In response to the dilemmas of trade, most nations have fashioned some amalgam of mercantilist and liberal policies, seeking to capture the benefits of each approach without surrendering to the liabilities of either. One increasingly popular strategy is regional integration, which creates free trade within a group of nations but practices mercantilism toward nations outside that group. (1)
In this section I examine two variants of regional integration at very different stages of evolution: the CARICOM’s convergence strategy for building sub-regional linkages in the current process of hemispheric integration. It analyzes the concentric circles approach first advocated by the West Indian Commission, and assesses how it was implemented and the issues and problems it generated.
The paper also examines the approach in the context of the developments in regional integration in the Hemisphere, and tries to highlight the extent to which convergence was feasible through attempts to link CARICOM to other regions, in particular the Andean Group and the CACM. Internal developments in CARICOM are also examined to show why the concentric circles approach failed. The main conclusion is that there is a need for a new diplomacy based on a new configuration of smallness and development criteria for CARICOM states to consolidate their convergence strategy.
CARICOM’S CONCENTRIC APPROACH: AN ASSESSMENT
Five sub-regional groups currently exist in Latin America: NAFTA, MERCOSUR, Andean Community (AC), Central American Common Market (CACM) and CARICOM. To these must be added ALADI [i], with eleven members, of which five belong to the Andean Community and four, to MERCOSUR. There are also several bilateral and trilateral agreements on economic complementation and trade liberalization between pairs of countries or between one country and a group of countries. Additionally, there are agreements with extra-regional groups or countries.
In looking towards the southern countries of the Western Hemisphere, CARICOM initially followed a notion of ever widening concentric circles based on similarities in size and levels of development and geographic proximity. The West Indian Commission ii] which best articulates this position, grappled with the twin problem of widening and deepening of CARICOM in the new Post-Cold War era. It resolved this dilemma by arguing that CARICOM, by reason of its small size should remain as a separate integration scheme and collectively deal with large Caribbean and Latin American countries. Countries such as the Dominican Republic, Haiti, Cuba and Venezuela were considered as large and potentially having too great an influence on the movement. Their economic and social structures were also seen as different and capable of weakening the already fragile coherence of CARICOM. Suriname, and possibly some of the other small overseas territories and dependencies were regarded as potential entrants to CARICOM, satisfying the criteria for smallness. The signing of trade and economic cooperation agreements with other Caribbean countries was seen as a better approach than membership of these countries in CARICOM.
In the eyes of the West Indian Commission, the first concentric circle would be CARICOM, comprising the small countries in the Caribbean. Full entry into CARICOM, as exemplified in the case of Suriname, illustrated this approach. The next outer ring would be the other Caribbean countries and the CACM. In approaching the developing countries of the hemisphere therefore, CARICOM essentially targeted the wider Caribbean Basin countries. In 1996 CARICOM agreed to give priority to negotiating free trade agreements with Colombia, the Dominican Republic, the Central American Common Market (or Costa Rica) and Venezuela. [iii] CARICOM also adopted a model approach in negotiating trade and economic agreements with non-CARICOM countries of the Hemisphere. It stipulated that reciprocity would be given by the MDCs of CARICOM and non-reciprocity would be negotiated for the LDCs of CARICOM.
As to the rest of the hemisphere (NAFTA AND MERCOSUR) which could be regarded as the third outer ring, CARICOM also agreed in the above-mentioned decision that the region should signal its interest in entering into trade arrangements with MERCOSUR, without stating clearly the nature (reciprocal or non-reciprocal) of such agreements. The implication however, seemed to be an expectation that with such large countries and trade blocs as MERCOSUR and NAFTA, trade agreements should be non-reciprocal. CARICOM already enjoys non-reciprocal trading arrangements with the developed counties (Canada and the US) in the Hemisphere in the form of CARIBCAN and CBI.
CARICOM countries perceive regional trade negotiations as important in assisting them to make the transition to a more competitive globalized environment. They accept that trade preferences are on their way out but plead for a reasonable period of adjustment as small economies which are vulnerable to rapid changes in international prices, environmental hazards, etc. They believe that there should be some understanding on the part of the international and hemispheric community to the plight of small economies. Trade strategies, which are formulated in terms of special and differential treatment, are therefore linked to the vulnerability of small states, the UN SIDS program, sustainable development and poverty reduction strategies. The majority of the social partners subscribe to this approach since they perceive the requirements for being internationally competitive as very exacting. They also argue for an adequate assessment of the negotiating environment facing CARICOM in the medium to long-term, in order to maximize the strategy towards hemispheric and multilateral trade negotiations.
