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Appendix D -- CARIBBEAN BASIN INITIATIVE -- Islands of the Commonwealth Caribbean

The Caribbean Basin Initiative (CBI), first proposed in 1982, is a broad United States foreign policy program designed to promote economic development and political stability. The CBI is not limited to the Commonwealth Caribbean nations but extends to the entire Caribbean Basin, also including selected countries of Central America, northern South America, and the non-English-speaking Caribbean (see table A, this appendix). The CBI consists of trade, economic assistance, and investment incentive measures to generate economic growth in the region through increased private sector activity.

Table A. Potential Beneficiaries of the Caribbean Basin Initiative, 1986

Anguilla Guyana
Antigua and Barbuda Haiti
Aruba Honduras
The Bahamas Jamaica
Barbados Montserrat
Belize Netherlands Antilles
British Virgin Islands Nicaragua
Cayman Islands Panama
Costa Rica St. Christopher and Nevis
Dominica St. Lucia
Dominican Republic St. Vincent and the Grenadines
El Salvador Suriname
Grenada Trinidad and Tobago
Guatemala Turks and Caicos Islands

Source: Based on information from United States, International Trade Commission, Annual Report on the Impact of the Caribbean Basin Economic Recovery Act on U.S. Industries and Consumers: First Report, 1984-85, Washington, September 1986, 1-8.

The most significant aspect of the program is the Caribbean Basin Economic Recovery Act (CBERA) of 1983. The CBERA provides Caribbean Basin countries with duty-free access to the United States market for most categories of exported products until September 30, 1995. It also includes special tax provisions for the tourist sector, as well as measures to support the economic development of Puerto Rico and the United States Virgin Islands. In addition to the CBERA, other CBI measures include increased United States economic assistance, a wide range of government and private sector investment promotion programs, support from multilateral development institutions and their donor nations, and Caribbean Basin country self-help efforts.

BACKGROUND

The CBI resulted from a series of 1981 meetings involving United States, Canadian, and Caribbean Basin officials. In a July 1981 meeting in Nassau, the United States special trade representative and the United States secretary of state met with the foreign ministers of Canada, Mexico, and Venezuela. Each agreed to support a multilateral action program for the region, within which each country and dependent territory would develop its own programs. Multilateral and bilateral meetings were held between the members of the so-called Nassau group and representatives of the Caribbean Basin countries.

The CBI package announced by President Ronald Reagan in a February 1982 address before the Organization of American States (OAS) consisted of foreign assistance, a free trade arrangement, and tax incentives for United States investors. The foreign aid portion of the CBI, which proposed an additional US$350 million for the Caribbean region for fiscal year (FY--see Glossary) 1982, was passed by the 97th Congress and became law in September 1982 (Public Law 97-257). (Two-thirds of this total was slated for Central America, with the remainder earmarked for the Caribbean.) The trade portion, contained in the CBERA, was passed by the 98th Congress in July 1983 and signed into law in August 1983 (Public Law 98-67). The CBERA also contained a tax benefit allowing United States citizens and companies to make deductions for expenses from conventions and business meetings held in CBI countries. The investment tax incentive portion of the package was left out of the legislation's final version. Also, a number of products were excluded from the eligibility list of duty-free exports.

HIGHLIGHTS OF THE CARIBBEAN BASIN ECONOMIC RECOVERY ACT

Duty-Free Treatment

Section 211 of the CBERA gives the president the authority to grant duty-free treatment to eligible countries and dependent territories for eligible products, and Section 212 outlines the criteria for eligibility. The president may not designate a communist country or a country that fails to meet certain criteria regarding the expropriation of United States property; does not take adequate steps to prevent narcotics from entering the United States; fails to recognize arbitral awards to United States citizens; provides preferential treatment to the products of another developed country, adversely affecting trade with the United States; engages in the broadcast of United States copyrighted material without the owner's consent; or fails to enter into an extradition treaty with the United States.

