5 0 44 2004 24 2 5 4 5 4 0 45 2005 23 2 5 4 3 7 0 44 2006 25 3 7 5 7 9 0 56 2007 22 2 7 11 12 5 0 59 2008 25 26 10 15 11 4 0 92 2009 40 23 15 13 7 3 1 102 2010 45 19 11 15 4 2 0 97 Average Growth Rate 12 40 9 61 -8 -13 4 11 Average Share 43 14 12 12 11 8 0 100 VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 31 | Table 6.2 presents figures on AfT over the period 2000-2009. AfT as a percentage of total ODA steadily increased over the last decade, from 14% in 2002 to 46% in 2009. Whilst the concentration of Japanese and US funds on infrastructural projects explains most of this trend, a positive contribution was also provided by the increased focus of Australian and New Zealand funds towards AfT initiatives. Table 6.2 AFT DISBURSEMENTS BY DONORS, MILLION USD AT 2005 PRICES Source: OECD (2012) Share of Year USA Japan France Australia New Zealand EU Total ODA 2002 0.0 0.0 4.5 0.2 0.2 0.6 5.5 13.6 2003 0.0 1.1 1.2 0.3 0.6 0.8 4.0 9.1 2005 0.0 2.1 0.4 0.3 0.5 2.6 5.8 13.3 2006 0.0 1.3 1.4 0.9 0.6 2.2 6.5 11.6 2007 0.1 5.3 7.1 1.2 0.3 2.0 16.0 27.1 2008 24.2 11.7 7.0 1.3 1.6 0.5 46.3 50.2 2009 18.4 10.2 0.3 10.2 7.3 0.3 46.8 46.1 Average Share 31 25 17 11 8 7 100 .. Table 6.3 illustrates AfT disbursements categorized according to their purpose- code. The table provides useful indications about the areas which were most impacted by Donor Partners’ interventions. Table 6.3 AFT DISBURSEMENTS BY PURPOSE, MILLION USD AT 2005 PRICES Source: OECD (2012) Av. Av. PC Descriptions 2002 2003 2004 2005 2006 2007 2008 2009 Growth Share Rate 21 Transport 2.7 1.7 3.8 2.2 1.2 2.9 32.0 36.8 45 61 22 Communications 0.8 0.2 0.2 0.4 0.3 1.4 1.5 6.3 34 8 23 Energy 0.8 0.3 0.2 0.0 0.2 2.9 9.1 1.4 8 11 24 Financial Sector 0.0 0.0 0.0 0.4 0.0 0.0 0.0 0.1 16 0 25 Business Support 0.0 0.0 0.2 0.7 0.3 0.2 0.3 0.7 48 2 31 Primary Sector 1.0 1.6 0.9 1.5 2.1 6.5 2.7 1.0 1 13 32 Manufacturing & Mining 0.0 0.1 0.0 0.4 0.3 0.8 0.2 0.0 -2 1 33.1 Tourism Policy 0.1 0.0 0.4 0.9 1.3 1.2 0.5 0.4 18 4 33.2 Trade Policy/Reg./Adjust. 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.1 31 0 Grand Total 5.5 4.0 5.7 6.5 5.8 16.0 46.3 46.8 36 100 CHAPTER 06 The OECD database shows that over the period 2002-2009, 80% of AfT was allocated | 32 to infrastructural projects, in particular transport-related infrastructures (60% of total funds). Productive sectors received the remaining 20%, with agriculture and tourism representing the major beneficiaries (14% and 4% respectively). Service sectors other than tourism (PC 25 and 31) received a very limited amount of funds. This is pretty worrying given that the combined export earnings from these sectors is equal to the whole export earnings generated by goods. Funds allocated to trade policies, regulations and adjustments were also very limited12. 6.2 Aid-for-Trade and Barriers to Trade The aggregate picture provided by Table 6.3 suggests that AfT allocated to Vanuatu was broadly aligned with Vanuatu’s comparative advantages and with the need to break Barriers to Trade. In order for alignment to be improved, the TPF recommends that support to tertiary productive sectors (services) should not only be limited to tourism. A more disaggregated analysis of the Purpose Codes can also be helpful to refine the judgment and identify further areas for improvement. As Vanuatu currently lacks monitoring and evaluation systems able to verify the outcomes of AfT interventions, the analysis must implicitly assume that all projects were successfully implemented. The key findings of the Purpose Code analysis can be summarized as follows: 1 For nearly all the productive sectors the Purpose Code “sectoral policy and administration management” attracted continuous and substantial support. This resulted in a number of sectoral policies which have been useful to identify development needs and recommend tailored interventions. Donor Partners should now be encouraged to support any measures to avoid unnecessary policy inflation and focus their assistance on supporting the implementation of recommended interventions for the productive sectors. 2 None of the funds accruing to agriculture have been directed towards enhancing productive capacity of either food or industrial/export crops. As lack of agricultural supply capacity represents one of the key BTT it is strongly recommended that future Donor Partners’ assistance be geared towards enhancing capacity in agriculture. 3 Support for agro-industry is absent. Given Vanuatu’s comparative advantage in this area it is essential that agro-industry projects be urgently developed and supported. 12 It is noted that some 4 Despite continuous support to “fishing policy and administration funds for trade policies/ regulations/adjustments management”, the sector does not appear to have benefited to a substantial were allocated to Vanuatu by degree. AfT to the fishery sector should probably be reviewed and new multilateral organizations or channeled through regional interventions devised to achieve a sustainable contribution of Vanuatu’s organizations. As OECD fisheries to the country’s economic growth. data for Vanuatu cannot capture multilateral/regional 5 Support to financial intermediaries (formal/informal) has been very limited. funding mechanisms, figures presented in table 6.3 for PC Enhanced forms of intervention should be considered given that access to 33.2 should be considered as finance was identified by stakeholders as an important BTT. conservative estimates. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 33 | 6 Support to privatisation/de-monopolisation initiatives is absent and should be considered, may be in the form of a compensation fund, in the light of the high costs that the Government would be likely to face if it decided to terminate a monopoly concessions before their expiry date. 7 Donors Partners’ support on infrastructures has so far privileged road transport whilst support to air/sea transport and telecommunications has been fairly limited. Whilst it is recommended that donors increase their focus on addressing the most binding constraints in the relatively neglected areas, it is understood that this is already happening to a certain extent and that ambitious projects on inter-island shipping, airports upgrading, and underwater cabling are being considered by the Government, Donor Partners, as well as private investors. 8 Donors’ interventions in power generation have exclusively focused on renewable sources, which is in line with the national energy road-map and the broader climate change agenda. Donors’ subsidization of renewables is essential given the relatively high production cost of these sources compared to more traditional ones. Whilst Aid-for-Trade has so far privileged infrastructural projects it is recommended that Donor Partners positively consider the possibility of providing additional funds to the macro-area of productive sectors (goods and services), an area which hosts a significant number of Barriers to Trade. 6.3 Conclusions Consultation with Development Partners revealed significant interest in the development of Vanuatu. Over the last decade Donor Partners came to increasingly appreciate the importance of eliminating BTT to support sustainable development. This is demonstrated by the fact that the steady increase in total ODA was mostly due to additional AfT funds. Whilst AfT has so far privileged infrastructural projects it is recommended that Donor Partners positively consider the possibility of providing additional funds to the macro- area of productive sectors (goods and services), an area which hosts a significant number of BTT. The recent decision by the Vanuatu Council of Ministries to create an AfT Monitoring and Evaluation (M&E) system to track and coordinate Aid for Trade initiatives appears to go in the right direction to improve AfT effectiveness. The M&E system, to be managed by the DET in close cooperation with the Prime Minister’s Office Aid Coordination Unit, could also form the basis for the draft of a national AfT policy, to be developed taking into account the forthcoming update of the Pacific AfT strategy. All Development Partners with one possible exception indicated their willingness to take part as Observers to re-convened National Trade and Development Committee (NTDC). It is believed that donor participation could facilitate the development and funding of clear plans to address BTT. Participation in the NTDC could also facilitate enhanced coordination. This is of particular importance since Donor Partners’ coordination on productive sectors appears to be weaker compared to other areas such as health and education. CHAPTER 06 | 34 CHAPTER 07 | TRADE NEGOTIATIONS 7.1 Strategic Directions for Trade Negotiations It is important to understand that small developing economies such as Vanuatu can benefit from integrating fully within the Pacific region and beyond. While trade facilitation begins at home, and Vanuatu has a lot to achieve as pointed out in the chapter on BTT, the country can further benefit from being part of multilateral, regional and bilateral trade agreements and economic partnerships. It is evident that there is now a real risk that the World Trade Organization (WTO) Doha Round of negotiations may not be concluded in the near future. The immediate trade future for developing economies in the Pacific including Vanuatu will therefore rest on how they negotiate regional and bilateral trade agreements. Considerations of preference erosion also justify the need to size momentum through bilateral/regional trade agreements. Trade negotiations are a complex tool to achieve a straightforward objective: boosting the domestic economy by facilitating specialization in areas of comparative advantage. Trade negotiations are a complex tool to achieve a straightforward objective: boosting the domestic economy by facilitating specialization in areas of comparative advantage. An approximate way to identify areas of comparative advantage is to simply look at exports – if a country is exporting a certain good/service this indicates that conditions must exist for that good/service to be internationally competitive. The analysis undertaken in the previous chapters suggests that likely comparative advantages for Vanuatu lie in the following areas:

