ECONOMIC SOVEREIGNITY: LESSONS for PNG from the USA-CHINA TRADE WAR

By Charlie Gilichibi, 8th January 2025

The United States and the European Union are currently engaged in an economic war with China, and the question arises: why?

At the core of this conflict is the desire to protect domestic markets and economies from the erosion caused by decades of outsourcing and the resulting dependence on foreign production.

The Root Cause: Outsourcing and Its Consequences

Over the past several decades, many Western companies have outsourced their production to China to benefit from lower labor costs and streamlined manufacturing. While these decisions may have yielded short-term profits, they have also led to significant losses in employment opportunities and capital development in their home countries. This imbalance has caused widespread economic and political discontent, prompting governments in the USA and EU to take corrective measures.

Both the USA and EU are now implementing protective policies to counteract the effects of outsourcing. For example, tariffs on Chinese goods, introduced by former President Trump and continued under President Biden, aim to incentivize domestic production and reduce dependency on Chinese imports. As tensions escalate, this economic rivalry has become a defining characteristic of the global landscape, with the USA prioritizing its economy at all costs.

The Parallel in Papua New Guinea

When we consider Papua New Guinea, a similar phenomenon is occurring, but with a critical difference: here, it is the government itself outsourcing contracts to foreign firms. Just as outsourcing production to China has weakened Western economies, PNG's reliance on foreign firms for government contracts undermines the development of local industries and the retention of capital within the country.

Whether production is outsourced to China or Chinese companies ship their operations to PNG, the impact is fundamentally the same—it destroys local economies. The loss of opportunities for local businesses stifles the growth of domestic industries, deprives PNG citizens of employment, and hinders the circulation of wealth within the country.

The Justification for Foreign Contracts

The only justifiable reason for awarding contracts to foreign entities should be the absence of PNG companies or individuals capable of providing the required services. This stipulation should guide government policies to prioritize local providers and foster the growth of PNG’s private sector.

The Danger of Loan-Tied Foreign Contracts

One of the most troubling aspects of foreign contracts is when they are tied to the conditions of foreign loans. These arrangements are inherently detrimental to PNG's economy for several reasons:

1. Mismanagement and Corruption: Such contracts often come with inflated costs, commissions, and a lack of transparency, leading to significant financial inefficiencies.
2. Currency Drain: Funds from these loans are immediately withdrawn from the domestic economy as payments flow out to foreign contractors. This disrupts the velocity of currency—a critical economic principle that measures how quickly money circulates within an economy.

The velocity of currency is vital for sustaining economic growth. When funds remain within PNG, they create a multiplier effect, generating more economic activity, jobs, and development. However, when funds are siphoned out of the economy through foreign contracts, this potential is lost, leaving PNG with the burden of repaying massive loans without the corresponding economic benefits.

The Role of Import Replacements

Import replacement is a critical area where PNG can act immediately to strengthen its economy. Reducing foreign contracts is a straightforward step that does not require new industries to be built or long-term strategies to be developed. By ceasing the practice of awarding contracts to foreign contractors, PNG can retain funds within its economy, support local businesses, and stimulate job creation.

While import replacement strategies for goods and services may take time to develop, ending the outsourcing of contracts to foreign firms is an immediate, actionable step that can produce measurable economic benefits. The longer PNG relies on foreign contractors, the more difficult it becomes to build local capacity and achieve self-sufficiency.

A Lesson from Global Powers

The economic tensions between the USA and China should serve as a cautionary tale for PNG. The USA is fighting to protect its economy, jobs, and industries by imposing tariffs and incentivizing domestic production. In contrast, PNG continues to erode its economic foundation by awarding contracts to foreign firms and taking on loan conditions that benefit foreign entities at the expense of the local economy.

The Way Forward

PNG must adopt a deliberate approach to protect and develop its economy:

1. Prioritize Local Contracts: Ensure government contracts are awarded to PNG entities unless there is no domestic capacity to fulfill them.
2. Evaluate Loan Conditions: Avoid loans tied to foreign contracts, as they result in an immediate outflow of capital and limited economic returns.
3. Promote Domestic Production: Foster an environment where local industries can thrive and reduce dependence on foreign services.
4. Retain Currency Circulation: Develop policies that encourage money to stay within the local economy, enhancing the velocity of currency and driving economic growth.

By taking these steps, PNG can avoid the pitfalls experienced by other economies and work toward a more sustainable and self-reliant economic future. Just as the USA and EU are fighting to reclaim their economic sovereignty, PNG must prioritize policies that protect its markets, empower its citizens, and build a resilient economy.