In addition, the president is required to take into account eleven discretionary criteria. The criteria focus on the degree to which the potential beneficiary is prepared to provide equitable and reasonable access to its markets and basic commodity resources; follows the accepted rules of international trade; uses export subsidies or imposes export performance requirements or local content requirements that distort international trade; and undertakes self-help measures to promote its own economic development.

Twenty-eight countries or dependencies of the Caribbean, Central America, and northern South America are considered potential beneficiaries. By 1986 twenty-two of these had been designated for the duty-free provisions of the CBI, the exceptions being Guyana, Nicaragua, Suriname, Anguilla, the Cayman Islands, and the Turks and Caicos Islands, none of which applied for designation.

Section 213 sets forth the criteria for determining which articles may enter the United States free of customs duty. To qualify, a product must be grown, produced, or manufactured in one or more of the beneficiary countries. If produced from components from a non-CBI country, the product's direct processing costs must total at least 35 percent of the product's final cost. United States component parts may account for only 15 of these percentage points, the remaining 20 percent coming from non- CBI countries. Specific articles are excluded, including textiles and apparel subject to textile agreements, canned tuna, petroleum and petroleum products, footwear, work gloves, luggage, handbags, flat leather goods such as wallets, leather apparel, and watches and watch parts if any components originate in a communist country. Duty-free sugar exports are limited either by absolute quotas or by ""competitive need"" limits contained in the Generalized System of Preferences (GSP); these restrictions are intended to ensure that duty-free sugar imports will not impede the United States price support system for domestically produced sugar.

Section 214 outlines special measures for Puerto Rico and the United States Virgin Islands to ensure healthy economic development. These measures increase the permissible foreign content for United States insular possessions from 50 to 70 percent and treat the products of all insular possessions as favorably as products from CBI beneficiary countries.

Tax Provisions

Section 221 amends the United States Internal Revenue Code by transferring all taxes collected on rum imports from the Caribbean to the treasuries of Puerto Rico and the United States Virgin Islands. Section 222 also amends the Internal Revenue Code by allowing deductions for business expenses when attending conventions, seminars, or other meetings in a CBI beneficiary country or dependent territory provided that the country or dependent territory enters into a tax information exchange agreement (TIEA) with the United States. By the end of 1987, just three of the twenty-eight potential CBI beneficiaries--Barbados, Grenada, and Jamaica--were qualified for the convention tax deduction benefit.

OTHER MEASURES AND PROGRAMS RELATED TO THE CARIBBEAN BASIN INITIATIVE

Economic Aid

In the first half of the 1980s, United States economic aid to the CBI region increased substantially. From FY 1982 to FY 1985 economic assistance nearly tripled to US$1.8 billion. (However, as was the case with the supplemental allocation for FY 1982, the majority of assistance for FY 1985 went to Central America; less than 20 percent was destined for the Caribbean.) Approximately three-fourths of the total package was funneled into the Economic Support Fund (ESF) program. Although the ESF enables governments to meet immediate expenditures, it also allows them to delay potentially necessary fiscal reforms. Since FY 1987, absolute levels of economic assistance to the region have been declining because of United States efforts to reduce its government's budget deficit.

Investment Incentives and Promotion Programs

United States efforts in the CBI region also included measures to increase the level of private investment. In 1984 United States legislation created new sales export companies, known as Foreign Sales Corporations (FSCs), which were designed to generate government revenue for the host country and add to its international business infrastructure. FSCs provide United States firms with income tax exemptions and low operating costs; in exchange, FSCs must be incorporated outside the United States in insular territories or in countries that have concluded TIEAs with the United States. By 1987 Barbados, Grenada, and Jamaica had concluded effective TIEAs and were therefore eligible for FSCs. New legislation in 1986 also made countries with effective TIEAs eligible for investments with funds generated in Puerto Rico (via Section 936 of the Internal Revenue Code).