1. Tourism

2. Financial/Business/Telecommunication services

3. Services provided by overseas laborers

4. Primary products

5. Manufacturing products obtained from primary products Evidence also indicates that stronger comparative advantages exist in services (80% of Vanuatu exports) compared to goods (20% of Vanuatu exports). A sensible policy for Vanuatu’s negotiators is therefore using the tools provided by trade agreements to increase exports in these areas. The most challenging aspect in this respect lies in the fact that the country’s comparative advantages mostly lie in the services sector. It is true that benefits from services liberalization can be huge. An illustration on how services liberalization can encourage greater competition and efficiencies is provided by the Airspace Services Agreement between Australia, New Zealand and Vanuatu, which represents one of the key contributors to Vanuatu’s growth in the tourism sector. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 35 | However, it is also true that formulating services proposals is generally considered to be more difficult than formulating goods proposals: merchandise trade enjoys some statistical basis, a clear measurement of BTT (at least for tariffs, less so for non-tariff barriers) and a long history of negotiations at the global and regional level. Even for larger and more developed economies, however, services negotiations are relatively new, the measurement of BTT is far more challenging, and the balance of concessions is more difficult to assess. It is therefore clear that securing tangible benefits from services negotiations will require significant investment in time, research, and sector-specific analysis. The Vanuatu’s TPF identifies some possible areas where Technical and Financial Assistance could be sought in exchange for Vanuatu’s commitments in the services sector:

1. De-Monopolization Commitments vs. Assistance to negotiate the breaking monopolies and compensating former monopolists;

2. Commitments to establish Competition Laws/Authority vs. Assistance to set up and operate a competition regime;

3. Commitments to services liberalization;

4. Reciprocal commitments on labor mobility;

5. Commitments to facilitate foreign investments, under the understanding that any such commitments should only be taken just upon careful assessment of potential costs and benefits13; and

6. Assistance on training. This type of assistance, when coupled with commitments to facilitate foreign investments, can be crucial to boost Vanuatu’s trade competiveness. With approximately 4,000 school leavers graduating from secondary schools in Vanuatu every year, the demand for educational services is high. Vanuatu needs to add skills and re-skill its human capital into areas where job potentials are high, such as for work in the transportation, insurance and banking, and real estate. If FTAs stimulate foreign direct investments in offshore educational institutions and partnership agreements between Vanuatu’s education providers and those in other Parties, access to quality educational services will be a distinct possibility. This will ensure timely production of skilled human resources for key growth sectors and will add significantly to Vanuatu’s trade and investment profile. Vanuatu currently lacks a negotiating strategy on services. To take into account the importance of Vanuatu’s trade in services the TPF recommends that such a strategy be urgently drafted to assist trade negotiators. A thorough understanding of the regulatory framework and potential gaps will need to inform the negotiating strategy: as illustrated above, negotiating trade in services should not be narrowly defined as negotiating which services to liberalize but also negotiating how trade in services can better be developed through assistance for undertaking key reforms. On the goods side, Vanuatu will have an interest in using negotiations to break BTT related to Customs and SPS/TBT issues, and in securing a framework of Rules of Origin (ROO) which is adequate to its processing capabilities. Tariff 13 For example, countries liberalization should be pursued up to the extent allowed by fiscal considerations. such as Australia have Fiscal stress should be avoided by negotiating adjustment funds and technical/ adopted policies of not signing up to Bilateral financial assistance to reform the tax system and improve collection of domestic Investment Treaties due taxes. Protection should be considered for manufacturing products which are to the risks of inflated compensations being paid to obtained from primary products and that are starting to penetrate foreign foreign investors. markets – the truly infant industries. CHAPTER 07 Country consultations revealed that small scale enterprises claim to face significant | 36 foreign competition and that the reduction in tariffs could only compound this problem, generate closures and job losses. The TPF takes the view that this concern is probably overstated. Given the limited nature of non-infant manufacturing in Vanuatu, the net effect of tariff reductions will be relatively small. The gains from competition, through cheaper prices for consumers and cheaper inputs for producers, should outweigh the loss due to a few businesses closures whilst at the same time improve Vanuatu’s business environment to the benefit of sectors where the country enjoys comparative advantages. On the other hand, given the limited non-infant manufacturing base in Vanuatu, it is also true that lack of tariff liberalization for non-infants will not be able to damage the country to a great extent. When engaging with developed countries, Vanuatu’s negotiating team will also be tasked to secure additional AfT. The BTT indentified in Chapter 5 and the recommendations on AfT provided in Chapter 6 can lay the foundations for the development of a national AfT strategy and monitoring/evaluation system that Department of External Trade (DET) negotiators can use as the basis to secure additional AfT in the context of trade negotiations. 7.2 Current Negotiations and Future Opportunities Vanuatu is now a WTO member. Joining the WTO gives Vanuatu a seat on the international body establishing trade rules – this is an important advantage as all the Free Trade Agreements (FTA) negotiated by Vanuatu inevitably reflect WTO disciplines. The major challenge ahead for Vanuatu will now be that of devising a comprehensive WTO negotiating strategy, establishing a discrete set of negotiating priorities, building international alliances beyond the Pacific region, and using those alliances to achieve its priorities. The careful drafting of WTO post-accession strategy will also be crucial to implement WTO obligations and benefit from WTO rights – this is true also for other trade arrangement that Vanuatu is currently part of, such as the MSG. The FTA involving Vanuatu are presented in Table 7.1 FTA Coverage Status Table 7.1

