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Future CARICOM-US Trading Relations Beyond the Caribbean Basin Initiative

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Alicia Nicholls

A bipartisan bill (HR 991) was recently introduced in the United States (US) House of Representatives proposing to extend the Caribbean Basin Trade Partnership Act (CBTPA), one of the key pieces of legislation comprising the Caribbean Basin Initiative (CBI), to the year 2030. The benefits under the CBTPA are currently due to expire on September 30, 2020, unless extended by a subsequent Act of Congress.

The CBI has generally been regarded by successive US administrations as being mutually beneficial to both the US and CBI beneficiary countries. However, the current US administration’s greater insistence on reciprocity in its dealings with external trading partners and the on-going re-examination of its current trading arrangements mean that the extension of the CBTPA should not be taken for granted as a fait accompli.

While this article posits that CARICOM countries should indeed lobby for the CBTPA’s extension, it also proposes that, in the long-term, the region should think strategically beyond the CBI by considering a future CARICOM-US trading relationship which best enhances bilateral trade between the US and CARICOM to foster sustainable and inclusive development.

The Status Quo: The Caribbean Basin Initiative

Since 1983, preferential trade between CARICOM countries and the region’s largest trading partner, the US, has been governed largely by the CBI – a unilateral preference scheme of the US government which confers to eligible beneficiary countries non-reciprocal preferential access to the US market for a wide range of goods.

The CBI was first announced by then US President Ronald Reagan during an address before the Organisation of American States (OAS) on February 24, 1982, to facilitate the economic development and export diversification of Caribbean Basin countries, while also advancing US strategic economic and geopolitical interests in its “backyard”.

In 1983, the Caribbean Basin Economic Recovery Act (CBERA) was finally signed into law, coming into effect the following year. In 2000, after much lobbying by Caribbean countries, the CBTPA was passed and granted enhanced preferences for eligible textile and apparel from CBI countries on par with those enjoyed by Mexico under the North American Free Trade Agreement (NAFTA). While the CBERA was made permanent in 1990, the CBTPA is scheduled to expire on September 30, 2020.

Seventeen Caribbean countries and territories are currently CBERA beneficiaries, while seven are eligible for the enhanced CBTPA preferences. Haiti also receives additional benefits for its apparel and textiles under the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act of 2006, the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE II) Act of 2008, and the Haiti Economic Lift Program (HELP) Act of 2010, which are scheduled to expire in September 2025.

Data in the United States Trade Representative’s Twelfth Report to Congress on the Operation of the Caribbean Basin Economic Recovery Act (December 2017) illustrated that for the years 2012-2016, on average about half of US total imports from CBI countries entered the US market otherwise duty-free. This was followed by imports under CBI tariff preferences which accounted on average for less than a quarter of US total imports from CBI countries. Trinidad & Tobago, Haiti and Jamaica were the top three sources of total US imports from CBI countries.

CBI: Possible Headwinds

The USTR report noted a 24% decrease in US consumption imports from beneficiary countries in 2016 compared to 2015, and down 58% from 2006. This decline was attributed to lower petroleum prices and an increase in US domestic petroleum production. US imports from CBI countries declined from 0.5% of total US imports from the world in 2012 to 0.2% of total US imports from the world in 2016. Energy products accounted for 39.3% of US imports under CBI in 2016 and textiles and apparel (primarily Haitian apparel) accounted for 34.9%.

In an article I wrote on this topic a couple of years ago, I outlined some of the structural deficiencies with the CBI as currently operated which I argued circumscribe its effectiveness at promoting economic development and diversification in beneficiary economies. One of those deficiencies is that the CBI preferences apply to goods only, which over time has arguably lessened its value given the increasing contribution of services trade to Caribbean economies.

Besides the structural issues inherent in the CBI, its continuation faces some possible political headwinds. The CBERA’s incompatibility with the World Trade Organisation (WTO) rules on non-discrimination and its ineligibility for the ‘enabling clause’ exception mean that the US must seek a waiver from the WTO which must be approved by WTO members. The US’ current WTO waiver for CBERA (inclusive of the CBPTA) is due to expire on December 31, 2019. Given this administration’s greater insistence on reciprocity with its trading partners, as articulated in the 2018 Trade Policy Agenda, it should not be taken for granted that the US will seek a new waiver for CBERA. Moreover, the strong opposition made by some developing WTO members the last time the US sought a waiver means that approval of yet another waiver by the WTO is also not a fait accompli.

