The Effects of the FTAA on the Organization of the Eastern Caribbean States

The Organization of Eastern Caribbean States (OECS) has recently experienced serious economic and structural changes resulting from the World Trade Organization (WTO) rulings on their major export crops. With a declining agricultural industry and generally depressed economies, the countries are forced to decide whether they become part of the Free Trade Area of the Americas (FTAA), or remain out of the proposed union. These countries have been conducting both internal and external evaluations to determine the economic direction to follow to bolster their economies. The islands face dilemmas if they become members of the FTAA. One of the dilemmas we will examine here is the loss of welfare from the reduction of export subsidies on imports from the United States and its probable impact on OECS economies and intra -regional trade once the OECS becomes a member of the FTAA. The formation of the FTAA and the adoption of a common external tariff (CET) may force members of the OECS to buy high-priced goods from member countries. Using rice as a case in point we show that the most efficient producers of rice are Vietnam and Thailand. Vietnam produces rice at US$110 per ton, whereas Guyana has an average cost of US$144.00 per ton compared to Arkansas and Texas, with average costs of US$205.22 and US$247.68, respectively. Under a free trade scenario, in the absence of transport cost, assuming that rice is a homogeneous product, and that Vietnam can supply the world deficit at constant cost, Vietnam will become the ultimate supplier of rice. With the Common external tariff (CET), the FTAA becomes trade-diverting because it limits imports from more efficient rice producers, such as Thailand and Vietnam, in favor of rice from Guyana. The decision to purchase rice from Guyana only depends on whether all trade promotion activities that include elements of export subsidies are eliminated.