Trade Liberalization and the Caribbean Essay

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Trade Liberalization and the Caribbean

The current global economy espouses trade liberalization as the only way in which both developed and less developed countries (LDC’s) can benefit from each other. Trade liberalization is the establishment of open economies through the removal of barriers that protect domestic production from imports and foreign capital (Greenpeace).

            Examples of these barriers are tariffs, laws that limit foreign ownership of land and other resources or limit foreign participation in investment. Trade liberalization also means less government regulation of the economy in terms of subsidies and incentives to domestic producers (Greenpeace). The Caribbean has existing trade agreements with the United States that are aimed towards liberalization.

U.S. – Caribbean Trade Relations

            U.S.-Caribbean Basin Trade Partnership Act, which took effect in 2001, encapsulates the economic policy of the United States in the Caribbean Basin. The CBTPA grants duty-free access to certain export goods from eligible Caribbean countries (USTR). The CBTPA laid down a set of criteria in selecting countries eligible to trade with the U.S., rules governing trade and a list of preferred goods for export to the U.S. market.

            The Caribbean Basin includes the Caribbean and some countries in Central America. Currently, there are 19 eligible countries of which 12 are in the Caribbean – Aruba, Bahamas, Barbados, Belize, Guyana, Virgin Islands, Dominican Republic, Haiti, Jamaica, Netherlands, Trinidad and Tobago as well as the Organization of Eastern Caribbean States composed of 9 more states in the region (USTR).

            The eligibility of Caribbean countries is based on their adherence to the globalization policies of trade liberalization, privatization and deregulation. In addition, they should not act against the national interest and security of the U.S. and should support the international war against terror, participate in the World Trade Organization and trade exclusively with the U.S. among others (Shigetomi, Sastry and Ginsburg 25-30). Otherwise, the U.S. has the right to revoke trade partnership.

            Currently, the Caribbean Basin is the 10th largest market for U.S. products, consuming $28.1 billion worth of imported goods in 2006 (Shigetomi 7). Meanwhile, the Caribbean Basin was able to export $26.1 billion worth of products to the U.S. in the same year. Petroleum and natural gas products, i.e. methanol or ethanol, composed 43% of the total U.S. imports from the region (Shigetomi 4). Minor imports include apparel, cigars, jewelry, electrical components, sugar and other agricultural products. Meanwhile, the U.S. exported mainly refined petroleum products, semiconductors, jewelry, corn, cell phones and automatic circuit breakers to the Caribbean (Shigetomi 9).

            For textile and apparel products, they may enter duty free into U.S. territory only if they are made with 50% fabric and thread manufactured and cut in the U.S. and that all dyeing, printing and finishing are completed in U.S. territory (Shigetomi 3,12). For the automotive wire harnesses produced in Haiti, it may also enter the U.S. if 50% of the materials used were outsourced from the U.S (Shigetomi, 13).

            Duty free entry exempts products from tariffs that increase the costs of production and consequently raising its price. Hence, duty free or preferential access permits the price of Caribbean products to be competitive in the U.S. market.  The CBTPA is advanced by the U.S. to promote economic development and export diversity in the Caribbean (USTR).

Trade Liberalization and the Caribbean Economy

            However, 7 years after it has been implemented and with a few months left before the CBTPA ends this year, Caribbean economies are far from being developed or diversified. The Shigetomi Report is the 7th and final report to the U.S. Congress with regards to the impact of the CBTPA in the Caribbean. The following are inferences from the Country Reports (pp. 21-85) included in the Shigetomi Report where information from other sources are indicated through proper citation:

            The Caribbean is currently heavily dependent on the tourism industry which contributes from 30-60% of the GDP of the states in the region. This industry is reliant on outside capital from American investors for the construction of hotels, resorts, residences and related infrastructure. Consequently, up to 80% of tourists are from the United States.

            The industries in the Caribbean are generally composed of: labor-intensive industries such as textile and apparel or construction, service industries such as telecommunications, retail and off-shore banking or offshore incorporation as well as extractive industries such as mining. These industries are also dependent on direct foreign investment as can be seen in the case of Jamaica. The absence of heavy industries for manufacturing raw materials into finished products has made the Caribbean dependent on the U.S. For instance, Jamaica exports petroleum to the U.S. where it is refined and exported back to the Caribbean.

            Agricultural production for domestic food needs has been largely neglected where the focus has been on single crop production of bananas, sugarcane, tobacco or cocoa since the 1980’s. These crops were primarily exported to the U.S. However, when the U.S. started to produce and export beet sugar, it lowered the price of sugar significantly and the U.S. imposed a quota on Caribbean cane sugar at the same time (Ahmed 4). The absence of government support, increasing price of inputs and the barriers set by the U.S. as the single biggest market, the Caribbean farmers were at a losing end (Ahmed 5).

            The decreasing U.S. imports of Caribbean agricultural products since 2000 led the sugar production in St. Kitts and Nevis to close down in 2005, displacing some 1,200 workers. In St. Vincent, the banana industry, which employs 60% of the total labor force, is rapidly declining. The same is true in Haiti where more than 60% of the workforce is in the agricultural sector, in Dominica where farmers rely on a declining cocoa and nutmeg production and in banana-producing St. Lucia.

            Further, economic reforms towards liberalization as a requirement for continued eligibility under the CBTPA included the equal treatment of American and local investors under the laws of the Caribbean states. Currently, Belize has not fully complied and has been the subject of complaints from the American business community. Deregulation and privatization have also led to cuts in public spending. This led Antigua and Barbuda to consequently cut its public sector workforce, for the Dominican Republic and Jamaica to privatize electricity generation and transmission. This facilitated the entry of private corporations in the realm of public services.

