No. 2006-11-A

OFFICE OF ECONOMICS WORKING PAPER

U.S. INTERNATIONAL TRADE COMMISSION

Judith M. Dean 

U.S. International Trade Commission 

November 2006 

The author is with the Office of Economics of the U.S. International Trade 

Commission. Office of Economics working papers are the result of the ongoing 

professional research of USITC Staff and are solely meant to represent the 

opinions and professional research of individual authors. These papers are not 

meant to represent in any way the views of the U.S. International Trade 

Commission or any of its individual Commissioners. Working papers are 

circulated to promote the active exchange of ideas between USITC Staff and 

recognized experts outside the USITC, and to promote professional 

development of Office staff by encouraging outside professional critique of 

staff research. 

Address correspondence to: 

Office of Economics 

U.S. International Trade Commission 

Washington, DC 20436 USA 

Is Trade Preference Erosion Bad for Development?
IS TRADE PREFERENCE EROSION BAD FOR DEVELOPMENT?

Judith M. Dean

November 2006

Research Division, Office of Economics

US International Trade Commission

500 E St., SW

Washington, DC 20436

Judith.Dean@usitc.gov

*The views are those of the author, and do not necessarily reflect the views of the US International Trade Commission 

or the individual Commissioners. The participants of the World Bank/WTO International Symposium on Preference 

Erosion (WTO, June 2005) inspired me to pursue this research. I am grateful to Nick Grossman and Maya Shivakumar 

for excellent assistance with tables and data. Special thanks to Peg MacKnight for technical assistance. Thanks to the 

participants in the Midwest International Economics Group meetings, University of Kansas (Oct., 2005) and the Trade 

and Development Seminar at George Washington University (Nov. 2005) for helpful comments. 
IS TRADE PREFERENCE EROSION BAD FOR DEVELOPMENT?

Judith M. Dean

Research Division, Office of Economics

US International Trade Commission

500 E St., SW

Washington, DC 20436

Judith.Dean@usitc.gov

Abstract

In much of the recent debate about trade preference erosion, opponents have stressed the impact

that trade preferences have had on economic development in beneficiary countries. However,

lack of quantification of preference margins and preference utilization has inhibited testing such

hypotheses. This paper uses HS 8-digit level U.S. data to quantify both preference utilization and

tariff preference margins for the CBERA beneficiary countries from 1984-1998. Panel data from 1970-1998

are then used to test the impact of preference erosion on growth and investment in ten beneficiary countries. 

A two-equation simultaneous model is developed which allows preference erosion to impact growth directly 

as well as indirectly through investment. Results show that CBERA preferences have been steadily eroding 

since 1984, while average CBERA preference utilization has risen dramatically since 1984. The panel 

estimation shows that CBERA preference erosion did discourage investment and growth (both directly and 

indirectly) in some beneficiary countries. However, increased CBERA utilization stimulated investment and 

growth, and is likely to have outweighed the effects of preference erosion on development. Preferential 

access to qualifying apparel imports via the production-sharing program had at least as large an effect as the 

CBERA. Finally, for all countries, increased openness mattered much more for development than 

preference erosion. 

JEL: F15, F43, O40
3

IS TRADE PREFERENCE EROSION BAD FOR DEVELOPMENT?1

...[I]t is “crucial that modalities be developed to protect the preferential as well as 

favourable conditions of access of these countries. Otherwise, they run the risk of being 

chased out of the market with devastating socio-economic consequences...2” 

Prime Minister of Mauritius

[V]ulnerability to preference erosion is heavily concentrated in a sub-set of products, 

especially sugar and bananas,” and thus, “assistance to help countries cope with preference 

erosion can and should be closely targeted at the countries at risk.3” 

IMF Managing Director

I. Introduction

There has been much recent debate over the value of industrial countries’ preferential trade 

programs which grant duty-free or reduced duty access to many developing countries’ exports. Ostensibly, 

a country granted trade preferences would see demand for its exports grow, relative to other exporting 

countries still facing MFN tariffs. If the country receiving preferences is small, its exports would continue to 

be sold in the importing country at the MFN-tariff-inclusive price, with the exporter earning the difference. 

Thus, the benefits of such preferences for the exporting country would be increased exports and a transfer 

of rent from the importing country to the beneficiary country. 

Recent studies which attempt to quantify the value of US and EU trade preferences (Dean and 

Wainio (2006), Jean and Candau (2005), Alexandraki and Lankes (2004), Brenton and Ikezuki (2004))

suggest that reality may be closer to the view of the IMF Managing Director than that of the Prime Minister 

of Mauritius. Although coverage and utilization of preferences is quite high for many countries, preferences 

are widely underutilized, and preference margins tend to be small, except on some agricultural products and 

 

1

 This paper draws on Dean (2002), and the author’s earlier formal analysis of CBERA, in chapter 4 of USITC The Impact 

of the Caribbean Basin Economic Recovery Act. Publication No. 3447 (2001). 

2

Speech of the Prime Minister, Hon. P. R. Bérenger, Republic of Mauritius, at the opening of the G-90 Ministers' Meeting 

12 July 2004 http://ncb.intnet.mu/mfa/speech/sppm.htm, downloaded July 12, 2005.

3

 Statement by the IMF Managing Director, Rodrigo de Rato, Managing Director of the IMF, to the WTO General 

Council 22 October 2004 http://www.wto.org/english/news_e/news04_e/gc_stat_imf_22oct04_e.htm, downloaded 

July 12, 2005.
4

on apparel. Even assuming full transfer of rent, the number of countries in which this transfer exceeds 5 

percent of the value of exports is small.4

In light of this evidence, it appears that trade preferences are unlikely to have had a significant 

impact on developing countries’ economies. However, the recent attempts at quantification have been 

confined, typically, to estimates for a single year. Thus, not surprisingly, no attempt has been made to 

formally test whether or not these preferences have had any impact on development. This paper uses HS 

8-digit level U.S. data to quantify both preference utilization and tariff preference margins for the Caribbean 

Basin Economic Recovery Act (CBERA) beneficiary countries5 from 1984-1998. Panel data on 10 

countries from 1970-1998 is then used to test the impact of CBERA on growth and investment in these

beneficiary countries. 

