In 1973, the smaller, largely English-speaking countries of the Eastern Caribbean launched the Caribbean Community and Common Market (CARICOM), an integration plan intended to coordinate and enhance their collective economic and social development. Initially designed as an intraregional free trade area with expectations that it would become a common market, CARICOM integration has unfolded slowly and been limited to a partial customs union. CARICOM's strategy for finally achieving a "single economic space" rests on implementing the Caribbean Single Market and Economy (CSME), formally established on January 1, 2006 and intended to be fully in place by 2015. CARICOM is a highly trade dependent region undergoing major changes to its economic relationship with the world. Adjusting to these changes through the CSME is its primary development challenge. To fulfill the CSME vision, its members would have to adopt considerably deeper commitments to economic integration. The Caribbean Basin has been a longstanding interest of the United States, and the success of CARICOM directly affects stability in the region. It therefore has important implications for U.S. trade, investment, immigration, drug interdiction, and national security policies. Although small in size, CARICOM's trade and investment relationship with the United States may be poised to become a more prominent issue as the region adjusts to the changing external environment, not the least of which includes the ongoing erosion of trade preferences with Europe and the United States, as well as the concomitant rise of bilateral and regional free trade agreements in the region. This report evaluates CARICOM's development and implications for U.S. foreign economic policy. It will be updated periodically. The United States has long considered the Caribbean Basin a strategically important region based on its proximity and unique geographic features. It straddles the divide between North and South America (see Figure 1 ), is home to important sea-lanes, raw materials, trade and investment opportunities, and historically has been a first line defense against the encroachment of foreign powers. A broad range of U.S. interests in the region has been reflected in U.S. foreign policies dating from the Monroe Doctrine in the early 19 th century, through the Cold War era, culminating in the Caribbean Basin Initiative (CBI) in the 1980s, to the current effort to thwart illegal drug trafficking, money laundering, and terrorist activities. In all cases, the United States has sought to foster social, economic, and political stability in the region, while also maintaining an eye on its own economic, commercial, and strategic interests. CARICOM comprises a group of 12 island and 3 larger coastal nations in and around the Caribbean Sea, bordered by the Atlantic Ocean to the east, South and Central America to the south, the Gulf of Mexico to the west, and the United States to the north. Although CARICOM members share many cultural and historical similarities, as seen in Table 1 , their population, land size, economies, per capita income, and social indicators (e.g., life expectancy) can vary considerably, a reality that CARICOM responded to by designating some of its members as less developed countries (LDCs), making them eligible for "special and differential treatment." Collectively, these former British, Dutch, and French territories constitute a richly diverse cultural mosaic of European, African, and native influences that find themselves, paradoxically, "united by the very sea that also divides them." The tension between unity and division is a common theme throughout Caribbean society, leading to what might be considered the "CARICOM challenge:" how to integrate a diverse area in a manner that will meet individual country and regional development goals, in a equitable and mutually supporting way, without negating national identities and aspirations. CARICOM was established on July 5, 1973 with the signing of the Treaty of Chaguaramas. It was built on the trials and errors of previous unification efforts, beginning with the ambitious West Indies Federation (1958-62), which sought political and economic unification. Despite encouragement by Great Britain, it dissolved rapidly when Jamaica and Trinidad and Tobago withdrew in favor of national self-determination. In the midst of the failure to federate, the hope, if not the necessity, of economic integration remained alive and took new form in 1965 with the Caribbean Free Trade Association (CARIFTA). It marked the beginning of a free trade area and was replaced five years later by a deeper commitment under CARICOM. CARICOM began as two linked concepts: the Caribbean Community and the Common Market. Although conceptually yoked, they were devised as separate legal and institutional entities that provided a needed flexibility to accommodate differing national preferences for regional integration. The Caribbean Community comprises multiple functional relationships and institutions designed to integrate the region politically, economically, and legally. CARICOM was not given supranational authority, however, dropping any pretense of another federalist