Since the 1996 CARICOM decision on regional trade negotiations, CARICOM has concluded negotiations for a Free Trade Agreement with the Dominican Republic [iv] and a Partial Scope Agreement with Cuba[v]. It has also negotiated some reciprocity in the trade elements of the Agreement on Trade and Technical Cooperation between the Caribbean Community and the Government of the Republic of Colombia, through a Protocol amending the original Agreement.
In terms of special and differential treatment, the CARICOM/Cuba Agreement takes into consideration the differences in the levels of development between Cuba and the LDCs of CARICOM in the implementation of a program of trade liberalization between the Parties. The basic Agreement between CARICOM and the Dominican Republic is based on reciprocity with the The Agreement, together with the Protocol, provides for tariff treatment (duty free, phased reduction of duty, MFN rate of duty) to be extended to every category of good that would be traded between CARICOM and the Dominican Republic.
The CARICOM/Colombia Agreement began as a non-reciprocal agreement but had to provide for a level of reciprocity to Colombia after a period of four years. It makes provision for the four CARICOM MDCs to grant duty-free or duty-reduced treatment to identified products from Colombia, while Colombia provides similar treatment to a different and additional set of identified products from all CARICOM Member States, except the Bahamas which was not a party to the Agreement and Suriname which was not a member of CARICOM when the Agreement was concluded. MFN treatment applies with respect to other products. The CARICOM LDCs will continue to enjoy the benefit of preferences for their exports without having to reciprocate. A significant feature of all of the reciprocal trade arrangements that CARICOM has concluded is that the Less Developed Countries are not required to grant tariff concessions to imports from the Non-CARICOM parties to these agreements.
With regard to Central America, the history of working together in the CBI, along with geographic proximity and common strategic interests vis-à-vis hemispheric integration, has pushed CARICOM closer to the Central American countries. CARICOM/Central American cooperation has received more attention over the last decade. Central America has joined the Association of Caribbean States and within that framework, schemes of cooperation are being devised. In terms of trade arrangements, not much has occurred. Costa Rica expressed interest in associating itself with Trinidad and Tobago a couple years ago, and is now finalizing negotiations with the CARICOM grouping.
Over the last decade CARICOM’s relations with Mexico were governed by the CARICOM/ Mexico Economic Cooperation Agreement. There were no trade concessions in that agreement, which largely focused on mechanisms to improve trade, such as information exchange, trade promotion and cultural and technical cooperation. Overtures from CARICOM have been made to conclude a trade arrangement similar to that with Venezuela and Colombia, but without success. Trinidad and Tobago has had inconclusive discussions with Mexico about a possible FTA but generally, Mexico is regarded as too competitive by the CARICOM countries.
CARICOM relations with the countries of the southern part of the Hemisphere have been virtually non-existent except in the case of Brazil where Trinidad and Tobago, Guyana and Suriname have developed trade and other economic ties. The CARICOM/Brazil Cooperation Agreement focused largely on cultural and technical cooperation. The position of the CARICOM countries in relation to MERCOSUR has never been made clear by MERCOSUR [vii]. Even worse, the impression is sometimes conveyed that the CARICOM and the Central American countries are a US ‘burden’ and that integration in the Southern Hemisphere should proceed without them.
CARICOM countries themselves have also shown very little interest in developing new ties with these countries. Very few initiatives have been taken to explore what possibilities exist, and except for the odd visit, contact has remained extremely modest. CARICOM recently signed an Agreement with Chile to establish a CARICOM/CHILE Joint Commission on Cooperation, Coordination and Consultation as well as an Agreement on Scientific and Technical Cooperation. A similar one with Argentina is being contemplated. These would be arrangements similar to those existing with Mexico and Brazil. Beyond these arrangements, some interest has been expressed in free trade or partial scope arrangements mainly by Guyana, Suriname, and Trinidad and Tobago. Concretely, however, steps are still to be taken to indicate a real commitment and make this a reality.
