A Caribbean Policy for the Trump Administration

By Richard Bernal| April 13, 2017 on CSIS.org

YAMIL LAGE/AFP/Getty Images

The relationship between the United States and the countries of the Caribbean is complex, multidimensional, and of fundamental importance, because the United States is the largest economic partner of the Caribbean and the Caribbean is the third border of the United States. Given changing circumstances, U.S. policy toward the Caribbean has to be revised periodically, and this is particularly so when there is a new administration. The commencement of the Donald Trump presidency is clearly an opportune time for review of existing foreign policy.

There is a prevailing sense in the Caribbean that U.S. policy toward the region suffers from three weaknesses. First, it has not been holistic and consistently applied, with an overall rationale fragmented by a bilateral issue-focused approach for Haiti, Cuba, the Dominican Republic, and the 15-country Caribbean Community (CARICOM). The exceptions were President Ronald Reagan’s Caribbean Basin Initiative (CBI) and President George W. Bush’s Third Border Initiative (TBI). Second, the leadership of the region has felt that security issues dominate U.S. policy, with insufficient attention to economic issues. There needs to be a more nuanced appreciation that the economic development of the Caribbean is inextricably linked to other important issues such as democracy, governance, national security, transnational crime, and narcotics trafficking. Third, the distinctiveness of the Caribbean is subsumed when the United States launches a new foreign policy template such as the Enterprise of the Americas Initiative and the Free Trade Agreement of Americas.

All of these issues are of vital interest to the United States and the Caribbean. The purpose of this commentary is to assist in the reexamination of U.S. policy toward the CARICOM countries.

Context

The Caribbean has experienced a persistent economic slowdown since the onset of the global financial crisis that erupted in late 2008. Rates of growth in the Caribbean have varied among the countries but have been low and fluctuating, hovering around 1 percent, and the rate of unemployment has been almost 14 percent. In an effort to promote and sustain economic growth, governments have pursued fiscal policies that have contributed to a buildup of external debt. The crisis was precipitated by a combination of long-term structural and institutional factors, compounded by cyclical short-term factors such as commodity prices, in particular oil prices. The forecast for 2017 is for subdued economic growth. In these challenging circumstances there are several issues that require urgent attention to facilitate the economic recovery of the Caribbean. The United States, as a global superpower and largest economic partner of the Caribbean in trade, investment, and tourism, can play an important role in assisting the Caribbean to achieve sustainable economic development. For the United States to be more supportive of sustainable economic growth in the Caribbean, it must start with the recognition that these economies are small and acutely vulnerable to external events and that the options for diversification are limited.

Debt

Caribbean countries continue to be among the most indebted in the world. The debt is now a major impediment to economic growth because it has deprived Caribbean governments of the ability to use fiscal policy to promote growth. The situation is now at a point where a major policy initiative has to be mounted to significantly reduce the debt if sustainable economic growth is to be resumed. Congressional action on Puerto Rico’s $70 billion debt is a graphic reminder of what can happen.

Conventional wisdom in the economics profession is that, when the debt stock is over 75 percent of gross domestic product (GDP), the debtor country cannot grow its way out of debt. Jamaica leads with a debt/GDP ratio of 130.5 percent in 2014, followed by Barbados at 108.5 percent, Grenada at 99.1 percent, Antigua at 96.4 percent, the Bahamas at 82.4 percent, St. Vincent at 79.4 percent, St. Lucia at 78.4 percent, St. Kitts at 78.0 percent, Belize at 77.3 percent, and Dominica at 74.1 percent. Debt serving increased in 2014 to 23 percent of fiscal revenue and required 26.9 percent of current fiscal expenditure with Barbados leading with 35.3 percent.

The reduction of the debt will ease the liquidity constraints and solvency risk and allow governments to increase public investment in infrastructure, education, and health. The debt burden has to be reduced by a strategy combining (a) a restructuring of multilateral debt, (b) reduction of bilateral debt by debt swaps for climate mitigation, environment, education, and cancellation, and © conversion of commercial debt into multilateral debt.

Debt reduction needs to be supported by the creation of a macroeconomic stabilization fund, which would increase resilience through export promotion, improved fiscal management, and debt management, the objective being to prevent the buildup of debt to levels that stifle economic growth.

International Financial Intermediation

The implications of de-risking for correspondent banking relations is a problem to which the Caribbean is disproportionately vulnerable because of the prominence of foreign banks in the domestic financial systems and the heavy reliance on correspondent banking relations for international financial intermediation. Adverse impacts include choking international investment flows, trade financing, transfers of remittances, debt servicing, transfers of profits, and royalties. Some U.S. banks have already restricted or withdrawn some of these services to 16 banks in the Caribbean. Combatting money laundering and terrorist financing is a goal shared by Caribbean governments and suitable arrangements have to be put in place to ensure that this can be attained while allowing normalcy in international business. There have been meetings between the U.S. Treasury Department and Caribbean ministers, but the region feels that there is insufficient empathy. All this is in spite of compliance by Caribbean jurisdictions with the Foreign Account Tax Compliance Act (FATCA).

Security

The small states of the Caribbean in recent years have been threatened by transnational crime related primarily to narcotics trafficking and have benefitted from U.S. cooperation and assistance under the Caribbean Basin Security Initiative (CBSI). Priorities the CBSI seeks to address include: (1) maritime and aerial security cooperation, (2) law enforcement capacity enhancement, (3) border/port security, (4) firearms interdiction, (5) justice sector, and (6) citizen security and at-risk youth.

