Tag Archives: United States

Will US Financial Deregulation help mitigate the de-risking phenomenon?

Alicia Nicholls

The exigencies of complying with a complex and often confusing maze of overlapping regulations, coupled with steep fines for compliance breaches, have been identified as principle drivers for United States-based global banks’ restriction and termination of correspondent banking relationships with respondent banks in other jurisdictions. As part of his promise to “Make America Great Again”, US President Donald Trump has pledged to cut the regulatory noose argued to be strangling US enterprise and growth. Will this deregulatory push have the unintended spin-off of mitigating the de-risking phenomenon facing several countries around the world, including Caribbean States?

President Trump has been adamant that ‘burdensome’ regulations passed during the Obama administration to avert a repeat of the Global Economic and Financial Crisis of 2008, have been fetters on US business activity and prosperity. While most available data point to the contrary, the Trump Administration and Corporate America posit that Obama-era regulations like the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) have reduced bank profitability and risk appetite, culminating in dampened bank lending to consumers and businesses.

President Trump has so far signed two executive actions on financial deregulation. The latter, an executive order dated February 3, 2017, sets out seven core principles for regulating the US Financial System. It mandates Treasury Secretary, Steve Mnuchin, to consult with the heads of the member agencies of the Financial Stability Oversight Committee (FSOC) and to submit to the President within 120 days a review of “laws, treaties, regulations, guidance” inter alia, which among other things inhibit regulation in sync with the Core Principles. There has been reportedly a shift towards more ‘pro-business’ regulators. Perhaps most telling, in contrast to his anti-Wall Street rhetoric during the campaign, President Trump has picked several former bankers (notably Goldman Sachs) for key cabinet and administration positions, including for Treasury Secretary.

Stringent compliance burdens and costs, as well as uncertainty about the interpretation of the regulations, are major drivers for banks’ avoiding, rather than managing risks. Will an unintended consequence of financial deregulation in the US be a mitigation of the de-risking phenomenon? While at first blush this conclusion may appear tempting, I respectfully submit that this may be an overly optimistic view, at least at this early stage, for the reasons which I outline below.

Firstly, the Trump Administration has set its cross-hairs firmly on the Dodd Frank Act which President Trump termed a “disaster”. This Act, which is hundreds of pages long, was passed in the aftermath of the Great Recession. It includes, for instance, rules against predatory lending, sets measures to deal with banks which become “too big to fail”, prohibits proprietary trading by banks for their own profit (Volcker Rule), inter alia. While Dodd Frank is not perfect and has been blamed for contributing to de-risking, repealing it would not only create an environment for a resumption of the pre-crisis risky behaviours by banks and other financial institutions. It would set the stage for a repeat of 2008, in much the same way that deregulation during the 1990s to early 2000s, including changes to the (now repealed) Glass-Steagall Act, laid the groundwork for the Great Recession, almost a repeat of the Great Depression of the 1930s.

Secondly, Dodd-Frank is just one aspect of the de-risking problem. There appears to be no indication that the Trump Administration intends to tackle the constellation of other regulations, including international anti-money laundering, countering the financing of terrorism (AML/CFT), tax and banking regulations (Basel III), with which banks, including in the US, must comply.

In the World Bank’s seminal 2015 global survey on the Withdrawal from Correspondent Banking, some 95% of large banks had cited “concerns about money-laundering/terrorism financing risks” as a driver for withdrawing from correspondent banking relationships. However, it is unlikely that the Trump Administration will try to rollback AML/CFT rules. President Trump’s ‘America First’ ethos has a strong national security undertone. Weakening the US’ AML/CFT rules would likely make him appear ‘soft’ on money laundering and countering the financing of terrorism. International pressure is also a factor as the US’ last Financial Action Task Force (FATF) Mutual Evaluation Report (2016) highlighted some AML/CFT weaknesses, including gaps in timely access to beneficial ownership information.

Thirdly, replacing existing regulators with so-called pro-business regulators does not necessarily mean that there will be a more lenient approach to fines imposed on banks for compliance breaches. Unlike popular belief, most of the large banks which have been made to pay record fines had indeed knowingly committed serious AML/CFT breaches.