The CARICOM concentric approach tended to over-emphasize smallness to the detriment of the importance of a stronger Caribbean community. It focused too much on physical size of population and territory without taking into consideration other factors such as culture, collective negotiating power, level of development, regional and hemispheric geopolitical balance, etc. It changed over time as indicated in the willingness of CARICOM to consider membership for Haiti as well as other larger Caribbean countries. However, this over-emphasis of smallness has conditioned CARICOM’s attitude towards the Free Trade Area of the Americas (FTAA).
CARICOM’S SMALLER ECONOMIES APPROACH IN THE FTAA
It is useful to recall that CARICOM, relatively more than most, if not all regions, has enjoyed sizeable non-reciprocal preferences over the last twenty-five (25) years which have allowed it to continue the production of high-cost basic agricultural commodities. The abrupt elimination of those preferences would now spell severe labor disruption and possibly even ethnic strife for certain CARICOM members. For economies that have enjoyed such high protection in developed countries’ markets, the adjustment and transitional costs are high not only in the economic equation but also in political and social terms. Coupled with such risks are the natural barriers that these states face and which are linked to their small size. These relate essentially to the relatively higher transport costs that stem from small volumes; higher per capita utility costs associated with lack of scale and indivisibilities; the greater difficulties inherent in diversification due to narrow specialization and small markets; the higher transaction costs that face their small firms in entering foreign markets in areas such as acquiring marketing information, penetrating distribution networks, etc; the disproportionate impact of natural disasters, and the binding constraints of limited technical and administrative capacity. These bottlenecks do not necessarily condemn small states to be less developed than large ones. They however, involve different risks and call for policies appropriate to these states.
An FTAA that focuses mainly on reducing trade barriers and harmonizing regulations would leave untouched these problems. Rather, it would focus on securing national advantages in other markets. The natural constraints faced by small states would remain and not be addressed. It is for this reason that CARICOM perceives no deeper development purpose at work that is preceding formal market integration. CARICOM’s own integration experience is one that embraces sharing, cooperation and solidarity among essentially small Caribbean states to ensure economic and political security. It is therefore not comfortable with the perception of an FTAA grouping where economic gain is the fundamental motive and not a supplementary benefit. CARICOM also has difficulty entering into an agreement in which the absence of non-trade concerns is further compounded by the presence of a wider region where geography is less relevant and so much more diversity has to be accommodated.
In addition, the slow pace of deepening CARICOM is a factor that does not induce its widening. Its proposed Single Market and Economy lacks depth as seen in the significant divergence between the proposed FTAA and the present state of integration in CARICOM. If one compares the nine negotiating areas in the FTAA with what pertains in CARICOM, it becomes clear that for seven of them the internal arrangements in CARICOM are either non-existent or in an embryonic stage. The latter are Services, Government Procurement, Competition Policy, Intellectual Property Rights, Investment, Subsidies and Anti-Dumping and Countervailing Measures, and Dispute Settlement. As it stands, only in Market Access and Agriculture can CARICOM claim to have some relevant depth. The proposed FTAA therefore far surpasses CARICOM in terms of a harmonized policy area, and this may well be so even if one were to accept that CARICOM has a common external tariff (more uncommon in many ways) and has some history of a community, in terms of functional cooperation and people-to-people collaboration.
In making the above structural comparisons, it is important not to neglect the process criteria that have affected CARICOM’s vision of the FTAA. It is worth noting that the failure of CARICOM’s concentric approach to hemispheric integration, which sought to embrace an inner ring of small states in Central America and the Caribbean, has taken away the comfort of approaching hemispheric integration with the solidarity of a wider coalition of interests similar to what the Benelux countries did in Europe. This lack of solidarity is expressed in the failure to speak with one voice in FTAA negotiations, inability to reap an early harvest on free trade among themselves, and the pursuit of different bilateral relations with the US and the rest of the hemisphere. The idea of linking the smaller states of the Caribbean Basin and opening markets progressively to increasing levels of competition never materialized although some diplomatic effort was discharged in this direction.