Additionally, the current mercantilist tenor of US trade policy has occasioned a greater insistence on reciprocity and enhanced scrutiny of its trade agreements with countries with which the US has a trade deficit. It is this policy shift which hastened the renegotiation of NAFTA and its renaming to the USMCA. While reports do not indicate that the CBI is under the microscope, the programme’s unilateral nature means that preferences thereunder may be unilaterally varied or ended at any time. This adds some uncertainty for Caribbean exporters.

One element which might be keeping the CBI out of the current administration’s cross-hairs is that the CBI had immediately led to a spike in US domestic exports to CBI countries (then including other Caribbean Basin economies), peaking at $26 billion in 2005. Although US exports to CBI countries have declined since 2005, the US still enjoys a wide trade surplus with CBI countries – the total value of US exports to CBI countries in 2016 was $10.5 billion, while the total value of US imports to CBI countries in that same year was only $5.3 billion, leading to a US merchandise surplus with CBI countries of $5.1 billion in 2016.

Indeed, in the statement released by US Representative Terri Sewell (D-AL), one of HR 991’s co-sponsors (the other is Brad Wenstrup (R-OH)), the congresswoman noted, inter alia, that “Extending the U.S. Caribbean Basin Trade Partnership Act will expand the United States’ trade with Caribbean basin countries and increase our nation’s economic growth”.

CBI: Next Steps

Let me note that even if the CBTPA is not extended, this does not necessarily affect other components of the CBI programme which in the case of the CBERA is currently ‘permanent’ and with regard to the Haiti-specific preferences are due to expire in September 2025.

Nonetheless, this is not to diminish the importance of retaining the CBTPA tariff preferences, which still account for an important share of US imports from CBI countries. In 2016, the value of US imports under CBERA was $479 million and $252 million under the CBTPA. For this reason, the best immediate option is for CARICOM countries to step up their lobbying for an extension of the CBTPA. This lobbying effort should, of course, be done in collaboration with the regional private sector, the Caribbean diaspora and friends of the Caribbean in the US Congress. It is in this vein that the closure of the US-based Caribbean Central American Action (CCAA), which did excellent work on behalf of the region in the US, leaves a void which will need to be filled.

Another issue will be finding ways to increase the rate of utilization by CBI exporters of the CBERA/CBTPA preferences. This is a catch-22, of course, as the current wide US surplus with the region is perhaps the reason why CBI has been outside of the current administration’s crosshairs.

Nevertheless, US foreign policy has recognised that an economically prosperous Caribbean is in the US’ best interests. The Multi-Year US Strategy for Engagement in the Caribbean, pursuant to the US-Caribbean Strategic Engagement Act of 2016, recognizes this by outlining several broad proposals for improving the trade and investment climate between the US and Caribbean. The mechanism of the US-CARICOM Trade and Investment Council, as provided for under the Trade and Investment Framework, should be used as a forum to discuss the implementation of these proposals and ways to improve CBI beneficiaries’ utilization of the preferences with the view to enhancing their economic development.

Let me hasten to say, however, that underutilization of the CBI is not simply a product of the structural problems of the initiative, but is symptomatic of the chronic under-utilisation by regional firms of current trade agreements in place between CARICOM and its trade partners. This speaks to wider structural issues prohibiting regional exporters from converting market access into market penetration. For one, navigating the myriad of requirements for exporting to the US under the CBI and other trade preference programmes is not easy for businesses, especially MSMEs which lack scale and have limited resources to interpret and meet the legal and other requirements under these arrangements.

Beyond CBI: Options for Future CARICOM-US Trading Relations

Given the CBI’s inherent structural problems and the possible political headwinds which may face the CBTPA’s renewal, CARICOM should seriously consider options beyond the CBI for its future trading relations with its most important partner.

An appropriate policy response should be evidence-based, that is, backed by sound data, as well as broad-based stakeholder consultations on the way forward. However, at least four options are readily apparent.

