The United States and Cuba: Implications of an Economic Relationship

The recent reduction of restrictions in the 48-year-old U.S. embargo against Cuba has allowed bilateral trade to expand considerably in the past few years. Nonetheless, the commercial, economic, and financial embargo has remained intact. What are the arguments in favor of and against deeper commercial relations between the United States and Cuba? What are the views within the U.S. private sector about the desirability of such an expanded relationship? What obstacles, if any, would arise within the context of rethinking the U.S.-Cuban economic relationship? To address these questions, on May 24, 2010, the Latin American Program convened a two-panel conference on the status quo and future of U.S.-Cuban economic relations.

The last decade's significant growth in economic ties—particularly within the agriculture and tourism industries—between the United States and Cuba is a response to the partial relaxation of embargo restrictions, explained José Raúl Perales, Senior Program Associate of the Latin American Program. In the eight years following the 2000 Trade Sanctions Reform and Export Enhancement Act, bilateral agricultural trade and farm sales more than tripled. From 2003 to 2008, an estimated 35 percent of Cuba's agricultural imports came from the United States. It is also estimated that, by eliminating current restrictions on U.S. travel to Cuba, the island nation could expect 500,000 to one million tourism-related U.S. visits per annum. These data hint at the many benefits to a deeper U.S.-Cuban economic relationship.

However, important considerations remain as to the pitfalls of deeper economic relations. Cuba's economic climate is intolerant of U.S. firms: there exists no accord on U.S. individual or corporate property claims. Indeed, in spite of the Obama administration's move to allow U.S. telecommunication firms to apply for licenses to conduct business in Cuba, few such companies have rushed in. Important challenges of policy unpredictability under the current Cuban regime persist, and significant questions arising from issues of human rights and labor relations cannot be overlooked.

Whether or not one agrees with the U.S. embargo against Cuba, one must keep in mind that the embargo exists for reasons of human rights, averred Christopher Sabatini, policy director at the Council of the Americas. Cuba violates freedom of association, strictly limits freedom of expression, and systematically violates the core covenants of the International Labor Organization (ILO). When the debate strays from this central issue of rights we lose site of the real issues facing Cuba and Cuban citizens today.

According to Sabatini, any change to the status quo in bilateral economic relations will start with the executive's authority over the embargo's regulations. A history of past efforts at dismantling U.S. embargoes reveals that terminating an embargo is never the result of a straight up-or-down congressional vote, but rather the result of slight, incremental regulatory changes allowing empowered, independent actors to develop their own contacts with counterparts on the island.

Sabatini noted that the ability to affect significant change on the embargo falls within the scope of executive regulatory authority, particularly in areas of telecommunications and travel licensing. On April 13, 2009, President Obama announced an increased allowance for U.S. telecommunications companies to establish licensing agreements to allow roaming coverage on the island and establish a fiber optic cable to Cuba. However, Sabatini indicated that regulations prohibiting U.S. equipment transfers to the island for commercial purposes continue to prevent the sale of handsets on the island, and block infrastructure investments such as cell phone towers, routers, and switchers. Sabatini contended that the Obama administration must introduce regulatory modifications that allow the federal bureaucracy to meet his stated goals regarding Cuba.

Regardless of the U.S. government's actions, a post-embargo, post-Castro Cuba does not necessarily imply a business bonanza for U.S. companies, added Professor José Azel of the University of Miami's Institute for Cuban and Cuban American Studies. Azel explained the three principal reasons why companies engage in foreign direct investment: companies are resource seeking, efficiency seeking, and market seeking. They seek to secure country-specific resources, take advantage of lower labor costs or privileged distribution locations, and establish a foothold in a new, strategic, or dense market. He posed that Cuba offers resources such as oil, nickel, and tourism but has not developed the efficiencies necessary to attract foreign direct investment. Though Cuba has more than eleven million citizens, its impoverishment means that its market has few effective consumers.

Azel believes that Havana's best bet in attracting foreign direct investment is to encourage the Cuban American community to act as the island's "first movers." Cuban American entrepreneurs feel stronger emotional motivations to invest and overstep the disadvantages of being a foreigner in a foreign market. Azel contended that small- and medium-sized Cuban American entrepreneurs could set up small businesses in the island while middle- and senior-level Cuban American executives in multinational corporations could champion the island's foreign investment. Thus, Havana must foster the competitive urgency to invest and offer sustainable competitive advantages for the first movers.