experiment, which allowed for relative ease of ratification. This arrangement, however, did not lead to full regional integration. In the words of two Caribbean experts, "CARICOM is a structure created by national governments to make national policies more effective by pursuing them within a regional framework." The Common Market, on the other hand, focused on trade and investment integration and was a stretch from the start. It proceeded from a free trade area to become a limited customs union, complete with a porous (multiple exceptions) common external tariff (CET). Although the "Common Market" did not evolve much beyond a "loose trading regime," CARICOM did succeed in bringing together a diverse group of states. The smallest islands subsequently formed the Organization of Eastern Caribbean States (OECS) in 1981 to pursue an even deeper and, some would argue, more successful integration pact in part to strengthen their position vis-à-vis the larger CARICOM countries. In 2001, CARICOM formally adopted the CSME concept in the Revised Treaty of Chaguaramas (the Revised Treaty), effectively replacing the Common Market as the economic integration standard. Together, CARICOM and the CSME share the attainment of three fundamental goals: 1) economic integration; 2) coordination of foreign policies; and 3) functional cooperation (banding together to share resources in health, education, environment, science, technology, transportation, and other disciplines). In each case, overcoming the disadvantages of small scale has been a driving concern, whether seeking scale economies from an enlarged domestic market, greater intraregional trade, shared costs in the provision of public sector goods, or integration of policy responses to negotiate from a stronger unified position in the international arena (see Small Countries: Are They Naturally Disadvantaged? , below). Some of these goals, however, have found greater success than others, as CARICOM struggled to maintain its momentum. From the start, CARICOM faced a harsh external environment. The 1970s was a time of oil price shocks, rising interest rates, and growing ideological extremism in the Caribbean that gave way to slow growth, rising debt, social unrest, and political division in the 1980s, although to a lesser extent than in Latin America. The excesses of this period discouraged deeper integration. CARICOM remained tied to Europe through unilateral preferential trade arrangements and would take up, with some controversy, the conditional U.S. offer of unilateral trade preferences defined in the 1983 Caribbean Basin Initiative (CBI). These preferences enhanced selected trade opportunities, but were ultimately limited and proved to be poor foundations for diversifying economic activity, as had trade dependence in the colonial period. By the 1990s, the economies of Latin America and the Caribbean rebounded, but CARICOM actually began to experience declining growth in output and productivity in many cases, with collective GDP growth on average falling from 3.9% in the 1970s to 2.2% in the 1980s and 1.9% in the 1990s. In addition, by the turn of the 21 st century, the World Trade Organization (WTO) pressed the European Union (EU) to eliminate their unilateral preferences accorded CARICOM exports (e.g., bananas and sugar), and the United States entered into a string of bilateral free trade agreements (FTAs) with Western Hemisphere countries that began to erode the relative benefits of the CBI preference programs. As the benefits of trade preferences continued their relative decline, the natural structure of CARICOM's trade patterns began to shift (see next section), as did incentives to move beyond a customs union. As an inward looking strategy typical of 1970s integration efforts, CARICOM was constrained as a trade-related development strategy. Described by one Caribbean scholar as, "integrating, expanding, and protecting the regional market for goods," CARICOM did not enhance intraregional trade to the degree expected. One study finds that from 1970 to 2003, although intraregional trade grew faster than extraregional trade, as a percentage of total trade, it peaked in 1998 (details are discussed in next section). Intraregional trade is also dominated by Trinidad and Tobago's oil exports. Net of oil, which is not affected much by CARICOM's preferences, intraregional exports have never exceeded 6% of total CARICOM trade. The trends suggest that CARICOM trade policies were limited in advancing intraregional integration. Many have cited the lack of progress in implementing CARICOM policies as one factor that has inhibited intraregional trade growth. Structural factors, particularly the similarity in economies and high concentration of export products, however, also naturally limited the potential trade effects of CARICOM's regional market for goods, an effort recently characterized as "doomed to be a low impact activity." Future growth in trade, therefore, is expected to come from exchange outside of CARICOM, which will require careful management of small-state volatility given CARICOM's highly concentrated export base, which increases vulnerability to external shocks and erratic shifts in terms of trade.