  • Trading under WTO MFN conditions

This is not an attractive (or real) option for CARICOM countries as it would result in regional exporters paying WTO Most Favoured Nation (MFN) rates for goods currently benefiting from CBI tariff preferences, thereby reducing what little margin of competitiveness they currently enjoy in the US market.

  • Trading under the US Generalised System of Preferences (GSP)

The US GSP was created in 1974 and provides duty-free, non-reciprocal access to the US market for a number of goods from 131 designated beneficiary countries, including 44 Least Developed Countries (LDCs). In March 2018 President Trump signed legislation to renew it to March 2020. Similar to the CBI, the GSP’s unilateral nature still adds an element of uncertainty for traders. The rules of origin under the GSP are also stricter than those under the CBI.

While some US imports from CBI countries do enter the US market under the GSP, these are much less than those entering otherwise duty-free, under CBI and HOPE Act tariff preferences and under WTO Most Favoured Nation (MFN) terms. Additionally, not all CBI countries are GSP designated countries. For example, Antigua & Barbuda, Barbados and Trinidad & Tobago were graduated and are no longer eligible for preferences under the GSP.

  • Acceding to CAFTA-DR FTA

Acceding to an existing US FTA, such as the CAFTA DR, may be another possible option. Under Article 22.6 (Accession) of the CAFTA-DR, any country or group of countries may accede to the Agreement “subject to such terms and conditions as may be agreed between such country or countries and the Commission and following approval in accordance with the applicable legal procedures of each Party and acceding country.”

Acceding to CAFTA-DR would create market access openings for CARICOM exporters not only to the US, but to the other CAFTA-DR parties: Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, as well as enhanced market access to the Dominican Republic (with which CARICOM already has an FTA).

Conversely, there are considerations to be borne in mind. Are the commitments under the CAFTA-DR ones that CARICOM Member States are prepared to undertake and capable of implementing? What would be the possible impact of these market access openings on CARICOM’s most sensitive industries?

There are also political considerations. With the USMCA signed (but still awaiting ratification by all three governments), the current administration is said to be looking closely at the CAFTA-DR, which means that a possible renegotiation of that agreement at some point cannot be ruled out.

  • Negotiation of a CARICOM-US Free Trade Agreement

The fourth and perhaps best long-term scenario is the eventual conclusion of a CARICOM-US Free Trade Agreement. As noted in the latest USTR Report on CBERA, eight countries (including the Dominican Republic) are no longer CBERA beneficiaries due to being party to FTAs with the US. Indeed, the aim was for the US to conclude an FTA with CBERA beneficiaries as soon as possible.

There are possible positives to concluding a CARICOM-US FTA, including gaining preferential access to the US market for CARICOM services providers, and the prospect of negotiating a mutually beneficial and binding trading agreement which provides certainty for exporters from both sides.

However, there are also some potential downsides. An FTA is reciprocal and binding which means CARICOM Member States will be required to make market access concessions to the US as well. CARIFORUM countries are already struggling to implement commitments made under the CARIFORUM-EU Economic Partnership Agreement which has been provisionally applied since 2008. Some CARICOM governments may also worry about the further erosion of tariff revenue.

It is also doubtful whether the current US administration (or any future one) would agree to the generous level of special and differential treatment as CARIFORUM was able to negotiate with the European Union (EU) under the CARIFORUM-EU EPA. Negotiating a CARICOM-US FTA will also necessitate reconciling differing levels of ambition and competing interests among CARICOM Member States due to asymmetric development levels and capacity for undertaking commitments.

Nonetheless, of the four future scenarios presented, this is likely to be the most beneficial option for CARICOM. Any post-CBI CARICOM-US trading arrangement should at the very least be reciprocal (not unilateral), provide for special and differential treatment and development assistance, include gender and environmentally sensitive provisions, include an investment chapter which incorporates recent best practices in investment treaty rule-making which seek to ensure a proper balance between investor rights and States’ regulatory rights, and mandate on-going review and monitoring of the agreement to ensure that it is achieving its objectives. These could be best captured in an FTA.

Conclusion

In conclusion, the best immediate option for CARICOM at this moment should be lobbying for the CBTPA’s extension. However, given the flaws inherent in the CBI and the possible headwinds facing the programme’s future continuation, CARICOM policymakers would be advised to keep one eye on lobbying for an extension of CBTPA with the other on a longer term view of what its next steps should be regarding the region’s future trading partnership with its most important trading partner.

