Analysis of trade flows between Puerto Rico and CARICOM and prospects for integration

Puerto Rico and Caribbean Community (CARICOM); Caribbean countries share important common characteristics. They are open economies and while their trade specialization patterns are heterogenous, historical, institutional and geographical factors have shaped export and import linkages that are closely tied to those of the United States and Western Europe. CARICOM Caribbean economies and Puerto Rico also adopted, early on, a common approach to development, that of 'industrialisation by invitation'. Its main elements included fiscal incentives, the attraction of foreign direct investment flows and, in the case of CARICOM Caribbean economies, an import policy encapsulated in the common external tariff. Finally both confronted the process of increasing internationalization of trade flows and investment, a changing external environment and a widening process of economic liberalization with a positive response. It consisted in deepening and strengthening their respective regional ties. CARICOM economies revised the Chaguaramas Treaty and laid the foundations for the formation of the single market and economy (CSME, 1991);. As part of its overall policy orientation, Puerto Rico, has sought to deepen its relations with the greater Caribbean region. A first step in this direction is an analysis of the trade flows with CARICOM Caribbean economies. This document provides such analysis. It is divided into three sections. The first section provides a brief comparison between Puerto Rico and CARICOM Caribbean economies in terms of size, output, development models and trade specialization patterns. The second section analyses trade flows between Puerto Rico and CARICOM. This section provides an aggregate and country-by-country trade analysis with Puerto Rico including exports and imports. Some of the variables considered include market share, relative unit values and specialization. The analysis also uses the constant share analysis methodology to determine the importance of demand (global demand); and that of market dynamics for given products (structural demand effect);.The analysis is complemented by a typology of Puerto Rican export products to the Caribbean. The third section centers on the perspectives for further commercial integration between CARICOM economies and Puerto Rico. Following a computation of indices of trade compatibility on a country-by-country basis, the document analyses four aspects that are fundamental determinants of any integration process. These are the Commonwealth status of Puerto Rico; the size of the market and the composition of output; the trading regime and the degree of competitiveness of the economies involved. Competitiveness is ascertained using selective indicators such as operating costs, transport costs and the real exchange rate. The final reflections are found in the conclusion.