Fourthly, even if financial deregulation in the US eases the regulatory pressure on US global banks, it does not affect two core problems which appear to be driving the de-risking of regional banks, namely the perceived unprofitability of providing correspondent banking services to indigenous Caribbean banks, and the Caribbean region’s unjustified characterisation as a ‘high risk’ region for conducting financial services. In the previously mentioned World Bank 2015 Survey, some 80% of large banks cited “lack of profitability of certain foreign CBR services/products” as a driver of exiting correspondent banking relationships.

Further to the latter point, Caribbean countries, particularly international financial centres (IFCs) are consistently and unjustifiably placed on US government lists deeming them as money laundering threats, despite the fact that no Caribbean IFC is currently on any CFATF list of ‘high-risk and non-cooperative jurisdictions’. The most notorious example of this unfair practice is the US’ annual International Narcotics Control Strategy Report, the latest edition of which listed 21 Caribbean jurisdictions without providing (as usual) any evidence to support the conclusions drawn.

Caribbean countries are consistently branded as tax havens in spite of the fact that all Caribbean countries have signed intergovernmental agreements (IGAs) with the US Government pursuant to the extra-territorially applied US Foreign Account Tax Compliance Act (FATCA) passed in 2010. Most Caribbean governments have already passed implementing legislation to bring their IGAs into force. In addition, while the US has opted not to be a part of the OECD’s Common Reporting Standard, several Caribbean countries have elected to be early adopters!

Added to this is that compliance officers in overseas banks usually view the Caribbean as a “collective” and not as individual countries; any perceived risks in one country are transposed to the Region as a whole.

Granted, it is still early days of the Trump Administration and the findings of the Treasury Secretary’s report on which regulations may possibly be earmarked for axing would not be known for some time. What does help, however, is where there is clarification of the rules through clearer guidance. For instance, for a long time it was unclear how far banks’ due diligence requirements were to go. In addition to knowing their customer (KYC), there appeared to be a growing consensus that banks were also supposed to know their customer’s customers (KYCC).  Definitive guidance through the FATF Guidance in October 2016 showed that KYCC was not required. Turning to the US, that same month the US Office of the Comptroller of the Currency (OCC) released guidance to assist banks in the periodic risk reevaluation of foreign correspondent banking relationships.

However, the Region would be well-advised not to expect any serious mitigation of the de-risking phenomenon stemming from US financial deregulation. Despite being a ‘pro-business’ administration, it should be remembered that the overriding goal of the Trump Administration’s regulatory rollback is to “Make America Great Again”, point blank. Any spill-over positive benefits to the Caribbean from Trumpian financial deregulation would be welcomed but unintended, and it is more likely that the regulatory rollback may perhaps be more harmful than helpful to the region.

There is no panacea for the de-risking phenomenon as it is caused by a multiplicity of factors. Regional governments and private sector stakeholders should continue their lobbying and advocacy efforts, including engagement with key US administration officials, regulators and the banking sector. Given the Trump Administration’s ‘America First’ disposition, lobbying efforts which emphasises the implications that possible derisking-related economic and social destabilisation in the Caribbean may have on the US’ homeland security would be more impactful than pure moral suasion.

These advocacy efforts should also highlight to US officials and to US correspondent banks Caribbean countries’ own efforts at continuously improving their AML/CFT frameworks and the compliance efforts of Caribbean banks. Regional banking stakeholders should also continue to explore the possibility of investing in technologies such as Know Your Customer (KYC) utilities and legal entity identifiers (LEIs) to assist in customer due diligence (CDD) information sharing between themselves and their US correspondents.

These were part of the remarks I gave as a panellist at the Barbados International Business Association (BIBA) International Business Forum 2017

Alicia Nicholls, B.Sc., M.Sc., LL.B., is a 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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Race for the White House and US-Caribbean Relations

Alicia Nicholls

US presidential election campaigns are keenly followed in the Caribbean not just for the riveting debates and endless intrigue, but for the important consequences which any change in US domestic and foreign policy will portend for the region. The US is not just the largest trading partner for many Caribbean countries and a valued ally. It is a major tourism source market and is also home to a large and growing Caribbean diaspora.

As of writing, the US presidential race has narrowed down to billionaire business mogul Donald Trump as the presumptive nominee for the Republicans. Former Secretary of State, Hillary Clinton, appears to be mathematically on track to securing the Democratic nomination, despite a continued spirited fight by Vermont senator, Bernie Sanders.