The status quo is a lose-lose situation, explained President of the National Foreign Trade Council William Reinsch. The U.S. embargo against Cuba neither helps achieve U.S. foreign policy interests nor benefits the U.S. economy. Along with the broader economic restrictions on U.S. relations with Cuba, the embargo does little more than support the current Cuban regime. Reinsch observed that obstacles to progress in U.S. policy toward Cuba are due in no small part to state politics in Florida and New Jersey, the two U.S. states with the largest percentage of Cuban Americans. This has led to the election of Members of Congress who remain sympathetic to the embargo.

Nonetheless, Reinsch noted that there are far fewer statutory obstacles to a change in U.S. policy than most observers suggest. The Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, commonly known as the Helms-Burton Act, codified the President's licensing authority and thus his or her ability to make changes to the embargo. Given his mid-April declaration to thaw relations, President Obama appears to know and understand this authority, though his approach has been one of modest, piecemeal change. Reinsch explained that the Obama administration's tempered approach to policy change is based on an assumption that any U.S. concession will prompt a Cuban concession, though Reinsch believes that Cuba—as the biggest beneficiary of the embargo—would not reciprocate.

Central to any discussion of U.S.-Cuban economic relations is a thorough understanding of Cuba's energy sector, added Jorge Piñón, visiting research fellow at the Cuban Research Institute of Florida International University. The history of Cuba's oil sector has been one of perpetual foreign dependence, beginning with the Cuban Revolution that initiated Cuba's sugar-for-oil barter exchange with the Soviet Union in 1960. Since the Acuerdo de Cooperación Energética de Caracas and the Convenio Integral de Cooperación entre Cuba y Venezuela of 2000, Cuba's oil dependence on the U.S.S.R. has been replaced by Venezuelan dependence. Cuba today consumes approximately 150,000 barrels of oil per day, 93,000-100,000 of which comes from Venezuela, according to Piñón. Under the agreements, Cuba must pay 60 percent of its Venezuelan oil invoice within 90 days of purchase in the form of bartered goods and services, such as the medical services and technical assistance that involve upwards of 40,000 Cuban professionals. The remaining 40 percent of the invoice is to be paid in the lapse of 25 years, at an annual interest rate of 1 percent.

Only when Cuba diversifies suppliers and develops its offshore resources will the Cuban people have the economic independence needed in order to consider a political and economic evolution. With the help of international oil companies such as Spain's Repsol, Norway' s Statoil Hydro, Venezuela's PDVSA, and Brazil's Petrobras among others, Cuba is investing in domestic oil production and refining infrastructure. Yet, in spite of these developments, Piñón argued that a bilateral policy contributing to Cuba's energy independence and a broader national energy policy is necessary. Piñón contended that if U.S. companies were allowed to contribute in developing Cuba's hydrocarbon reserves, infrastructure modernization, and renewable energy, autocratic and corrupt governments' influence on the island would be reduced.

In terms of specific U.S. industries, agribusiness is pushing for a lifting of certain restrictions in the U.S. embargo in order to increase its participation and ensure that U.S. firms can better compete in the Cuban market, explained Chris Garza, senior director of congressional relations at the American Farm Bureau. Garza highlighted how U.S. businesses can sell agricultural products to other U.S.-sanctioned countries and U.S. citizens can travel to such countries and saw the elimination of travel restrictions to Cuba as intrinsic to the interests of American agribusiness. A lifting of travel restrictions on U.S. citizens would increase the overall demand for food consumption on the island, spur U.S. agricultural exports there, and shift the demand from bulk commodity imports to higher valued and more processed products in Cuba. Likewise, a lifting of restrictions on the financial services available to U.S. citizens traveling to Cuba would return money spent by visitors to Cuba back to the U.S. in the form of agricultural purchases.

Similarly, the U.S. tourism industry would like to see changes to the U.S. embargo against Cuba, averred the National Tour Association's Public Affairs Advocate Steve Richer. President Obama's recent easing of travel restrictions for Cuban Americans has led to an estimated 20 percent increase in U.S. travel to Cuba in the past year through the seven officially authorized Cuba tour operators. The National Tour Association, alongside its sister professional association, the United States Tour Operators Association, convened a summit in March of 2010 in Cancún, Mexico, to discuss the future of U.S. travel to Cuba. Cuba's Minister of Tourism; three other sub-cabinet ministers from Foreign Affairs, Foreign Investment, and Transportation; and the president or vice-president from every single tourist operator in Cuba participated and showed strong interest in the potentially increased tourism.