Alicia Nicholls, B.Sc., M.Sc., LL.B., is an international trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

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Is the Caribbean Basin Initiative still relevant to CARICOM countries?

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Alicia Nicholls

For my latest article on CBI, click here.

In late December of last year, the United States Trade Representative (USTR) released its ninth report to the US Congress on the operation of the Caribbean Basin Initiative (CBI). As the CBI approaches almost thirty years in existence, it is worth pondering on whether the CBI, initially passed during the Cold War, is still relevant to CARICOM countries today.

The Caribbean Basin Initiative refers to the preferential trade concessions extended unilaterally by the United States under several key pieces of legislation to seventeen sovereign countries and dependent territories washed by the Caribbean Basin.  Instituted by the Reagan administration under the Caribbean Basin Economic Recovery Act (CBERA) in 1983, the CBI is said to represent a permanent commitment by the US to encourage the development of strong democratic governments and revitalized economies in the Caribbean Basin. The preferential treatment accorded under the CBERA includes duty-free treatment for most products, and in other cases, tariff rates which are much less than the most favoured nation (MFN) rate. Amendments to the CBERA and the passage of the Caribbean Basin Trade Partnership Act (CBTPA) in 2000 and the Trade Act of 2002 have increased the number of items eligible for preferential treatment and granted NAFTA-parity to some items.  Haiti benefits from additional concessions, primarily for apparel, under the  Haiti Hemispheric Opportunity through Partnership Encouragement (HOPE) Act of 2006,  the HOPE II Act of 2008 and the Haiti Economic Lift Programme (HELP) Act of 2010.

Trade under the CBI

The US is the Caribbean’s main trading partner and trade under the auspices of the CBI accounts for much of the US’ imports from CBI countries.  The USTR report reveals that in 2010 total US imports from CBI countries was $10.1 billion, representing 0.5% share of total US imports from the world. CBI countries were the eighteenth largest market for the US exports to the world. Although there were originally 24 beneficiary countries, five Central American countries plus the Dominican Republic became parties to a free trade agreement with the US (CAFTA-DR), thus losing their beneficiary status. Panama has also recently signed an FTA with the US (Panama-US).

Some challenges

The CBI is a unilateral arrangement. The benefits are granted by the US to certain eligible goods from CBI beneficiary countries without reciprocal treatment being demanded for US goods. The CBI statutes outline several eligibility criteria which must be met before the president can grant such treatment to any beneficiary country. The CBERA was passed during the height of the Cold War and many of the eligibility criteria under the initial act and in subsequent acts have the objective of furthering US national security and foreign policy goals. In some cases, these eligibility criteria do work in the region’s interest. The recognition of internationally recognised workers’ rights and commitments to eliminate the worst forms of child labour, to combat corruption and to  promote the rule of law are things which most CARICOM countries would readily demand of their governments. However, some criteria like the stipulation that no communist country can be a beneficiary country and the requirement of beneficiaries to provide  ‘equitable and reasonable access’  to their markets and basic commodity resources are much less innocuous and could arguably limit policy space and the right of the beneficiary countries to choose their own political and economic path to development without fear of repercussions.

Unilateral preferential arrangements like the CBI also bring with them a measure of uncertainty due to their unilateral nature.  CBI concessions can  be unilaterally limited, suspended or withdrawn in the case of non-compliance by a beneficiary country with the eligibility criteria or where imports from the country or a group of countries is deemed to cause ‘serious’ injury to domestic producers. This uncertainty is heightened by the increased international hostility towards non-reciprocal trading arrangements which has cast a shadow on the future of CBI. Like the African Growth and Opportunity Act (AGOA), the CBERA does not qualify under the WTO’s ‘Enabling Clause’ because it discriminates among developing countries and thus requires a waiver. Although the CBTPA extends the CBI through to September 2020 or until an FTA is signed with the US, the WTO waiver expires in 2014. This means that the  CBI preferences would no longer be legal under the WTO rules after 2014 unless another waiver is obtained.