The CBERA is an ideal test case for this hypothesis. Begun in 1984 as the Caribbean Basin 

Initiative (CBI), and extended twice, the objective of the CBERA was to encourage export diversification, 

growth and development in Caribbean and Central American countries (USITC 2001). In 2001, the Office

of the US Trade Representative stated that: “expansion of the CBI benefits through enactment of the 

[Caribbean Basin Trade Preference Act (CBTPA)6]...represented an important affirmation of the United 

States’ ongoing commitment to economic development in the Caribbean Basin, by providing an open US 

market for CBI goods.”

7

 Yet, despite annual evaluations by the USITC of the effects of CBERA on the 

US, the impact on the beneficiary countries has not been formally analyzed.8 

 

4

 This number varies greatly across preference programs and depends to some extent on the method used by different 

authors to calculate the values. Incorporation of actual utilization into the value calculation is critical (Dean and Wainio, 

2006).

5

 The following countries are presently beneficiaries: Antigua, Aruba, Bahamas, Barbados, Belize, British Virgin Islands, 

Costa Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, 

Monteserrat, Netherlands Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, 

Trinidad and Tobago.

6

 The most recent extension, enacted as part of the Trade Act of 2000.

7

 USTR, “4th Report to Congress on the Operation of the Caribbean Basin Economic Recovery Act,” Dec. 31, 2001.

8

 See note 1.
5

Early assessments of CBI preferences actually predicted that they would have minimal effects 

(Pelzman and Schoepfle , 1988; Ray, 1987; Clark and Zarrilli, 1994), since most CBERA-eligible goods 

already entered the US duty-free under MFN or GSP. In addition CBERA preference margins were small, 

and non-tariff measures (NTMs) restraining eligible goods were left in place. Perhaps most important, goods 

in which these countries had some comparative advantage, such as apparel, were excluded from CBERA. 

Interestingly, the “production-sharing” program (PSP), which ran concurrently with CBERA, did offer 

reduced duties on apparel assembled from fabrics wholly made and cut in the US.

9

 In addition, under the 

related Guaranteed Access Levels (GALs) program, a country received quota-free access for qualifying 

apparel. Only with the CBTPA in 2000, was preferential access extended (with conditions) to include 

apparel exports. 

Results of this analysis show that CBERA tariff preference margins have been eroding fairly 

steadily since the inception of the program in 1984 for the region as a whole, as well as for the 10 countries 

included in the panel analysis. This erosion has been largely due to US multilateral liberalization during the 

period. At the same time utilization of the CBERA preferences has grown dramatically, as has the share of 

PSP trade and GALs trade in the region’s overall trade with the US. Preliminary results from the panel 

estimation reveal that erosion of CBERA preferences may have discouraged growth and investment in the 

CBERA region. However, the negative impact of CBERA preference erosion was likely outweighed by the 

positive impact of increased utilization of the program. There is also some evidence that participation in 

production sharing had larger positive effects on investment and growth than did CBERA preferences. This 

would suggest that preferences targeted toward goods in which the region had some comparative advantage 

are indeed more important for growth and investment than the CBERA program itself. Perhaps most 

 

9

 Production-sharing also included goods from other sectors. For more detail on these programs see USITC (2001).
6

important, it appears that openness on the part of beneficiary countries mattered far more for growth and 

investment in the region than preference erosion. 

II. Preferential Trade and Preference Erosion in the CBERA Countries

Figure 1 shows US imports10 from all CBERA member countries by preference program between 

1984 and 1999. The share of US imports under the CBERA program more than doubled from 1984 to 1998, 

rising from 7 percent to 19 percent, then falling slightly to 14 percent in 1999. The well-documented shift 

from the use of GSP preferences to CBERA preferences over time can be seen in figure 1. Though the 

share of US imports entering under the GSP was 7 percent in 1984 (equal to the share entering under 

CBERA), it fell to only about 1 percent by 1999. In contrast to CBERA imports, PSP imports rose 

dramatically over the period and constituted the largest component of US preferential imports from the 

CBERA region at the beginning of the new millennium. From 1984 to 1999, PSP imports rose from 7 

percent of US imports from the region to 43 percent , before declining to 32 percent in 1999. Most of this 

dramatic increase is due to growth in apparel imports from CBERA countries. The fraction of PSP imports 

entering under GALs has also grown significantly.

11

 

Figure 2 shows the coverage and utilization of the CBERA preference program over 1984-99, as 

well as the unweighted average tariff preference for the region. Coverage is defined as the percentage of 

US imports from the region in a given year that are eligible for CBERA preferences, and utilization is defined 

 

10 Data for 1989-1999 are calculated using HTS 8-digit data from the USITC Dataweb (www.usitc.gov), and include total 

imports in HS Chapters 1-97. For 1984-88, the data are from various issues of USITC The Impact of the Caribbean Basin 

Economic Recovery Act, and include all imports. 