1. Trade in Goods Melanesia Spearhead Group 1. Concluded (under review) FTA INVOLVING

2. Trade in Services (MSG) FTA

3. Labor Mobility

2. Concluded VANUATU Source: DET (2012) Economic Partnership Note: (X) = except for tariff

1. Trade in Goods 1. Under negotiations liberalization Agreement (EPA)

1. Trade in Goods 1. Concluded Pacific Islands Countries Trade

2. Trade in Services 2. Under Negotiations Agreement (PICTA)

3. Labor Mobility 3. Under Consideration Pacific Agreement on Closer 1. Trade in Goods 1. Under Negotiations(X) Economic Relations (PACER) 2. Trade in Services 2. Under Consideration Plus 3. Labor Mobility 3. Under Negotiations VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 37 | The MSG FTA is one of the two FTA ratified so far by Vanuatu. The MSG FTA covers Vanuatu, Solomon Islands, Papua New Guinea and Fiji. A progressive schedule of tariff reductions was initiated in 1998 with 100% tariff liberalization envisaged for 2013. Vanuatu and Fiji started to trade under MSG rules without delay and the MSG trade agreement appears to have boosted trade in goods between the two countries. During the period 2002-2009 both Vanuatu exports to Fiji and Fijian exports to Vanuatu increased by around 300%. On average and over the same period Vanuatu exported 7.3% of its goods to Fiji, whilst Fiji exported 7.8% of its goods to Vanuatu. PICTA was ratified by Vanuatu in 2005. Trade with PICTA countries which are not MSG members is negligible given their limited productive and absorptive capacity. Looking at the FTAs under negotiation/consideration, the following remarks appear appropriate:

1. The recently concluded MSG’s arrangement on labor mobility can allow Vanuatu to address some the skill shortages identified during national consultations. Countries such as Fiji and Papua New Guinea are facing shortage of skilled and potentially unskilled labor and Vanuatu may be able to benefit from those shortages.

2. Given the relevance of the EU market to Vanuatu’s exports, incentives are in place for Vanuatu to join an EPA. The option of pulling out of an EPA is less attractive now that Vanuatu stands to lose preferential market access to the EU due to its imminent graduation from Least Developed Country (LDC).

3. PICTA Trade in Services may provide some benefits to Vanuatu. A labor mobility agreement under PICTA could be mutually beneficial given existing labor shortages in some PICTA countries which are not MSG members.

4. PACER Plus can provide significant benefits on the condition that Vanuatu is able to formulate negotiating proposals conducive to the elimination of BTT in the services sector, and to secure a good deal on labor mobility for low- skilled/semi-skilled workers. With surplus labor and lack of employment opportunities in Vanuatu, one of the biggest gains for the country can come from increased labor market access. On trade in goods Vanuatu will benefit for tariff liberalization given Australian and New Zealand’s comparative advantages in this area – Vanuatu already imports 50% of its goods from these two countries. In reducing tariffs, attention should be given to protect fiscal revenues and Vanuatu’s truly infant industries. Vanuatu should seek to secure ROO adequate to its processing capabilities and seek assistance on Customs and SPS/TBT issues. 14 Consideration could Since benefits from an FTAs will be directly proportional to the level of pre- be given as to whether existing trade flows between prospective partners, Vanuatu might also wish the suggested agreements could be better entered into to pursue a series of bilateral trade agreements14 with a discrete number of regionally or sub-regionally. countries which are excluded by current negotiations, and in particular:

1. New Caledonia, one of the key export markets for Vanuatu’s goods and services;

2. Japan, one of the key export markets for Vanuatu’s goods and a market with significant potential for trade in services; and

