EXECUTIVE SUMMARY

This report covers the impact on the United States of the Caribbean Basin Economic Recovery Act (CBERA) and the Andean Trade Preference Act (ATPA) during calendar year 1996. Given the similarity in the reporting requirements for each of these statutes and their identical statutory reporting date, the Commission has combined the reports into a single document. Section 215 of the CBERA statute requires the Commission to prepare an annual report assessing both the actual and the future probable effects of CBERA on the U.S. economy generally, on U.S. industries, and on U.S. consumers. Similarly, section 206 of the ATPA requires the Commission to report annually on the program. The approach taken to determine the probable effect of CBERA and ATPA is the use of a partial-equilibrium analysis to produce "upper bound" estimates of these welfare effects on the U.S. economy, U.S. industries, and U.S. consumers. Lower bound estimates were not calculated. The future probable effect of CBERA and ATPA on the United States is estimated by an examination of export-related investment in the beneficiary countries. Data sources for the reports include travel, direct observation, interviews with other government agencies, and reports from U.S. embassies.

Part I. Caribbean Basin Economic Recovery Act: Impact of CBERA on the United States

The Caribbean Basin Economic Recovery Act has been operative since January 1, 1984. CBERA eliminates, or in some cases reduces, tariffs on eligible products of 24 designated Caribbean, Central American, and South American countries and territories. The primary goal of CBERA is to promote export-oriented growth in the Caribbean Basin countries and to diversify their economies away from traditional agricultural products and raw materials. CBERA applies to the same tariff categories covered by the more restrictive U.S. Generalized System of Preferences (GSP) program. CBERA benefits extend beyond those of GSP in that they apply to additional products and the product-qualifying rules are more liberal.

Main Commission findings

• The overall effect of CBERA-exclusive imports on the U.S. economy and on consumers continue to be negligible in 1996. In 1996, the value of duty-free U.S. imports under CBERA was around 0.035 percent of U.S. gross domestic product. The total value of U.S. imports from CBERA countries amounted to 1.8 percent of total U.S. imports.

• Ethyl alcohol provided the largest estimated gain in consumer surplus ($17.2 million) resulting exclusively from CBERA tariff preferences in 1996. Seasonal cantaloupes provided the second largest estimated gain in consumer surplus ($11.3 million).

• Industries were screened for potential effects of CBERA on U.S. production in 1996. Industries with potential displacement of 5 percent or more were selected for additional discussion. Industries selected were those producing seasonal cantaloupes, higher-priced cigars, certain seasonal melons, and fresh pineapples. Additional analysis was applied to these items that indicated that potential displacement may not be as high as that estimated in the screening process for some of the products. Commission analysis suggests that CBERA production often complements, rather than competes directly with, U.S. goods. For example, U.S. cigar imports from the CBERA region surged in 1996 under CBERA owing to a trend toward increased premium cigar consumption. These cigars do not compete directly with the bulk of U.S. cigar production, which is machine manufactured. The small U.S. hand-rolled-cigar industry is operating at full capacity.

• Duty-free imports of the 25 leading CBERA-exclusive items, except for 2 sugar subheadings, produced net welfare gains for U.S. consumers in 1996. Ethyl alcohol yielded the largest such net gain, valued at $8.0 million, followed by seasonal cantaloupes, frozen orange juice, methanol, and certain jewelry and parts.

• The probable future effect of CBERA on the United States is expected to be minimal in most economic sectors. However, the Commission was able to identify 31 discrete investments in export-oriented production of CBERA-eligible products, including electronic components, fruits, vegetables, and life rafts. Some of these investments were also made in textiles and apparel. Together, these investments amounted to over $30 million in 1996.

• U.S. imports from the Caribbean Basin continued to grow after NAFTA's inception in 1994, but at a slower rate. In contrast, growth in the share of U.S. imports accounted for by the rest of the world declined. Commission analysis suggests, in general, that a higher degree of trade diversion occurred between imports from the rest-of-the-world and NAFTA countries than between CBERA and NAFTA countries.

