Academic journal article Current Politics and Economics of South and Central America

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

Academic journal article Current Politics and Economics of South and Central America

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

Article excerpt


For over 40 years, the United States has relied on unilateral trade preferences as an integral part of its foreign economic policy. Trade preferences give market access to selected developing country goods, duty free or at tariffs below normal (NTR)1 rates, without requiring reciprocal trade concessions. They come in many forms and are intended to promote economic growth and development in poor countries by stimulating export promotion and investment, and to encourage the use of U.S. inputs in foreign manufacturing. Trade preference programs must be authorized by Congress and are usually done so for specified periods of time.

The Caribbean Basin (see Figure 1)2 has benefitted from multiple preferential trade arrangements, the best known being those linked to the Caribbean Basin Initiative (CBI) implemented on January 1, 1984, and revised periodically by Congress. Since 1984, the growth of free trade agreements (FTAs) in the region has signaled a shift in U.S. trade policy. The increase in reciprocal FTAs (particularly the Dominican Republic-Central America-United States Free Trade Agreement-CAFTA-DR) with even more generous trade provisions for certain Caribbean exports has the effect of -eroding" the relative benefits given to countries covered only by the CBI programs, raising questions about the future path of U.S. trade policy for those countries.

This report reviews unilateral preference programs for the Caribbean, discusses how they have been affected by FTAs in the region, and considers trade policy options for dealing with countries still relying on trade preferences and that may be considering whether to negotiate an FTA with the United States.


The United States has a long history of employing various types of trade incentives to encourage specific trade activities. Motivated by commercial, political, and security interests at times, the U.S. Congress has created multiple unilateral trade preference programs that promote developing-country exports, but are often structured so as to limit the negative economic effects on U.S. producers and workers. Over time, bilateral, regional, and multilateral trade agreements have come to eclipse the importance of many preference arrangements, a trend that a review of these developments will show has been particularly visible in the Caribbean Basin.

Background: Early Trade Preference Programs

In 1964, the United States government initiated a preferential tariff program based on production sharing. Production sharing is a cost-reducing business strategy that seeks competitive (price) advantage by locating manufacturing processes in more than one country (now often referred to a value added chains). U.S. firms specialize in the capital intensive, technology driven stages of production, and outsource assembly and other lower-skill processing to lower-wage countries. Under the U.S. production-sharing program, foreign firms that import U.S. component parts and assemble or process them into finished or semi-finished products may then re-export them back to the United States, with duties levied only on the value added abroad (no tariff on U.S. content).3

U.S. firms benefit from production sharing by the required use of their inputs (to receive the tariff exemption) and in retaining a portion of the global market for goods that might otherwise go to lower-cost foreign producers that do not use U.S. inputs. Foreign firms using U.S. inputs benefit from the tariff exemption, making their products more competitive in the U.S. market relative to those of other producers who face a duty on the full value of their competing exports. This type of production arrangement has been commonly used for automobile parts, electronics, and apparel, among other manufactured goods.4

The Caribbean Basin and Mexico were early beneficiaries of the production sharing program, with proximity providing a major advantage. …

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