The United States also concluded bilateral investment treaties with two CBI countries, Haiti and Panama, and held discussions about negotiating such a treaty with most other nations in the region. The Department of Commerce, the Department of State, and the Office of the United States Trade Representative have primary responsibility for implementing promotion programs for investment in CBI countries. In 1984 the Department of Commerce established the CBI Center to provide support services for companies interested in developing businesses in the region. In March 1987, the Office of the United States Trade Representative appointed a CBI ombudsman to serve in Washington as a problem solver for firms participating in the initiative. In addition, the Overseas Private Investment Corporation, a United States government entity charged with insuring foreign investments of American firms, dedicated approximately half its portfolio in the early 1980s to the Caribbean Basin.

Textile Initiative

In early 1986, President Reagan strengthened the CBI by introducing a new program to promote investment in the textile industries of CBI countries. The program guaranteed access to the United States market for certain textile and apparel imports. In addition, higher levels of access were provided for textiles manufactured from material originating in the United States. As of mid-1987, bilateral textile agreements had been signed with the Dominican Republic, Haiti, Trinidad and Tobago, and Jamaica.

Complementary Trade Preference Programs

Several other United States trade preference programs apply worldwide, rather than just to the Caribbean area. The GSP permits approximately 2,800 products to be imported duty free into the United States from developing nations around the world. All of the potential beneficiary countries under the CBERA are eligible for benefits of the GSP, which in 1984 was extended until 1993. A second trade preference program covers two items of the Tariff Schedules of the United States (TSUS) that provide for reduced duties for products of United States origin that are assembled or processed in other countries. Finally, the TSUS also allows special duty rates for certain products of countries that have been designated least developed developing countries (LDDCs) of the GSP. To date, the only CBI country that is eligible for special treatment as an LDDC is Haiti.

Multilateral Support

Other countries of the Caribbean Basin (Colombia, Mexico, and Venezuela) have instituted development programs in the region, as have Britain, Canada, the European Economic Community (EEC), the Federal Republic of Germany (West Germany), France, the Netherlands, and Japan. Mexico and Venezuela established the Joint Oil Facility in 1980 to provide concessionary oil rates to ten countries of the Caribbean Basin; the agreement was a milestone in cooperation among developing nations. Colombia has offered special trade credits and technical assistance programs to several governments in the region.

In 1986 Canada announced plans to implement an economic and trade development assistance program for the Commonwealth Caribbean. The program, known as Caribcan, provided for duty-free access to the Canadian market of 99.8 percent of current Commonwealth Caribbean imports. Excluded from the program were textiles, clothing, footwear, luggage and handbags, leather garments, lubricating oils, and methanol. The EEC's most important program is the Lomé Convention (see Glossary), which covers numerous African, Caribbean, and Pacific countries, including twelve CBI beneficiaries. The Lomé Convention is updated every five years. Lomé III, which took effect in March 1985, offers duty-free access to the EEC as well as economic aid and investment incentives. Work of multilateral institutions such as the Inter-American Development Bank, the International Monetary Fund (IMF--see Glossary), and the World Bank (see Glossary) also complements the CBI program, as do the programs of consultative groups such as the Caribbean Group for Cooperation in Economic Development.

IMPACT

Assessing the effectiveness of a 12-year trade program that began in 1983 is difficult. Initial reports indicated that the overall trade performance for the CBI region was disappointing; CBI exports to the United States in 1985 were 24 percent lower than in 1983. The decline was a result of weak markets, mainly in oil, but also in bauxite, alumina, and sugar. Final 1986 figures were expected to show further declines because of a United States decision to lower its sugar import quota; the OAS estimated that the decrease would cost Caribbean producers US$250 million.