• Of the sectors that were the focus of specific analysis, apparel accounted for the largest share of U.S. imports, or 40 percent. This sector also showed the most growth in U.S. imports from both Mexico and CBERA beneficiaries during the period 1991-96. As predicted prior to NAFTA, U.S. apparel imports from CBERA and NAFTA suppliers were most affected by shifts in sourcing and investment to Mexico. The devaluation of the Mexican peso, U.S. textile quotas on East Asian suppliers, and rising costs in certain Caribbean economies also appear to have been important factors affecting the growth in Mexico's share of U.S. apparel imports.

Trade-related activities in 1996

• The leading items entering the United States under CBERA provisions in 1996 were: raw sugar; certain leather footwear uppers; higher-priced cigars; jewelry made of precious metals; and medical, surgical, and dental instruments; all items were principally from the Dominican Republic.

• Of the $2.8 billion in U.S. imports that entered under CBERA in 1996, imports amounting to $2.3 billion could not have received tariff preferences under any other program. The five leading import items benefiting exclusively from CBERA in 1996 were raw sugar, leather footwear uppers, higher priced cigars, certain jewelry and parts, and methanol.

• The United States has consistently had a merchandise trade surplus with the CBERA countries collectively since 1987. In 1996, this surplus amounted to $829.9 million, down from $2.3 billion in 1995 and was the smallest since 1988.

• Apparel is the fastest growing category of U.S. imports from CBERA countries. Apparel imports grew from 5.5 percent of the value of overall U.S. imports from the region in 1984 to 41 percent in 1996. Most apparel is not eligible for CBERA tariff preferences, but it does benefit from reduced duties under HTS 9802 production-sharing provisions, as well as from preferential market access provided to CBERA suppliers.

• The absence of the GSP program for the first three quarters of 1996 depressed the share of total imports from CBERA countries entering duty free under GSP to 1.1 percent, the lowest since CBERA became operative.

  

• Since the inception of CBERA, beneficiaries have increasingly claimed CBERA duty-free status for their exports to the United States. In 1996, a record 18.9 percent of U.S. imports from CBERA countries entered under the program, compared with 17.7 percent in 1995 and 6.7 percent in 1984, the first year of CBERA.

• In 1996, the Dominican Republic and Costa Rica continued to lead in taking advantage of CBERA. These two countries combined have been responsible for more than one-half of overall annual U.S. imports under CBERA since 1989. In 1996, they provided 56.9 percent of the total.

Part II. Andean Trade Preference Act: Impact of ATPA on the United States

The Andean Trade Preference Act, which was signed into law in December 1991, eliminates or reduces tariffs on eligible products of four Andean mountain countries of South America Bolivia, Colombia, Ecuador, and Peru. The primary goal of ATPA is to promote broad-based economic development in these Andean countries. The ATPA also aims to develop viable economic alternatives to coca cultivation and cocaine production by offering Andean products broader access to the U.S. market. ATPA applies to the same categories covered by the more restrictive U.S. GSP program, but offers broader product coverage and more liberal product-qualifying rules.

Main Commission findings

• The overall effect of ATPA-exclusive imports on the U.S. economy and on consumers continued to be negligible in 1996. In 1996, the value of duty-free U.S. imports under ATPA was around 0.015 percent of U.S. gross domestic product. The total value of U.S. imports from ATPA countries amounted to 1.0 percent of total U.S. imports.

• Chrysanthemums, carnations, anthuriums, and orchids provided the largest estimated gain in consumer surplus ($10.7 million) resulting exclusively from ATPA tariff preferences in 1996. Fresh cut roses provided the second largest estimated gain in consumer surplus ($10.6 million).