            Most of the countries in the Caribbean are still heavily indebted to foreign funding institutions such as the World Bank and where a large portion of their internal revenue are spent in payment of these loans. Imports continue to be higher than exports, with the exception of the Bahamas and Barbados. The resulting huge trade deficits mean that the value of what they consume is more than the value of what they produce locally. The Shigetomi report states that poverty is still relatively high in the region, especially in Haiti and that the educational system continues to be weak in Jamaica.

Who benefits from free trade?

            Because of an underdeveloped agricultural and manufacturing base which are crucial to industrialization and self-reliance, majority of Caribbean states have been and still are heavy importers of basic commodities (i.e. food, petroleum) and capital goods (i.e. machinery). The Shigetomi report in fact lauds the Dominican Republic as the “7th largest importer of U.S. goods in the Western Hemisphere” (37).

            The dependency on imports has been further reinforced by trade when the CBTPA has limited the trading partners of the Caribbean states to a single developed country – the U.S. Through the criteria for eligibility and rules of trade, the U.S. seems to have established both a captive market and a secure business environment for their excess products represented in their exports and their excess capital represented in their direct foreign investments.

            Trade, through preferences, has also dictated what products the participating countries should produce in order to be competitive. These products or services are largely what the U.S. needs at the same time, products that also do not compromise its local producers. The high tariffs for cane sugar made beet sugar producers in the U.S. and the recent rules regarding textiles and apparel were meant to protect its sugar and textile industry.

            The non-inclusion of the main Caribbean agricultural products for duty free access in recent years made it difficult for the Caribbean to gain a foothold in the U.S. market, hence the decline of agricultural production in the past 7 years and the large-scale shift to tourism. This is a manifestation of unfair trade where the U.S. can use barriers to protect its domestic industries while its LDC trading partners are bound by the rules to liberalize.

            Currently, the U.S. is a major consumer of oil and is expanding its energy sources after 9/11 in efforts to reduce its reliance on oil in the Middle East. Fluctuations in prices of crude oil in the OPEC controlled countries in that region have led to the sourcing of petroleum from other regions in the world (McCormick). The proximity of the Caribbean and its relatively high reserves made the region an ideal energy source.

            In the case of the textile and automotive wire harnesses, strict outsourcing and final processing rules meant that raw fiber and wiring materials produced in the U.S. have a steady market, the labor-intensive process of production are done by workers in the Caribbean while the less intensive finishing touches to these products are done by American workers.

            The jobs generated by tourism, telecommunications, mining, construction and the textile and apparel industry should be qualified if they have indeed impacted on the quality of life of Caribbeans. It seems that most of these jobs require a large number of blue collar or low-skilled workers either as housekeepers in the hotels, construction workers, miners and seamstresses. The concern of the CBTPA has been the establishment of minimum wages favorable for investment. This is especially so when Asian countries such as China are also textile and apparel producers. Keeping minimum wages low makes the prices of goods for export equally competitive but at the detriment of workers (McCormick).

Conclusion

            Economic development has always been a by-word in economic policies. In the context of the U.S. – Caribbean trade, it has come to mean trade liberalization, direct foreign investment, shaping one’s economy to suit not the demand of the domestic market but of foreign markets, declining agriculture and low-paid jobs. It has meant an unequal trading relationship where the developed country makes the rules, enforces it and the LDC’s have only to comply.

            Economic development should be equated to industrialization or the capacity to produce the food and non-food needs of society. Industrialization means the establishment of both heavy and light industries and the domestic production of raw materials. This means the development of agriculture to supply domestic food needs as well as industry requirements and the development of manufacturing to process raw materials into other consumable products.

            However, the present character of the global economy which espouses trade liberalization has severely limited the capacity of non-developed countries such as those in the Caribbean region towards industrialization. It has led to an export-oriented and import-dependent character of the economy where exports are raw and semi-processed products and imports are finished goods. Overall, it seems that developed countries such as the U.S. primarily benefit from trade over the LDC’s it establishes trade partnerships with.

Works Cited

Ahmed, Belal. “The Impact of Globalization on the Caribbean Sugar and Banana Industries”.    The Society for Caribbean Studies Annual Conference Papers 2 (2001). 27 March      2008 <http://www.caricom.org/jsp/community/donor_conference_agriculture/ preferences.pdf>

McCormick, Richard. “The African Growth and Opportunity Act: The Perils of Pursuing           African Development through U.S. Trade Law”. Texas International Law Journal,           41(339), 2006: pp.339-381. 24 March 2008  <http://proquest.umi.com>.

Greenpeace International. “What is free trade?” 2008. 27 March 2008             <http://www.greenpeace.org/international/campaigns/trade-and-the-          environment/what-is-free-trade>.

Shigetomi, Kent, Shubha Sastry and Mitchell Ginsburg. “Seventh Report to Congress on the      Operation of the Caribbean Basin Economic Recovery Act”. 31 December 2007. 27     March 2007 <http://www.ustr.gov/assets/Trade_Development/   Preference_Programs             /CBI/asset_upload_file373_13752.pdf>.

United States Trade Representative. “Caribbean Basin Initiative”. 2008. 27 March 2008             <http://www.ustr.gov/Trade_Development/Preference_Programs/CBI/Section_Index.     html>.

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