The reasons for such a lack of convergence are not clear but certainly diplomatic shortcomings must have played an important role. The initial effort to establish dialogue between the two regions began in the early 1990s. The need to give priority to the deepening of existing commercial linkages between the two sub-regions and the importance of a timely start to negotiations aimed at the creation, as soon as possible, of a Free Trade Area between the two sub-regions was recognized [viii]. However, progress in achieving the latter goals has been negligible. Except for the initiative taken by Costa Rica in the last few years to negotiate an FTA with Trinidad and Tobago and subsequently the CARICOM grouping[ix], efforts on both sides remained sporadic and inconsequential. long after the initial encounter. Indeed, the first Summit of leaders only took place in February 2002, long after positions had been established. Furthermore, the special diplomatic initiatives of both the Dominican Republic and Belize to build bridges between the two regions appear to have been ineffective and possibly needed more diplomatic support from the rest of the region.
CONCLUSION: THE WAY FORWARD FOR CARICOM
To sum up then, there have been some efforts to develop a coherent CARICOM pattern and strategy in forging stronger ties with Latin America and the wider Caribbean. Along the lines of open regionalism, a building block approach seems to be evolving, following a process of opening to increasing levels of competition, giving priority to the Caribbean Basin, and in sync with greater integration into the hemispheric and world economy. The Caribbean Basin is at the core of that building block process, and in particular the “inner Caribbean” which comprises the islands in the Caribbean Sea along with Central America, Venezuela and Colombia.
The failure of its concentric approach to build coalitions and promote stronger trade integration among small countries in the hemisphere has forced CARICOM to rely heavily on its smaller economies’ approach in the FTAA. Success in the latter, however, remains elusive in spite of the broad commitments made to assist small countries. At present, a new diplomacy based on a novel configuration of smallness and development is required in the FTAA as eligibility for special and differential treatment is being tackled in this crucial final negotiating phase.
In the years ahead it is expected that Latin America will grow in even greater importance for CARICOM. The FTAA process will impose on CARICOM the task of finding the optimum path to hemispheric integration. This will involve exploration of the various options for linking existing bilateral and regional agreements. It is a challenge that these states have already accepted and will result in significant new diplomatic initiatives in the near future.
INTEGRATION: LIBERAL ON THE INSIDE AND MERCANTILIST ON THE OUTSIDE
Regional integration is best thought of as trade policy that is liberal on the inside and mercantilist on the outside. Within the community, free trade is encouraged by the elimination of trade barriers and the harmonization of economic policies. Trade barriers remain against the outside world, however, and the community achieves mercantilist goals of self-sufficiency and enhanced power that would be impossible for the constituent nations individually.[ Even the largest EU member, Germany, has a GDP barely a quarter of that of the United States, but the economy of the EU as a whole is slightly larger than the U.S.(6)]
Though liberals argue that both peace and prosperity could be achieved more fully through global free trade, regional integration may deal more effectively with trade dilemmas. First, regionalism [dampens, though it does not eliminate,] mercantilist worries about sacrificing national self-sufficiency[ and autonomy]. Regional interdependence is less risky than surrendering control of the economy to the vicissitudes of global markets and the economic policies of 150 other nations, especially because regional nations are likely to share basic values and economic structures. Second, regional integration creates a level of governance above the nation that can soften the dislocations and resolve the disputes that inevitably arise from trade.
It is not wholly clear whether regional strategies like NAFTA and the EU are ultimately compatible with the ideal of global liberalism. The bicycle theory of trade policy argues that the two approaches are mutually supporting because as long as free trade moves forward it stays upright, but it inevitably falls if it slows down or stops. Any movement toward free trade (even if regional) keeps the forward momentum going, thus resisting the natural drift toward protectionism that occurs whenever trade policy becomes strictly a national matter.
However, even though free trade areas are GATT-legal under Article 24, they contravene the liberal spirit of the nondiscrimination principle embodied in the most favored nation clause.(7) In fact, the term “most favored nation” has become a misnomer: The EU, for example, applies the MFN rate to only seven nations–the United States, Japan, Canada, Australia, New Zealand, South Africa, and Taiwan. Nearly all others are charged a more favorable rate. Free trade or preferential tariff rates apply not only to the fifteen EU members but to most other European nations (partners in the European Economic Area), twelve Mediterranean nations (EU associates), sixty-nine African, Caribbean, and Pacific countries (under terms of the Lomé convention), and all other developing countries (under the Generalized System of Preferences). As these arrangements multiply, the liberal foundations of the global order suffer severe erosion. A WTO study determined that by the mid-1990s 42% of all global trade flows were conducted under preferential agreements, but other studies have placed the figure as high as 53%. Nearly 75% of trade involving the EU is conducted under preferential arrangements, in contrast to about 28% in North America and 4% in Asia. In 1995 68% of the manufactured imports of EU nations came from other EU members and 59% of foreign direct investment was intra-EU. Thus, while the EU remains publically committed to multilateral liberalism, its interactions have drifted into a pattern of discrimination more often associated with mercantilism.
