Regional agreements, trade cost and flows in the Pacific

Abstract

This paper investigates the effects of regional trade agreements initiated during the last two decades on the trade flows between small island states situated in the South Pacific Ocean. The agreements have contributed to the growth of regional trade flows positively, but to a limited extent due to a significant trade diversion to non-member countries. We argue that the incentive of trade with a large non-member country tends to be more than that with a small regional member because of limited demand, scale and industrial activities. Though the trade barriers have declined substantially in the Pacific, high trade costs due to poor logistics, bureaucratic regulations and weak institutions compared to the neighbours have remained the binding constraints for deriving potential benefits from such agreements. Collective negotiations for external trade and developing common logistics and institutions for facilitating trade among the members would encourage regional trade flow and minimize asymmetric gains among the members.