Despite the overall decline in exports, the United States Department of Commerce pointed out that from 1983 to 1985 there was a 14-percent increase in nontraditional exports, such as apparel, electronics, vegetables, seafood, and wooden furniture. Furthermore, if oil-producing countries of the region are excluded, exports to the United States increased in most areas of the region. Exports from Central America, the Central Caribbean, and the Eastern Caribbean increased by 13.4, 15.9, and 19.0 percent, respectively. All of the oil-producing exporting countries of the region, however, experienced substantial declines in total exports to the United States. In 1981 United States imports from these countries amounted to US$6 billion, but by 1985 that figure had dropped to US$2.7 billion.

The direct investment benefits of the CBI have not been substantial. New United States investment in the region amounted to approximately US$208 million during the first eighteen months of the CBI, generating roughly 35,000 new jobs. However, this new investment amounted to less than 2 percent of the total United States direct investment in the region and thus represented only a slight improvement. In addition, income derived from direct investment actually declined, bringing down the former relatively high rate of return for businesses in the region. The direct investment figures did not include the planned divestitures of major companies in Jamaica (Reynolds Metals), Costa Rica (United Brands), and the Netherlands Antilles (Exxon). The few new projects included data processing, electronics, manufacturing, and hotel development.

In its September 1986 report on the first two years of CBERA operation, the United States International Trade Commission (ITC) emphasized the percentage increases in exports destined for the United States from non-oil-refining CBI countries. An average increase of 14.8 percent was noted in exports from these Central American and Caribbean CBI nations. Nevertheless, the report observed that these increases compared unfavorably with the 33.8-percent growth rate of American imports worldwide. The ITC report concluded that the impact of the CBERA on United States industries and consumers had been minimal. The report also noted the problems involved with export-oriented economic development in the Caribbean region. According to the ITC, growth in Caribbean exports is likely to be slow because producers in the region face a number of constraints, including high transportation costs, inadequate infrastructure, and a lack of experience and access to marketing channels in the United States. Subsequent ITC reports will be published annually, as mandated by law, until the expiration of the CBERA in 1995.

The reactions of CBI countries and dependent territories to the CBI have been mixed. Although several, most notably Costa Rica, have praised the CBI, many of the smaller one have expressed concerns over the CBI's shortcomings. In August 1985, the prime ministers of eleven Caribbean states informed President Reagan of their concern about increased United States protectionism. They also pointed out that the CBI excludes products that are important for foreign exchange earnings and employment potential, most notably textiles, footwear, and leather products. At the 1986 Caribbean Community and Common Market (Caricom--see Appendix C) summit meeting in Guyana, Caribbean leaders indicated further reservations about the CBI. They reported that aid levels to Caricom nations had stagnated since the increases of 1983 and also pointed out that smaller countries of the Eastern Caribbean lacked the necessary infrastructure to take advantage of CBI benefits. Several suggestions to improve the CBI came out of the summit meeting, including an increased United States sugar quota, a 10-percent tax credit for United States investors in the region, and an increase in development aid, particularly for infrastructure projects, through regional development institutions, such as the Caribbean Development Bank.

* * *

Since the CBI was first proposed in 1982, much material has been published on the principles, benefits, and shortcomings of the program. Notable United States government publications include the Department of Commerce's annual guidebook on the CBI; the Department of State's Background on the Caribbean Basin Initiative (1982); the United States International Trade Commission's Annual Report on the Impact of the Caribbean Basin Economic Recovery Act on U.S. Industries and Consumers, first published in 1986; and Elliot Abrams's ""CBI and the U.S. National Interest."" An extensive review of the CBI was also presented in the published hearings of the Subcommittee on Oversight of the House of Representatives' Committee on Ways and Means, held in February 1986. Journal articles providing background on the CBI include ""Sinking in the Caribbean Basin"" by Robert Pastor, ""The Reagan Caribbean Basin Initiative, Pro and Con"" published in the Congressional Digest, and Nicholas Raymond's ""Caribbean Basin Initiative Revisited."" (For further information and complete citations, see Bibliography.)


Caribbean Islands - TABLE OF CONTENTS


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