The mix of liberal and mercantilist motivations for regional integration is most easily illustrated in connection with customs-union theory, which adapts Ricardian ideas concerning global free trade to the special case of regional trade preferences. Canadian economist Jacob Viner’s classic 1950 book The Customs Union Issue identifies two effects of initiating free trade among members of a regional organization while continuing protection against the outside world.
Trade creation occurs when a customs union allows goods once produced domestically to be imported from a more efficient producer in a member country. The result is the familiar Ricardian gains from trade, in which both countries are better off and the rest of the world is not adversely affected. However, a second pattern, which Viner calls trade diversion, may arise if the establishment of a customs union shifts production from an efficient outside producer to a less efficient inside one. For example, suppose that Germany initially imports a good from its most efficient global producer, a firm in the United States. After the creation of a customs union between France and Germany, Germany would impose a higher tariff on the American product than on the comparable French one. As a result, French imports could replace American imports. This trade diversion modifies the positive liberal assessment of a customs union because it shifts production from a more efficient to a less efficient producer. Whereas trade creation benefits member states without affecting others, the benefits of trade diversion come to member nations at the expense of outside nations.
Economists contend that compensating losers–though second best to laissez-faire–is preferable to protecting jobs through trade barriers, which are inefficient because the price increases they induce cut consumption and reward less efficient domestic producers. The second-best alternative is to augment free trade with programs that directly compensate displaced workers, such as unemployment insurance. However, because the taxes to finance such programs may be more visible to voters than trade barriers, protectionism may be politically first best though economically third best, at least where redistributive measures have limited philosophical support, such as in liberal America. The European socialist tradition makes it easier to sustain much more generous welfare provisions, but such policies are not costless. They may be responsible for unemployment levels of over 10 percent throughout Europe in the 1980s and 1990s, which would be completely unacceptable in the United States both because of the hardship on the unemployed and the tax drain of supporting them. By contrast, European polities would not tolerate the American approach, which accepted “high risk and high reward, and left its losers to be pushed far from the economic and social mainstream,” resulting in a “frisky, but cruel economy.”(8)
However, it is difficult to maintain social protection–which inevitably imposes costs on business–when diminishing trade barriers force firms to compete with those in other countries that do not bear such burdens. For example, French firms demand a level playing field in competing with Spanish firms whenever the French government mandates employee benefits, health and safety rules, or environmental regulations more costly than those in Spain. In fact, free trade tends to harmonize many national policies, making it especially difficult for a nation to sustain different tax policies than its neighbors. Denmark, for example, found it impossible to maintain a value-added tax (VAT, i.e., sales tax) 8 percent higher than neighboring Germany’s because Danish citizens could simply evade the tax by purchasing goods in Germany and bringing them across the border duty free.
Thus, some trade barriers must exist if nations wish to maintain different laws with respect to many aspects of economic, social, and political life. Of course, different nations do choose different policies because they reflect different values and theories, different economic circumstances, and different balances of political power. Different tax policies, for example, reflect fundamentally different philosophies concerning how big the state should be, what functions it ought to perform, and how progressive taxation should be. In most nations, such key issues trigger mighty partisan battles over philosophical principles and the distribution of costs and benefits. In short, trade poses fundamental dilemmas, made more troublesome when nations pressed together by trade ties view such dilemmas differently, as in the case of the United States and Japan. Indeed, regional integration is attractive to many nations precisely because it increases trade with regional neighbors–who are presumably similar in important ways–while retaining insulation from nations who are more distant not only geographically but in policy preferences.