3. China, one of the biggest import markets for Vanuatu and a market with significant export potential in goods and services. CHAPTER 07 7.3 Conclusions | 38 Trade negotiations have the potential to boost Vanuatu’s exports in areas of comparative advantage. Vanuatu needs to frame negotiating proposals aimed at eliminating key BTT in those areas, in particular on services and labor mobility. On the goods side, offensive interests are more limited but benefits can be achieved if smart concessions on tariff liberalization are coupled with assistance to overcome BTT related to Customs and SPS/TBT issues and support to truly infant industries. Form an organizational point of view the TPF welcomes the recent decision by the Council of Ministries about the leading role that the NTDC should have in coordinating inputs from national stakeholders, building consensus around negotiating priorities and providing clear mandates to DET negotiators. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 39 | CHAPTER 08 | VANUATU’S TRADE CONSTITUTION The Department of External Trade takes the view that the following set of recommendations represents a comprehensive Trade Policy Framework suitable to guide public policy for the years to come. A national consensus around these statements was sough and found via comprehensive national consultations and a national validation workshop. These recommendations represent a comprehensive Trade Policy Framework suitable to guide public policy for the years to come. 8.1 Overarching Recommendations I. The limited size of Vanuatu’s domestic market implies that in order to find its way out of poverty and into development Vanuatu must necessarily export increased quantities of goods and services. In other words, increasing Vanuatu’s export competitiveness represents the key strategy to boost Vanuatu’s development. II. Vanuatu should re-establish a prudent fiscal policy as a precondition for a sustainable export-led economic growth, and improve coordination with monetary policy. 8.2 Sector-specific Recommendations III. To boost exports of goods Vanuatu’s productive capacity for commodities where the country enjoys a comparative advantage must be prioritized. These commodities include fish, coconut, cocoa beans, kava, beef, timber, sandalwood, root crops, and coffee beans. Agricultural expansion will offer job opportunities in the rural areas and provide Vanuatu’s truly infant industries such as essential oils, meal of root crops, coffee, medicaments, food preparations, and art crafts, with the necessary raw materials for mass production. IV. In the context of primary industries the fishery sector is performing below potential. A comprehensive Fisheries Development Policy covering options to further develop opportunities from aquaculture, coastal and oceanic fisheries must urgently be drafted to lay the foundations for the provision of greater benefits to the broad Ni-Vanuatu population. V. Indiscriminate policies of import substitution have substantially failed to achieve any significant result. Tariff protection and duty exemptions for manufacturing businesses without linkages to the primary sector have failed to transform those businesses in leading exporters. Whilst economic considerations can justify protection for Vanuatu’s truly infant industries, protection for non- infants is not recommended. VI. Over the past decade export of services generated foreign exchange earnings which were around five times those generated by of exports of goods. Future growth of Vanuatu’s exports will be mainly based on trade in services. Vanuatu is currently lacking an overarching Services Policy and this should be urgently CHAPTER 08 developed. Vanuatu’s Services Policy will refine strategic options to increase | 40 exports in areas of comparative advantage such as tourism, labor mobility, banking, telecommunications, business and environmental services (including carbon trading). VII. Tourism is currently representing the major engine of export-led growth. Key policy options to further increase export earnings should include: • increase support to Ni-Vanuatu SMEs in particular with the creation of a comprehensive training program for reserved tourism activities; • draft and implement a Zoning Policy; • draft and implement a Traditional Knowledge, Cultural Expressions, and Bio-Diversity Policy which should, inter-alias, identify and stimulate links between tourism and indigenous art/music; • draft and implement a Cruise Ship Policy; • negotiate the opening of new air connections with promising countries of origin, notably in Asia; • create of a comprehensive tourism dataset to guide tourism policy; and • improve value adding for urban tourism, notably through initiatives of waterfront regeneration, broad-based environmental education, and improved linkages with the primary and agro-industry sectors. 8.3 Recommendations to Break Systemic Barriers to Trade VIII. The VISIP prioritization exercise identifies priority infrastructural projects for Vanuatu (see Table 8.1). In addition, a number of additional infrastructural projects are currently being implemented (renewable energy projects in outer islands) or are in the process of being implemented (an inter-island shipping program and a project to upgrade Ifira Port in the capital city). The VISIP priority projects must be staged appropriately and implemented. Amongst the priority projects, the Submarine Broadband Cable has the potential to deliver very significant benefits to Ni-Vanuatu. The budget of Government Departments tasked to maintain infrastructures must increase proportionally to the extension of the infrastructural network. URBAN FOCUS RURAL FOCUS TABLE 8.1 Port Vila & Luganville Urban Series of rural road rehabilitation projects VISIP PRIORITY Development Project INFRASTRUCTURE Bauerfield Airport Improvement Series of provincial water supply projects PROJECTS Source: VISIP prioritization Efate Geothermal Plant tool Submarine Broadband Cable to Fiji Solid Waste Management Projects in Port Vila & Luganville Upgrading of Santo Main Wharf VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 41 | IX. Reservation of inter-island shipping activities appears to discourage the establishment of a healthy and transparent inter-island shipping service, and to create opportunities for rent-seeking. Inter-island shipping should be further liberalized by amending the list of reserved activities under the VIPA Act. X. Land issues must be addressed via a comprehensive program of land registration and evaluation in urban and rural areas, and the introduction of legal reforms necessary to implement land zoning. XI. A Competition Policy and law must be drafted and a Competition Authority established. Vanuatu’s competition authority would be tasked to enforce competition in those sectors which are already liberalized. It could also provide technical advice to the Government and generate public awareness on the implications of introducing competition into new sectors. XII. Customs clearance time must be reduced by establishing a training and certification system for pre-clearance agents and by providing adequate port infrastructures for Customs inspection. XIII. Stevedoring concessions should be revised though negotiations. Donor Partners should support the Government by providing technical advice and adjustment funds. XIV. A comprehensive SPS/TBT policy must be drafted to clearly allocate responsibilities amongst the various entities playing a role in this area, identify and cost missing facilities. The Department of Quarantine must be urgently provided by state-of-the art post-harvest facilities, including facilities for bio- treatment (fumigation), inspection facilities (collection points for checking and certifying), quarantine laboratories (to test for pest and diseases). The Food Technology Development Centre must be equipped with a food laboratory to test food safety and quality and support the development of Standards to ensure conformance and quality assurance. XV. Implement the Act establishing a Chamber of Agriculture and/or strengthen existing intermediate organizations to allow Government authorities to structurally engage farmers on SPS/TBT and agricultural issues. XVI. The