Trade Policy

The FSM Trade Policy shall promote and facilitate private sector development and foreign directinvestment in priority sectors in order to achieve export-led economic growth and sustainable development, creating employment, improving services, alleviating poverty with the ultimate objective of raising the standards of living in the FSM.

The Federated States of Micronesia (FSM) consists of about 607 small islands with a total land area of about 701.8 square kilometers and an exclusive economic zone of over 1 million square miles (2 589 988 square kilometers). The country is divided into four States namely; Chuuk, Kosrae, Pohnpei and Yap with an estimate population of about 110, 000 people.

2. The FSM economy is mainly an import based aid dependent economy (mainly from the Compact). In 2005, grants contributed about 63% to total revenue compared to 66% in 1995 and the bulk of the money ($131.4 million) in 2005 was spent on current expenditure and very little ($11.4 million) was used on capital expenditure. The overall economic performance from FY 1995 to FY 2006 was very weak and the annual average percent growth was -0, 7%, GDP and real income have actually fallen. The Government has the largest contribution to GDP, followed by wholesale and retail, and subsistence. Trade in agriculture, fisheries and tourism contributes very little to GDP. In order to promote trade and investment, FSM needs to create a conducive environment for investment and private sector development.

3. The main sectors that were identified in the SDP as priority sectors and which will be targeted by the Trade Policy to promote economic growth include agriculture, fisheries and tourism.

4. FSM’s performance in trade has also been very weak. In 2007, the value of merchandise exports from FSM constituted about $16.2 million and imports were about $142.7 million. Food and beverages dominate the import bill representing about $40.1 million of imports in 2007 (30% of total imports). The main import markets are the US, Japan, Guam and Australia. Fish is the major export commodity and it accounted for about 69 % of total exports in 2007. Other products, which used to do well in the export market, include copra, bananas and citrus and recently kava and betel nuts are the main exports. The main export markets are Japan, US, Guam, Commonwealth of Northern Mariana Islands (CNMI), the Republic of the Marshall Islands (RMI) and Hawaii.

5. Services contribute about 77% to GDP but exports of services are very low. The main services export is tourism, but it is still underdeveloped. Another potential source of ‘exports’ is the temporary movement of natural persons abroad. Technical and financial assistance is needed to upgrade the training institutions to develop skills that are needed to turn around the economy and export the surplus skills.

6. FSM will liberalize and upgrade the key service sectors such as telecommunication, financial and transport services amongst other sectors to promote efficiency and reduce the cost of doing business. However, diagnostic studies need to be undertaken prior to liberalization and some regulations need to be put in place to protect public interest.

7. FSM has various trade-related laws regulating trade and investment at the National and State level. FSM will review and introduce new laws relating to taxation, trade facilitation, corporate governance, government procurement, competition, intellectual property, traditional knowledge and genetic resources, environmental laws in order to create a good business environment, which is conducive for promoting sustainable economic growth and development. Tax reform must be prioritised in order to ease the tax burden on the business community and also to minimize revenue loss from participating in trade agreements.

8. The Trade Policy seeks to assist FSM exporters to consolidate existing markets and identify new ones. It will promote inter-state trade, trade with the Freely Associated States (FAS), and nearby markets such as Guam, Saipan, Hawaii and the US mainland.

9. Presently, the US Mainland, Hawaii, CNMI and Guam remain FSM’s key trading partners both in terms of export and import. There will be a need to review existing trade and investment incentives in order to boost exports into those markets and enhance US investment in the FSM.

10. The sub regional market is also an area of interest with export opportunities in RMI and Palau, noting that they already constitute a destination for exports originating from the FSM. In this regard, the Micronesian Trade Committee (MTC) will need to be further strengthened, noting that it may also serve as institutional tool for negotiations with big trading partners.

11. FSM has signed and is in the process of ratifying the Pacific Island Countries Trade Agreement (PICTA). Currently, PICTA is being extended to include trade in services and temporary movement of natural persons and FSM will continue to participate in those negotiations.

12. FSM has access into the Australian and New Zealand market via the South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA), which is a non-reciprocal Agreement. However, market access is hampered by transportation problems and onerous rules of origin, quarantine and phytosanitary requirements. Although FSM is not a signatory to the Pacific Agreement on Closer Economic Relations (PACER) between Forum Island Countries (FICs) and Australia and New Zealand, it is participating together with the other FICs in discussions for PACER Plus. National and State study and consultations are being undertaken to assist the FSM in developing its negotiating strategy and positions with the view to enhance its participation in those negotiations. In addition, FSM will need to consult with the US on whether and how the most favoured nation (MFN) clause in the Amended Compact will be applied.

13. Asia is an important market for FSM, with Japan being the major export market, especially for fish and tourism. FSM should continue to seek additional market access in other Asian countries.

14. FSM together with the other 13 Pacific ACP States is negotiating an Economic Partnership Agreement (EPA) with the European Commission (EC). The fisheries sector has indicated its interest in the EU market and there is merit to explore the potential cost for the FSM to signing the Interim EPA or comprehensive EPA to enable the private sector to benefit from the market access opportunity that has been offered by the EC. However, before signing the EPA, FSM will also need to consult with the US on whether and how the most favoured nation (MFN) clause in the Compact Agreement will be applied.

15. The key objectives of the Trade Policy include: creating an environment which is conducive for investment and private sector development; addressing the supply-side constraints and non-tariff barriers; promoting import substitution and exports of value added goods and services; guiding the nation in trade negotiations and in implementing trade agreements; using the Trade Policy to secure Aid for Trade from FSM’s trading partners and donors; and promoting export-led sustainable economic growth, with the ultimate objective of raising the standards of living in the FSM.

16. In order to achieve the abovementioned objectives, multi-year project proposals, which include measurable indicators, will be prepared based on trade policies detailed in Annex 2. The Trade Policy will be reviewed and monitored annually and necessary changes made to ensure that the objectives are met.

17. This abridged version of the Trade Policy should be read together with Annex 1 which details the key trade policy issues, challenges and opportunities and Annex 2 which identifies the main stakeholders and entities responsible for the implementation, the time frame, and the sources of funding.

18. The key policies outlined in the table below will be pursed in order to promote trade and investment in the identified priority sectors.