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

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 Federated States of Micronesia. I quantify what was lost to the Federated States of Micronesia by arguing that the provisions would have made the Federated States of Micronesia 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, which did have preferential access to the US market. The estimates suggest that the Federated States of Micronesia lost from $700 million to over $1 billion in gross domestic product from 1986 to 2001.