11 The earliest GALs arrangements were with Costa Rica, Dominican Republic, Haiti, Trinidad and Tobago and Jamaica. 

These were in place as early as 1987. A GAL was negotiated with Guatemala in 1990, but it wasn't until 1994 that the US 

added GALs with El Salvador, and Honduras. The GALs with Haiti and with Trinidad appear to have expired in 1994 and 

have not been renewed. 
7

as the share of US CBERA-eligible imports in a given year actually entering under the CBERA program.12 

The unweighted average tariff preference margin is defined as the difference between the MFN ad 

valorem equivalent tariff and the preferential tariff at the HTS 8-digit level. The regional margin is the 

average of the 8-digit level margins, across all US imports from eligible countries, in a given year.13 

Several interesting features emerge here. First, at the regional level, the coverage of the CBERA 

program was far below 100 percent during the period. As figure 2 indicates, approximately 26 percent of US 

imports from the CBERA region were eligible for CBERA preferences in 1984. Coverage peaked at 44 % 

in 1989, then fell back to 28 percent in 1999. Second, CBERA preferences were underutilized. Utilization is 

likely to be less than 100 percent for a number of reasons: some goods may enter under GSP instead; 

exporters may lack information about CBERA eligibility; exports may not qualify because they do not meet 

the CBERA regional content requirements. Third, utilization rose significantly during this time period, from 

34 percent in 1984 to 72 percent in 1999. Fourth, preference erosion has taken place almost steadily since the 

inception of the CBERA program in 1984. Unweighted average tariff margins fell from 5.5 percent in 1984 

to about 3.4 percent in 1999.14 What is most striking about figure 2 is the dramatic rise in utilization despite 

the erosion of preference margins. Figure 3 shows that this pattern is also apparent for many of the

individual CBERA countries, for which data are available from 1989-1999. 

 

12 Coverage and utilization data for 1989-1999 are calculated using HTS 8-digit data from the USITC Dataweb 

(www.usitc.gov). For 1984-88, the data are from various issues of USITC The Impact of the Caribbean Basin Economic 

Recovery Act, and include only information on imports eligible for duty-free access. Although this omits imports that 

were eligible for reduced-duty access, these were a very small portion of eligible imports at that time. 

13 Average tariff preference data for 1995-99 are calculated using HTS 8-digit data from the USITC Tariff 

Database (www.usitc.gov). For 1989-94, preference margins are calculated using HS 6-digit tariff data from TRAINS via 

WITS. For 1984-88, preference margins are calculated as the unweighted calculated duty estimates for the US from 

Value of US Imports for Consumption, Duties Collected, and Ratio of Duties to Values 1891-2003 

(http://dataweb.usitc.gov/scripts/AVE.PDF). Since nearly all CBERA preferential trade was duty-free during this early 

period, using an estimate of the US non-preferential tariff should slightly overestimate the preference margins. On the 

other hand, since the non-preferential tariff is estimated using calculated duties, it already incorporates preferential trade, 

and thereby underestimates the preference margins. 
8

III. Modeling Growth and Investment in the CBERA Region

A cursory look at growth and investment in the region reveals no discernible differences in the period 

following the inception of the CBERA program. For many of the beneficiary countries,

15 annual real income 

growth averaged 3 percent or higher both before (1970-83) and after (1984-98) CBERA (table 1). While 

real per capita income growth is generally much slower, it also shows no systematic difference between the 

periods. Investment remained between 20 and 30 percent of GDP in the Caribbean, and between 15 and 20 

percent of GDP in Central America during both periods. However, table 2 shows that both FDI inflows and 

real export growth are much higher post-CBERA. In 4 out of 6 Central American countries, FDI as a ratio 

of GDP is between 50 percent and 200 percent higher, and real export growth is much more rapid than in the 

earlier period. In more than half the Caribbean countries FDI inflows are a larger share of GDP 

post-CBERA, though the less complete export growth data show little systematic change. 

The significant unilateral trade liberalization which took place in the CBERA region during this period

makes it difficult to decipher the impact of the program itself. Virtually all beneficiary countries moved from 

import-substitution industrialization characterized by highly protectionist regimes, to more open, liberalized 

regimes between 1970 and 1999. In Costa Rica, Trinidad, Jamaica, and Guyana this transformation took 

place as early as the mid- to late 1980s. The other beneficiary countries began major reforms in the early to 

mid-1990s. For the CBERA region as a whole,16 most reform periods included macroeconomic stabilization 

measures, significant deregulation of the foreign exchange market, and trade reform. In general, trade 

reforms were characterized by removal of quantitative restrictions, reductions of tariff levels, and narrowing 

of the tariff range (USITC, 2001). In addition countries removed export taxes and implemented incentives 

 

14 Trade-weighted margins fell similarly from 3.7 percent to 1.3 percent.

15 Due to lack of data, Aruba, Montserrat, British Virgin Islands, and Netherlands Antilles were omitted from the 

analysis.

16 For detailed studies, see the WTO Trade Policy Reviews and IMF Staff Country Reports.
9

for foreign direct investment. Between 1986 and 1999, nearly all CBERA beneficiary countries also became 

members of the WTO, as well as one or more regional trade agreements.

17

 

Many studies have found evidence of a direct link between unilateral trade liberalization and more 

rapid growth, though the debate continues as to the robustness of these results.18 The early work of Levine 

and Renelt (1992) found no robust direct link, but instead a strong indirect link between trade and growth via 

investment. Four recent cross-country studies have emphasized the role of unilateral trade liberalization in 

impacting growth through investment. Greenaway, et al. (1998, 2002), find evidence that both investment 

and trade openness strongly increase growth, though the impact of trade reforms appear to follow a J-curve 

pattern. Using a two-equation simultaneous system, Baldwin and Seghezza (1996) find evidence that 

reductions in tariffs at home and abroad generate “trade-induced investment-led growth.”19 However, they 

find no significant direct link between trade liberalization and growth. Wacziarg's (2001) eight-equation 

simultaneous system allows trade policy to affect growth indirectly through six channels, including 

investment.20 He finds that more than half of the total effect of trade openness on growth occurs through 

increased investment. In evaluating various model specifications based on predictive ability, Krishna, et al. 