Even in Europe, however, these dilemmas have been recognized but not resolved; instead, the battleground has shifted from national-level to regional-level politics. For example, workers fear that without regional coordination, diminishing trade barriers will tend to harmonize national policies by driving all nations to emulate those with the weakest social protection, an outcome called social dumping. Recognizing that national policies would increasingly converge, leftist parties successfully sought to foster harmonization in which the more laissez-faire countries emulate those with the most elaborate social policies. For example, the goal of the EU’s Social Charter in 1989 was to promote “convergence between social protection policies to avoid … competition between the systems with the attendant risk of decreasing social standards.” In particular, the European Parliament recognized “fundamental social rights which should not be jeopardized because of the pressure of competition or the search for increased competitiveness.” Of course, such a preference runs directly contrary to the values, theories, and political constituencies of more conservative parties throughout Europe, who prefer more laissez-faire arrangements.
The EU transformed this political contest between parties of the left and right into a controversy over the dilemma concerning effects of trade (and trade organizations) on the state, especially in Britain. In the 1980s, British labor unions recognized that the social legislation they preferred was more likely to be enacted by the EU than by a British government dominated by Conservatives. In effect, they preferred to have labor law written by the French Socialist Jacques Delors, president of the European Commission, rather than by Conservative British prime minister Margaret Thatcher. By allying with the Socialist Parties of Europe, the British Labour Party sought to reverse through EU legislation the conservative revolution that Thatcher had achieved through national legislation. Such calculations lead to controversies over how much national sovereignty must be sacrificed in order to achieve the gains from trade. Thatcher condemned the EU as an attempt “to suppress nationhood and concentrate powers at the centre of a European conglomerate.” She is certainly correct in that assessment, but one wonders whether her defense of national sovereignty would be as spirited if the majority of the EU were more inclined to support her brand of conservatism. In any case, citing national sovereignty, Britain opted out of the Social Charter in 1989, the social-policy annex to the Maastricht Treaty in 1992, and participation in the euro in 1998. In 1994, Conservative prime minister John Major blocked the election of the head of the European Commission because the leading candidate favored a larger role for the EU at the expense of the constituent national governments. The link between trade and other values cannot be severed.
Still, despite the loss of sovereignty implicit in economic interdependence, we can now see why regional trade liberalization generates momentum to create even closer forms of integration. In the liberal vision, every increment of liberalization hints at the greater benefits that lie ahead if integration progresses. For example, if free trade permits low-wage labor in Spain to produce products cheaply for the rest of Europe, free movement in factors of production such as capital would obviously enable Spain’s comparative advantage to be exploited even more fully. As each barrier to trade is diminished, remaining ones become more visible and vulnerable to political pressure. In the mercantilist vision, regional integration also tends to generate momentum: Because each step increases interdependence, it is natural that each nation would welcome more intensive integration arrangements that impose greater constraints on the disruptive policies of other governments. As trade increases, the dilemmas it creates become more onerous and demands for institutions capable of dealing with them rise.
Thus, regionalism tends to progress along parallel tracks, one market-based, the other institutional. Even though the deepening of regional integration encourages greater integrative steps, it tends to sharpen political clashes over the form that it should take, especially the role it should play with respect to trade dilemmas. Liberals emphasize the economic dimension of free trade, in part because its tendency to undermine the capacity of national governments to sustain social protection could further the laissez-faire agenda of diminished state activity and an enhanced role for private enterprise. Fearing just such an outcome, others accept free trade only in exchange for the package of protection against the dilemmas of trade embodied in the social dimension. That is, it opts for an activist regional government to replace the increasingly impotent national governments.
However, greater levels of integration in Europe will require the precise resolution of ambiguities that, up until the early 1990s, were responsible for the acceptance of integration by groups with incompatible views. A key issue has been whether the leveling of trade barriers will arise from the opening of the most protectionist nations or the closing of the most liberal ones. The 1992 Single Market initiative was valued by some for its free trade face (Germany, England, Belgium, and Luxembourg); others were attracted by its protectionist face (France, Italy, and Spain).