More so  than in any other election season in recent memory, trade policy has been a hot button topic in both the Democratic and Republican presidential primaries. Echoing sentiments long held by some Americans who are fed up with what they see as America getting a raw deal from free trade, the talking points of the presidential candidates have adopted a more protectionist and anti-trade tone than has been seen in recent election cycles. Strong criticisms are being leveled at the recently signed but not yet ratified Trans-Pacific Partnership Agreement with Pacific-Rim countries, as well as the longstanding tri-nation North American Free Trade Area (NAFTA) with Canada and Mexico.

Feeding into the populist, anti-establishment anger, candidates of both major parties have raised concern about the US’ large trade deficits with Mexico and China, the offshoring of US companies to countries with lower labour and production costs, and the consequential loss of American manufacturing jobs. The presumptive Republican nominee, known for his hardline positions on immigration and trade, colourfully equated the US’ deficit with China to rape.

As small island developing states, Caribbean countries have long posited that trade must be fair, foster sustainable development, and not be to the detriment of the local jobs and industries. However, the current tone of the US presidential campaign equates fair trade with trade which supports only US interests. It is maybe fortunate for the region that the Caribbean has not featured in any of the foreign policy discussions or debates during either the Democratic or Republican Primaries, although discussions around tax havens in light of the Panama Papers will have implications for the offshore financial centres in the Region. Anti-immigration rhetoric on the Republic side, while aimed primarily at the anti-immigration lobby’s favourite “villains” like Mexican and Muslim immigrants, could have implications for Caribbean migration to the US as well.

It would be naïve to think that any country would put another’s ahead of the needs of its own people. However, the current “America first” rhetoric raises issues of the future of unilateral preferential arrangements like the Caribbean Basin Initiative which provide beneficiary countries duty-free access to the US market for most originating goods, without the beneficiary country having to confer reciprocal access to US originating goods. Seventeen Caribbean countries and dependencies currently benefit from such status. Perhaps one saving grace is that the programme is seen to be a benefit to the US and the region has a trade deficit with the US. According to the Report to Congress released in December 2015, “[t]he value of U.S. exports to CBERA beneficiary countries grew 2.5 percent in 2014, exceeding the growth rate for total global U.S. exports, which grew 2.1 percent”.

The anti-trade, “America first” message which pervades the current US presidential election campaign brings into question whether there will be any resolution in sight to the long-running US-Caribbean rum dispute. Caribbean rum producing countries have long raised concerns about subsidies given by the US federal government to rum producers in its territories, namely Puerto Rico and the US Virgin Islands. The cover-over programme allows tax revenues raised by the Federal Government from the excise tax on both local and foreign produced rums to be transferred to the “location of production”, that is, the Puerto Rico and US Virgin Islands. The treasuries of both territories depend heavily on these subsidies for revenue to support investments in infrastructure, education and health and it is no surprise that both territories have increased rum production in order to increase their share of these revenues.

However, Caribbean rum producers like Barbados have argued these subsidies amount to unfair competition, by making Caribbean rums less competitive in the US market. The loss of market share not only means the loss of foreign exchange flows to cash-strapped Caribbean countries and a weaker current account position, but it also threatens jobs in the rum sector in Caribbean countries. So far there has not been any real progress on this issue and it is not pessimistic to think that this may very well go the same way as the US-Antigua Gambling case went after the US failed to comply with the World Trade Organisation’s rulings – nowhere.

An issue which is not directly trade-related but which would also have an impact on US-Caribbean trade, investment and remittance flows is that of the loss of correspondent banking relationships due to de-risking practices by US-based banks. Fears of harsh sanctions by US regulators has led several US banks to abandon the risk-based approach by avoiding risk altogether and terminate correspondent banking relationships with banks and money transfer providers in the region. It is an issue which CARICOM, in conjunction with the Caribbean Association of Banks, has been raising at the bilateral, and increasingly the hemispheric and multilateral level. Last week, St. Kitts & Nevis Prime Minister Dr. Timothy Harris led a delegation which raised the issue again with officials from the US State and Treasury Departments at a consultation in Washington DC.

Another key issue is that of climate change. Climate change is a threat to the world, but is an existential threat to the small island developing states of the Caribbean which bear the brunt of the adverse impacts. President Obama’s stance and support for tackling climate change may not be replicated by his successor. As one of the world’s largest emitters of greenhouse gases (GHG), US emission cuts and whether it ratifies the Paris Agreement will have important implications for whether the target of temperature increases of no more than 1.5 degrees or 2 degrees above pre-industrial levels is met.

