Economy / Foreign Policy / Politics

The Potential Economic Opportunities for U.S. Businesses in Cuba

Overview  

Since Fidel Castro took power in 1959, the United States has adopted policies to isolate Cuba both diplomatically and economically. Former President Barack Obama began the process of normalizing relations between the United States and Cuba during his tenure. The Obama administration’s policies signal a shift in 50 plus years of American foreign policy. Under the Obama administration, the countries have restored full diplomatic ties, eased travel restrictions, and even eliminated some trade restrictions. Cuba however remains a controversial topic amongst U.S. citizens and elected officials, as some believe relations should not be restored until the Cuban government adopts democratic reforms.

It is not yet clear if President Trump’s administration will continue to normalize relations with Cuba or if the administration will revert back to longstanding U.S. policy of isolation. The Hill has reported that the administration is in the process of finishing a review of new Cuba policies, and is likely to roll back concessions made by the former administration until “freedoms are restored” to the Cuban people. Meanwhile in the Senate, Senator Amy Klobuchar recently introduced S.1286, a bill to lift the trade embargo on Cuba. The bill has 13 co-sponsors and includes members from both sides of the aisle.

With speculation looming that the United States may once again tighten restrictions on Cuba, a number of organizations have released studies on the potential economic impact of such policies. Both the United State International Trade Commission (USITC) and Engage Cuba, a pro-Cuba advocacy group, released separate reports analyzing industries where U.S. businesses will be able to thrive and the economic impact of reverting back to total isolationist policies. USITC full report can be found here and Engage Cuba’s report can be found here. This article will analyze the findings of both reports.

Current Restrictions and Barriers

Currently, there are several pieces of legislation in place that codify restrictions on U.S. trade and travel to Cuba. These are the Cuban Democracy Act of 1992, the Cuban Liberty and Democratic Solidarity Act of 1996, and Trade Sanctions Reform and Export Enhancement Act (TSRA) of 2000. However, some exceptions exist which have eased restriction allowing for trade and travel between the two nations.

31 C.F.R. § 515.560 provides 12 exceptions in which U.S. citizens can travel to Cuba. These can include family visits; official business of the U.S. government; journalistic activities; support for the Cuban people; humanitarian activities; and certain export transactions approved by the Department of Commerce. As for trade, exports continue to be subject to the specific licensing requirements under the Export Administration Regulations (EAR), but also contain exceptions. The exceptions exist for products that are intended to improve Cuban living conditions, support independent economic activities and improve the free flow of information. Products such as medicine, medical supplies, food, and agricultural products can be exported to Cuba with special previsions from the Secretary of Commerce.

Despite these exceptions, many restrictions and barriers still exist for U.S. entities that hope to do business in Cuba. For example, U.S. issued debit or credit cards cannot be used in Cuba; certain provisions prohibit U.S. aid or government funding to support exports to Cuba; the government may not offer export marketing assistance, technical trade assistance, and credit or credit guarantees of exports; and U.S. citizens cannot travel to Cuba if they do not qualify under one of the 12 categories. Financing restrictions under TSRA, which limit payment options U.S. exporters can offer, were identified as one of the major impediments for sales across all industries. These restrictions have raised the price of American goods, making them less attractive in the Cuban market.

Aside from U.S. laws and regulations, American corporations also face significant hurtles from the Cuban government. For example, politics play a role in Cuban trade and investment decisions, meaning a U.S. business with a superior product and price may still not win contracts due to the political climate between the countries. Further, the Cuban government remains unwilling to approve most foreign direct investment projects that involve wholly foreign owned entity. Additionally, there are concerns with the legal system, as there is no private practice of law in Cuba and the domestic system lacks transparency. This makes it extremely difficult for foreign entities to gauge their risk of doing business in Cuba. There is a lack of property rights for American businesses as well, as the State owns the majority of land creating further risks. Intellectual property rights are of further concern, as copyright laws have not been modified to comply with The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) or to address the digital market.

While progress has been made in normalizing relations between the two countries, it is clear that both governments need to continue to lift restrictions and barriers in order for U.S. entities to succeed.

Effects of Removing Restrictions in Different Industries

As stated, USITC and Engage Cuba are two organizations that have compiled data to show the effects of removing restrictions of travel and trade with Cuba. The major assumption made by the reports is that both the United States and Cuban government will continue the progress of normalizing relations and lift barriers. The reports analyze areas of potential short and long-term success for U.S. entities wishing to do business in Cuba.

According to USITC,

“Before initial U.S. restrictions were implemented in 1960, Cuba was a major U.S. trading partner, ranking as the seventh-largest U.S. export market. In 2014, however, it ranked as the 125th-largest U.S. export market, with U.S. exports to Cuba totaling just $299 million.”

Clearly there is room for U.S. business to expand and enter into the Cuban market. Yet despite the current trade barriers between the countries, the United States still ranked amongst the top 10 suppliers to Cuba from 2005-2014. Despite the loosening of restrictions, exports have actually decreased almost 40% since announcing the normalization of relations. The reports suggest that higher food prices, a lack of credit options for Cuban importers, and political pressure for the U.S. to fully lift trade sanctions account for this drop. However, it also cites the proximity of America to Cuba as one of the strongest advantages for U.S. businesses.

Below is a list of industries with potential growth opportunities if barriers between the countries continue to be lifted.

