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Since President Obama’s historic move toward normalizing trade and diplomatic relations with Cuba in December 2014, a number of important changes to US policy have ensued—just the beginning of the unravelling of decades-old policies. As US companies wade through the new legalities—what is permitted and what remains off limits—we’ve seen swift movement to capitalize on new opportunities: MasterCard now permits use of US bank cards in Cuba; US company Airbnb has an established presence in Cuba to help connect tourists with the proliferating casas particulares; New Jersey company IDT Corporation partnered with state-owned telecom firm ETECSA to provide direct phone services to Cuba; and US ferry companies have been approved for passenger ferry service between Florida and Cuba—to name a few. To be sure, huge uncertainties remain, not just in terms of the policy outlook in the United States, but regarding the reception of the Cuban government to such changes (particularly those in support of the nascent private sector), as well as the significant economic challenges and reforms still facing Cuba. But the stage has been set for more open trade and investment relations.
The Tide of Regulatory Changes
Several new US regulations in effect since early 2015 essentially expand the exchange of people, goods and services, and finance. In brief, major changes include:
- Relaxed travel restrictions for Americans falling under 12 categories that now only require a general license and no further special permission from the US Treasury’s Office of Foreign Assets Control (OFAC)—though tourism remains excluded;
- US travelers no longer subject to per diem dollar limit, permitted to import $400 goods per person (with a cap of $100 for alcohol and tobacco), and can use credit/debit cards in Cuba;
- Remittances increased from $500 to $2,000 per quarter;
- Microfinancing, business training, and farm equipment exports permitted for private business and farmers;
- Expansion of US exports with a focus on telecommunication and internet-related goods and services;
- Select imports of Cuban goods and services now permitted, but only those produced by cuentapropistas, the small but growing group of self-employed entrepreneurs in Cuba; and
- US financial institutions can open accounts at Cuban banks and enroll merchants.
These new regulations were followed by important milestones in the path toward normalizing diplomatic relations, notably the removal of Cuba from the US State Sponsors of Terrorism (SST) list,1 coupled with a historic bilateral meeting at the Panama Summit of the Americas in April 2015. Subsequent resolution of a number of issues is highly anticipated but will necessarily take time. Foremost among these issues are resolving claims on expropriated assets of companies and citizens, many whom were not American citizens at the time of expropriation, as well as addressing human rights concerns. Perhaps the biggest elephant in the room is the continued trade embargo, which requires a final determination by the US Congress.2
Impact on Trade and Investment
By its nature, the trade embargo is the major factor preventing US-Cuba trade and investment in practice. But as Hufbauer and Kotschwar (2014) argue, even if it is lifted, taking a number of reciprocal steps will be just as important to ensure the right transition and equal footing in each other’s markets. In Cuba, state-owned industries will likely have a vested interest in protection from outside competition; moreover, US firms must play catch up to foreign firms that have enjoyed a degree of first-mover advantage in Cuba.
The United States was the seventh largest exporter of goods (mostly foodstuffs) to Cuba in 2013 and, not surprisingly, has faced stagnant if not negative growth in recent years (figure 1). US imports of Cuban goods are practically zero.
Figure 1 Top suppliers of Cuban imports, 2004-13
Source: IMF Direction of Trade Statistics (DOTS).
Hufbauer and Kotschwar (2014) estimate that under normal economic relations, US exports of goods and services to Cuba could reach $6 billion per year, while Cuban exports to the United States could reach $7 billion. The stock of direct investment from all foreign countries in Cuba might reach $17 billion compared to $1 billion today. While still far from realizing this potential, in the near-term, current changes in US policy will perhaps have the greatest impact on agriculture and telecommunications, among the major targeted sectors for relaxed restrictions.
Agriculture
That the agricultural sector is an early target for increased trade is not surprising: Cuba is a net food importer and lucrative export market for the United States, which in turn remains a low-cost, competitive supplier. Since the early 2000s, certain agricultural products were authorized by the US sanction program, though exports remained largely constrained to corn, poultry meat, and soybeans. In part, this was due to the requirement that Cuban purchases be made via cash-in-hand payments before shipment and handled through third-party banks. Moreover, US agricultural imports must go through the Cuban state-trading entity, Empresa Comercializadora de Alimentos or Alimport, which arranges supply contracts, import logistics, and distribution, while other countries can sell products directly to Cuban state-owned enterprises.
