Paradise Lost: The Cost of Removing Tax and Trade Provisions from the C ompact of F ree A ssociation

Abstract

Upon implementing the C ompact of F ree A ssociation between the U nited S tates and the F ederated S tates of M icronesia, the US C ongress unilaterally stripped tax and trade provisions that would have encouraged investment in the F ederated S tates of M icronesia. I quantify what was lost to the F ederated S tates of M icronesia by arguing that the provisions would have made the F ederated S tates of M icronesia 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 A merican S amoa and C ommonwealth of the N orthern M ariana I slands, which did have preferential access to the US market. The estimates suggest that the F ederated S tates of M icronesia lost from $700 million to over $1 billion in gross domestic product from 1986 to 2001.