The Caribbean Basin Economic Recovery Act (CBERA), operative since January 1, 1984, authorizes the President to proclaim duty-free treatment or reduce duties on eligible products of designated Caribbean, Central American, and South American countries. The primary goal of CBERA is to promote export-oriented growth in the Caribbean Basin countries and to diversify their economies away from such traditional agricultural products and raw materials as aluminum, bananas, coffee, petroleum, and sugar.

Background:
Section 215 of CBERA requires the U.S. International Trade Commission (the Commission) to report annually on the actual and probable future effects of CBERA on the U.S. economy generally, on U.S. industries, and on U.S. consumers. The effects of duty reductions are measured by estimating: (1) the extent to which consumers benefit from duty reductions through lower prices (consumer surplus); (2) the loss of tariff revenues to the Government; and (3) the potential displacement of domestic production. Net welfare effects are measured by subtracting estimated tariff revenue losses from estimated gains in consumer surplus.1 The potential displacement in domestic production is measured based on the change in demand for competing domestic products. Probable future effects are estimated based on an analysis of recent investment data.

1995 trade update:
The United States has had a collective trade surplus with the countries designated for CBERA benefits since 1987; that surplus was $2.3 billion in 1995. U.S. merchandise imports from the 24 CBERA beneficiaries totaled $12.6 billion in 1995, or 1.7 percent of U.S. imports worldwide, while U.S. exports were just under $14.8 billion.

Welfare effects include changes in consumer surplus and producer surplus that result from price changes. To produce maximum potential welfare and displacement estimates, the analysis used in this report does not consider changes in producer surplus because it assumes that production in each market faces no constraints in meeting demand over the relevant range that is, the supply of U.S. domestic production is assumed to be perfectly elastic (the supply curves in all of the markets are horizontal) and, consequently, U.S. domestic prices are assumed not to fall in response to CBERA imports.

More than two-thirds of total U.S. shipments from CBERA beneficiaries enter free of duty under one of several U.S. provisions. Imports entered duty-free under CBERA provisions totaled a record high $2.2 billion in 1995, or 17.7 percent of imports from the CBERA beneficiaries; imports valued at $37 million paid duties that were reduced, but not eliminated, under other CBERA provisions. In comparison, imports from CBERA beneficiaries entered duty-free under Generalized System of Preferences (GSP), which was not operative from August 1 through December 31, 1995, were $260 million. Articles eligible for GSP duty-free entry (when that program is operative) also are eligible for duty-free entry under CBERA and could have entered under either program.

Two countries the Dominican Republic and Costa Rica supply the bulk of the shipments entered under CBERA provisions. These two countries combined have accounted for more than one-half of total annual CBERA entries since 1989. In 1995, the Dominican Republic was the top supplier of leather footwear uppers and jewelry of precious metal the leading items entered under CBERA. The top CBERA entries from Costa Rica were jewelry of precious metal and electrothermic hair dryers.

Effects of CBERA on U.S. industries and consumers:
Of the $2.2 billion worth of U.S. imports that entered under CBERA provisions in 1995, $1.4 billion of those imports could not have received tariff preferences under any other program. The Commission used a partial-equilibrium analysis of the 25 leading items benefiting exclusively from CBERA tariff preferences in 1995 to produce estimates of the maximum potential effects of CBERA.

All of the items analyzed for which data were available produced net welfare gains for U.S. consumers. Ethyl alcohol yielded the largest such gains (valued at $7.6 million); followed by frozen concentrated orange juice ($1.8 million); medical instruments ($824,000); fresh cantaloupes entered from September 16 through July 31 ($672,000); frozen vegetables ($656,000); trunks, suitcases and briefcases with outer surface of other textiles ($577,000); and jewelry and parts of precious metal except silver, except necklaces and clasps ($568,000).

Industries estimated to experience maximum displacement of more than 5 percent of the value of U.S. production were electrical variable resistors (10.6-percent displacement, valued at $781,000); frozen vegetables (9.1-percent displacement, valued at $498,000); ethyl alcohol (5.9-percent displacement, valued at $84.3 million); and pineapples (5.5-percent displacement, valued at $3.2 million).

Probable future effects of CBERA:
CBERA tariff preferences are likely to have minimal future effects on the U.S. economy. Based on reports from U.S. Embassies in the Caribbean Basin region on investment activity during 1995, the Commission identified 26 new projects and 10 expansion projects involving the production of goods intended for export to the United States under CBERA provisions. These projects involved capital outlays totaling $28.9 million.

Of the investments projects identified, only two both to produce medical instruments in Costa Rica involved the production of goods that had some small measurable estimated welfare gain for U.S. consumers in 1995, but displaced a maximum of less than 0.6 percent of U.S. production, according to the Commission's estimates.