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The World Bank Economic Review Advance Access originally published online on May 4, 2006
The World Bank Economic Review 2006 20(2):241-259; doi:10.1093/wber/lhj008
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© The Author 2006. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

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

Çaglar Özden

Çaglar Özden is an economist in the Development Research Group, International Trade Division of the World Bank; his email address is cozden{at}worldbank.org.

Gunjan Sharma

Gunjan Sharma is a graduate student in the Department of Economics at the University of Maryland; her e-mail address is sharma{at}econ.bsos.umd.edu.

Preferential trade arrangements should be evaluated by their effect on prices rather than by their effect on the total value of trade. This point is emphasized in the theoretical literature but rarely implemented empirically. This article analyzes the U.S. Caribbean Basin Initiative’s (CBI’s) impact on the prices received by eligible apparel exporters. The CBI’s apparel preferences are the most important and heavily used unilateral preferences because of high trade barriers imposed on exports from the rest of the world. A fixed-effects generalized least squares (GLS) estimation is used to isolate the effects of other factors (such as quality, exchange rates, and transaction costs) and to identify the effects of tariff preferences. CBI exporters capture only about two-thirds of their preference margin despite the high degree of competition among importers. This translates into a 9 percent increase in the relative prices they receive, with some variance across countries and years. Countries specializing in higher value items capture more of the preference margin, and the implementation of the North American Free Trade Agreement (NAFTA) has a negative effect. Removing Multifibre Arrangement quotas significantly lowers the benefits of CBI preferences.


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