(2003) argue for inclusion of both investment and trade variables in explaining growth. They also emphasize 

controlling for the economic state of a country's trading partners when explaining growth. 

In light of this literature, this study uses a simple two-equation model which allows trade preference 

programs (CBERA and PSP) to impact growth directly as well as indirectly through investment. Let annual 

 

17 The CACM was reactivated about 1993, and entered into a trade agreement with Dominican Republic in 1998. In 

addition, all Central American countries negotiated (or began negotiating) PTAs with Mexico during the 1990s. 

Revitalized in 1991, CARICOM maintains essentially free trade among its members, and has reduced its CET range since 

1991. CARICOM entered into PTAs with Venezuela (1993), Columbia (1994) , and the Dominican Republic (1998).

18 See Krishna, et al. (2003), Rodrik and Rodriguez (2001), Tybout (2000), US ITC (1997), Edwards (1998). 

19 They argue that trade liberalization may raise the return to capital, stimulating investment and thereby growth. This 

could occur through reduced cost of imported intermediates, increased demand for investment goods, and 

procompetitive effects in investment goods, tradables, and/or the financial sector.

20 These are: incentives for better macroeconomic policy, impact on government size, lower degree of price distortion, 

increased exposure to new technology, technology transmission through FDI.
10

real income growth in a country be a function of growth in the factors of production (low-skilled labor (L), 

high-skilled labor(H), and capital (K)), and technological change ( Â).

123 Yˆ = ALHK ˆ +a ˆˆˆ + + a a (1)

where “^” indicates proportionate change, and a j is the share of input j (j=L, H, K) in total output. 

Trade barriers are assumed to slow down technological change by: limiting access to goods embodying new 

technologies; impeding foreign investment, and thus, knowledge transfer from foreign firms; reducing 

incentives to improve technology in order to remain competitive on world markets.21 To keep things simple, 

assume that technological change is driven by country-specific factors (d ) and by a country’s own trade 

restrictions as well as its trading partners’ (TR ). With these assumptions equation (1) might be written as:

123

ˆ ˆˆˆ Y =d + a L +++ a H a K ß′(TR) (2)

The vector TR includes beneficiary country’s unilateral trade barriers, US unilateral trade barriers, and 

trade preferences under CBERA and PSP.

Investment is modeled using a modified simple accelerator model. The desired capital stock in any 

period is assumed to be a linear function of income. Thus, investment today is a linear function of the 

difference between income next period and income today: 

1

1

t t t t

t t t

I ( K * K ) h(Y Y )

ˆ I / Y h(Y )

+

+

= − = −

=

(3)

where * indicates desired level of capital in period t+1, and 0<h<1.22 Since income growth next period is 

unknown, investment decisions today must be based on expectations of future growth, 1

e

t

ˆY +

. Suppose trade 

liberalization is expected to stimulate growth:

 

21See Edwards (1993, 1992), Harrison (1996), Levine and Renelt (1992).

22Allowing for partial adjustment in a given period, (3) can be rewritten as: 1

( * ) ( ) t t t t I = g K −K = g h Y Y +⋅ −

,

0 1 < < g .
11

^

1 1 2

ˆ ˆ e

Yttt + = + g g Y TR (4)

According to (4), expected growth next period is equal to actual growth this period plus an adjustment for 

changes in trade restrictiveness today, with g1 > 0 and g 2 < 0 . Thus, (3) becomes:23

^

1 2

ˆ

/ t

t t t I Y = + hg g Y h TR (3)N

IV. Estimation and Data

Equations (2) and (3)’ form a two-equation simultaneous model of income growth and investment. 

They are estimated using pooled data for 5 Central American countries (Costa Rica, El Salvador, Guatemala, 

Honduras, and Nicaragua) and pooled data for 5 Caribbean countries (Dominican Republic, Guyana, Haiti, 

Jamaica, and Trinidad) for the years 1970-98. These countries were chosen based on data availability. The 

sample ends in 1998 to avoid changes in investment and growth due to anticipation of the CBTPA in 2000.

For each country, income growth is measured as the log difference in real GDP per capita, while investment 

is measured as the ratio of gross capital formation to GDP. Data on skilled labor, or proxies such as 

enrollment in secondary education, were not available for all 10 countries over the entire time period. Hence, 

L was redefined as the total labor force. 

Equation (2) was modified to address non-random shocks which occurred during this time period. 

Radical changes in the prices of several commodity exports caused wide short-run fluctuations in growth in 

the CBERA region. Since terms of trade data were not available for all countries for all years, (2) includes

a variable (EXCIit) measuring changes in the export capacity to import (the ratio of export revenues to import 
12

prices). Two additional dummies variables were included to account for non-random political, military or 

economic shocks. The first is a “crisis” dummy variable, which takes a value of one for a country at a point 

in time when a major shock took place (e.g., a military coup in Guatemala in 1982, a U.S. trade embargo 

against Haiti 1992-94). The second is a dummy for the debt crisis in the early 1980s.24 Thus, equation (2) 

becomes: 

1 2 3

ˆ ˆ ˆ Yit d e i a Lit a Kit a EXCIit it = + + + ßT1

′ ′ Rit + + + ß μ2 it (2)N

where μit is a vector of country or time specific shocks and it e is a random error. Other major shocks that 

are controlled for include the wars in El Salvador and Nicaragua, the significant changes in the US sugar 

quota regime affecting the Dominican Republic, and the Jamaican change in government in the 1970s. 

