U.S. Trade Policy and the Caribbean: From Trade Preferences to Free Trade Agreements

J. F. Hornbeck
Specialist in International Trade and Finance

For over 40 years, the United States has relied on unilateral trade preferences to promote exportled development in poor countries. Congressionally authorized trade preferences give market access to selected developing country goods, duty free or at tariffs below normal rates, without requiring reciprocal trade concessions, although their extension is conditioned on extensive eligibility criteria and the use of U.S. inputs in many cases. The Caribbean Basin has benefitted from multiple preferential trade arrangements, the first being the Caribbean Basin Initiative (CBI), passed by Congress in the Caribbean Basin Economic Recovery Act of 1983. Other programs include the Caribbean Basin Trade Partnership Act (CBTPA) of 2000, which provides tariff preferences for imports of apparel products, and the Haiti HOPE Act of 2006 (amended in 2008), which gives even more generous preferences to imports of Haitian apparel. 

Since the preferences have been implemented, U.S.-Caribbean trade has grown, but evaluations of the early programs suggest that their effects were not as robust as originally hoped. Benefits tended to be concentrated in a few countries and products, limiting export promotion and deterring product diversification. Over time, benefits have been "eroded" by multilateral trade liberalization and other regional U.S. preference programs. Bilateral free trade agreements, particularly the CAFTA-DR, have actually replaced unilateral preferences with permanent, more attractive tariff reductions and trade rules for former CBI countries such as the Dominican Republic and Central American countries. As the main exporters of apparel in the Caribbean Basin, they were among the primary beneficiaries of the Caribbean trade preference programs. 

In recent years, Congress has decided on only short-term extensions of the Caribbean and other preference programs. A number of Members seek a comprehensive review of these programs with an eye on harmonizing and revamping their various provisions. Congressional concern over eligibility criteria, simplifying rules of origin, targeting the least developed countries, and standardizing benefits are among a number of broad issues being debated as part of the preference reform agenda. In the 111th Congress, the discussion of extending the Caribbean programs may be part of a broader reauthorization effort for all preference arrangements. In addition, there are a number of issues and circumstances converging that may suggest the need for reorienting U.S. trade policy in the Caribbean region. The most effective trade preferences are the apparel provisions provided under the CBTPA, which expire on December 31, 2010. But, they are sparsely used by the smaller Eastern Caribbean countries, now the main beneficiaries in the region after CAFTA-DR was implemented, because they have largely services-based economies. Also, there is a reluctance by these countries to make the transition to an FTA without some guarantee of a "development component" to the agreement. These concerns persist, despite the promise of permanent market access and increased investment that an FTA holds out. The Caribbean countries, long involved in dependent economic relationships, appear content to take a cautious path toward any new trade arrangement with the United States. 

For U.S. trade policy, any thoughts of achieving broader regional integration are challenged by these circumstances. Broader integration may be difficult to reconcile with the needs of very small developing countries, which are highly vulnerable to the vicissitudes of global economic trends and may require new and creative solutions, particularly if U.S. policy is still driven by the historical focus on development and regional security issues in addition to trade liberalization. In the context of continuing with trade preferences in similar or altered form, or opting for an FTA, the solution is not immediately obvious. 

Date of Report: January 14, 2010
Number of Pages: 26
Order Number: RL33951
Price: $29.95

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