In recent years, US agricultural exports to Cuba have averaged $360 million but peaked at over $700 million in 2008. Though not large in nominal terms, since the early 2000s, the United States was the dominant supplier of Cuban imports. But this share has decreased steadily, from 42 percent in 2007 to about 20 percent today, as other countries have expanded their market share, notably the European Union, Brazil, and Argentina (see figure 2).
Figure 2 US export share of global agricultural exports to Cuba
Note: Based on data using the HS 2007 WTO agricultural products group. Vietnam, another large supplier of certain agricultural goods to Cuba, is not included because of missing data.
Source: Author’s calculations based on data from UN Comtrade.
US producers are eager to recapture market share in Cuba and are also eyeing new markets for wheat, currently dominated by Canada and the European Union, and rice, among others. The US Department of Agriculture projects that once export restrictions are fully removed, US agricultural sales could reach $1 billion.3 A major obstacle to greater sales continues to be lack of financing. While Cuba’s removal from the SST list was a welcome change to relieve some pressure on US bank lending to Cuban buyers, many banks still seem reluctant to assume the additional risk, and US exporters at large must continue to rely on financing from foreign institutions and the cumbersome cash payment policy. Proposed legislation, the Agricultural Export Expansion Act of 2015, seeks to address these challenges to facilitate greater trade, short of lifting the trade embargo, by permitting agriculture export financing directly from US banks.
Of course, it’s not just about US trade to Cuba but Cuban agricultural products also having a fair share in the US market for its top exports of fruit juices, fish, and shellfish, possibly even sugar (which is still Cuba's number one agriculture export but would face daunting quota barriers in the United States). Long-term improvements in infrastructure and meeting sanitary and safety regulations will all be prerequisites.
Telecommunications
The development benefits of connectivity for the modern economy—particularly for key Cuban industries like tourism and biotechnology and for facilitating access to information in general—have made modernizing and upgrading its telecommunications system a priority for Cuba and a partnership opportunity for the United States. Internet access in Cuba remains largely state-controlled. The low connectivity, high prices, restrictions on use, and prevalent surveillance, coupled with the lag in telecommunications infrastructure has led Cuba to have one of the lowest Internet and mobile phone penetration rates in the region: Some 5 percent of the Cuban population has open access to internet at home, while less than 20 percent has cellphones.
Past attempts to expand licensing partnerships between the United States and Cuba—including call services via satellite, an undersea fiber optic cable, and further infrastructure—came up short.4 Guzman (2015) offers a sober reminder of the reality of challenges facing US companies and potential investors.5 Foremost is the strong state hold on telecommunications, strengthened by a wave of renationalization after a short period of privatization in the 1990s. To be sure, these concerns are also part of a broader discourse on the investment climate at large in Cuba.
The new US regulations would be just a start, allowing US companies to establish commercial telecommunications services in Cuba. Through the SCP license exemption (Support for the Cuban People), US exports are now permitted for certain items that promote communications and the free flow of information within Cuba and abroad, including consumer communications devices, related software, applications, hardware, and services. Other services incident to internet communication, e.g., email, social networks, and domain name registration are also authorized, as are services like cloud storage and software design. Telecommunications infrastructure equipment can be sold to government-owned or controlled companies, but consumer devices must be intended for resale to consumers or the private sector.
Next Steps
With bilateral negotiations ongoing and changes in US policy still fresh, it is too early to fully assess their success in facilitating trade and investment. One thing to watch for is the pending assessment by the US International Trade Commission, to be released September 2015. The report will update its analysis of the economic effects of US restrictions on goods and services exports to Cuba, including sectoral impact and state-level analyses and quantitative estimates of potential trade in the absence of restrictions. No doubt these results will add further fuel to the congressional debate on lifting the embargo.
Notes
1. Presence on the SST list meant restrictions on US foreign assistance, a ban on exports and sales of defense and dual-use items, and miscellaneous financial and other restrictions.
2. In February 2015, Senator Amy Klobuchar (D-MN) introduced legislation, Freedom to Export to Cuba Act of 2015 (S.491), to end the embargo; so far the bill has gained little traction.
3. “Recovering Lost Markets in Cuba,” Washington Trade Daily 24, No. 80, April 22, 2015.
4. Of course, the sector was also shadowed by the imprisonment of Alan Gross in 2009 for distributing banned communications technology into Cuba.
5. For detail see, Eduardo R. Guzman, “Telecommunications in Cuba and the U.S. Embargo: History, Opportunities, and Challenges,” National Law Review, March 6, 2015, (accessed on May 5, 2015).