VCMB should be liquidated and closed as it simply duplicates functions which are currently undertaken by the Department of Quarantine with the result of increasing costs and reducing competitiveness of Vanuatu’s commodities. XVII. Analytical tools to estimate labor demand and current/prospective supply must be established and regularly updated. This is essential for the successful conduction of Education, TVET and labor policies (including polices on labor mobility). XVIII. Vanuatu’s pool of teachers must be increased and upgraded, in particular in areas such as Accounting, Economics, ICT, and Science subjects. XIX. Vanuatu’s school curriculum must be revised to make it more relevant to the needs of the labor market. A National Qualification Framework must be developed. XX. Assessment of quality and relevance of TVET providers must be improved and the VNTC must be provided sufficient resources to comply with its mandate. XXI. Tertiary education providers should be bundled under the umbrella of a Vanuatu National University. The Fijian and Samoan models of amalgamation may provide examples of legislative framework which could be used to create such an entity. CHAPTER 08 XXII. A careful Language Policy to promote both English and French as national | 42 languages should be explored to provide Vanuatu with a competitive edge to trade with French territories in the Pacific and to attract investments. XXIII. The Department of External Trade must re-convene the National Trade and Development Committee (NTDC) as the high-level inter-ministerial decision- making body on trade policy. XXIV. The drafting of a Vanuatu Trade Act must be pursued as and the next logical step following approval of the TPF. XXV. There is high potential for VIPA/VTO to work very closely with the Department of Foreign Affairs and Vanuatu’s diplomatic missions. Financial resources should be provided to pilot participation of VIPA/VTO in key diplomatic missions XXVI. A VIPA Investment Promotion Strategy Framework is currently missing and should be urgently drafted. National stakeholders agreed that recommendations of the Vanuatu Trade Policy Framework will be used to establish a comprehensive medium-term implementation plan which allocates responsibilities to suitable leading agencies, establishes timelines for delivery, and defines clear performance indicators to track progress towards agreed objectives. 8.4 Recommendations on Aid-for-Trade XXVII. To improve Aid-for-Trade effectiveness: • Donor Partners must avoid unnecessary policy inflation and focus their assistance on supporting the implementation existing policies for the productive sectors. • AfT allocated to Vanuatu must be fully aligned with Vanuatu’s comparative advantages and with the need to break Barriers to Trade. In order for alignment to be improved, support to tertiary productive sectors (services) should not only be limited to tourism. • Support to the primary and secondary productive sectors must also be increased focused towards: o Enhancing productive capacity for either food or industrial/export crops. o Supporting the agro-industry. 8.5 Recommendations on Trade Negotiations XXVIII. Vanuatu should draft a comprehensive WTO negotiating strategy, establishing a discrete set of WTO negotiating priorities, building international alliances beyond the Pacific region, and using those alliances to achieve its priorities. Vanuatu should also draft a WTO post-accession strategy. XXIX. Services negotiations must be prioritized because 80% Vanuatu’s comparative advantages lie in the services sector. Vanuatu currently lacks a negotiating strategy VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 43 | on services. To take into account the importance of Vanuatu’s trade in services the TPF recommends that such a strategy be urgently drafted to assist trade negotiators. The Vanuatu’s TPF tentatively identifies some possible areas where Technical and Financial Assistance could be sought in exchange for Vanuatu’s commitments in the services sector: • De-Monopolization Commitments vs. Assistance to negotiate the breaking monopolies and compensating former monopolists • Commitments to establish Competition Laws/Authority vs. Assistance to set up and operate a competition regime • Commitments to services liberalization • Commitments to facilitate foreign investments • Reciprocal commitments on labor mobility • Assistance on training XXX. On the goods side, Vanuatu must use negotiations to break BTT related to Customs and SPS/TBT issues, and to secure a framework of Rules of Origin (ROO) which is adequate to its processing capabilities. Tariff liberalization should be pursued up to the extent allowed by fiscal considerations. Protection should be considered for manufacturing products which are obtained from primary products and that are starting to penetrate international markets – the truly infant industries. XXXI. Vanuatu must prioritize agreements that can provide significant benefits: • Implementation of the MSG’s arrangements on labor mobility, given labor shortages in countries such as Fiji and Papua New Guinea. • An EPA, given the relevance of the EU market to Vanuatu’s exports and the fact that Vanuatu stands to lose preferential market access to the EU due to its imminent graduation from Least Developed Country (LDC). • A PICTA agreement on labor mobility, given existing labor shortages in some PICTA countries which are not MSG members. • PACER Plus, given the potential benefits arising from the elimination of BTT in the services sector, and from securing a good deal on labor mobility for low-skilled/semi-skilled workers. On trade in goods Vanuatu will benefit for tariff liberalization given Australian and New Zealand’s comparative advantages in this area. In reducing tariffs, attention should be given to protect fiscal revenues and its truly infant industries. Vanuatu should seek to secure ROO adequate to its processing capabilities and seek assistance on Customs and SPS/TBT issues. • Bilateral trade agreements with a discrete number of countries which are excluded by current negotiations, and in particular New Caledonia, Japan, and China. A summary of the Trade Policy Framework recommendations is provided in Table 8.2, which concludes this document. National stakeholders agreed that those recommendations will be used to establish a comprehensive medium- term implementation plan which allocates responsibilities to suitable leading agencies, establishes timelines for delivery, and defines clear performance indicators to track progress towards agreed objectives. The medium-term implementation plan will represent the key strategic tool to manage the workings of the National Trade Development Committee. CHAPTER 08 | 44 Table 8.2 SUMMARY OF TPF RECCOMENDATIONS No. RECCOMENDATIONS OVERARCHING Increasing Vanuatu’s export competitiveness represents the key strategy to boost Vanuatu’s I development Re-establish a prudent (anti-cyclical) fiscal policy and improve coordination with monetary II policy SECTOR-SPECIFIC Expand production for commodities where the country enjoys a comparative advantage such III as fish, coconut, cocoa, kava, beef, timber, sandalwood, root crops, and coffee to provide job opportunities and support Vanuatu’s truly infant industries Draft a comprehensive Fisheries Development Policy to enhance development opportunities IV from coastal and oceanic fisheries and aquaculture V Pursue performance-based import substitution in respect to truly infant industries Draft an overarching Services Policy to increase exports in areas of comparative advantage VI such as tourism, labor mobility, banking, telecommunications, business, and environmental services (including carbon trading) To further develop tourism exports: • boost training for reserved tourism activities • draft a Zoning Policy • draft a Traditional Knowledge, Cultural Expressions, and Bio-Diversity Policy • draft a Cruise Ship Policy VII • negotiate the opening of new air connections with promising countries of origin, notably in Asia; • create of a comprehensive tourism dataset • improve value adding for urban tourism, notably through initiatives of waterfront regeneration, broad-based environmental education, and