Great Expectations: Were Hopes About U.S. Opportunities In Cuba Unrealistic? by [email protected]

Is the honeymoon in U.S.-Cuba economic ties already over? Only a year ago, the Barack Obama administration announced a series of changes in U.S. policy aimed at stimulating U.S.-Cuba trade, investment and travel. Despite last July’s establishment of U.S. diplomatic ties with the island and the March 2016 visit to Cuba by President Obama — the first by a sitting U.S. president since Calvin Coolidge in 1928 — some would-be U.S. exporters and investors are already expressing impatience about the slow pace of concrete results. Some are wondering whether too much was initially made about the importance of the U.S. embargo of Cuba as a barrier to progress, and too little has been said about the importance of the Cuban government’s own impediments to opening the country’s market to foreign trade and investment. Given Cuba’s unique social and political history, and its traditional suspicion of the U.S., what levels of expectations are appropriate?

In February 2016, U.S. exports to Cuba amounted to a modest $19.2 million, up from $14.5 million in 2015, but far below the $44.5 million recorded in February 2014. After peaking at $464.4 million in calendar 2012, the figure dropped to $180.2 million in 2015, because of Cuban fears of avian flu in imports of U.S. chickens. In comparison, U.S. exports to the neighboring Dominican Republic amounted to $7.1 billion in 2015. As of March 2016, the U.S. had recorded absolutely no imports from Cuba since March 2012, compared with the $4.6 billion from the Dominican Republic in 2015 alone.

Why is it taking longer for the Cuban market to open up to American goods and investment dollars than many had anticipated? On the one hand, a new report by the U.S. International Trade Commission (USITC) says that “U.S. restrictions on trade with and travel to Cuba have largely prevented U.S. suppliers and investors from accessing the Cuba market.” More positively, however, the report also notes that “new or expanded U.S. exports in several goods and services sectors could occur if U.S. restrictions are lifted.” The 449-page report provides a comprehensive analysis of market opportunities and challenges for U.S. firms in Cuba.

But does such a conclusion imply that lifting the U.S. embargo would provide a quick fix? Not at all, unfortunately. Adds the report: “Even if U.S. restrictions are lifted, Cuban non-tariff measures, institutional and infrastructural factors, and other barriers — including those associated with a non-market, state-controlled economy — still exist and may affect the ability of foreign partners to trade with or invest in the country.”

The Problem of Infrastructure

For trade to occur between the two countries, there needs to be a modern infrastructure in both, explains Mauro Guillen, Wharton management professor and director of The Lauder Institute. The end of the embargo will provide a major step forward in achieving that goal. “While the U.S. has been building up its infrastructure over the years — especially for trade — Cuba hasn’t [done so],” he says. Once the embargo is lifted, building the infrastructure required for normalization of trade “would be part of the evolution in Cuba,” he says. The process will require huge inflows of capital. “After the embargo is lifted, the infrastructure will get built … port infrastructure, the airport, all the facilities” required for enabling Cuba to participate fully in the global economy.

“To expect results within a year-and-a-half or two years is totally unrealistic.”–Mauro Guillen

“Cuba still has to decide how much it wants to open up its market in specific areas, and how much it wants to privatize that market,” adds Jay Brickman, vice-president of government services and Cuba service at Crowley Maritime, which established the first regularly scheduled common carrier service for licensed cargo from the U.S. to Cuba back in 2001, some 40 years after such services were suspended. “There has not been significant growth in trade between the two countries. A number of companies have expressed a huge amount of interest and they continue to develop their relationship with the Cuban government, but not to the point of saying that there is a huge increase in trade.” Despite last year’s flurry of encouraging announcements and the establishment of diplomatic ties, “things have not changed much,” Brickman notes.

Sailings by Crowley were actually reduced in 2015, Brickman explains, because “the Cuban government was very concerned about avian flu, and they were not sure whether they wanted to buy poultry from the U.S. In order to protect themselves, they shifted their purchases of poultry to Brazil. We are now back to three sailings a month, which is a positive thing for us. That reflects that Cuba is again increasing its agricultural imports from the U.S., which is the base cargo…. [Cuba] changed back to the U.S. because the country is a very competitive producer of poultry.”

Brickman agrees that ending the U.S. embargo will not provide a quick boost for U.S. exporters and investors. “From the Cuban side, they still have a number of different things they have to resolve. How much do they want to privatize? How much of it is going to continue to be [controlled by the] government?” he asks. “They’re saying that about 80% of the economy should still be under the control of government entities, liberalizing little by little.”

Cuba is faced with some difficult things over the short-and-medium term, Brickman added. The first one is: “What is going to happen with Venezuela? That’s so important for them because of the economic support they get from Venezuela. If they lose that, they need to replace it, and certainly one of the ways they want to replace it is by increasing tourism — and also [increasing] remittances from Cuban-Americans and Cuban-Spaniards, and so forth.” To the extent that Cuba is able to replace the Venezuelan contributions and other support, they probably will be more conservative and slower-paced about making their other changes domestically, he said. “If they figure they are getting more money in, which they can use for social programs, that buys them additional time to slowly make other changes, as opposed to being rushed into changes.”

David Lewis, vice-president of Manchester Trade, a Washington, D.C. consultancy, advises U.S. exporters and investors to study the USITC report carefully. “For the first time in many years, we have the closest thing to an independent baseline economic research on what’s going on in the economy of Cuba and how it relates to the changes in the relationship between the U.S. and Cuba. And, therefore, what can you forecast in terms of business prospects.” Lewis adds that the report for breaks down the Cuban market by industries and sectors so that prospective shippers have background information that “helps them decide whether their plans might work or not.”

“Cuba still has to decide how much it wants to open up its market in specific areas, and how much it wants to privatize that market.”–Jay Brickman

The prospective end of the U.S. embargo will not put an end to the multiple political, legal and administrative constraints that exist within Cuba’s socialist economy, notes Lewis. “Because of the focus on the heavy lifting of liberalizing the embargo restrictions, a lot of people

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