Pressure by Cuba will not pay off

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This past week, United States relations with Cuba were back in the spotlight. The Trump administration announced new restrictions on travel and trade with Cuba. The rollback of Obama’s measures towards the island’s government is a promise President Trump had made some months ago. The steps are reasonable, since  Obama’s agreement with Cuba was insufficient  and inequitable. The U.S. gave much and received little in return.

It has been more than a year since the normalization of relations. Clearly, Cuba has been unwilling to change rapidly, and past treaties were insufficiently in achieving a new robust track. One example is the continued discriminatory practices against Americans in the island. On a recently booked trip I had to Cuba, for example, it turned out that hotel rates were unjustifiably much higher for Americans than for Europeans, so I cancelled my plans.

The intention of the hotel was to give a silent retaliation for the years of economic embargo. The focus was on individuals that had no say on the matter and also no ability to change or improve American relations with Havana.

In fact, with the new tight restrictions, American individuals can no longer visit Cuba and groups need a license from the Treasury Department to visit the country. The Cuban tourism industry will feel the effects of U.S. government encouragement of Americans to stay in private houses and avoid hotels and restaurants connected to or owned by the military and security services.

After decades of adverse relationships, isn’t it time to bury the hatchet and bring out the peace pipe. For that, Cuba needs to take a step back and accept new policies which are fair, non-discriminatory and welcoming to visitors, both American and Cuban alike. As a fair trade and commerce relationship is not yet a reality, the United States government needed to demonstrate a stronger position in order to encourage appropriateness.

In addition, it is important to note that seeking improved relations with Havana does not mean forgetting the violations against human and civil rights during the Castro government. The population’s welfare is equally relevant as economic aspects in diplomatic relations, and actions such as expropriations and unjustified prison sentences should still be remembered and repaired. Curative marketing evaluates, carries physical accosting, debt, and destruction until true restitution is made.

Much remains to be done by Cuba, particularly since the United States has already long ago initiated important steps to reflect its own atonement. Cuban pressure to repay for earlier inequities will not work. Only if both parties commit to a fair relationship, will we see commerce between the countries grow and bring benefits and economic growth.

DOING BUSINESS IN CUBA: DON’T FORGET OPPORTUNITY COSTS

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Photo: Miguel Discart

The continuing and growing chatter on doing business in Cuba is reaching epic proportions. It has become the “flavor of the month” (and will continue to be) among entrepreneurs, investors, exporters, importers, financiers and U.S. multinational companies. It is understandable. After 56 years of isolation from American commercial relations, the bilateral movement to restore diplomatic relations has created hope that normal business activity is right around the corner. Fantasies abound of a pre-revolutionary market economy where flourishing trade and investment and an explosion of tourist activity including casino gambling will rule supreme.

Time for a reality check, however. The new, the novel, the exotic, the previously forbidden fruit may appear to be the most tantalizing, but objective criteria should form the true template from which to measure all business decisions. The incremental and marginal changes in trade with Cuba are just that–they do not represent a wide open door. To date, the most profitable businesses dealing with Cuba are those that put on conferences and seminars on doing business in Cuba. And the majority of these events are seances of pure speculation, since the true experts on doing business in Cuba (those doing business in Cuba today) would not dare speak honestly and openly for fear of being harrassed (or worse) by the Cuban government.

Don’t get me wrong–I am all for doing business in and with Cuba once U.S. law is changed to permit that. I believe that the prospects for U.S.-Cuba are great, indeed. However, right now–in the here and now–American entrepreneurs and small companies, especially, need to consider what is known in economics as opportunity costs–whereby the same amount of time, energy, and money will reap a greater return elsewhere. The Dominican Republic and Panama are cases in point and solid benchmarks for comparison since they are also located in the Caribbean Basin region. In the first instance, besides agriculture similar to Cuba’s, the Dominican Republic’s non-agricultural substantial, including textiles, medical devices and footwear. The country has over 2000 manufacturing firms and hosts 112 call centers and 64 industrial parks it with 610 companies. Its tourism sector is its crown jewel, generating over $6 billion in annual income. The most-visited destination in the Caribbean, the DR attracted over 5 million tourists last year. Its first-rate tourism infrastructure comprises a welcoming and well-trained cadre of hospitality workers. Competition from Cuba will be challenging but certainly not a serious threat. A beneficiary of the DR-CAFTA trade agreement with the U.S., the nation’s $61 billion economy will expand about 6 percent this year, up from a previous forecast of 5 percent. Foreign direct investment, which will exceed $2.3 billion this year, totals over $30 billion and has grown 245% during the last decade.

