The Coming US-Cuba Trade Boom

Kent A. Jones Professor, Babson College
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Now that more details of President Obama’s modest easing of the Cuban trade embargo have been announced, the U.S. can begin, finally, to re-build its economic relationship with its close neighbor. Ending this economically destructive policy completely, however, will require a formal vote by Congress to end the trade restrictions.

The modest measures taken so far will only remove transaction costs on the small amount of trade that already exists. Red tape, such as burdensome financial and payment terms, perversely reduced U.S. competitiveness in selling food and humanitarian goods to Cuba, harming mainly U.S. exporters.

What’s at stake ultimately is the re-establishment of a thriving trade and investment relationship between the two countries that was interrupted by Castro’s revolution and central planning folly, and then aided and abetted by the embargo. The U.S. is now in a position to help Cuba back to its rightful place in western hemispheric trade.

History tells an interesting story. For most of the 20th century before Castro, nearly all of Cuba’s trade was with the U.S., and in 1959 the U.S. had more investment in Cuba than in all the rest of Latin America combined. During those years, many U.S. companies invested in oil production, electrical generation, communications and sugar processing.

So close were these ties that Cuba was on the verge of becoming a U.S. state in the late 1890s, but for the opposition of U.S. sugar beet farmers, who felt threatened by Cuba’s cheaper cane sugar (watch for the U.S. sugar industry to lobby hard against relaxing the embargo as the debate heats up this year).

Today, no one is suggesting that Cuba become the 51st state, but the potential for U.S.-Cuban trade and investment is indeed the natural result of Cuba’s location and historic ties with the U.S. Just 90 miles south of the Florida Keys, Cuba is closer to many major U.S. markets than many U.S. states. Before Castro, sugar, tropical fruits and other agricultural products were major exports to the U.S., in exchange for imports of U.S. agricultural and manufactured goods.

At the same time, Cuba became an enormously popular vacation destination for U.S. citizens, as Havana drew many thousands of tourists with its music and nightclub scene.

The new regulations announced last week will allow U.S. citizens to travel to Cuba without the strict regulations in place under the embargo. In the meantime, tourism has in fact returned to Cuba, financed this time largely with European investments. Increasing U.S. travel to Cuba could open up many new US business and investment opportunities, from new hotels and cruise ship connections to communications, finance, and manufacturing.

Economists estimate that the U.S. could expand trade and investment with Cuba on the basis of location, market logistics and history in the same proportion as its NAFTA partners, Canada and Mexico if the embargo ended and Cuba instituted market-based economic reforms. In addition, some two million Cuban-Americans could fuel renewed economic links with their former homeland.

So what’s in the way of this new trade bonanza?

Castro expropriated U.S. assets in Cuba worth about $2 billion in 1960, usually with no compensation. The Helms-Burton Act requires that these U.S. claims be settled before the trade embargo can end.

Creative deals that would allow these U.S. firms to re-enter the Cuban markets as the embargo is phased out could resolve many of the commercial compensation issues. If prospects for Congressional repeal of the embargo improve, one can expect these U.S. firms to work behind the scenes to promote these negotiations.

Yet the most critical element is the need to reform the Cuban economy. The embargo was supposed to cause a regime change that would lead to this outcome, but that failed to materialize. What is manifestly clear is that external pressure, spun by Castro as U.S. bullying, has been incapable of motivating such reforms.

Ending the embargo would provide a subtle, but more powerful, impulse for change in Cuba: exposure to the possibilities of open markets, entrepreneurship and economic advancement for those willing to work for it.  These influences are likely to be more subversive to the socialist regime than the indiscriminate sledgehammer of the embargo.

Already, Cuba faces the danger that many of its younger and better-educated citizens will emigrate to other countries to escape the dead end of its tightly controlled economy. This will also be a powerful motivator for internal reform.

History provides yet one more important lesson: Cubans don’t need to choose between the corrupt pre-revolutionary Batista regime and the pernicious Castro regime. Ending the trade embargo will contribute to the opportunity for them to do something new: to make more active choices in their lives, and to work for two things that have eluded them for many years—democracy and prosperity.