improved linkages to the primary and agro-industry sectors. BREAKING BARRIERS TO TRADE Implement the VISIP priority projects and increase operational budget of Government Departments tasked to maintain infrastructures proportionally to the extension of the VIII infrastructural network. The Submarine Broadband Cable has the potential to deliver very significant benefits to Ni-Vanuatu Further liberalize inter-island shipping by amending the list of reserved activities under the IX VIPA Act Implement a comprehensive program of land registration and evaluation in urban and rural X areas, and introduce legal reforms necessary to implement land zoning VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 45 | BREAKING BARRIERS TO TRADE cont. XI Draft and implement a Competition Policy and law and establish Competition Authority Establish a training and certification system for pre-clearance agents and provide adequate port XII infrastructures for Customs inspection Revise stevedoring concessions though negotiations. Secure support from Donor Partners via XIII technical advice and adjustment funds Draft a comprehensive SPS/TBT policy allocating responsibilities amongst the various entities, identifying and costing missing facilities. Provide the Department of Quarantine with state-of-the art post-harvest facilities, including facilities for bio-treatment, inspection facilities, and quarantine XIV laboratories. Provide the Food Technology Development Centre with a food laboratory to test food safety and quality and support the development of Standards to ensure conformance and quality assurance Implement the Act establishing a Chamber of Agriculture and/or strengthen existing intermediate XV organizations XVI Liquidate and close the Vanuatu Commodity Marketing Board Establish analytical tools to estimate labor demand and current/prospective supply and ensure XVII regular updating to support the conduction of Education, TVET and labor policies (including labor mobility policies) Increase and upgrade Vanuatu’s pool of teachers, in particular in areas such as Accounting, XVIII Economics, ICT, and Science subjects Revise Vanuatu’s school curriculum to make it more relevant to the needs of the labor market and XIX develop a National Qualification Framework Provide additional resources to the VNTC to improve assessment of quality and relevance of TVET XX providers Bundle tertiary education providers under the umbrella of a Vanuatu National University drawing XXI upon the he Fijian and Samoan models of amalgamation XXII Draft a Language Policy to promote both English and French as national languages Re-convene the National Trade and Development Committee (NTDC) as the high-level inter- XXIII ministerial decision-making body on trade policy XXIV Draft a Vanuatu Trade Act XXV Pilot participation of VIPA/VTO in key diplomatic missions XXVI Draft a VIPA Investment Promotion Strategy Framework CHAPTER 08 | 46 AID FOR TRADE EFFECTIVENESS To improve Aid-for-Trade effectiveness: • Donor Partners must avoid unnecessary policy inflation and focus their assistance on supporting the implementation existing policies for the productive sectors. • Aid for Trade allocated to Vanuatu must be fully aligned with Vanuatu’s comparative advantages and with the need to break Barriers to Trade. In order for alignment to be XXVII improved, support to tertiary productive sectors (services) should not only be limited to tourism • Support to the primary and secondary productive sectors must also be increase and focused towards: o Enhancing productive capacity for either food or industrial/export crops o Supporting the agro-industry TRADE NEGOTIATIONS Draft a comprehensive WTO negotiating strategy to establish a discrete set of WTO XXVIII negotiating priorities, and build international alliances beyond the Pacific region. Draft a WTO post-accession strategy Prioritize services negotiations and draft a negotiating strategy on services. Identify areas where Technical and Financial Assistance could be sought in exchange for Vanuatu’s commitments in the services sector - for example: (i) De-Monopolization Commitments vs. Assistance to negotiate the breaking monopolies and compensating XXIX former monopolists; (ii) Commitments to establish Competition Laws/Authority vs. Assistance to set up and operate a competition regime; (iii) Commitments to services liberalization; (iv) Reciprocal commitments on labor mobility; (v) Commitments to facilitate foreign investments; and (vi) Assistance on training Use goods negotiations to break BTT related to Customs and SPS/TBT issues, and to secure a ROO framework which is adequate to Vanuatu’s processing capabilities. XXX Pursue tariff liberalization up to the extent allowed by fiscal considerations. Protect the truly infant industries Vanuatu must prioritize agreements that can provide significant benefits: • Implementation of the MSG’s arrangements on labor mobility • An EPA XXXI • A PICTA agreement on labor mobility • PACER Plus. Bilateral trade agreements with New Caledonia, Japan, and China. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 47 | APPENDIX A.1 | MERCHANDISE EXPORTS Table A1.1 VANUATU EXPORTS, VT MILLION, HS Code HS Description 2000 2001 2002 2003 0303 Fish, frozen, whole 1053 920 1453 3420 0302 Fish, fresh or chilled, whole 10 3 0 3 0301 Live fish 2 7 9 41 0305 Fish, cured, smoked, fish meal for human consumption... 0 0 0 1 0304 Fish fillets, fish meat, mince except liver, roe 1 1 4 8 2936 Provitamins and vitamins, their derivatives 0 0 5 5 1203 Copra 781 359 217 355 1513 Coconut, palm kernel, babassu oil, fractions, refi... 61 129 424 168 1211 Plants, plant parts for perfumery, pharmacy, etc, 164 239 115 105 1801 Cocoa beans, whole or broken, raw or roasted 188 60 272 329 1212 Locust beans, seaweed, sugar beet, cane, for food 10 11 79 98 0202 Meat of bovine animals, frozen 191 147 76 135 4407 Wood sawn, chipped lengthwise, sliced or peeled 140 64 23 31 3301 Essential oils, resinoids and terpenic by-products 0 0 5 1 2306 Oil-cake other than soya-bean or groundnut 6 7 35 50 4101 Raw hides and skins of bovine, equine animals 30 27 19 28 0201 Meat of bovine animals, fresh or chilled 0 0 0 15 1106 Flour and meal of legumes, roots, tubers, nuts, ci... 0 4 4 2 0307 Molluscs 26 15 7 9 4420 Ornaments of wood, jewel, cutlery caskets and case... 0 12 4 8 0508 Coral, shell, cuttle bone, etc, unworked, and wast... 8 12 8 24 1209 Seed, fruit and spores, for sowing 1 0 3 4 1515 Fixed veg fat, oil, fractions, not chemically modi... 0 1 4 7 2106 Food preparations, nes 0 1 0 0 0901 Coffee, coffee husks and skins and coffee substitu... 0 0 1 0 0206 Edible offal of domestic animals 2 1 0 2 3304 Beauty, make-up and skin care preparations 0 0 6 0 3004 Medicaments, therapeutic, prophylactic use, in dos... 0 1 0 1 0805 Citrus fruit, fresh or dried 0 0 0 0 0904 Pepper (Piper), crushed or ground Capsicum, Piment... 0 2 1 0 Others 410 406 609 535 TOTAL (excl. HS 70 to 90) 3085 2429 3385 5386 TOTAL (excl. HS 3 and 70 to 90) 1994 1483 1913 1904 APPENDIX A.1 | 48 EXCLUDES HS CHAPTERS 70 TO 90 Source: WITS (mirror data) Average Average Average 2004 2005 2006 2007 2008 2009 2010 share share growth rate (fish) (no fish) 12303 14207 19263 20613 20077 13510 19034 33.6 80.8 .. 33 0 0 120 0 225 216 36.6 0.4 .. 53 93 58 22 33 21 36 32.5 0.2 .. 1 0 0 17 30 11 26 61.0 0.1 .. 6 2 41 3 3 33 23 46.5 0.1 .. 8 29 1 6 5 6 9 .. 0.0 .. 982 268 616 690 1205 220 606 -2.5 4.0 22.0 997 1015 312 226 1226 206 527 24.0 3.4 18.5 107 234 319 414 442 417 437 10.3 1.9 10.5 185 170 271 327 248 308 588 12.1 1.9 10.3 293 285 482 334 266 143 5 -5.5 1.3 7.0 126 155 163 148 245 81 128 -3.9 1.0 5.6 87 58 52 44 37 26 27 -15.3 0.4 2.1 50 31 52 76 80 45 52 100.6 0.3 1.4 88 94 18 27 28 0 22 14.0 0.2 1.3 35 41 39 50 38 21 13 -7.7 0.2 1.2 4 53 103 50 44 2 15 .. 0.2 1.0 3 4 1 51 97 25 81 70.3 0.2 1.0 9 14 53 11 9 11 10 -9.3 0.1 0.6 4 7 8 21 20 21 12 38.6 0.1 0.4 5 3 9 15 8 16 9 0.8 0.1 0.4 6 12 27 7 23 6 5 22.5 0.1 0.3 5 7 5 11 2 10 31 65.8 0.1 0.3 1 2 9 16 8 12 16 60.0 0.0 0.2 0 8 47 0 0 1 6 54.9 0.0 0.2 3 8 8 6 14 6 5 8.6 0.0 0.2 1 2 8 7 12 9 4 .. 0.0 0.2 0 11 3 2 0 8 18 49.1 0.0 0.2 1 4 6 3 5 5 4 .. 0.0 0.1 0 0 0 0 0 0 8 52.5 0.0 0.0 758 249 251 415 253 309 217 -6.2 2.8 15.4 16154 17064 22226 23730 24460 15715 22191 21.8 .. .. 