Cuba-US Thaw and the Economy

How Normalizing Relations with Cuba Affects You

Cuba-US Thaw and the Economy
December 31, 2014

President Obama shocked many Americans on December 17, 2014, by announcing his intention to normalize relations between the U.S. and Cuba. Stating that the U.S. will “end an outdated approach that for decades has failed to advance our interests,” Obama urged Congress to end the embargo that the U.S. has maintained on Cuba for over 50 years.

In reality, there is only so much the President can do without Congress. A fact sheet detailing the President’s goals may be found at http://www.whitehouse.gov/the-press-office/2014/12/17/fact-sheet-charting-new-course-cuba, which notes that the President’s actions are being implemented through revised regulations in the Commerce and Treasury Departments.

Let’s look at some areas where Obama’s actions may have more immediate impact.

  • Tourism – The largest change may be the ability to use U.S. credit and debit cards in Cuba. Currently, visitors to Cuba must use cash for transactions. U.S. card issuers will first have to work out the processing details with Cuban banks and merchants, so for the near term, cash is still required.

    Tourism has not been opened to all Americans, but all travelers within the currently designated non-tourist categories such as family visits, government business, or educational activities may now receive a general license, making trips easier.

    Those returning from Cuba may now bring back at least $400 of Cuban goods, with a maximum of $100 of those goods as personal alcohol and tobacco purchases. Cuban cigars, anyone?

  • Trade – Exports have been expanded to include items for building materials and agricultural equipment. The goal is to target materials that can help Cuba build and expand a private sector to develop their own resources.

    Did we say expanded exports? People do not realize it, but export exceptions exist for items like raw agricultural products, forestry materials, and various categories of food and medicine. Within these guidelines, $359 million in goods were exported to Cuba last year.

  • Telecommunications – Export of items to build up communications access in Cuba were specifically highlighted. The Internet is currently accessible to an approximate 5% of Cubans.

    The U.S. assumes that better communication capability will improve the life of Cubans – and possibly let them see glimpses of what life is like beyond Cuba, although the government is almost certain to modify access to their advantage.

What is the true economic opportunity in all this? After all, Cuba is not a very large economy and there is virtually no infrastructure for any sort of private enterprise. President Obama’s actions may be aimed at promoting a healthy Cuban private sector, but nothing so far suggests that the Cuban government is interested in such a private sector.

Gary Hufbauer, a co-author of Economic Normalization with Cuba: A Roadmap for U.S. Policymakers, estimates that the opportunity for exports to Cuba may hit $4.3 billion annually, and imports from Cuba could reach $5.8 billion. However, that assumes fully normalized relations, which are a very long way off – if they are ever achieved.

Unraveling a series of over 50-year-old claims will not be so simple, either. When the Castro government nationalized industries in Cuba, thousands of businesses and individuals simply had their assets confiscated without compensation. Almost 6,000 claims against Cuba were filed with the Foreign Claims Commission within the Justice Department, with an estimated value at the time of $1.8 billion (approximately $7 billion today). These claims must be addressed somehow as part of lifting the embargo. Cuban GDP is approximately $68 billion, so any remunerations will be a fraction of what is owed.

Given these practical hurdles along with the political ones, it is likely that no meaningful action will take place in the short-term and the average American will be unaffected by the president’s announcement.

In the long term, there may be investment possibilities within Cuba. However, it may take years, or even decades, to carve out some compromise between a free enterprise system and the Cuban government.

You may benefit if you invest in some of the companies planning to add export capability. However, unless the Cuban government becomes more market-friendly, the first effect on the average American is likely to be easier access as a tourist, and perhaps better access to Cuban rum and cigars.

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