• Industries were screened for potential effects of ATPA on U.S. production in 1996. Industries with potential displacement of 5 percent or more were selected for additional discussion. Industries selected were those producing chrysanthemums, carnations, anthuriums, and orchids, fresh cut roses, asparagus, and miniature spray carnations.

• Imports of nearly all of the 25 leading ATPA-exclusive items produced net welfare gains for U.S. consumers in 1996. Fresh cut roses yielded the largest such net gain, valued at $877,000, followed by asparagus; chrysanthemums, carnations, anthuriums, and orchids; ropes, chains, etc. of precious metals; and other cut flowers.

• The probable future effect of ATPA on the United States is expected to be minimal in most economic sectors. However, the Commission was able to identify 12 discrete investments in export-oriented production in several ATPA-eligible sectors, including flowers, fruits, vegetables, jewelry, wood products, and copper components. Together, these investments amounted to over $15 million in 1996.

• ATPA appears to have had slight but positive effects on drug-crop eradication and crop substitution in the Andean region during 1996. To date, supply management efforts have not shown dramatic success. Moreover, the long-term nature of the requirements for establishing viable alternative crops and building necessary economic infrastructure means that a significant decline in drug-crop production may not be seen for some time. However, eradication efforts in 1996 did contribute to an overall decline in the volume of land under coca cultivation. Also, alternative development efforts to introduce new products and expanded production into the region are beginning to show promising results.

Trade-related activities in 1996

• A 12.9-percent growth in U.S. imports from ATPA countries collectively, and a 1.3-percent decline in U.S. exports to these countries in 1996 resulted in a small collective U.S. deficit of $148.9 million in this trade, following years of a U.S. surplus.

• Apparel products accounted for 38.3 percent of U.S. imports from ATPA countries in 1996, down 5.8 percent from 1995. Colombia and Peru are the only significant suppliers. Although apparel imports from ATPA countries are not duty free under ATPA, the United States instituted a "Special Access Program" program for ATPA countries on August 24, 1994, when Colombia was accorded special regime quotas for apparel.

• The absence of the GSP program for the first three quarters of 1996 resulted in a decrease in the share of total imports from ATPA countries entering duty free under GSP to 1.7 percent, compared with 3.4 percent in 1995 and 5.8 percent in 1994.

• ATPA provisions accounted for an increasing portion of all U.S. imports from ATPA countries: 11.3 percent in 1994, 13.7 percent in 1995, and 15.8 percent in 1996.

• Flower products, mostly from Colombia and Ecuador, continued to dominate imports under ATPA in 1996. Four categories of cut flowers accounted for over one-third of all entries under ATPA provisions.

• Although the flower sector remained the principal beneficiary of ATPA, its relative importance in the program declined as imports in other categories increased. Flowers constituted 60 percent of all entries under ATPA in 1993, 44 percent in 1994, 40 percent in 1995, and 34.3 percent in 1996. Other products benefiting from ATPA in 1996 included certain jewelry articles, refined unwrought lead, cathodes of refined copper, tuna and skipjack not in airtight containers, unwrought metal products, and raw sugar.

• Of the $1.3 billion in U.S. imports that entered under ATPA provisions in 1996, imports valued at $1.0 billion could not have received tariff preferences under any other program. The five leading items benefiting exclusively from ATPA in 1996 were chrysanthemums, carnations, anthuriums, and orchids from Colombia; fresh cut roses; copper cathodes; other cut flowers; and ropes, chains, etc. of precious metals.

• Colombia continued to be the leading ATPA beneficiary country in 1996, providing 44.1 percent of all imports under ATPA. However, Colombia's share of the total was down from 60.2 percent in 1994 and 53.2 percent in 1995 because its exports under ATPA provisions rose at the lowest rate. Peru ranked as the second ATPA beneficiary, with 30.4 percent of all U.S. imports under ATPA in 1996; Ecuador was the third, with 17.2 percent, and Bolivia was the fourth, with 8.3 percent of the total.