For over 40 years, the United States has relied on unilateral trade preferences as an integral part of its foreign economic policy. Trade preferences give market access to selected developing country goods, duty free or at tariffs below normal (NTR) rates, without requiring reciprocal trade concessions. They come in many forms and are intended to promote economic growth and development in poor countries by stimulating export promotion and investment, and to encourage the use of U.S. inputs in foreign manufacturing. Trade preference programs must be authorized by Congress and are usually done so for specified periods of time. The Caribbean Basin (see Figure 1 ) has benefitted from multiple preferential trade arrangements, the best known being those linked to the Caribbean Basin Initiative (CBI) implemented on January 1, 1984, and revised periodically by Congress. Since 1984, the growth of free trade agreements (FTAs) in the region has signaled a shift in U.S. trade policy. The increase in reciprocal FTAs (particularly the Dominican Republic-Central America-United States Free Trade Agreement—CAFTA-DR) with even more generous trade provisions for certain Caribbean exports has the effect of "eroding" the relative benefits given to countries covered only by the CBI programs, raising questions about the future path of U.S. trade policy for those countries. This report reviews unilateral preference programs for the Caribbean, discusses how they have been affected by FTAs in the region, and considers trade policy options for dealing with countries still relying on trade preferences and that may be considering whether to negotiate an FTA with the United States. The United States has a long history of employing various types of trade incentives to encourage specific trade activities. Motivated by commercial, political, and security interests at times, the U.S. Congress has created multiple unilateral trade preference programs that promote developing-country exports, but are often structured so as to limit the negative economic effects on U.S. producers and workers. Over time, bilateral, regional, and multilateral trade agreements have come to eclipse the importance of many preference arrangements, a trend that a review of these developments will show has been particularly visible in the Caribbean Basin. In 1964, the United States government initiated a preferential tariff program based on production sharing. Production sharing is a cost-reducing business strategy that seeks competitive (price) advantage by locating manufacturing processes in more than one country (now often referred to a value added chains). U.S. firms specialize in the capital intensive, technology driven stages of production, and outsource assembly and other lower-skill processing to lower-wage countries. Under the U.S. production-sharing program, foreign firms that import U.S. component parts and assemble or process them into finished or semi-finished products may then re-export them back to the United States, with duties levied only on the value added abroad (no tariff on U.S. content). U.S. firms benefit from production sharing by the required use of their inputs (to receive the tariff exemption) and in retaining a portion of the global market for goods that might otherwise go to lower-cost foreign producers that do not use U.S. inputs. Foreign firms using U.S. inputs benefit from the tariff exemption, making their products more competitive in the U.S. market relative to those of other producers who face a duty on the full value of their competing exports. This type of production arrangement has been commonly used for automobile parts, electronics, and apparel, among other manufactured goods. The Caribbean Basin and Mexico were early beneficiaries of the production sharing program, with proximity providing a major advantage. Lower transportation costs and quicker turnaround times have provided Mexican, Caribbean, and Central America producers with an additional competitive factor, at least for certain niche markets, over their more distant, but often lower-cost Asian competitors. Many Caribbean countries have developed their export processing zones around this program. By the 1970s, the concept of preference programs for developing countries shifted. Whereas production sharing was based on a mutually beneficial competitive business strategy, developing countries had long advocated for unilateral trade preferences as a form of development assistance. Under the auspices of the General Agreement on Tariffs and Trade (GATT), the Generalized System of Preferences (GSP) was conceived as a way for developed countries to respond to this expressed need. The GSP permits developed countries to grant unilateral tariff preferences for selected imports from developing countries to promote export-led growth. The U.S. program provides limited tariff incentives for many, but not all products. The Caribbean region has availed itself of both the GSP and production sharing incentives for many years. The U.S. GSP program requires periodic renewal by Congress and was last reauthorized through December 31, 2010. The tariff