The national security capacities of these small sates are overmatched; financial and technical support and cooperation will be necessary because global terrorism, money laundering, human trafficking, and cyber crime are international in scope and character. The cost of security is already an additional expense on all forms of economic activity, but it is a necessary investment as the cost of crime may be as high as 4 percent of GDP, which has immediate implications for vital economic sectors, in particular tourism. In any case, the nature of the security threats requires region-wide coordinated collaborative action.

Trade

Trade between the Caribbean countries (other than Cuba and the Dominican Republic) and the United States has been conducted under special trade arrangements. The Caribbean Basin Economic Recovery Act (CBERA) (revised 1990) and the Caribbean Basin Trade Partnership Act (CBTPA) passed in 2000, which enhances CBERA, provide unilateral duty-free market access for nearly all goods from beneficiary countries. The 2006 Haitian Hemispheric Opportunity through Partnership Encouragement Act (HOPE) enhances the current access for certain apparel enjoyed by Haiti under CBTPA.

The Dominican Republic has made good use of the Dominican Republic–Central America Free Trade Agreement (CAFTA/DR). The CARICOM governments do not feel their economies are ready to cope with a CARICOM-U.S. Free Trade Agreement at this time. There are other ways to enhance the arrangements governing U.S.-CARICOM trade.

All CARICOM countries except Suriname are CBERA beneficiaries. However, not all CARICOM beneficiaries are eligible for the additional preferences provided under CBTPA. Only Barbados, Belize, Guyana, Haiti, Jamaica, Saint Lucia, and Trinidad and Tobago have been designated as fully eligible to receive the enhanced benefits of the CBTPA.

CBERA benefits are limited to merchandise trade, which accounts for a diminishing share of total regional exports. With the exception of Belize, Guyana, Suriname, and Trinidad and Tobago, services dominate total exports of individual countries. Therefore, one clear objective in any future trade arrangement should be to provide opportunities to harness and grow the services trade between the United States and CARICOM. Integrated value chains in health, education, and business services processing could benefit employment and international competitiveness in both the United States and the Caribbean.

Climate Change

Although the Trump administration may not feel that climate change is a clear and present danger with the potential for imminent damage to the United States, the situation of the Caribbean is very different. The small island developing states of the Caribbean are among the most vulnerable to climate change in the entire world. The region has suffered perennial natural disasters that have caused damage the equivalent of a significant percentage of GDP (e.g., damage of 200 percent of GDP when Hurricane Ivan hit Grenada, requiring massive reconstruction of infrastructure and rehabilitation to the built environment). Climate change, evident in the form of global warming and sea level rise, will require mitigation measures, particularly because Caribbean countries are coastal societies (i.e., population, economic activity, and infrastructure are concentrated on a narrow strip of the coast).

There is a need for more financial resources for disaster relief and disaster risk reduction projects to accelerate the recovery of economic activity after a natural disaster, with emphasis on infrastructure projects, and to enhance climate adaption and mitigation. These resources should be complementary to other initiatives in the region such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

Energy

While the price of oil and gas is lower than in past years, there is no guarantee that they will not increase. Most of the Caribbean countries are almost completely dependent on imported fossil fuels, with the exception of Trinidad and Tobago and possibly Guyana in the future. These countries cannot assume financial relief on the scale provided by the PetroCaribe program, as the dire economic circumstances in Venezuela may force a change in the terms of PetroCaribe. The dependence on imported energy has to be substantially altered by a shift to alternative energy sources, such as solar, wind, and thermal, by a combination of public, private, and public-private partnerships.

Citizenship by Investment

Citizenship-by-investment programs are generally an attempt to attract inflows of foreign capital into Caribbean countries that have extremely small markets, very limited resources, and few export opportunities. The programs have been criticized as being improperly managed, and there is an opportunity for the United States to provide technical assistance to improve both the initial and annual screening processes. The proliferation of these programs is indicative of the urgent need for public-sector investment especially in infrastructure. In pursuit of infrastructure development, some governments have turned to China, which has financed and constructed highways, hospitals, concert halls, stadiums, and government buildings.

Revisiting Caribbean Policy

The U.S.-Caribbean Strategic Engagement Act (H.R. 4939) was passed in December 2016. Representative Eliot Engel (D-NY) explained that: “ With constant crises around the globe that demand U.S. attention, we must not lose sight of our long-term interests close to home. At a time when our friends in the Caribbean need us more than ever, this bill will prioritize our partnership with the sub-region for many years to come. It is long past time to have a multi-year strategy that will allow us to increase engagement with the Caribbean.

The coincidence of the implementation of H.R. 4939 and the new administration is the opportunity to revisit and redesign U.S. policy toward the Caribbean. The mandated reports by the secretary of state and the administrator of the U.S. Agency for International Development to be submitted to Congress are inputs for a multiyear strategy focused on enhancing engagement with the countries of the Caribbean. The legislation puts particular emphasis on energy security, countering violence, expanding diplomacy, and providing educational exchange opportunities for citizens of the Caribbean.

Prospect

A democratic, peaceful, and prosperous Caribbean Basin is in the interest of the United States. Economic development is a critical component of the foundation of stable democratic societies and the best long-term defense against threats to national security. The growth of trade, tourism, and investment between CARICOM and the United States can contribute to the economic development of the CARICOM countries, thereby strengthening a partnership based on shared economic and political ideals. The proposals outlined here can promote the expansion and diversification of trade and investment between the United States and the CARICOM region to the benefit of both parties. The effectiveness of the proposals could be multiplied significantly if they were coherently integrated components of a single, comprehensive new template for U.S. policy toward the Caribbean.

Ambassador Richard L. Bernal is a nonresident senior associate of the Americas Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2017 by the Center for Strategic and International Studies. All rights reserved.

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