ESSA

ESSA

The embargo has gotta go


Eddie Go

By

April 4th, 2016


For decades, the Cuban economy has been constrained under strict communist rule. Eddie Go makes an economic case for re-establishing trade and other economic relations between the U.S. and Cuba in light of Obama’s historic visit to the island.


The United States and Cuba haven’t exactly been on friendly terms ever since Fidel Castro seized power in 1959, trapping the Caribbean island under decades of communist rule. Incidents such as the Cuban Missile Crisis have sparked great resentment towards the Castro regime, prompting the U.S. to uphold its trade and investment embargo against Cuba. The blockade, first authorised in 1962, was intended to weaken Castro’s influence and push for democratic reforms in Cuba. 54 years on, it seems like the tide is finally beginning to turn. Since December 2014 the leaders of both countries have worked towards improving relations and gradually loosening restrictions. Setting foot in Havana for the first time last month, it was clear that President Obama and Raúl Castro, the current Cuban President, still share many opposing views.[i] However the two leaders were in agreement on one issue: the time has come to lift the embargo against Cuba.

With heightened disapproval towards the embargo and pressure from global bodies, the momentum has never been this strong.[ii] Opponents of the embargo assert that the policy has failed in achieving its objectives and created economic losses on both sides. In a predominantly planned economy, it would be naïve to assume that lifting the embargo would immediately deliver prosperity to ordinary Cubans and create an economic boom. However, restoring economic relations could still do a whole lot of good for both the U.S. and Cuba. With the Castro brothers’ economic grip on Cuba weakening, perhaps it’s time for Congress to have a good hard think about the economic merits of lifting the embargo.

The benefits of trade

The Cuba of today is no longer as self-sufficient as it once was. The nation relies heavily on imports for a range of commodities such as food. As a consequence of hurricanes and low productivity in domestic agriculture, imports make up around 80% of food consumed.[iii] Although U.S. firms are currently permitted to export most agricultural goods and medical products despite the embargo, payments can only be made in cash.[iv] A complete lifting of the trade embargo will allow exporters to provide better payment terms, thereby increasing Cuban demand for exported goods such as rice.[v] Greater competition arising from trade with the U.S. will place downward pressure on prices, and hopefully pass on lower costs to Cuban consumers.

Restored trade relations will also allow Cuba to export goods they have a comparative advantage in such as cigars and rum,[vi] Unorthodox goods and services such as classic cars, medical workers and biotechnology products are also likely to be sought after if the trade embargo is lifted. While the island does not have much to offer the U.S. anymore, Cuban firms may nevertheless discover new trade opportunities and increase their productivity over time.

Spurring innovation and economic growth in Cuba

There have been signs in recent years that the Cuban Government is moving away from its strict communist model, but how far they are willing to go still remains uncertain. Since 2011, control over various sectors of the economy has been taken out of state hands, and many Cubans have been encouraged to pursue entrepreneurship and self-employment.[vii] Minor tax changes have also been implemented to lure overseas investors. As Cuba takes these small steps towards a market economy, foreign investment will become more crucial than ever. The U.S. embargo locks the island from a large pool of investment capital and its abolition could inject much-needed funds into the Cuban economy. This would enable new businesses and enterprises to produce more output, stimulating entrepreneurship and fuelling economic growth.

Decades of isolation have also positioned Cuba behind other nations in terms of technological advancement. While the blame can largely be pointed at suppressive measures taken by the Cuban Government, it appears that their attitude may be softening. For instance, Cubans have recently been provided with easier access to the Internet via lower costs and the installation of Wi-Fi hotspots.[viii] If the Castro regime continues along this path, the U.S. has a lot to offer. Multinationals such as Google are already detailing plans to lay telecommunications infrastructure in Cuba, and many Cuban entrepreneurs are lined up and ready to make the most of the incoming technology.[ix] Ending the embargo will make it easier for tech giants to set up shop and allow more Cubans to be connected online. This increased access to information should hopefully drive innovation and yield more efficient methods of production.

Bolstering a popular tourism industry

Tourist travel to Cuba remains illegal under the laws of the U.S. embargo. However, a surge in visitors throughout 2015 suggests that many are already taking advantage of President Obama’s loosened travel restrictions – Americans can travel to Cuba if they fall under one of 12 broad categories.[x] Lifting the embargo would erase the legal ramifications deterring many potential visitors and allow Cuba’s tourism industry to fully prosper. With many firms in the tourism sector privately operated, there is immense potential for the industry, along with associated industries such as hospitality and retail, to employ more Cuban workers and contribute significantly to the nation’s GDP.

What’s in it for the U.S.?

With a study by the U.S. International Trade Commission estimating costs to the U.S. of up to $1.2 billion annually in lost economic opportunities, evidence presents a strong case for abolishing the embargo.[xi] As aforementioned, an end to the embargo would improve the competitiveness of American exports, revive sectors such as agriculture and enable job growth.

Of course, economic successes in Cuba rely significantly on the Castro administration loosening their grip on the economy so that businesses can achieve their full potential. Although Cuba is still run by leaders who identify themselves as communists, incremental progress on economic reforms give hope that a market economy could someday be realised. Lifting the embargo today could very well accelerate this process and deliver positive economic outcomes for Cubans in the meantime.

 

[i] The White House, Office of the Press Secretary. (2016). Remarks by President Obama to the People of Cuba [Press release]. Retrieved from https://www.whitehouse.gov/the-press-office/2016/03/22/remarks-president-obama-people-cuba

[ii] Gass, N. (2016, March 21). Poll: Majority of Americans back ending Cuban embargo. Politico. Retrieved from http://www.politico.com

[iii] World Food Programme. (2016). Cuba: Overview. Retrieved from https://www.wfp.org/countries/cuba/overview

[iv] Office of the United States Trade Representative. (n.d.). Cuba. Retrieved from https://ustr.gov/countries-regions/americas/cuba

[v] Congressional Research Service. (2014). U.S. Agricultural Trade with Cuba: Current Limitations and Future Prospects. Retrieved from https://www.fas.org/sgp/crs/row/R44119.pdf

[vi] Ernesto Hernandez-Catá, E. (2015, January 5). Preparing for a Full Restoration of Economic Relations Between Cuba and the USA. Association for the Study of the Cuban Economy. Retrieved from http://www.ascecuba.org

[vii] Rainsford, S. (2012, January 12). Raul Castro’s Cuban reform ‘without haste’. BBC News. Retrived from http://www.bbc.com/news/

[viii] Associated Press in Havana. (2015, June 19). Cuba to expand ​internet access to battle country’s dire lack of connectivity. The Guardian. Retrieved from http://www.theguardian.com/au

[ix] Ashby, T. (2016, 1 February). Silicon Island Rebooted: Cuba’s Information & Communications Technology Revolution. Harvard International Review. Retrieved from http://hir.harvard.edu

[x] Hamre, J. (2016, 26 January). Surge of Americans tests limits of Cuba’s tourism industry. Reuters. Retrieved from http://www.reuters.com

[xi] U.S. International Trade Commission. (2001). The Economic Impact of U.S. Sanctions With Respect to Cuba. Retrieved from https://www.usitc.gov/publications/332/pub3398.pdf

Image: Greg Montani

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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