Appendix B -- Dominican Republic and Haiti
CARIBBEAN BASIN INITIATIVE
The Caribbean Basin Initiative (CBI), enacted by the United
States Congress in 1982-83, represented one of the major United
States foreign economic policies toward Latin America and the
Caribbean in the 1980s. Mainly a trade promotion program, the
Initiative provided duty-free access to the United States market
for about 3,000 products; it expanded bilateral economic
assistance; and it allowed some limited tax breaks for new United
States investors in the region. A number of United States agencies
contributed to the formulation and implementation of the policy. As
a result of the early failure of the CBI to stimulate exports from
many of the countries involved, legislators attempted to amplify
the program, and by 1990 Congress and the White House were expected
to approve an expanded version. Whereas the CBI had improved the
region's prosperity only slightly, by 1989 it had served
nonetheless as a catalyst toward economic diversification in a
number of Caribbean Basin countries.
The Reagan Administration's Proposal and Congressional
Amendments
On February 24, 1982, in a speech before the Organization of
American States, President Ronald Reagan unveiled a new proposal
for the economic recovery of Central America and the Caribbean. The
Reagan plan expanded duty-free entry of Caribbean Basin exports,
for up to twelve years, as well as increased economic assistance
and tax incentives for new United States investment in the region.
The administration's proposal arose in the political context of a
successful revolution in Nicaragua, active insurgencies in El
Salvador and Guatemala, and coups in Grenada and Suriname that had
established radical leftist regimes. Dramatic political change,
coupled with an international economic crisis characterized by high
oil prices, unprecedented interest rates, and declining commodity
prices, rekindled the interest of United States policy makers in
the region.
In September 1982, the 97th Congress passed the foreign aid
portion of the president's plan in the form of Public Law 97-257,
after scaling back some portions of the proposal, most notably the
amount of aid earmarked for El Salvador. Even with congressional
amendments, the overwhelming share of the US$350 million in
supplemental assistance under the Caribbean Basin Economic Recovery
Act, the bill's official name, went toward the most strategically
important nations in the region: El Salvador, Costa Rica, Jamaica,
the Dominican Republic, and Honduras. Impoverished Haiti, for
example, received only US$10 million in supplementary aid.As a
result of opposition from domestic labor and industrial interests,
the 98th Congress did not pass the trade provisions of the Act (as
Public Law 98-67) until July 1983. The bill's final version,
however, excluded the following items from duty-free coverage:
petroleum and petroleum products, sugar, canned tuna, luggage,
handbags, certain other leather goods, flat goods, rubber and
plastic gloves, footwear, textiles and apparel subject to the
Multifiber Agreement, and watches or watch parts manufactured in
communist countries. Critics of the Initiative argued that with or
without these exclusions, it represented more a political policy
than a developmental one because new duty-free provisions would
provide only limited economic benefits. Congressional sentiment ran
against the investment tax exemptions originally included in the
bill, and these measures were never approved. Some tax breaks were
extended, however, to companies holding business meetings in
certain countries.
Section 212 of the Act provided the president with the
authority to designate beneficiary countries. To qualify, countries
had to have a noncommunist government, had to meet specific
requirements concerning the expropriation of United States
property, had to cooperate in regional antinarcotics efforts, had
to recognize arbitral awards to United States citizens, could not
provide preferential treatment to the products of developing
countries in such a manner as to adversely affect United States
trade, had to abstain from the illegal broadcast of United States
copyrighted material, and had to maintain an extradition treaty
with the United States. In addition, the Act authorized the
president to consider eleven discretionary criteria to qualify
potential beneficiaries. These included such considerations as the
use of subsidies, acceptance of the rules of international trade,
and guarantees of workers' rights. President Reagan initially
announced twenty-one beneficiary nations or territories from the
Caribbean, Central America, and the Northern coast of South
America. Countries excluded from the list included Cuba, Nicaragua,
Guyana, Suriname, Anguilla, the Cayman Islands, and the Turks and
Caicos Islands, none of which applied for designation. The Bahamas
became a beneficiary nation in March 1985; Aruba became one in
January 1986 (its independence date); and Guyana, in November 1988.
In March 1988, President Reagan suspended Panama's eligibility
because of reported links between that country's government and
international narcotic traffickers.
The CBI legislation also encompassed other important
provisions. Section 213 stipulated the basic product eligibility
rule that at least 35 percent of the value-added of the imported
product had to originate in a beneficiary country for that country
to qualify for duty-free treatment. This section also empowered the
president to withdraw duty-free treatment in case of injury to
domestic industries resulting from CBI imports. As a result of
complaints from Puerto Rico and the United States Virgin Islands
that the CBI extended benefits previously reserved for United
States overseas territories, section 214 set forth special benefits
under the law. These included an increase in foreign content for
product eligibility of up to 70 percent, as well as other more
technical exemptions. Section 221 also transferred all rum taxes
proceeds to the treasuries of the two United States possessions.