preference model as development strategy continued to evolve in the 1980s. The next step targeted specific regions of the world for deeper preferences than those accorded under the GSP, a strategy driven by regional security issues, as well as economic and political interests of the United States. Congress enacted the first such geographically targeted program for the Caribbean region in 1983. The impetus to create a Caribbean trade preference program arose from concern over the region's economic collapse and political radicalization that materialized in the early 1980s. Proximity, vulnerability, and instability have long made the Caribbean Basin a particular strategic interest of the United States, a notion well established in U.S. political history dating to the Monroe Doctrine. In light of this reasoning, President Reagan and the U.S. Congress initially considered a comprehensive response to the Caribbean Basin's troubles. Trade preferences would emerge as the primary economic component of a scaled back alternative. President Reagan unveiled the Caribbean Basin Initiative (CBI) in a speech before the Organization of American States on February 24, 1982, arguing that ensuring economic and political stability in the Caribbean region was vital to U.S. security interests. He proposed a controversial mix of tax incentives, aid, and trade preferences. The idea was rejected by many constituencies, however, particularly those representing import-competing firms and workers. As a consequence, the first bill died in the 97 th Congress. In the 98 th Congress, however, Congress acted promptly on the Caribbean Basin Economic Recovery Act (CBERA). Although it again drew stiff resistance from U.S. textile and labor interests, once scaled back to modest duty-free treatment for only 10% of Caribbean exports, it passed with overwhelming support in both the House (392-12) and the Senate (90-7). President Reagan signed it into law on August 5, 1983 ( P.L. 98 - 67 ), and the trade preferences went into effect on January 1, 1984. The CBERA permits 27 countries to be designated by the President as beneficiary countries (24 initially were—see Appendix ), eligible to receive duty-free or reduced-duty access for selected exports provided the countries meet specific conditions. Designation may be denied or suspended if the country (1) is a Communist country; (2) has seized U.S. property without compensation; (3) fails to recognize or enforce awards arbitrated in favor of U.S. citizens; (4) affords preferential treatment to goods from other countries to the detriment of U.S. commerce; (5) broadcasts U.S. copyrighted material without permission; (6) has not signed an extradition agreement with the United States; or (7) is not taking steps to afford internationally recognized worker rights. Thus, the unilateral nature of the arrangement is clear: meet U.S.-defined eligibility criteria and selective imports will be granted trade preferences. No negotiation was involved. Provided a good is wholly the "growth, product, or manufacture" of, and imported directly from, a beneficiary country, it may enter the United States duty free or at a reduced rate of duty. There were, however, significant exceptions for articles defined by Congress as "import sensitive." These included textile and apparel articles subject to textile agreements under the Multi-Fiber Arrangement (MFA), petroleum products, footwear, handbags, luggage, flat goods, work gloves, leather wearing apparel, canned tuna, and watches or watch parts. Under the rules of origin, 35% of the article's value of labor and parts had to originate in a beneficiary country, although some 15% of the 35% could be of U.S. origin. A number of special provisions also applied. First, all Caribbean imports were still subject to safeguard measures (resumption of tariffs) if the imports were shown to increase in quantities that would hurt U.S. producers. Also, special treatment was accorded to some import-sensitive goods. CBERA gave ethanol imports duty-free entry if produced under certain conditions and sugar imports from the region entered under a tariff rate quota (TRQ)—duty free up to a specified quota and then taxed at prohibitively high levels. Congress also required the United States International Trade Commission (USITC) to produce biennial reports on the effects of the preference program. The USITC found that for the first five years, the impact was relatively small, with imports from beneficiary countries expanding at slower rates than imports from the rest of the world. CBERA eligible products, nonetheless, grew from 6.7% of total U.S. imports from CBERA beneficiary countries in 1984, to 7.4% in 1985, 11.1% in 1986, 12.7% in 1987, and 13.0% in 1988. Even these numbers overstate the effects because there was an increasing shift from use of duty-free access under GSP to CBERA, so the marginal increase in duty-free goods that entered exclusively under CBERA was small. Under CBERA, textile and apparel products were excluded from receiving tariff reductions, despite the fact that they were a major manufacturing export (and job creating) sector for the region.