The restrictiveness of the trade regime is affected by the trade preference programs, as well as 

unilateral trade reforms, and the interactions between them. Because country-level data are difficult to 

obtain for 1984-1988, regional measures of CBERA utilization and preference margins are used to represent 

the program. PSP utilization is proxied by the share of US apparel imports from the region which enters 

under PSP. Though not all apparel imports are eligible due to the requirement to use US components, this 

should give a rough idea of how much the region participates in the PSP. Since PSP is even more valuable 

if a country has a GALs agreement (since qualifying apparel imports enter quota-free), the share of regional 

PSP trade entering under GALs is included. Anecdotal evidence from exporters in beneficiary countries 

 

23Of course, the fraction h in equation (4) may not be a constant, but instead a function of the return to capital and the 

rate of depreciation, h=h(r, d). If, as in Baldwin and Seghezza, trade liberalization raises the return to capital, we have 

^

1 2

ˆ / ( ) ( ) t

t t t t I Y = + h TR Yg g h T R TR . Attempts at interacting GDP growth with the measures of own country and US 

openness did not reveal any significant interactive effects, and did not alter the results presented below.

24 Both dummies were constructed by the author based on information from various IMF country reports. 
13

indicated thatNAFTA resulted in investment and trade diversion from the region.

25

 A dummy representing 

the period after NAFTA implementation is, therefore, included. In subsequent work, the possibility of 

interactions between the preference programs, reform and NAFTA will be tested. 

Because countries’ trade restrictions were reduced during this time period, some measure of trade 

openness for both Central America and the US should be included. As is well known, however, it is difficult 

to find such measures.

26 Data on the ratio of trade to GDP are the most complete for these 10 countries 

during 1970-1998. Thus, despite its known shortcomings, this variable is used to represent the level of 

openness in beneficiary countries and in the United States. Lack of complete data for some of the widely 

used proxies for trade openness made it impossible to test the robustness of results with alternative 

measures.

27 However, reform period dummies were introduced to capture periods of major trade reform 

and/or macro-stabilization efforts. 

 The simultaneous relationship between income growth and investment, along with the likelihood that 

countries in the region experienced similar contemporaneous shocks (e.g., hurricanes, droughts, collapses in 

commodity prices) suggest the use of three-stage least squares. Spencer-Berk tests rejected the null 

hypothesis of exogeneity for investment and income growth in the Central American region, and for income 

growth in the Caribbean. Thus, these three equations were estimated using three-stage least squares, while 

the investment equation for the Caribbean was estimated using SUR. These equations were also corrected 

for country-specific first-order serial correlation and groupwise-heteroskedasticity. The instruments include 

all exogenous variables in the system plus the lagged values of dependent variables. Country-specific effects 

 

25 While PSP allowed apparel made from US fabrics and yarns to enter the US market with reduced duties, NAFTA 

removed all duties from the same products originating in Mexico. In interviews with AGEXPRONT (an exporters’ 

association) and an apparel manufacturer in Guatemala in 2001, exporters noted that after NAFTA, orders for shipments 

by very large U.S. retailers under the PSP were cancelled and shifted to Mexico. Similar views were reported by several 

apparel manufacturers in Dominican Republic and Trinidad. 

26See Harrison (1996) and Rodrik and Rodriguez (2001), for example. 

27Most other proxies, such as collected tariffs or black market premia, are not available for years prior to CBERA. 
14

were included in both equations to capture the influence of non-measurable country characteristics which 

would likely influence both investment and growth. 

IV. Results

The results in table 3 suggest that preference erosion had a small direct negative impact on both 

investment and growth in Central America. A one percent decline in the regional average CBERA 

preference margin reduces growth by 0.04 percent and investment by 0.06 percent, though with a lag. There 

is also evidence that investment has a strong positive effect on income growth. Thus, any drop in investment 

due to preference erosion would also indirectly reduce income growth. In contrast, table 4 suggests that 

preference erosion has no direct impact on Caribbean investment, but does have a small direct negative 

impact on growth. This, surprisingly, suggests that preference erosion may have dampened development in 

both regions, despite the small size of the average preference margin.

However, these two tables also suggest that preference utilization has a positive impact on both 

growth and investment--one that is much stronger than preference erosion. In Central America a one 

percent increase in the utilization of CBERA preferences has a 30% larger direct impact on investment, and 

twice the direct impact on growth as a one percent decline in the preference margin. In the Caribbean, an 

increase in utilization has a positive direct impact on investment (while preference erosion does not), and has 

more than two times the impact on growth as does preference erosion. Thus, the effect of the dramatic 

increase in utilization of the CBERA program during this time period (shown in figure 2) may have more than 

offset any impact preference erosion had on development. 

Tables 3 and 4 also reveal that the production sharing program may have mattered just as much or 

more than the CBERA program for development in the region. In Central America, both investment and 

growth were far more sensitive to PSP utilization than to preference erosion. In addition, PSP utilization had 

a stronger positive impact on investment than CBERA utilization, though it had a similar impact on growth. A 
15

GALs agreement strengthened the impact of PSP utilization on investment (as expected), though its impact 

on growth appears perverse. In the Caribbean, PSP again had a stronger effect on investment than either 

preference erosion or CBERA utilization. PSP utilization alone had no impact on growth, but PSP with a 

GALs agreement did have a small positive effect on growth. 

Perhaps most interesting, these results suggest that a country’s own trade reform may have had a 

larger impact on development than any preference program. In Central America, investment is twice as 

sensitive to a country’s own openness as it is to preference erosion, and 50% more sensitive to openness than 

to CBERA utilization. The positive significant coefficient on the reform dummy also suggests that overall 

trade and macroeconomic reforms had an additional small stimulus to investment. In the Caribbean, 

investment is 50% more sensitive to an an increase in a country’s openness, than it is to an increase in 

CBERA utilization. 

