The Caribbean Basin Initiative (CBI), enacted by the United States Congress in 1982-83 and modified and expanded in 1990, represented one of the major United States foreign economic policies toward Latin America and the Caribbean in the 1980s and 1990s. 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. Whereas the CBI had improved the region's prosperity only slightly by 1991, it had served nonetheless as a catalyst toward economic diversification in a number of Caribbean Basin countries.
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 Multi-fibre Arrangement, 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 narcotics traffickers. Panama's suspension was lifted in 1990 after the United States invasion. The 1991 United States embargo against Haiti after that nation's coup effectively curtailed the CBI's program for Haitian exports (see table C, this Appendix).
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 beneficiary country content for product eligibility of up to 70 percent, as well as other more technical exemptions. Section 221 also transferred all rum tax 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 of the United States Internal Revenue Service Code, known as 936 funds (see Glossary), 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 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.
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. Guaranteed access levels for CBI beneficiary countries were provided through import quota negotiations based on previous exports and expected growth under the Tarriff Schedule 807 program (see Glossary). 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 program 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), which became law on August 20, 1990. Stating that "the existing program has not fully achieved the positive results that were intended," the 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.
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 1991, 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$1.8 billion from 1984 to 1990, 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 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 area's total exports lagged behind other regions, growth in manufactures and other nontraditional exports far surpassed that of other regions. In fact, some Caribbean 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.