International Trade

It’s Time to Capitalize on Trade with Cuba

Recently, the U.S. Treasury Department expanded the positive list of authorized exports to Cuba. With the goal of “enabling economic advancements for the Cuban people” and “meeting the needs of Cuban people,” the U.S. has removed financing restrictions of exports to Cuba (except agriculture) and will allow exports related to news gathering and dissemination, telecommunications, and civil aviation. In addition, the department moderately expanded the list of permissible reasons to travel to Cuba, but major restrictions remain. Tourist travel as well as U.S. exports to the tourist sector or state-owned enterprises will still be denied

As relations normalize, it is important to emphasize Cuba has great potential to be a business partner, and the final outcome of negotiations should be considered as much as a trade agreement as a geopolitical maneuver. Past and current restrictions have failed; they sacrificed competiveness for unrealized political gains. The free market promises faster reforms and economic gains for both countries.

The U.S. abandoned the full embargo and began the free market approach in 2000, when President Clinton authorized the Trade Sanction Reform and Export Enhancement Act (TSRA) allowing agricultural and medical exports to Cuba. In 2003, Virginia launched its first of several trade missions to Cuba, securing agricultural export deals. In 2014, Virginia exported $24 million in goods, increasing to $391 million the total export dollars since TSRA was enacted. Virginia has the fifth largest trade volume of any state with Cuba. Louisiana has made the most of U.S.-Cuba trade with $88 million in exports in 2014 and over $1.5 billion overall. Not all states are taking advantage of the opportunities that TSRA offers. A Texas A&M study conducted just after TSRA was enacted predicted which states would gain the most in agriculture exports. According to that study, Louisiana should rank fourth at $65 million in a good year. Arkansas, California and Iowa were projected to occupy the top positions, but today they rank ninth, eleventh and fifteenth.

TSRA did not completely free agricultural trade. Deals have to be made in cash, and travel restrictions limit demand for American foodstuffs. A 2007 United Stated International Trade Commission (USITC) report estimated that if these restrictions were eliminated, total U.S. agriculture exports could increase by $337 million, capture 62 percent of the market, and create 6,000 new American jobs. The U.S. dominates trade in the Caribbean – especially agriculture. The average Caribbean island obtains 75 percent of its agricultural imports from the U.S. The Dominican Republic, the only country in the region comparable in population size and purchasing power to Cuba, imported $12 billion of agricultural goods in 2013, with 51 percent or $6.14 billion originating in the U.S. In the same year, Cuba imported an equivalent $6.7 billion of agricultural goods, but only 5.2 percent was from the U.S., accounting for just 32 percent of their food imports. U.S. Secretary of Agriculture Tom Vilsack reported Cuba imports 80 percent of its food and represents a $1.7 billion market.

Encouraged by the growing opportunities, on January 15, 2015 the Obama Administration relaxed travel and financial regulations, but there is still much to do. The existing restrictions cause U.S. producers to surrender $6 billion in potential Cuban exports to less competitive producers like China, Brazil, Canada and Mexico.

The next reforms needed to continue freeing the market are in investments, and the expansion of the list of permissible exports is a big step in the right direction. Before the Obama Administration started to normalize relations, Cuba began losing financial support from Venezuela and started reforms to attract foreign direct investment (FDI). Measures included tax benefits to foreigners, special economic zones, phasing out the dual currency regime, permitting foreign ownership of businesses, and expanding the Mariel port to handle 800,000 containers a year. So far these efforts have been piecemeal and only modestly effective. However, now the biggest roadblock is being addressed, the private market will be able to guide the hand of negotiators. Already, Florida’s Miami-Dade County is considering hosting a daily ferry to Cuba.

While normalizing relations with Cuba does not compare economically to a comprehensive 21st century trade agreement like the Trans-Pacific Partnership (TPP), it will occupy an important place in the history books. The Castro brothers’ regime has lasted through no fewer than 10 U.S. presidential administrations and continued a hard communist line despite the fall of the USSR and market reforms in China. As U.S.-Cuban relations normalize it is the incentives afforded by trade that will prove a strategy to reform state-controlled economies and promote economic prosperity.

In Depth: International Trade

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