3750 2748 2810 2945 4307 1904 2847 3.63 .. .. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 49 | Table A1.2 VANUATU EXPORTS, VT MILLION, TOP 20 DESTINATIONS, DESTINATION 2000 2001 2002 2003 2004 Thailand 3202 6411 11355 27491 105846 Japan 12170 7148 4357 8048 16850 Belgium 4250 1108 893 772 10928 New Caledonia 0 1112 1143 1419 1736 Germany 3695 1520 840 1390 5453 Philippines 0 0 0 0 0 Fiji 0 0 752 940 2928 Singapore 647 338 1835 2382 1616 Australia 360 1614 2349 1229 2012 Mexico 0 0 0 0 1191 USA 765 831 2717 793 905 Malaysia 730 27 610 575 151 France 574 255 1206 1320 1035 New Zealand 377 676 551 316 663 Cuba 0 0 0 0 0 China, Hong Kong SAR 798 690 1104 850 782 United Kingdom 13 72 667 249 508 Other Asia, nes 927 832 174 384 567 Viet Nam 0 0 0 0 0 Netherlands 599 3 532 0 615 APPENDIX A.1 | 50 EXCLUDES HS CHAPTERS 70 TO 90 Source: WITS (mirror data) Average Average 2005 2006 2007 2008 2009 2010 growth rate share 119985 158327 173405 172196 102395 131411 45.0 64.9 15773 29265 33611 30814 25439 57372 16.8 15.5 7673 6668 1779 10255 1378 9 -45.7 2.9 1855 2984 2861 3529 3973 3389 13.2 1.5 3412 1815 552 182 932 2607 6.2 1.4 0 1726 3853 9350 1382 6064 36.9 1.4 2862 4787 3415 2711 2187 .. 16.5 1.3 1148 1320 2377 918 2282 2653 25.7 1.1 3339 2232 1641 1358 277 924 -6.0 1.1 0 6185 2471 0 978 4198 .. 1.0 1091 1008 922 975 1326 1305 5.1 0.8 74 222 862 4157 1789 1515 56.2 0.7 493 605 874 1895 203 1797 24.2 0.7 343 375 1202 1608 573 1608 10.1 0.5 8031 0 0 0 0 0 .. 0.5 503 651 780 316 206 200 -12.9 0.4 1482 852 680 634 538 535 25.0 0.4 184 216 195 10 1012 1726 8.4 0.4 0 0 0 0 6127 0 .. 0.4 523 116 819 336 391 2103 109.7 0.4 VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 51 | Table A1.3 VANUSTU EXPORTS, VT MILLION, TOP 20 DESTINATIONS, DESTINATION 2000 2001 2002 2003 2004 Belgium 425 111 89 77 1093 Japan 398 430 251 282 242 New Caledonia 0 110 114 142 174 Germany 369 152 82 138 545 Philippines 0 0 0 0 0 Fiji 0 0 72 94 288 Singapore 65 33 183 237 161 Australia 34 156 231 104 188 Malaysia 73 3 61 57 15 France 49 23 121 132 103 USA 76 82 145 46 47 New Zealand 38 68 55 32 66 China, Hong Kong SAR 63 56 105 79 74 Netherlands 59 0 53 0 61 Bangladesh 0 0 93 198 129 United Kingdom 1 6 66 25 50 Papua New Guinea 0 27 130 146 199 Thailand 0 5 0 0 4 Other Asia, nes 93 83 17 38 57 APPENDIX A.1 | 52 EXCLUDES HS CHAPTERS 70 TO 90 AND HS CHAPTER 3 Source: WITS (mirror data) Average Average 2005 2006 2007 2008 2009 2010 growth rate share 767 667 178 1025 138 1 -45.7 16.2 201 207 154 263 103 144 -9.7 9.5 186 298 286 353 397 339 13.3 8.5 334 180 52 2 84 247 -3.9 7.8 0 48 385 935 138 606 88.6 7.5 285 479 342 271 219 .. 17.3 7.3 114 132 237 91 153 234 13.7 5.8 322 207 145 125 11 79 8.6 5.7 7 22 86 416 179 151 7.6 3.8 48 60 87 189 20 177 13.6 3.6 59 70 76 83 118 125 5.1 3.3 34 37 120 160 38 125 12.7 2.7 33 58 72 29 20 17 -12.1 2.2 50 11 77 26 29 203 13.2 2.0 0 2 129 0 0 0 .. 2.0 138 78 57 53 37 38 39.6 1.9 0 0 0 0 0 0 .. 1.8 7 63 254 91 3 0 -9.6 1.5 18 22 19 1 11 15 -16.5 1.3 VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 53 | APPENDIX A.2 | MERCHANDISE IMPORTS Table A2.1 VANUATU IMPORTS, VT MILLION, BY HS SECTION HS Section 2002 2003 2004 2005 2006 2007 XVI - Machinery, Appliances, etc. 1502 1356 1719 2014 2684 3168 VI - Products of the Chemicals or Allied 1637 1334 1524 2532 2340 2724 Industries IV - Prepared Food, Beverages, Spirits, 1265 1452 1443 1586 1731 2074 Tobacco XVIII - Optical, Photographic, medical 738 695 940 1286 1834 1827 instruments etc. Section II - Vegetable Products 951 1030 1497 1181 1321 1463 XV - Base Metals and Articles of Base 629 649 881 977 1163 1483 Metal Section XI - Textile and Textile Articles 516 582 652 1004 849 907 Section I - Live Animals; Animal 343 397 422 447 517 627 Products Section V - Mineral Products 333 360 395 462 560 648 Section X - Pulp of Wood, Paper, etc. 230 243 199 260 343 399 Section IX - Wood, Articles of Wood, etc. 244 208 236 274 314 343 Other Sections 1334 1250 1229 1385 1947 1984 TOTAL 9723 9555 11136 13408 15603 17648 Table A2.2 VANUATU IMPORTS, VT MILLION, TOP 5 ORIGINS 2002 2003 2004 2005 2006 Australia 4411 4497 5319 5624 6756 New Zealand 2081 2056 1931 2262 3085 China 298 342 562 708 918 Fiji 621 604 726 847 1108 France 625 551 483 503 779 APPENDIX A.2 | 54 Source: DCIR (2012) Average Average 2008 2009 2010 2011 2008 2009 2010 growth rate share 5052 3783 3181 2737 6.9 17.1 1 -45.7 16.2 2745 3442 2928 2733 5.9 15.1 144 -9.7 9.5 2504 2433 2555 2885 9.6 12.5 339 13.3 8.5 2492 1991 1942 1524 8.4 9.6 247 -3.9 7.8 1938 1930 798 660 -4.0 8.0 606 88.6 7.5 1911 2141 1453 1327 8.6 7.9 .. 17.3 7.3 877 1055 1518 1129 9.1 5.7 234 13.7 5.8 784 786 970 1062 13.4 4.0 79 8.6 5.7 857 746 692 510 4.8 3.5 151 7.6 3.8 623 577 583 545 10.1 2.5 177 13.6 3.6 485 392 398 378 5.0 2.1 125 5.1 3.3 3065 2820 2107 1683 2.6 11.8 125 12.7 2.7 23332 22097 19127 17172 6.5 100.0 17 -12.1 2.2 Source: DCIR (2012) Average Average 2007 2008 2009 2010 2011 growth rate share 6785 8032 8042 7920 7373 5.9 37.1 3931 4061 3946 3693 3426 5.7 17.4 1255 2493 2892 2701 1847 22.5 8.0 1487 2087 2069 2005 2084 14.4 7.8 669 1428 669 594 815 3.0 4.1 VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 55 | APPENDIX A.3 | BILATERAL CONSULTATIONS Table A3.1 LIST OF BILATERAL CONSULTATION MEETINGS No. Date/Time Date/Time Person(s) consulted 01 Tuesday 07 February 10:00 – 11:00 Director 02 Tuesday 14 February 10:00-11:00 Director & DG MTCIT/MNVB 03 Tuesday 14 February 15:00-16:00 Director 04 Wednesday 15 February 08:30-09:30 Director and Senior Officials 05 Wednesday 15 February 10:00-11:00 Senior Representatives 06 Wednesday 15 February 13:30-14:30 Senior Representatives Acting Director, General Manager Food Centre, 07 Wednesday 15 February 15:00-16:00 focal point PHAMA 08 Thursday 16 February 07:30-08:20 Director 09 Thursday 16 February 08:30 – 09:30 DG MAQFF 10 Thursday 16 February 11:30-12:30 Acting Director 11 Thursday 16 February 13:30-14:30 Senior Officials 12 Thursday 16 February 15:00-16:00 Acting Director 13 Friday 17 February 08:30-09:30 Directors & DG Education 14 Friday 17 February 10:00-11:00 Chief Executive Officer 15 Friday 17 February 11:30-12:30 Commissioner 16 Friday 17 February 13:30-14:30 Director 17 Friday 17 February 15:00-16:00 CEO 18 Friday 17 February 16:30-17:30 Acting Director and Senior Officials 19 Monday 20 February 07:30-08:20 Director 20 Monday 20 February 10:00-11:00 Senior Officials 21 Monday 20 February 11:30-12:30 Head and Senior Officials/Second Secretary 22 Monday 20 February 13:30-14:30 Senior Representatives 23 Monday 20 February 15:00-16:00 Deputy Ambassador 24 Monday 20 February 16:30-17:30 Head(s) 25 Wednesday 22 February 07:30-08:20 Head(s) 26 Wednesday 22 February 08:30-09:30 Resident Representative and Senior Officials 27 Wednesday 22 February 13:00-14:00 Acting CTA 28 Wednesday 22 February 14:00-15:00 Director 29 Wednesday 22 February 15:00 – 16:00 Senor Officials 30 Wednesday 22 February 16:30 – 17:30 Director and Senior Officials 31 Wednesday 22 February 17:30 – 18:30 Head(s) 32 Thursday 23 February 09:00 – 10:00 DG, Director Trade 33 Thursday 23 February 10:15 – 11:15 Senior Representative 34 Thursday 23 February 11:30 – 12:30 Acting Director 35 Thursday 23 February 17:30 – 18:30 Team Leader APPENDIX A.3 | 56 Organization Ministry VNSO MFEM Department of External Trade MTCIT Vanuatu Cultural Centre .. Department of Tourism MTCIT Vanuatu Chamber of Commerce MTCIT RBV .. Department of Quarantine and Livestock, & the Food Centre MAQFF Department of Cooperative and Ni-Vanuatu Business MNVB .. MAQFF Department of Forestry MAQFF Department of Customs MFEM Public Works MIPU Department of Education ME Vanuatu National Training Council ME Department of Labor MIA Department of Land ML VIPA ML Department of Finance MFEM Department of Agriculture MAQFF Prime Minister Office PMO AusAID/AUS High Commission .. NZAID .. France .. UN .. EU .. JICA .. OCTA .. Department of Foreign Affairs MFA Energy Unit ML Department of Industry MTCIT ADB/WB/IFC .. MSG .. China .. Department of Environment MIA Vanuatu Overarching Productive Sector Policy Consulting Team .. VANUATU GOVERNMENT TRADE POLICY FRAMEWORK 2012 57 | APPENDIX A.4 | DOCUMENTS REVIEWED/CONSULTED