Puerto Rico also benefited from the twin plant plan (see Glossary),
which encouraged United States investors to operate complementary
factories in Puerto Rico and in other beneficiary countries. This
framework enabled investors to tap funds accumulated under section
936 (see Glossary) of the United States Internal Revenue Code in
order to develop complementary operations if the recipient country
had signed a Tax Information Exchange Agreement (TIEA) with the
United States. Finally, Section 222 permitted tax deductions for
business conventions in the region if the country had signed a
TIEA.
The CBI Network
The United States Department of State played a central role in
designing and implementing the Initiative, but many other
executive-branch agencies contributed extensively to the policy.
The United States Agency for International Development (AID)
administered most economic assistance flows, concentrating its
efforts on the private sector. The Overseas Private Investment
Corporation, the Peace Corps, the Department of Transportation, the
Export-Import Bank, and the Customs Service of the Department of
the Treasury all enhanced and complemented AID's endeavors. The
Department of Commerce, through its Caribbean Basin Information
Center and its normal regional offices, provided information
packages, investment climate statements, economic trend reports,
special product advice, investment missions, a monthly networking
newsletter, and other information and services for potential
investors. The Department of Agriculture similarly promoted the CBI
through frequent agribusiness marketing workshops and technical
assistance missions, and by supplying important regulatory
information on United States import standards. The International
Trade Commission and the Department of Labor took part by issuing
in-depth annual reports on the progress of the CBI and its impact
on the United States. The Office of the United States Trade
Representative oversaw bilateral investment and textile agreements;
and, beginning in 1987, that office hired an ombudsman to direct
the CBI Operations Committee, an interagency task force dedicated
to the policy's success. Finally, public and private monies helped
to create a strong private business and advocacy network to further
the aims of the CBI.
The United States government also generated a certain amount of
multilateral and bilateral support for the Initiative. Mexico,
Venezuela, Colombia, and the European Economic Community supported
the CBI in a limited way, mainly through the extension of existing
programs. Japan increased its aid to the region, as did Canada; on
February 17, 1986, the Canadian government offered its own import
preference program for the region, a package it dubbed Caribcan.
Multilaterals such as the Inter-American Development Bank, the
World Bank (see Glossary), and the International Monetary Fund (see
Glossary) also cooperated with the Initiative through a variety of
programs, particularly policy reform efforts coordinated with AID.
Expansion of CBI Benefits and Programs
Visiting the island of Grenada on February 20, 1986, President
Reagan announced increased access to the United States market for
apparel assembled in the Caribbean Basin in an effort to enlarge
the impact of the CBI. The program, referred to either as 807-A
(see 807 program, Glossary) or "Super 807" provided guaranteed
access levels for CBI beneficiary countries through import quota
negotiations based on previous exports and expected growth. The
proposal was the direct result of regional discontent with the
limited benefits of the Initiative and the expressed fears of
regional leaders with regard to mounting protectionist sentiment in
the United States. A group of leaders of the English-speaking
Caribbean had expressed their dissatisfaction through a detailed
letter to President Reagan in late 1985. Regional leaders generally
welcomed the small improvement made through the 807-A announcement
because of the extraordinary growth in textile production since the
inauguration of the CBI.
After a series of regional and Washington-based hearings, in
1987 members of Congress introduced legislation to improve further
the benefits of the Initiative. By mid-1989, a number of proposals
had been combined under the Caribbean Basin Economic Recovery
Expansion Act of 1989 (H.R. 1233), most of which was expected to
become law. Stating that "the existing program has not fully
achieved the positive results that were intended," the House's
Expansion Act, dubbed CBI II, proposed an indefinite time extension
for duty-free entry of CBI covered products (previously scheduled
to expire September 30, 1995) and the addition of several specific
garments and fabrics to be provided reduced or exempted duties. It
also guaranteed market access for textiles and footwear via
bilateral agreements with all beneficiary nations; potential
increases for beneficiary countries in their sugar quotas, through
reallocations from other countries that did not reach their
allotted share; increased duty-free allowances for United States
tourists visiting the region; more flexible criteria for ethanol
imports; increased postsecondary scholarships for study in the
United States; greater promotion of tourist development; and the
trial establishment of preinspection customs facilities to expedite
exports. CBI II also sought special measures to enable the Eastern
Caribbean and Belize to reap greater benefits from the program, as
well as the application of new rules of origin for determining the
content of duty-free imports, the employment of internationally
recognized workers' rights criteria in evaluating the compliance of
beneficiary countries, and a requirement that the president report
to Congress every three years on the progress of the Initiative.
An Assessment of the First Five Years
One of the major aims of the plan was to increase economic
assistance in order to foster sustained economic growth through
stimulation of the private sector and the expansion of exports.
