In late 2014, President Obama reopened diplomatic relations with Cuba after more than a fifty year freeze and authorized a broader array of travel and business activities with the island. On June 16, President Trump announced his own policy restricting some areas of commercial engagement permitted during the past several years.
This new policy toward Cuba aims to catalyze political change by weakening and depriving the socialist regime of U.S. dollars. However, despite differences in tactics, both major US political parties have the same long-term foreign policy objectives with Cuba: for its regime to strengthen human rights and economic freedoms for its citizens.
Most impediments towards a trade relationship still derive from Cuba’s unsustainable and unjust economic and political system. For this reason, American businesses and investors would be wise to pay more attention to the reforms taken in the coming years by Cuba’s leaders, rather than US policy.
I recently went to visit Cuba, mainly Havana, with two friends. We observed firsthand both the potential, and the continuing suffering of the Cuban people. On one hand, we witnessed private enterprises in the form of Airbnb’s, restaurants, and taxi services for the expanding number of tourists that provide Cubans direct access to private income. On the other hand, we also saw decaying infrastructure, highways without lighting at night, ancient vehicles that emit heavy emissions, and markets with limited inventory. All of these problems can only be solved with an aggressive overhaul of the socialist system.
A major driver of the recent tightening of policy includes the Cuban military’s ongoing control of much of the economy through holding companies, mainly GAESA, or Grupo de Administración Empresarial S.A. Over time, the Cuban military has grown to control nearly 60% of the economy, including a large footprint in the tourism sector. The US tourism sector, has dominated the first couple years of business development in Cuba. This means that most US dollars would be supporting the Cuban military.
American dollars will most likely flow to the Cuban military as long as members of the socialist revolutionary party remain in power. This means that even if the current US administration had further opened bilateral trade relations with Cuba, there would still be some degree of limitations for businesses and investors seeking to establish a long-term sustainable market in Cuba. American companies, investors, and travelers must understand that until the military relinquishes some of its monopoly over commerce, US policy will remain strict.
One direct impact on US businesses from the new policy is that other countries with substantial and long-running economic ties to Cuba will be able to expand upon those links and further penetrate the Cuban market without competition from the United States. American companies seeking to do business in Cuba, even those with significant capital, already start from behind. The new restrictions make it even more difficult for Americans to make inroads in exposing Cubans to American goods, services, and capital.
The Venezuelan Effect
Another major threat to Cuba’s economy, independent of US policy, includes Venezuelan oil subsidies to the island. Analysts estimate that political chaos and plummeting oil prices have forced Venezuela to decrease exports to Cuba, from 115,000 daily barrels in 2008 to 90,000 in recent years, to 40,000 in recent months. The Cuban government has already responded with power cuts, which could eventually impact commerce, including tourism, more deeply.
Cuba indicated in 2015 that it would end its dual currency system in the coming year, but as of mid-2017, it has still shown no sign of doing so. Cuban residents use a local currency and tourists use a different currency, valued much higher than the domestic one. This creates essentially two different economies, one of which is largely off limits to Cubans. Under this system, most US industries apart from tourism will struggle to develop significant revenue streams and set market pricing within the domestic economy.
The system also illogically keeps salaries low for highly skilled professionals such as doctors treating only domestic clients, while allowing many less skilled entrepreneurs, such as restaurant owners and taxi drivers to earn significant income from tourists in the stronger valued convertible peso. The convertible peso is also pegged to the US dollar, leaving many tourists surprised at the high cost of goods and services in comparison to other Latin American countries. The dual system can also be confusing for capital investment and exporters. This is another obstacle that only Cuba’s regime can resolve.
Areas for Optimism
Ultimately, the onus is on the Cuban regime to pursue reforms if it aims to develop full relations with the United States. President Raul Castro plans to retire in 2018, likely marking the end of the era of governance by the original generation of revolutionaries. It is uncertain whether his likely successor, Miguel Diaz-Canel, will be more progressive, but it clearly presents a major opening for changes on the island, with the emergence of the first leader not associated with the original revolution in 1959.
The recent changes constitute a temporary halt in the opening to Cuba, but not a reversal. Notably, in 2015, when the opening was first proposed many politicians resisted the opening of an embassy in Havana. There appears to be consensus that the US and Cuba should be engaging on multiple fronts. As long as a diplomatic dialogue and some business ventures continue, companies and investors should expect the opening to continue, albeit just more slowly for the time being.
Samuel Schofield is a Contributing Analyst at Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/07/the-path-to-future-trade-relations-between-the-united-states-and-cuba/