Historically seen as the US’ backyard, the Caribbean has lost much of its geostrategic importance to US administrations in recent years. Conflicts in the Middle East, Africa, as well as tensions with Russia and China have occupied US foreign engagement. It has opened the door for greater engagement by the Caribbean with China which has expanded its influence in the region. However, there are issues on which the US and Caribbean still share common concerns, including issues of security, energy, combating drug and human trafficking, to name a few. At the U.S.-Caribbean-Central American Energy Summit in Washington DC, chaired by Vice President Joe Biden, the US reaffirmed its commitment to regional energy integration with the Caribbean and Central America.

There does appear to be another nugget of hope. On April 20th, H.R. 4939 – United States-Caribbean Strategic Engagement Act of 2016, a bi-partisan bill sponsored by New York Representative Eliot Engel (Democrat)  won the unanimous consent of the House Foreign Committee. The objective of the bill is “to increase engagement with the governments of the Caribbean region, the Caribbean diaspora community in the United States, and the private sector and civil society in both the United States and the Caribbean, and for other purposes”.

Though still in need of debate and approval by both Houses of Congress, the bill could be a catalyst for constructive re-engagement of US-Caribbean relations. Some of the objectives include increasing US-Caribbean diplomatic relations and economic cooperation, supporting regional economic, political and security integration efforts in the Caribbean, encouraging sustainable economic development , reducing crime and improving energy security, inter alia. Section 3 of the draft Bill provides that a multi-year strategy for US engagement with the Caribbean must be submitted no later than 180 days after the Act’s enactment. Whether this new re-engagement with the Caribbean will fit within the foreign policy agenda of the next president will have to be seen.

The US relationship with the Caribbean is a valued relationship with ties which go beyond trade. Despite these bonds, there is indeed need for deeper constructive dialogue, engagement and cooperation with the US on a number of pressing issues which have sustainable development and macroeconomic implications for the Caribbean. The Caribbean region does have supporters in the DC Beltway. These include members of the Caribbean diaspora who have ascended to positions of influence in Congress and which have been instrumental in lobbying the US government on issues of concern to the region. However, like everything else, the future tone of US-Caribbean trade relations, will depend heavily on who takes the presidential oath of office in January 2017.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a 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.

Has the Caribbean Basin Initiative Outlived its Usefulness to CARICOM countries?

Alicia Nicholls

This September the United States International Trade Commission (USITC) released its biennial report on the operation of the Caribbean Basin Economic and Recovery Act (CBERA), one of the components of the Caribbean Basin Initiative under which CARICOM countries currently enjoy non-reciprocal, preferential access to the US market for most merchandise exports.

Three years ago I authored an article questioning whether the CBI was still relevant and beneficial to CARICOM countries. In that article I had highlighted that while the CBI still has relevance for CARICOM countries, its structure meant that CARICOM countries have benefited unequally and risk losing any margin of preference if its WTO waiver is not extended. I had concluded that a reform of the CBI would have been a preferred option but that a CARICOM-US FTA which had a trade and development focus could be more beneficial in the long term to CARICOM countries once it allows for special and differential treatment and capacity building assistance.

The USITC reports that average CBERA utilisation rates fell in 2014 and that the impact, though positive, has been small and again limited to a few exports and a few countries. This prompts two questions: has the CBI outlived its usefulness and is it time for CARICOM countries to negotiate a free trade agreement (FTA) with the US?

Current CARICOM-US Trading Arrangements

Most CARICOM countries currently enjoy non-reciprocal duty-free or reduced duty access for most merchandise exports (about 5,700 HTS 8-digit tariff lines) to the US market under the Caribbean Basin Initiative. The CBI is comprised of CBERA (non-expiring) and CBTPA (expiring September 30, 2020). Haiti also enjoys additional preferences under the HOPE Acts (Haitian Hemispheric Opportunity through Partnership Encouragement Acts of 2006 (HOPE I) and of 2008 (HOPE II)) and the Haitian Economic Lift Program (HELP) Act of 2010 which give preferential treatment to Haitian apparel, textiles, and certain other goods.

The stated goal of the CBI is to contribute to the economic growth and development of beneficiaries. The seventeen Caribbean beneficiary countries and territories are: Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, British Virgin Islands, Curaçao, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. Though a CARICOM country, Suriname is not a CBERA beneficiary.