Beneficiary nations sought increased aid to cushion the impact of
the recession of the early 1980s and to provide support during the
difficult economic adjustment period of the mid-1980s. The US$350
million in assistance to the region, provided under the auspices of
the CBI as a supplement to annual allocations, contributed to a
dramatic increase in United States assistance to Central America
and the Caribbean, from US$300 million in 1981 to nearly US$1.5
billion in 1985. A large portion of this assistance, however, was
motivated by United States strategic concerns rather than
developmental ones. For example, El Salvador, engaged in a war
against leftist insurgents, received nearly one-third of all
assistance throughout this period. Similarly, some strategic
countries received allocations in excess of their absorptive
capacities while other countries pursued additional United States
support. Increased assistance gave the United States significant
leverage in encouraging recipient countries to reform their
economic policies in such areas as exchange rates, the promotion of
increased and diversified exports, the expansion of light
manufacturing, reductions in import controls, privatization of
state-owned enterprises, the balancing of fiscal accounts,
promotion of small business development, and the upgrading of
infrastructure. Evidence of the impact of these reforms continued
to be inconclusive at the close of the decade, but several
countries had begun to open and to diversify their economies,
thereby setting the stage, it was hoped, for sustained future
growth.
The promotion of increased foreign investment, although not
part of the final CBI legislation, continued to be one of the
overall goals of the Initiative. In 1988 the United States
Department of Commerce surveyed Caribbean investment trends in a
comprehensive manner, after a previously unsuccessful attempt to
quantify CBI-related ventures in 1986. The 1988 survey revealed
that significant new investment had taken place in the region
during the 1984-88 period, despite the lack of tax credits for
United States companies. The 642 United States companies
participating in the study accounted for US$1.6 billion in new
investment in CBI countries (excluding Panama) and for 116,000 new
jobs. Only 150 of these firms (23 percent), however, exported CBI-
eligible products; therefore, the CBI was directly related to the
creation of only 15 percent of the new jobs. Furthermore, the new
investment was highly concentrated; five countries accounted for 67
percent of all new investment. By 1988 the Dominican Republic had
surpassed Jamaica as the prime investment location, and it received
one-fifth of all the Caribbean Basin's new investment because of
the vibrant growth of its industrial free zones. By contrast, Haiti
suffered disinvestment because of political unrest, high nonwage
costs, and increased regional competition for investment in labor-
intensive industry. More than half of all foreign investment was
from the United States, followed by the Republic of Korea (South
Korea), Canada, and Hong Kong. Although new CBI-related and other
foreign investment helped the balance-of-payments positions of
several countries and provided badly needed jobs in manufacturing
and tourism, foreign exchange remained scarce in the late 1980s,
and unemployment continued to hover at dangerously high levels in
most countries.
The centerpiece of the Initiative, however, was neither aid nor
investment, but one-way duty-free trade with the United States. An
assessment of CBI trade data demonstrated both negative and
positive trends. On the negative side, the value of total Caribbean
Basin exports generally declined throughout the 1980s because of
dwindling prices for the region's traditional exports, such as
petroleum, sugar, and bauxite. Except in the case of sugar, this
poor performance was attributable almost solely to the vagaries of
primary product prices. United States policy clearly damaged sugar
exports, however, through the reimposition of sugar quotas in 1981
and through the 75 percent reduction in Caribbean and Central
America quotas from 1981 to 1987, a trend that offset export growth
among CBI-exempted products. Not only did the region's total
exports drop by US$2.7 billion from 1983 to 1988, but its share of
the United States market weakened, dropping from 6.5 percent of
United States imports in 1980 to 1.6 percent by 1987. As was true
of investment, only a small percentage (less than 20 percent) of
the growth in nontraditional exports resulted from duty-free entry
extended through the CBI. Furthermore, only ten items accounted for
the great majority of products that entered the United States
market duty-free. Moreover, exports, like investments, were
concentrated; only a handful of countries generated the
overwhelming share of CBI 806.3 (see 807 program, Glossary) and 807
exports, while some countries suffered substantial declines in
exports. Overall, despite import exemptions in the United States
market, the United States ran a trade surplus with the region from
1987 to 1989. After years of pursuing the goal of "trade, not aid,"
United States policy through the CBI in 1989 continued to provide
fewer economic benefits from trade than from aid.
Despite some negative trends, Caribbean Basin countries
experienced substantial growth in nontraditional exports during the
1980s. For example, although the Basin's total exports lagged
behind other regions, growth in manufactures and other
nontraditional exports far surpassed that of other regions. In
fact, some Basin countries outperformed even the newly
industrialized countries of Asia. The composition of trade shifted
markedly away from agricultural commodities and raw materials in
favor of nontraditional exports, textiles, and apparel. In 1983 the
region's exports broke down as being 78 percent traditional
commodities, 17 percent nontraditional ones, and 4 percent textiles
and apparel; by 1988, however, traditional exports represented only
37 percent of total exports, compared with 44 percent for
nontraditionals, and 19 percent for textiles and apparel. This
shift was particularly true of United States imports covered under
the 807 provisions; the value of these imports more than doubled
from 1983 to 1988. Judging by these statistics, it appeared that
although the CBI directly stimulated only limited export growth,
its emphasis on nontraditional exports contributed to the
restructuring of much of the region's external trade. Such
restructuring was especially found among Caribbean countries
because of the larger share of depressed primary products in their
export baskets relative to those of Central America.
After an initial lag period, CBI trade statistics improved
markedly in 1988, and observers expected continued growth in trade
and investment. Although many of the structural obstacles to
development in the region endured, the broadening of the productive
and export base improved long-term prospects for economic growth.
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