V. Conclusion

Though recent quantification of US trade preference programs with developing countries show 

underutilization and often small preference margins, many still argue that these preferences are significant 

for development. If so, then preference erosion could be bad for development. In this paper CBERA 

utilization and preference margins were quantified, using highly disaggregated data, from the inception of the 

program in 1984 until 1999. The impact of CBERA preference erosion on investment and growth was then 

tested, using data on 10 CBERA beneficiary countries, from 1970-1998. A two-equation simultaneous model 

was used, which allowed for direct and indirect effects of preference programs and trade reform on 

investment and income growth. 

Results showed that CBERA preference margins have been eroding steadily over the 15 year time 

period. Surprisingly, CBERA utilization grew dramatically throughout the same 15 years. Preliminary results 

from the panel estimation suggest that preference erosion does matter for development. Preference erosion 
16

had a small direct negative impact on investment and growth in Central America, and on growth in the 

Caribbean. Given a strong positive relation between investment and growth in both regions, preference 

erosion would also have an indirect negative impact on growth.

However, participation in CBERA mattered more for development than preference erosion. 

Investment and growth in both regions were much more sensitive to CBERA utilization than to preference 

erosion. Thus, the negative effect of the small gradual decline in preference margins over the time period 

may have been completely overwhelmed by the positive impact from the simultaneous dramatic increase in 

CBERA utilization. Participation in the production sharing program had even greater effects on investment 

and growth than preference erosion, and in some cases than utilization of the CBERA. This may be due to 

the fact that PSP offered preferences on apparel exports while CBERA did not. Finally, a country’s own 

trade reform appears to matter far more for development than preference erosion. 

Several issues remain unaddressed and require further work. While these results reflect changes in 

regional preferences and utilization, it remains to be seen whether or not changes in country-specific 

preference margins and utilization will have similar impacts on growth and investment. There may also be 

interactions between own-country trade reform and participation in preference programs, requiring alternate 

specifications. Finally, if growth and investment also depend upon their values in previous years, dynamic 

panel estimation may be appropriate. 
17

REFERENCES

Alexandraki, K. and H. Lankes (2004). “The Impact of Preference Erosion on Middle Income Developing 

Countries,” IMF Working Paper No. 169.

Baldwin, R. and E. Seghezza (1996). “Testing for Trade-Induced Investment-Led Growth,” NBER

Working Paper 5416.

_____ (1998). “Regional Integration and Growth in Developing Nations,” Journal of Economic 

Integration, 13, pp. 367-99. 

Baldwin, R. and A. Venables (1996), “Regional Economic Integration,” in G. Grossman and K. Rogoff, eds., 

Handbook of International Economics Vol. 3, Amsterdam: Elsevier Science. 

Brada, J. and J. Mendez (1988), “An Estimate of the Dynamic Effects of Economic Integration,” Review of 

Economics and Statistics.

Brenton, P. and T. Ikezuki (2004). “The Initial and Potential Impact of Preferential Access to the US 

Market under AGOA,” World Bank Policy Research Working Papers No. 3262. 

Clark, D. and S. Zarrilli (1994). “Non-Tariff Measures and the U.S. Imports of CBERA-Eligible 

Products,” Journal of Development Studies, 31(1) 214-24.

Dean, J. (2002). “Do Trade Preferences Promote Growth?” USITC Office of Economics Working Paper 

No. 2002-07-A.

Dean, J. and J. Wainio (2006). “Quantifying the Value of U.S. Tariff Preferences,” World Bank Working 

Paper No. 3977.

DeMelo, J., C. Montenegro, and A. Panagariya (1992), “L’integration Regionale Hier et Aujourd’hui,” 

Revue D’Economie du Developpement.

Greenaway, D., W. Morgan, and P. Wright (1998). "Trade Reform, Adjustment and Growth: What Does

the Evidence Tell Us?," Economic Journal 108:1547-61.

_____(2002). "Trade Liberalisation and Growth in Developing Countries," Journal of Development 

Economics 67:229-244.

Harrison, A. (1996). “Openness and Growth: a Time-Series, Cross-Country Analysis for Developing 

Countries,” Journal of Development Economics 48:419-47.

Jean, S. and F. Candau (2005). “How Much Are EU Trade Preferences Worth for Sub-Saharan Africa and 

other Developing Countries?,” manuscript prepared for joint World Bank/WTO International 

Symposium, "Preference Erosion: Impacts and Policy Responses," WTO, Geneva, June 2005.
18

Krishna, K., A. Ozyildirim, and N. Swanson (2003). "Trade, Investment and Growth: Nexus, Analysis, 

and Prognosis," Journal of Development Economics 70:479-99.

Levine, R. and D. Renelt (1992),”A Sensitivity Analysis of Cross-Country Growth Regressions,”

American Economic Review 82 (4) pp. 942-963.

Panagariya, A. (2000). “Preferential Trade Liberalization,” Journal of Economic Literature 38 (2), 287-31.

Pelzman, J. and G. Schoepfle (1988). “The Impact of the Economic Recovery Act on Caribbean Nation’s 

Exports and Development,” Economic Development and Cultural Change, 36(4) 753-91. 

Ray, E. (1987). “The Impact of Special Interests on Preferential Tariff Concessions by the United States,” 

Review of Economics and Statistics, 69 (2) 187-93. 

Tybout, J. (2000). “Manufacturing Firms in Developing Countries: Howe Well Do They Do and Why?”

Journal of Economic Literature, 38(1) 11-44.

USITC (1997). The Dynamic Effects of Trade Liberalization: an Empirical Analysis. Publication 3069.