Richer recommended that the U.S. government take the first step and heed the effects of travel restrictions on U.S. airlines, cruise lines, tour operators, and advertisers as it considers whether or not to change the status quo. Restrictions on travel not only limit revenue from U.S. tourism operators, but they also harm other business sectors that would benefit from free access to Cuba. Richer relayed one discussion with medical supplies providers about how travel restrictions prevent much-needed sophisticated medical equipment from being sold to Cuba, as the equipment requires on-site training and follow-up inspections to ensure that equipment is running properly. Richer concluded by noting that the status quo also runs counter to U.S. values of civil rights and liberties. People should have the right to travel, and the person-to-person contact arising from travel could foster better bilateral relations between the United States and Cuba.

Important to keep in mind when discussing potential U.S. investment in Cuba is the situation of labor and workers' rights, added Joel Brito, executive director of the Grupo Internacional para la Responsabilidad Social Corporativa en Cuba. Within Latin America, Cuba is signatory to the second largest number of international labor conventions, but in reality, violates a large majority of these conventions. Brito also highlighted that Cubans hired in a growing tourism industry would not have the right to freedom of association, collective bargaining, or to a decent salary. He argued that the conventional wisdom suggesting that the mere presence of U.S. tourists will improve the plight of Cubans needs to be rethought. In the last two decades, Cuba has received approximately 29 million tourists from 70 countries, yet they have come for reasons of tourism, not human rights, and little has changed politically in the island.

Brito explained the role for foreign action in terms of Cuba's systematic violation of the rights of its workers. For instance, in 2008, three Cuban workers were granted political asylum in the United States after being forced to work without compensation for the Curaçao Drylock Corporation as a way of paying a Cuban government debt to the company. A U.S. federal court ruled in favor of the workers and awarded them USD $80 million. Likewise, in February 2010, eight Cuban doctors and nurses filed charges of slave labor against Cuba, Venezuela, and the state-owned oil company Petróleos de Venezuela (PDVSA), in a federal court in Miami. The medical workers contended that they were forced to work without compensation to help pay off a Cuban government oil-debt to Venezuela. Foreign direct investment in Cuba from the United States and elsewhere should be encouraged, but such investment must recognize the importance of workers' rights, of protecting the environment, and of opposing systemic corruption, argued Brito.

The legal ramifications of doing business with Cuban firms can hamper a deepening of the U.S.-Cuban economic relationship, not to mention all forms of foreign direct investment, warned Ignacio Sánchez, a partner at DLA Piper. Since the vast majority of the island's current businesses were formed as the result of uncompensated confiscation following the Cuban Revolution, the victims of expropriation—most of whom are now U.S. citizens—must be compensated before any advances in U.S. investment in the island. The same issues will arise if and when Cuban firms start exporting goods to the United States. For instance, will proceeds of Cuban rum sales go to Cuban rum firms or to the Bacardi or Arechabala families? There are 5,911 U.S. citizens with claims totaling USD $1.8 billion (in 1960 dollars) resulting from property that was confiscated from them in 1960. In Sánchez's view, any discussion of post-transition Cuba needs to address these issues.

According to Sánchez, the U.S. embargo against Cuba did not truly take effect until 1992 when President George H.W. Bush signed the Cuban Democracy Act, prohibiting foreign subsidiaries of U.S. companies from doing business with Cuba. In addition, with the Soviet Union as its benefactor, Cuba was receiving over USD $6 billion in aid per annum throughout this period, and from 1992 until 2000, another foreign benefactor forced the regime dollarize the economy, sell off assets, and pursue foreign investment. In Sánchez' opinion, the embargo's status quo was not preferable, but the ineffectiveness of the embargo is overstated. He referenced the Helms-Burton Act for clear conditions to suspend and end it, including: legalization of political activity, release of all political prisoners, dissolution of the Cuban Ministry of the Interior's Department of State Security, establishment of an independent judiciary, and a government that excludes the Castro brothers. Only when these conditions are met and democracy reestablished should the embargo be lifted.