Manufacturing

In 2014, Cuba’s importation of U.S. manufactured goods was only $14.1 million. The USITC report attributes this low number to tighter U.S. restrictions on exports of most manufactured goods. In the near future, imports to Cuba will likely be limited to types of products that the Cuban government qualifies as necessary for domestic consumption. The USITC report predicts that there are immediate and high growth opportunities for U.S. exporters of building materials and construction equipment if restrictions are lifted, as Cuba’s infrastructure is in crucial need of improvement. The U.S. processed food, beverages, chemical and chemical products industries also are considered to have potential opportunities for tremendous growth. There is more long-term opportunity for energy products, medical goods and telecommunication equipment. Projections from the USTIC report show that the elimination of barriers by both governments could increase total U.S. exports of manufactured goods to Cuba by approximately 444 percent. This 444 percent increase would equate to $1.2 billion and would represent 20 percent of manufactured goods in Cuba.

Agriculture

Lifting trade barriers could also have a significant benefit on agricultural exports for U.S. businesses. U.S. suppliers have said that they are put at a competitive disadvantage due to their inability to offer credit and freely travel to Cuba. Removing these restrictions would put U.S. agricultural exporters at a more level playing field with their international competitors. The proximity of the U.S. to Cuba, and the efficiency of U.S. ports make U.S. businesses lucrative trading partners for Cuba.

Agricultural products with the most potential growth according to the UCTRI report include wheat, rice, corn, soybean complex, poultry, pork, beef, and dairy. The report states that John Block, former Secretary of Agriculture under President Ronald Regan, estimates that U.S. agricultural exports could exceed $1 billion if restrictions are lifted.  If restrictions are lifted, the exportation of the nine selected agricultural products in the report are estimated to increase up to 155% from the 2010-13 average. This would put these specific exports at $797 million, representing 68 percent of total Cuban imports of agricultural products.

U.S. agriculture exporters also have to deal with several restrictions from the Cuban government. The success of the agriculture industry is dependent on the removal of restrictions, as well as certain economic factors. First, success is dependent on the purchasing power of the Cuban economy and economic growth of the country. Second, is the U.S. relationship with Alimport – the state controlled import company whose decisions are not only economical, but political as well. Third, whether the lifting of restrictions would change Cuba’s requirements that imports form the U.S. be handled exclusively through Alimport. Lastly, whether Cuba succeeds in its policy of import substitution through boosting domestic agricultural production. The success and failures of U.S. agricultural exporters are subject to these conditions.

Services

The U.S. travel and hospitality industries have tremendous growth opportunity if restrictions between the countries are lifted. The UCTRI report estimates that unrestricted travel from the U.S. to Cuba could add an additional 1.5-3.5 million U.S. tourist visitations to Cuba. Hotel operators also have expressed their interest in investing in Cuba as they see potential opportunity for growth. However, as discussed above, the major hurdles the hospitality industry faces include the inability to own land under Cuban law, and the necessity for foreign participation in the Cuban hotel sector to be a joint venture with Cuban State owned Hotels.

 The Cost of Rolling Back Current Policies

With a number of different industries effected, Engage Cuba has estimated that roll back in current U.S. policy on Cuba could cost U.S. business and taxpayers approximately $6.6 billion over the next 4 years, and affect as many as 12,295 jobs across the country. Tourism, manufacturing, agriculture and shipping are amongst the industries most likely to be negatively impacted by rolling back policies. A study referenced in Engage Cuba’s report estimates that U.S. business and farmers lose approximately $5.9 billion a year in revenue opportunities due to the current embargo.

In terms of travel and tourism, the airline industry could lose approximately $512 million annually or almost $2 billon over the next four years if travel to Cuba is banned. The report states that the loss of the $512 million could affect as many as 3,990 jobs in the airline industry. The damage would not stop there, as a number of other industries, which are linked to and receive support from the airline industry, would also feel this economic impact. According to Engage Cuba’s report, the hospitality, food services, travel services, and air traffic control are all industries that would be negatively affected from the decline of the airline industry. The report also estimated that the cruise industry could lose approximately $200 million in revenue, affecting over 6,000 jobs. This loss could cost south Florida’s economy $212.8 million alone.

Companies in the manufacturing industry are in the process of finalizing contracts that have the potential to generate nearly $1.1 billion worth of exports from the United States to Cuba over the next five years. This loss would affect over 1,343 American jobs. Over a four year span, the loss to manufacturing would be approximately $875.4 million.

Although significant restrictions are still in place, American businesses have been able to capitalize in certain industries. The reports project that continued normalization can further benefit American businesses and increase exports.

 Conclusion

 Normalizing U.S. – Cuba relations will continue to be a contentious topic up for public debate. Based off of these reports, it appears that continuing normalizing relations is in the best financial interests of American businesses. U.S. entities have already begun to see the financial benefits of doing business with Cuba, and reversing these policies could have significant economic repercussions. U.S. entities in industries such as telecommunications, housing, construction, energy, and pharmaceuticals all have potential significant financial opportunities in the short and long term if relations continue to be normalized. Again, these projections are based on the assumption that both governments will pass policies to continue normalizing relations. The United States has the capacity to be a leading business partner with Cuba due to proximity between the nations, efficiency in transportation of goods, and the quality of America products.

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