The assessment by nations outside the EU will also depend heavily on the balance between trade creation and trade diversion. The real danger is that the complicated games among European governments and interest groups will be resolved principally by shifting costs onto foreigners. The ambivalent U.S. attitude toward the EU has always been heavily dependent upon how protectionist it would become. However, the United States originally supported the EC as a means to European recovery at a time when Europe was seen to be more valuable as a political and military ally than it was seen to be dangerous as an economic competitor. The EC also tied West Germany to the West, discouraging a policy of neutrality or alignment with the Soviet Union in pursuit of German reunification. Now, however, the U.S. interest concerns its own exports, since about a quarter of them go to the EU and most of the rest face competition from EU firms. Further, because any preferential tariff area has the potential to become a heavily protectionist trade bloc, the behavior of the EU is continuously monitored by those who see it as the precursor of an international system composed of such regional arrangements.
While the EU does appear to be moving in a liberal direction–its average MFN tariffs on industrial products should fall under 3 per cent by the turn of the century–in some areas of special interest to the U.S. that movement remains slow. Its agricultural tariffs still average over 20% and import protection and the use of contingency measures remain significant in particular industrial sectors such as textiles, automobiles and consumer electronics, where high tariffs co-exist with intense anti-dumping activity that also limits market access. As protection at the border is gradually reduced, internal obstacles to competitiveness and efficient allocation of resources become more apparent. Community subsidy programs remain sizable by international standards and the opening of public procurement, which accounts for 12 per cent of the Union’s GDP, has so far had limited effect on external suppliers.
Within Europe, however, the major controversies concern the tensions provoked by the dilemmas of trade, an enlightening example of which is the chaos surrounding the collapse of the European Monetary System (EMS) and the subsequent creation of the euro.
1. Regional integration can take a variety of forms. In a preferential trade area, a group of countries establishes lower barriers to the import of goods from member countries than from outside countries. The free trade area is a special case of a preferential trade area in which trade barriers between members are reduced to zero. A customs union is a preferential trade area in which the members adopt a common external tariff. A common market allows the free movement of factors of production such as capital and labor as well as free trade in goods. Finally, an economic union or community occurs when the economic policies of common market nations are coordinated and harmonized under supranational control and a single currency.
2. Between 1990 and 1994, 26 preferential trade agreements were signed in the Western Hemisphere alone. 22 new regional trade agreements were reported to the WTO between mid-1997 and mid-1998.
3. Timothy M. Devinney and William C. Hightower, European Markets After 1992 (Lexington, Mass.: Lexington Books, 1991), p. 21.
4. The Benelux customs union among Belgium, Luxembourg, and the Netherlands had been formed in 1948.
5. For convenience, I will use the label EU to refer to both the current European Union and its predecessor organizations.
6. The EU remains slightly smaller than NAFTA in GDP, but its trade is more than twice as large.
7. The United States has never fully accepted the EU’s conformity with Article 24 because it has not eliminated tariffs on “substantially all” goods (failing, most notably, with respect to agriculture). Nonetheless, the U.S. has not opposed the EU, but it has been active in pushing the WTO to examine the conformity of all regional agreements with GATT.
8. “The Slippery Slope,” Economist, July 30, 1994.
9. “Gambling on the Euro,” The Economist, January 2, 1999.
[ii] West Indian Commission. “Time For Action-The Report of The West Indian Commission”, Black Rock, Barbados, 1992.
[iii] At its Seventeenth Meeting held in Barbados in July 1996, the Conference of Heads of Government took this decision.
[iv] This Agreement entered into force between the Dominican Republic and two CARICOM Countries (Jamaica and Trinidad and Tobago) from December 1st 2001.
[v] The Agreement on Trade and Economic Cooperation between the Caribbean Community and the Government of the Republic of Cuba was signed on 5 July 2000 and came into force on January 1st 2001.
[vi] Venezuela has since requested the extension to it of the preferential tariffs that were granted to Colombia by the CARICOM MDCs at the earliest convenience.
[vii] In Brazil’s proposal to expand MERCOSUR to the South American Free Trade Area (SAFTA), no mention was made of CARICOM.
[viii] CARICOM: Joint Communique Issued at the Conclusion of the Fourth CARICOM-Central America Ministerial Meeting, Georgetown, Guyana, 22 March 1999
[ix] The CARICOM-Costa Rica FTA, now in its final stages of negotiation, may open the possibility for a wider CACM-CARICOM Free Trade Agreement.
CARICOM TRADE STRATEGY AND HEMISPHERIC INTEGRATION