Should the Caribbean Look to the East? An Assessment of Caribbean Export Potential

ABSTRACT

This study assesses the export potential of East Asia for the Caribbean within the framework of a structural gravity model. Export potential of 30% is estimated to be available to the Caribbean within East Asia. Individual markets with the greatest export potential are Singapore, China, and Japan. Various simulations of a free trade agreement between the two regions suggest the existence of even larger potential. The challenge for the Caribbean is that without significant structural changes, the region will be unable to exploit East Asia’s potential. Greater effort at the industry and policy levels will be critical for export expansion.

KEYWORDS:

• Export potential
• trade complementarity
• natural trading partner
• non-traditional markets
• structural gravity
• free trade agreement
• Caribbean
• East Asia

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Proponents of the natural trading partner hypothesis argue that preferential trade agreements (PTAs) are welfare-enhancing if participating countries already trade disproportionately with each other (Deardoff and Stern 1994). Opponents hold the opposite view; welfare gains are greater from PTAs if participating countries trade less with each other (Michaely 1998). Schiff (2001) argues that neither view is correct; specifically, two countries are natural trading partners only in the sense that one country imports what the other exports.

² Khadan and Hosein (2013) show that trade complementarity is low between CARICOM and the EU and North America, respectively.

³ CARICOM includes Antigua and Barbuda, Bahamas (The), Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago.

⁴ ASEAN includes Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.

⁵ Various estimates of trade potential have relied primarily on the utilization of statistical indices (Colley 2015; De Castro 2012; Khadan and Hosein 2013), which permit only partial inferences and do not account for factors that impact the flow of trade.

⁶ The inclusion of both time-variant and -invariant effects has become common in gravity modeling, mainly due to the heteroskedastic nature of trade data which affects the efficiency and consistency of parameters (Egger and Nelson 2011).

⁷ For various reasons, CARICOM countries do not exchange a large variation of products, which results in zero bilateral trade activity. As such, the level of disaggregated data used in this analysis expectedly captures a significant number of zeroes. More specifically, 51.9% of the available bilateral observations are zero (1,950,319 instances out of the 3,758,784 data points).

⁸ These include: Argentina, Antigua & Barbuda, Australia, Belgium, Bahamas (The), Belize, Brazil, Barbados, Brunei Darussalam, Cambodia, Canada, Chile, China, Colombia, Costa Rica, Germany, Dominica, Dominican Republic, France, Gabon, Grenada, Guyana, Hong Kong, Haiti, Indonesia, India, Italy, Jamaica, Japan, Korea (Republic of), Laos, Liberia, Mexico, Myanmar, Montserrat, Malaysia, Mauritius, Netherlands (The), Norway, Panama, Philippines (The), Portugal, Singapore, Spain, Suriname, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, Switzerland, Thailand, UK, United Arab Emirates, USA, Venezuela, and Vietnam.

⁹ ASEAN countries were listed in Footnote 2. The “plus six” countries include Australia, China, India, Japan, South Korea, and New Zealand.

¹⁰ According to the findings of Baier and Bergstrand (2007), the average treatment of trade agreements is 0.70 – suggesting doubling of trade between parties. The inherent limitations facing these smaller Caribbean countries, from an endowment to production (technology and finances) are expected to constrain the potential of any well (balanced) negotiated trade agreement. The estimated coefficients employed seek to replicate real-world experiences of other regions for practicality.

¹¹ This is in line with Whalley’s (1998) rational expectations on FTAs.