Besides these inherent structural problems with the arrangement, not all countries in the region have benefited equally from the CBI. Its benefits have tended to be concentrated in a few countries.  Since the inclusion of petroleum products for preferential treatment, Trinidad & Tobago has benefited the most thanks to its resource base and manufacturing capacity.  With the exit of the CAFTA-DR countries, that country is now the leading CBI exporter to the US with petroleum products and methanol now making up the bulk (76%) of CBERA exports (from non-CAFTA-DR countries) to the US market in 2010 and almost all exports of such products come from Trinidad & Tobago.  Another ‘winner’ is Haiti. After Costa Rica joined the CAFTA-DR, Haiti became the second largest exporter to the US under the CBI. According to the USTR report, apparel not only accounts for over 90% of Haitian exports to the US but almost all of Haiti’s apparel imports enter under the CBTPA and the HOPE Acts.

Once a leading exporter of ethanol and apparel to the US under the CBI, Jamaica’s ethanol and apparel exports to the US have declined.  The Bahamas has in fact now superseded Jamaica as the third leading source of US imports under the CBI.  For some countries like Antigua & Barbuda and Barbados, the majority of exports to the US enter under normal trade relations (i.e. at the MFN rate) as opposed to under CBERA or the CBTPA. Not only has there been concentration in the gains from the CBI but the CBI has led to little economic or export diversification in CBI countries. Petroleum products and apparel account for most CBI exports to the US. Moreover, even before the exit of the CAFTA-DR countries, CBI countries’ share of the US import market has been on a downward trend from 3.1% in 1983 to 1984, to just 0.5% in 2010, according to the USITC.

Through their lobbying efforts and the aid of some empathetic members of the US Congress, CBI countries have succeeded in getting some important additional concessions which have helped make the CBI more beneficial. However, the CBI is a goods-only arrangement, meaning that only designated goods exports, as opposed to services exports, benefit from preferential access. Most CARICOM countries are now services-based economies and stand to benefit more from an arrangement which also provides market access for their service providers, particularly through Mode 4 (temporary movement of natural persons).  The CBI’s utilisation by regional exporters and its effectiveness have been limited by stringent rules of origin requirements and conditions, remaining non-tariff barriers to trade and declining margins of preference as the US continues to sign FTAs with other more competitive developing countries.  Some of these challenges were highlighted in a recent report. The argument can also be made that the CBI is based on an outdated school of thought which posits that free trade and increased exports automatically foment development.

Contemporary Relevance ?

Despite its many drawbacks and weaknesses, it is submitted that the CBI still remains relevant for CARICOM countries today even though some countries clearly benefit more than others and the developmental impact has been largely disappointing. It remains relevant because, for all its flaws, the CBI still provides a margin of preference for the region’s exports in a world where such non-reciprocal preferences are quickly shrinking away in favour of greater competition and a more ‘level’ playing field. The majority of the region’s exports which receive preferential treatment in the US market still enter under the CBI, as opposed to the Generalised System of Preferences (GSP) which has less favourable preferences than the CBI. For some countries like Barbados, no exports to the US entered under the GSP for the past few years and exports enter either at the MFN rate or under the CBI. Moreover, the CBI’s continued attractiveness is evidenced by the fact that according to the USTR Report, Suriname has indicated its interest in receiving beneficiary status and is currently in talks with the US to this effect.

Though the extension and reform of the CBI to address the challenges outlined would be the preferred option for the region, it is unlikely that WTO members would be willing to grant another waiver, especially given the opposition that the current waiver encountered. With the Free Trade Agreement of the Americas (FTAA) off the table for the foreseeable future and the US actively engaged in pursuing FTAs, it is inevitable that CARICOM will at some point have to pursue an FTA with the US.  A CARICOM-US FTA which has a trade and development focus could be beneficial to CARICOM countries if it provides market access for the region’s  service providers, allows for special and differential treatment (especially for lesser developed CARICOM States) and includes technical and capacity building assistance to help the region meet its commitments and develop its export capacity to better capitalise on the market access gained. However, given the asymmetry in bargaining power between the US and CARICOM and the US approach to FTAs, it is probably unlikely that CARICOM would be able to gain from the US all of the concessions which it had gained from the EU with the Dominican Republic under the CARIFORUM-EC Economic Partnership Agreement.

For my latest article on CBI, click here.

Alicia Nicholls is a trade policy specialist and law student at the University of the West Indies. You can contact her by email and follow her on Twitter at @licylaw.