1. Gay, D. (2005), Baseline Study of the Trade Situation and Business Environment in Vanuatu

2. IFC (2010), Tourism Impediment Diagnostic, State of Play Assessment Report for Vanuatu Kaufmann, A. K., and Mastruzzi, M. (2008), Governance Matters VII: Governance Indicators for 3. 1996-2007, Washington DC, World Bank Institute. Pacific Institute for Public Policy (2009), Maximizing Vanuatu’s exports with a focus on 4. Australian and New Zealand markets

5. Vanuatu Government (2003), Priority Action Agenda 2006-2015

6. Vanuatu Government (2003), Tourism Master Plan 2004-2010

7. Vanuatu Government (2005), National Investment Policy

8. Vanuatu Government (2006), Education Sector Strategy 2007-2016

9. Vanuatu Government (2008), Diagnostic Trade Integration Study

10. Vanuatu Government (2008), Tourism Action Programme

11. Vanuatu Government (2009), Education Road Map

12. Vanuatu Government (2010), Overarching Productive Sector Policy, Scoping Report Vanuatu Government (2010), Technical and Vocational Education and Training (TVET) Policy 13. 2011-2020

14. Vanuatu Government (2010), World Customs Organization Diagnostic Report

15. Vanuatu Government (2011), Current and Future Labor Market Issues in Vanuatu

16. Vanuatu Government (2011), Fiscal Strategy Report 2012, Volume 1

17. Vanuatu Government (2011), Industrial Policies Vanuatu Government (2011), Micro, Small and Medium Enterprise (MSME) Policy and Strategy 18. for Vanuatu

19. Vanuatu Government (2011), National Cooperative Policies and Plan of Action 2011 - 2016

20. Vanuatu Government (2011), National Forestry Policy

21. Vanuatu Government (2011), National Skills Development Strategy

22. Vanuatu Government (2011), Vanuatu ICT Policy (draft)

23. Vanuatu Government (2011), Vanuatu Universal Access Policy

24. Vanuatu Government (2012), National Foreign Policy, Advancing National Interests (draft)

25. Vanuatu Government (2012), National Livestock Framework (draft)

26. Vanuatu Government (2012), National Population Policy Vanuatu Government (2012), Priority Action Agenda, 2011 Update, Re-committing to Reform to 27. Achieve an Educated, Healthy and Wealthy Vanuatu (draft)

28. Vanuatu Government (2012), Vanuatu Infrastructure Strategic Investment Plan (draft) APPENDIX A.4