In May 2013, CARICOM countries signed a Trade and Investment Framework Agreement (TIFA) in Port of Spain, Trinidad following a meeting between CARICOM Heads of Government and US Vice President Joe Biden. The TIFA, an updated agreement to one signed in 1991, is not an FTA. While it outlines several objectives and goals, it does not create binding commitments or market access. It does however create a CARICOM-US Trade and Investment Council which will be charged with executing the agreement. An annex to the Agreement called the Initial Action Agenda sets out priority areas for action. Currently, Grenada, Jamaica and Trinidad & Tobago are the only CARICOM countries which currently have bilateral investment treaties in force with the US.

Current Level of CARICOM-US Trade

The US is CARICOM countries’ largest trading partner for goods and services trade and a major tourism source market for CARICOM countries. However, the $8.5 billion USD worth of total US exports from CBERA countries (with and without preferences) only accounted for 0.36% of total US’ imports from the world, and declined from $8.9 billion in 2013 and $12 billion in 2012 (USITC 2015).

US product imports from CBERA countries are concentrated primarily in the energy and mining and manufacturing sectors (USITC 2015). Trinidad & Tobago, Haiti, The Bahamas, and Guyana jointly accounted for 89.1 percent of the value of US CBERA imports in 2014 (USITC 2015).

The USITC 2015 reports that CBERA utilisation rates, that is, CBERA imports as a percentage of total US imports from that country, have fluctuated over the past five years and have varied by country. After rising to 26.5% in 2013, average CBERA utilisation rates fell to 23.1% in 2014, although a few countries saw an increase in their utilisation rates during this period. This means that of the CBERA countries’ exports to the US in 2014 ($8.5 billion), only 23.1% ($1.97 billion), or less than a quarter, were done under CBERA. Most CARICOM merchandise exports to the US are therefore not under the CBERA but are either under the Generalised System of Preferences (GSP) or under Most Favoured Nation (MFN) applied rates.

According to the USITC Report, while Belize had the highest CBERA utilisation rate (62.5%) and was the fifth largest source of US imports under the CBERA in 2014, Trinidad & Tobago was the leading source of US imports under CBERA but registered the 6th highest CBERA utilisation rate for the same period. Trinidad & Tobago which has been the main beneficiary of CBERA due to its energy exports (mainly methanol and crude petroleum) has seen its total imports and utilisation rate decline due to declining US consumption, increased US production of crude oil and maintenance and shutdown of some factories in Trinidad (USITC 2015).

CBERA is of less importance for smaller islands of the region whose economies are services-based, mostly tourism and financial services. St. Lucia’s utilisation rate dropped from 51.7% in 2010 to just 7.5% in 2014. While Barbados saw its utilisation rate increase from a mere 3.8% in 2013 to 10.6% in 2014, this still is down from its rate of 17% in 2010.

The good news is that despite my prediction back in 2012, the WTO Council for Trade in Goods considered and approved the US’ waiver request for CBERA again and it is now up to the General Council to adopt it. Additionally, some of the products which are eligible for dutyfree access under the CBERA are not eligible under the GSP. However, more sobering is that the weaknesses of the CBI remain, including the exceptions in its product coverage, the lack of eligibility for services trade and certain stringent product eligibility requirements. Another problem is its unpredictability due to its unilateral nature. A beneficiary’s status may be revoked or the programme discontinued at any time. As an example, the US recently indicated it will suspend South Africa’s benefits under AGOA, a preferential programme for African countries, for allegedly failing to make continual progress towards eliminating barriers to U.S. trade and investment.

Generalised System of Preferences

Besides CBI, certain CARICOM countries also currently benefit under the Generalised System of Preferences (GSP), the oldest of the US’ trade preference programmes. Similar to the CBI, the GSP is a unilateral arrangement providing non-reciprocal duty-free access to eligible products originating in qualifying countries. Unlike the CBI which currently applies only to Caribbean countries, according to the USTR Report 2015, as of January 1, 2015, there were 122 designated GSP beneficiary developing countries, of which 43 were LDCs.

Under the GSP less tariff categories and products benefit from preferences than under the CBERA. However, LDCs, such as Haiti, are entitled to additional product coverage.

