Paradise Lost: The Cost of Removing Tax and Trade Provisions from the Compact of Free Association.

SPIRe’s Dr. Samuel Brazys examines the cost of removal of tax and trade provisions for the Federated States of Micronesia from a treaty of free association with the United States in a new paper at Asia & the Pacific Policy Studies.  A write up of the article can be found on the blog of the Crawford School of Public Policy at the Australian National University here.


Upon implementing the Compact of Free Association between the United States and the Federated States of Micronesia the US Congress unilaterally stripped tax and trade provisions that would have encouraged investment in the FSM.  I quantify what was lost to the FSM by arguing that the provisions would have made the FSM an explicitly sanctioned tax haven through empirical estimates of the impact of tax havens on growth and a comparison of performance of similarly situated entities, the American Samoa and Commonwealth of the Northern Mariana Islands, who did have preferential access to the US market.  The estimates suggest that the FSM lost from $700 million to over $1 billion in GDP from 1986-2001.  I conclude by suggesting that growth can occur in the FSM, if the US releases the remaining funds of an Investment Development Fund (IDF) meant to compensate for the removal of preferential tax and trade provisions.

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