_____ (2001). The Impact of the Caribbean Basin Economic Recovery Act. Publication No. 3447.

Wacziarg, R. (2001). "Measuring the Dynamic Gains from Trade," World Bank Economic Review,"

15(3) 393-429.
19

Table 1. Growth and Investment before and after CBERA

Real Income Growth1

Real Income 

Growth p.c. 3Investment4

(average annual, %) (average annual, %) (% of GDP)

Pre2Post2Pre Post Pre Post

Central America

Costa Rica 4.1 4.9 1.4 2.3 22.4 19.5

El Salvador 0.9 3.5 -1.3 1.8 16.6 15.1

Guatemala 4.1 3.2 1.4 0.9 15.7 13.5

Honduras 4.2 3.6 0.9 0.6 19.8 20.7

Nicaragua 1.4 0.1 -1.7 -2.2 17.7 21.0

Panama 4.2 3.3 1.6 1.2 . 17.3

Caribbean

Antigua 4.8 55.3 4.5 54.2 28.7634.4

Bahamas 2.2 2.5 (.) 0.7 . .

Barbados 2.2 2.1 1.8 1.8 23.1 15.7

Belize 5.5 6.1 3.4 3.2 22.2 22.6

Dom. Rep. 7.0 4.0 4.3 2.2 20.9 22.1

Dominica 4.5 53.4 3.8 53.7 30.2629.8

Grenada 3.3 54.4 . . 26.7632.1

Guyana (.) 2.2 -0.6 2.4 24.3 30.5

Haiti 2.7 -0.9 0.7 -2.7 16.3 15

Jamaica 0.9 2.0 -0.5 1.2 20.6 24.8

St. Kitts 3.8 56.0 3.5 56.7 . .

St. Lucia . 6.8 . 5.3 . 24.6

St. Vincent 4.1 4.1 3.1 3.3 28.2628.5

Trinidad 4.0 0.0 2.7 -0.7 24.9 19.9

1

 GDP in constant 2000 $US.

2

"Pre" designates average over 1970-1983. "Post" designates average over 1984-1998.

3 GDP per capita in constant 2000 $US.

4 Gross capital formation (% of GDP).

5 Calculated from 1978-1983.

6

 Calculated from 1977-1983.

(.) indicates less than 0.1%.

Source: All data from World Bank, World Development Indicators, 2005.
20

Table 2. FDI Inflows and Export Growth before and after CBERA

FDI Inflows Real Export Growth2

(% of GDP) (average annual, %)

Pre1Post1Pre Post

Central America

Costa Rica 2.1 2.6 5.7 10.2

El Salvador 0.4 0.9 2.1 6.2

Guatemala 1.4 1.2 2.1 4.4

Honduras 0.6 1.3 3.7 2.4

Nicaragua 0.7 2.2 3.3 3.9

Panama 2.5 1.5 . 3.9

Caribbean

Antigua . . 11.2 38.0

Bahamas 1.2 41.0 5.5 3.

Barbados 3.6 2.2 . .

Belize 1.4 2.6 . 7.2

Dom. Rep. 1.7 1.9 7.2 15.7

Dominica 0.01 58.5 10.3 36.9

Grenada 0.9 57.1 -1.2 36.5

Guyana -1.2 7.4 -4.5 7.4

Haiti 0.8 0.2 7.6 3.5

Jamaica 2.3 2.0 1.5 .

St. Kitts 2.1 12.6 0.1 37.0

St. Lucia . 7.9 . .

St. Vincent 0.5 10.4 13.1 33.5

Trinidad 4.9 5.0 1.3 5.9

1

"Pre" designates average over 1970-1983. "Post" designates average over 1984-1998.

2

 Exports in constant 2000 $US.

3

 Calculated from 1978-1983.

4 Calculated from 1976-1983.

5 Calculated from 1977-1983.

Source: All data from World Bank, World Development Indicators, 2005.
21

Table 3. Investment and Growth in Central America1

Investment 2Income Growth (p.c.)2

(3SLS) (3SLS)

Variable Coefficient t-Statistic Variable Coefficient t-Statistic

GDP per capita (log difference) 0.24* 2.98 Investment 0.37** 2.91

ln Openness 0.16** 9.49 Debt Dummy -0.04** -3.45

ln US Openness 0.03 1.61 Crisis Dummy -0.07** -4.52

ln CBERA Utilization (lagged) 0.10* 2.66 ln CBERA Utilization 0.09** 4.20

ln CBERA Preference (lagged) 0.07* 2.56 ln CBERA Preference 0.04** 2.83

ln PSP Utilization (lagged) 0.13* 2.44 ln PSP Utilization 0.09** 2.22

ln GALs share in PSP (lagged) 0.03** 3.26 ln GALs share in PSP -0.02** -2.57

NAFTA -0.05** -2.94 TOT Change 0.03 1.62

Reform Dummy 0.03** 3.24 El Salvador War Dummy -0.06* -2.25

Nicaragua War Dummy -0.02 -0.98

ln US Openness -0.07** -4.01

Country Fixed Effects (Cross) yes Country Fixed Effects (Cross) yes

Country AR1 Correction yes Country AR1 Correction yes

Observations 140 Observations 140

Wald test: all parameters=0

2

c = 392.0** Wald test: all parameters=0

2

c = 317.9**

1

t-statistics in parentheses. **, *, and † indicate significance at the 1%, 5%, and 10% levels, respectively.