The only CARICOM countries currently eligible for benefits under the US GSP are Belize, Dominica, Grenada, Guyana, Haiti, Montserrat, St. Kitts & Nevis, St. Lucia, Suriname, St. Vincent and the Grenadines. Eligibility of a country for beneficiary status is subject to both economic and political considerations. Among other things, the US President is prohibited by statute from designating any communist countries (with exceptions) or countries which have expropriated, imposed taxes or other measures on US property as GSP beneficiaries.

If he/she finds that a country is sufficiently competitive or developed, the President may withdraw, suspend or limit the GSP status of any beneficiary country. Antigua & Barbuda, the Bahamas, Barbados, and Trinidad & Tobago are not currently GSP beneficiaries.

The GSP expired on July 31 2013 and was renewed retroactively on June 29, 2015. It has been extended to December 31, 2017. The future of the GSP beyond December 2017 is uncertain. However, some in the US believe GSP benefits should only be extended to LDCs, in which case only Haiti would benefit among current CARICOM beneficiary countries. Some so-called import sensitive products for the US, especially those in which developing countries have a competitive advantage such as most textiles and apparel, are not eligible. GSP imports are also subject to more stringent rules of origin than those under CBERA.

Would an FTA with the US be the answer?

Several former CBERA beneficiaries have concluded FTAs with the US, including five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua) and the Dominican Republic (CAFTA-DR in 2004) and Panama (US-Panama FTA in 2012). Given the issues outlined with both the CBI and the GSP, should CARICOM countries do the same?

Since the failure of the CARICOM-Canada negotiations, CARICOM still only has one FTA with a developed partner (the Economic Partnership Agreement with the EU). CARIFORUM’s negotiation position during the EPA negotiations was strengthened by the presence of the Dominican Republic. Such would not be the case in FTA negotiations with the US.
US FTAs, even those with developing countries such as CAFTA-DR and US-Panama, are generally light on development provisions and strong on those which provide protection for US investors and their investments, and for intellectual property rights.

For a sense of the US’ negotiation prowess, just take into consideration that with just a few exceptions the Trans-Pacific Partnership (TPP)’s investment chapter agreed to by 11 other negotiating partners is practically a carbon copy of the US’ Model BIT 2012. CARICOM countries will have to be strategic and clear on what they want to achieve and what are their deal breakers.

Priorities for CARICOM would be recognition of CARICOM countries’ small size and economic vulnerability and asymmetry in the commitments. As such they would likely be lobbying for special and differential treatment, development cooperation provisions, including technical assistance and capacity building to assist them, especially CARICOM lesser developed countries, in taking advantage of the market access opportunities an FTA with the US would open. With regards to services trade, CARICOM countries would likely seek enhanced commitments from the US in regards to (Mode 4) temporary entry for CARICOM natural persons.

Under the CBI, Caribbean countries are not required to extend duty-free treatment to like US imports into their territories. One of the main drawbacks to an FTA with the US will be the loss of tax revenues from the removal and reduction of tariffs on US imports as would be required under an FTA. One way to mitigate this would be lobbying for asymmetric and phased tariff removal, similar to what was committed to under the CARIFORUM-EPA with the EU. However, US FTAs, including CAFTA-DR are always ambitious in their scope in regards to liberalisation. Under the EPA, CARIFORUM was able to exclude a number of their most sensitive sectors from liberalisation. A deal breaker for any FTA with the US would be the extent to which CARICOM countries are able to protect nationally-important and sensitive industries from the stiff competition and possible death of these sectors and job losses if liberalised to competing US products too quickly. Civil society and industry consultations thus would be crucial to determining which sectors are most sensitive.

While an FTA with the US will likely increase the volume of US goods into CARICOM, the reverse is not necessarily guaranteed. Most CARICOM merchandise goods exports are already competing with other countries’ exports under normal trade conditions (i.e. at the MFN applied rate), and not under preferences. Therefore, the margin of preference secured for some CARICOM goods under a trade agreement may be negligible.

Investment treaty practice has evolved since the days when Grenada, Jamaica and Trinidad & Tobago signed their BITs with the US. The investor protections provided by a comprehensive investment chapter in a US-CARICOM FTA, coupled with robust investment promotion provisions, could serve as a signal for greater US investment to the region, while at the same time include development-friendly provisions and provisions which reinforce the right of the State to regulate.

