Price Effects of Preferential Market Access: Caribbean Basin Initiative and the Apparel Sector

Preferential trade arrangements should be evaluated by theireffect on prices rather than by their effect on the total valueof trade. This point is emphasized in the theoretical literaturebut rarely implemented empirically. This article analyzes theU.S. Caribbean Basin Initiative’s (CBI’s) impacton the prices received by eligible apparel exporters. The CBI’sapparel preferences are the most important and heavily usedunilateral preferences because of high trade barriers imposedon exports from the rest of the world. A fixed-effects generalizedleast squares (GLS) estimation is used to isolate the effectsof other factors (such as quality, exchange rates, and transactioncosts) and to identify the effects of tariff preferences. CBIexporters capture only about two-thirds of their preferencemargin despite the high degree of competition among importers.This translates into a 9 percent increase in the relative pricesthey receive, with some variance across countries and years.Countries specializing in higher value items capture more ofthe preference margin, and the implementation of the North AmericanFree Trade Agreement (NAFTA) has a negative effect. RemovingMultifibre Arrangement quotas significantly lowers the benefitsof CBI preferences.