The Pacific economy in the tariff era

View from the West By James C. Pearce

The Asian Development Bank gave a mixed picture in its economic forecast for the Asia-Pacific region. Forecasts for the region, which were finalized before new U.S. tariffs were announced on April 2, show growth in developing Asia and the Pacific moderating over the next two years. 

A Chinese economic slowdown due to continued weakness in its property sector and higher U.S. tariffs will be partially offset by higher growth in South Asia, the ADB noted. The region will be challenged by rising trade barriers and significant trade uncertainty, but solid domestic demand and electronics exports will support growth.

In the Pacific, economic growth is predicted to dip slightly from 3.9 percent to 3.6 percent, whereas inflation will inch up to 3.7 percent from 3.4 percent.

While inflation is expected to go down in all Pacific nations except Papua New Guinea, economic growth looks set to slow down for most.

Let’s start with the good news. Headline inflation in early 2025 fell below pre-pandemic levels. Declining global commodity prices and the delayed impact of tighter monetary policies and reduced supply-side pressures in some economies lowered energy and core inflation. Food inflation also decreased despite a temporary spike from June to September 2024 due to recovering pork prices in China and adverse weather in India.

Tourism also further recovered, although visitor arrivals remain below pre-pandemic levels in the Pacific region. This is largely due to price pressures, with travel costs going up. Arrivals in 2024 reached 90 percent of pre-pandemic levels, but the Pacific is still lagging the rest of Asia, due to fewer tourist numbers.

The region’s high-income technology exporters also remain a bright spot, benefiting from strong global demand for electronics. What’s more, remittances to the Pacific remain high, particularly in U.S. dollars.

Now for the bad news. Rising trade uncertainty and escalating tariffs have created headwinds, weighing on financial markets and investor confidence.

The region must navigate these challenges to sustain its economic momentum. The Pacific is less equipped for this. Growth is expected to moderate further in 2026 due to a weaker external demand.

The ADB report noted that Fiji’s slowdown offset the broad-based rebound in Papua New Guinea, but the Cook Islands will see its growth decline from 8 percent to 2 percent in 2025, following a high of 14 percent growth in 2023.

While Japan is expected to recover next year, growth in the Eurozone is also expected to outstrip the region and accelerate growth.

Another issue is “price pressure”— the force that pushes prices of goods or services either upward or downward. The Pacific will face upward price pressures due to currency depreciation, bucking the trend of the Asia-Pacific region. That will hurt consumer and investor confidence. Finally comes the tightening of U.S. immigration policies and tariffs.

The pace of tariffs is producing a highly uncertain market in a region extremely sensitive to trends in supply chains.

Tighter immigration policies can also cause a rise in inflation as interest rates will stay higher and the flow of human capital will be reduced. What solutions could the Pacific adopt? Easing the price pressure of tourism is the obvious first step that will accelerate numbers to a region highly dependent on tourism. Several solutions exist here, including targeted and more diverse offers, investing in infrastructure and reducing the demand in peak periods.

Another is monetary policy. If the U.S. Federal Reserve keeps policy rates higher, inflation would go higher, which would affect some countries (the Federated States of Micronesia, the Marshall Islands and Palau) more than others (Tonga and the Solomon Islands).

The “easiest route” around this situation is to boost consumer and investor confidence. The problem with this route is that, although easy on paper, doing so in practice is tricky. As the report notes, moderate economic growth allows regional central banks to ease their monetary policy. That, in turn, can attract investment and get the economy moving—or it might not.

Next would be ending the conflicts in Ukraine and Israel and Palestine. If the conflicts escalate again, or persist, it could lead to more supply chain disruptions, higher and more volatile food and energy prices, and elevated global economic uncertainty and risk aversion.

The Pacific region should use whatever clout it has to advocate for a peace deal, especially now that the U.S. and Russia are talking again, and Trump is keen to keep China out in the cold.

Finally, the Pacific is greatly affected by the Chinese economy. If its property market worsens and tariffs cause real disruption, it would have a strong knock-on effect.

Once more, the Pacific = must present a united front and apply pressure on the Trump administration. Thankfully, some in the State Department are badgering the President to show more interest and investment in the region.

Dr. James C. Pearce previously worked at the University of Liverpool and the College of the Marshall Islands, and lived in Russia for almost a decade. He is the author of “The Use of History in Putin's Russia”, and has written on Russian memory politics, historical narratives, education policy and historical anniversaries. Send feedback to jcpearce.91@gmail.com.

The opinions expressed here are solely the author’s and do not reflect the editorial position of the Pacific Island Times.

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