As CARICOM service providers enjoy no preferential access to the US market, they face competition from service providers of countries which already have FTAs with the US. However, even when market access is created under an FTA for cross border services trade, there will be the need for mutual recognition agreements and visa waiver agreements in order to translate market access into market penetration.

The US will likely insist on a negative list approach to market access liberalisation of service sectors, the approach used in NAFTA and its subsequent FTAs. The negative list approach requires liberalisation of all sectors unless a reservation is specifically made in a country’s list of reservations. CARICOM countries and other developing countries have preferred to use the positive list approach used under the General Agreement on Trade in Services (GATS). It is a more development friendly approach which means only sectors specifically listed in a country’s schedule of commitments are liberalised and thus allows for the gradual liberalisation of sectors in keeping with each country’s development goals.
The US will also likely insist on no less favourable treatment than what CARICOM countries had agreed to with the EC under the EPA. CARICOM will also have to bear in mind that given a provision in the MFN clause in the EU-CARIFORUM EPA, the EU can insist on any more favourable treatment given to US than was given the EU under the EPA.

US treaty practice typically includes binding commitments on non-trade issues, such as labour. It has an on-going claim against Guatemala before the CAFTA-DR dispute settlement body in which it claims Guatemala has failed to meet its obligations under the CAFTA-DR agreement relating to effective enforcement of labour laws.

There are currently three main trade issues between the US and CARICOM countries which have to be addressed expeditiously even without an FTA. CARICOM rum exports are losing market share in the US market because of large subsidies given to rum producers in two US territories: the USVI and Puerto Rico. Secondly, the US/Antigua & Barbuda cross border gambling services dispute remains unresolved despite a WTO ruling in Antigua & Barbuda’s favour. An FTA will not necessarily resolve these issues as the DR which is a part of CAFTA-DR has complained about the rum issue as well.

Thirdly, the US has for a long time criticised copyright protection and enforcement in the Caribbean, a possible issue which might trigger disputes under any future US-CARICOM FTA. Caribbean countries constantly feature on the US Watch Lists under its annual Special 301 Report. The 2015 Special 301 Report is no different.

The Bottom Line

CARICOM countries should continue to take advantage of the non-reciprocal duty-free access to the US market provided by the CBI for their goods while these benefits last. However, while I do not think the CBI has outlived its usefulness just yet, it has several deficiencies which means it should not be treated as a long term strategy for boosting CARICOM trade with the US.

As mentioned, CBERA exports as a proportion of total CARICOM exports to the US are small and declining. The beneficial impact on regional exports has been unevenly spread and its unilateral nature, like the GSP, means benefits may be discontinued by the US at any time.

For the short term, the updated TIFA presents the best opportunity for CARICOM through the US-CARICOM Trade Council to lobby for reform of the CBI, address the long-standing rum and internet gambling disputes, and to negotiate concrete frameworks for increasing trade and investment between the US and CARICOM countries. Success on this front will not be automatic and will require strong regional cooperation, as well as effort on the part of both CARICOM and the US to ensure that concrete initiatives and commitments come out of these efforts.

However, given the importance of the US market for CARICOM and the growing importance of services-trade to regional economies, CARICOM will at some point  in the future have to consider, albeit cautiously, negotiating an FTA with the US as part of a long term plan to create a more predictable trade framework for US-CARICOM trade.

I say in the future because negotiations are an expensive and human-resource intensive exercise and require extensive research and stakeholder consultations. At the moment CARICOM countries are still grappling with the lingering effects of the 2008/2009 crisis on their economies and are also still struggling to implement many of the commitments made to the EU under the EPA. Progress on deepening CARICOM integration itself has ground to a halt and it would be easier to formulate a consolidated negotiating position as a more integrated region. I say cautiously because based on its current treaty practice the US is unlikely to extend the same level of special and differential treatment or development assistance which CARIFORUM was able to secure from the EU.

An interesting space to watch would be the on-going Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations between the US and EU. The EU is currently insisting on the inclusion of certain sustainable development provisions into the agreement. An example is its recently released proposed text for the investment chapter. It would be interesting to see whether these provisions make it into the final TTIP text and that could help make it easier for CARICOM to insist on some of the same provisions in any future FTA with the US.

For my previous article on the relevance of the CBI, please click here.

Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. Please note that the views expressed in this article are solely hers. You can also read more of her commentaries and follow her on Twitter @LicyLaw.