2

 Instruments include all exogenous variables in the system and lagged values of endogenous and exogenous variables.
22

Table 4. Investment and Growth in the Caribbean1

Investment 2Income Growth (p.c.)2

(SUR) (3SLS)

Variable Coefficient t-Statistic Variable Coefficient t-Statistic

GDP per capita (log difference) 0.05 1.01 Investment 0.26* 2.23

ln Openness 0.09** 5.88 Debt Dummy -0.08** -5.17

ln US Openness 0.01 0.19 Crisis Dummy -0.03† -1.85

ln CBERA Utilization 0.06* 2.24 ln CBERA Utilization (lagged) 0.10** 2.71

ln CBERA Preference 0.02 1.30 ln CBERA Preference (lagged) 0.04* 2.14

ln PSP Utilization 0.09** 2.95 ln PSP Utilization (lagged) -0.05 -1.08

ln GALs share in PSP -0.01 -0.65 ln GALs share in PSP (lagged) 0.02* 2.90

NAFTA -0.01 -0.57 TOT Change 0.02 1.17

Reform Dummy -0.01 -0.92 Jamaican Election Dummy 0.19** 6.51

DR Sugar Price Dummy -0.08** -2.44

ln US Openness 0.05 1.27

Country Fixed Effects (Cross) yes Country Fixed Effects (Cross) Yes

Country AR1 Correction yes Country AR1 Correction Yes

Observations 140 Observations 140

Wald test: all parameters=0

2

c = 199.26** Wald test: all parameters=0

2

c = 192.6**

1

Includes fixed effects. t-statistics in parentheses. **, *, and † indicate significance at the 1%, 5%, and 10% levels, respectively

2

 Instruments include all exogenous variables in the system and lagged values of endogenous and exogenous variables.
23

Figure 1. US Imports from CBERA Countries by Program, 1984-99

0

2

4

6

8

10

12

14

16

18

20

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Billions of US dollars

CBERA GSP PSP GALs MFN Other

 Source: Data for 1989-1999 are calculated using HTS 8-digit data from the USITC Dataweb (www.usitc.gov). For 1984-88, the data are from various issues of 

 USITC The Impact of the Caribbean Basin Economic Recovery Act. 
24

Figure 2. US Imports from CBERA Countries:

CBERA Coverage, Utilization and Average Tariff Preference, 1984-1999

0%

10%

20%

30%

40%

50%

60%

70%

80%

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Coverage and Utilization

0%

1%

2%

3%

4%

5%

6%

7%

Average Tariff Preference

Coverage Utilization Average Tariff Preference

 Source: Coverage and utilization data for 1989-1999 are calculated using HTS 8-digit data from the USITC Dataweb (www.usitc.gov). For 1984-88, the data are from various

issues of USITC The Impact of the Caribbean Basin Economic Recovery Act. Average tariff preference data for 1995-99 are calculated using HTS 8-digit data from the USITC Tariff 

Database (www.usitc.gov). For 1989-94, preferences are calculated using HS 6-digit tariff data from TRAINS via WITS. For 1984-88, preferences are calculated using unweighted 

calculated duty estimates for the US from Value of US Imports for Consumption, Duties Collected, and Ratio of Duties to Values 1891-2003 

(http://dataweb.usitc.gov/scripts/AVE.PDF).
25

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Costa Rica

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

El Salvador

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Guatemala

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Honduras

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Nicaragua

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Panama

Utilization Average Tariff Preference

Figure 3: CBERA Utilization and Average Tariff Preference by Country
26

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Antigua Barbuda

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Aruba

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Bahamas

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Barbados

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Belize

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Br Virgin Is

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Dominica Is

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Dominican Rep

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Grenada Is

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Guyana

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Haiti

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Jamaica

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Montserrat Is

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Netherlands Ant

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

St Kitts-Nevis

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

St Lucia Is

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

St Vinc & Gren

0

2

4

6

8

10

12

14

Preference

0

20

40

60

80

100

Utilization

19891990199119921993199419951996199719981999

Trin & Tobago

Utilization Average Tariff Preference

Figure 3: CBERA Utilization and Average Tariff Preference by Country (continued)

 Note: Aruba, Guyana and Nicaragua became beneficiaries in January 1986, November 1988 and November 1990, respectively; Panama lost its beneficiary status in April 1988 and was

 reinstated in March 1990.

 Source: See notes for figure 2. Data on preference margins prior to 1989 are not available for all countries or all years.
27

DATA APPENDIX

Variable Name Measure Source

Real Income Growth (p.c.)

Log difference in annual GDP p.c. (constant 

2000 $US) World Bank, WDI 2006

Real Investment Ratio of gross capital formation to GDP World Bank, WDI 2006

Labor force growth Log difference in annual labor force World Bank, WDI 2006

Export capacity to import Export revenue/import price index World Bank, WDI 2006

CBERA utilization

US imports under CBERA program/US 

imports eligible for CBERA program USITC Database

PSP utilization

US imports from CBERA countries under HTS 

heading 98020080/US apparel imports from 

CBERA region 

USITC, Impact of the Caribbean Basin 

Economic Recovery Act (various issues)

GALs share of PSP

US imports from CBERA under HTS heading 

9802.00.8015 (807A)/US PSP imports from 

CBERA region 

USITC, Impact of the Caribbean Basin 

Economic Recovery Act (various issues)

Openness 

Value of country’s exports plus 

imports/country’s GDP World Bank, WDI 2006

Openness of US Value of US exports plus imports/US GDP World Bank, WDI 2006

Debt crisis Country specific dummy variable Constructed by author

Crisis Country specific dummy variable Constructed by author

War

Dummy variable for El Salvador and 

Honduras Constructed by author

Reform years Country specific dummy variable Constructed by author

NAFTA Dummy variable for 1994-1998

Sugar Dummy

Dummy variable for US sugar regime 

changes with respect to DR, 1981 & 1990

Jamaican Election Dummy Dummy variable for Jamaica, 1972