A dynamic profit maximization model with adjustment costs of capital is implemented to study US outward processing trade in apparel and to examine the effects of preferential trade policies in the long and short runs. The model is used to determine the role of foreign investment and to simulate outcomes due to the introduction of the Trade and Development Act of 2000 and the elimination of Multi-Fiber Agreement quotas in selected Caribbean countries. The transitional dynamics as well as long-run costs and benefits of these trade policy changes are evaluated. While outward processing trade expands with preferences under the Caribbean Basin Initiative, policies typically require five years to be fully effective, and competition in freer markets could reverse the benefits realized under preferential trade.