U.S.-Cuba Thaw has a Long Road Ahead

12.20.14

U.S.-Cuba Thaw has a Long Road Ahead

12.20.14
ReutersReuters

By Jofi Joseph for Global Risk Insights

Wednesday’s bombshell that the United States and Cuba have agreed to attempt to put a half century of enmity behind it and seek to re-establish full diplomatic relations is a stunning game-changer.

Not only does it promise to revitalize Barack Obama’s foreign policy in the homestretch of his Presidency and transform the overall relationship between the United States and all of Latin America, it could finally open Cuba to the type and levels of business investment many have only dreamed of for generations.

A natural tourist mecca and a potential gateway into the broader Caribbean market, Cuba’s potential has sadly been strangled by fifty years of autocratic rule and comically inept economic mismanagement.

Nonetheless, before too many champagne corks pop and cigars are smoked, it is important to understand what will truly change in the coming weeks and months, and what remains subject to future bilateral dialogue and the whims of skeptics in both capitals, but especially Washington.

Trade embargo still in effect

As the White House acknowledged in its public rollout, the U.S. trade embargo against Cuba is U.S. law and hence Congress must act to repeal it. It is too soon to say if the overwhelming opposition of Congressional Republicans to the steps announced this week will eventually subside over time.

Much depends on the behavior of the Cuban regime in the coming months. Nevertheless, any likely full repeal of the embargo will occur at the earliest under the next President.

Ditto for seeing a U.S. Ambassador in Havana. Neither President Obama nor his successor would want to see a bruising confirmation battle occur over the first American envoy to Havana in a half century.

President Barack Obama talks with President Raúl Castro of Cuba from the Oval Office, Dec. 16, 2014. Pete Souza

President Barack Obama talks with President Raúl Castro of Cuba from the Oval Office, Dec. 16, 2014. Pete Souza

In the meantime, the Chief of the U.S. Interests Section in Havana, Jeffrey DeLaurentis, is an experienced career diplomat who can capably handle duties as an Acting Charge D’Affaires. If there is an opportunity for a fully ranking Ambassador to serve under a Democratic President, keep your eye on former Senator Chris Dodd, a genuine expert on Latin America and Cuba in particular.

US already trades with Cuba, which has declined in recently

What many pundits have overlooked is that legislation passed by the U.S. Congress in 2000 already authorized a significant loophole in the bilateral trade embargo, permitting the sale of unprocessed agricultural products and raw forestry materials under tight restrictions.

Accordingly, bilateral trade gradually increased to a peak of $711 million in 2008, but then declined in subsequent years, clocking in at $359 million in 2013. One reason for this decline in trade is that U.S. exporters are hamstrung by various restrictions, including a prohibition on extension of credit or other financing, allowing other exporters to capture market share.

The various steps announced this week by the Obama Administration, including the opening of accounts by U.S. institutions with Cuban financial entities and liberalization of some export controls, including those associated with the telecom sector, will help in this regard. However, until the U.S. embargo is fully lifted, American business will continue to face hurdles and obstacles that only apply to them.

Economic opening to Cuba will be shaped by the desires of the Cuban government

The Cuban government is unlikely to permit unfettered capitalism to arise on an island that has been protected from globalization for over 50 years. Instead, Havana will encourage heavy industry – manufacturing and mining, for starters – to proceed with investment and welcome U.S. companies selling industrial products and services, such as agricultural machinery, because those economic exchanges are likely to increase Cuban employment levels and allow for Cuban industry to benefit from spinoffs.

However, consumer goods that could threaten indigenous business are less likely to be welcomed with open arms, hence limiting the immediate benefits for the average Cuban consumer. In other words, one can expect firms like Cargill and John Deere to do well. PepsiCo and Unilever, not so much.

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