As for Panama, also a signatory of a free trade agreement with the U.S., the nation is located outside the hurricane zone and poised to benefit hugely from the $5.25 billion expansion of the Panama Canal. With a currency pegged to the U.S. dollar, the country is a bustling hub for trade and logistics, real estate, finance and banking as well as business processing (outsourcing, call center operations), and sports an exciting nightlife, casinos, beaches, and ecotourism and indigenous culture. Attracting over $5 billion in U.S. FDI, Panama’s pro-business environment has lured scores to establish regional headquarters there, including Johnson & Johnson, Caterpillar Inc. and Procter & Gamble Co. Panama ranks #38 out of 189 countries by the World Bank for ease of starting and business, #17 or accessing credit, and #9 for trading across borders.

Among the key prerequisites for traders and investors are a stable environment characterized by the rule of law, a transparent and efficient legal and administrative system, access to credit, respect for contracts and property rights, dispute settlement mechanisms and customers with buying power. Cuba comes up short on all of these. The DR and Panama combined are one-third larger than Cuba; and whereas the average monthly wage in Cuba is $20, it is $363 in the DR and $541 in Panama.

Cuba is a long-term play, much like investing in an empty lot in a neighborhood in transition versus opening a luxury retail store today in a high-end shopping center. Big companies and investor groups with billions in assets can afford to invest in Cuba now for the future; for all others, there are more immediate opportunities elsewhere.

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Jerry Haar is a professor in the College of Business at Florida International University and a research affiliate at Harvard University’s David Rockefeller Center of Latin American Studies

U.S.-Cuba Relations: a new beginning or much ado about nothing?

By Jerry Haar

Former Federal Reserve chairman Alan Greenspan, in a 1996 televised speech, referred to the continued overvaluation of stocks as “irrational exuberance” — an apt expression today in the wake of President Barack Obama’s Dec. 17th announcement of a policy to normalize relations with Cuba.

It is wishful thinking to believe that the renewal of diplomatic relations with Cuba will lead to removal of the U.S. trade embargo with that nation. Only Congress can suspend the Helms-Burton Act — a law that requires a transition to democracy in Cuba, restitution of confiscated property of U.S. citizens and the absence from power of both Castro brothers.

Nevertheless, it is important to highlight the implications of the U.S.-Cuba normalization accord and the eventual removal of the trade embargo in several key areas:

  • Remittances and financial services. Under the new agreement, the limit on remittances from Cuban-Americans to family in Cuba will be raised from $500 to $2,000 per quarter, and remittance forwarders will no longer require a specific license. Remittance levels are currently $2 billion, so the potential injection of four times as much capital into the Cuban economy would be huge. The Cuban government also would win big, because it charges a “processing fee” of 10 percent on all remittances. With their Venezuelan ATM “temporarily out or order” and neither Russia nor China able to whip out their checkbooks, Raúl Castro needs hard currency desperately.
  • Tourism. New rules still prohibit U.S. citizens from traveling to Cuba, except for those who fall within 12 currently existing categories; however, those permitted to do so, will no longer need to seek formal approval from Treasury’s Office of Foreign Assets Control. Were the embargo to be lifted, the IMF predicts both winners and losers in Caribbean tourism. “Curiosity tourism” to Cuba would surge, with prices rising and Cuban infrastructure, at capacity already, unable to accommodate the large influx. U.S. travel to Cuba would probably be a “one-off” — that is, not a repeat destination like the Dominican Republic where price, quality and service are far superior to Cuba’s.
  • Trade. The U.S. and Cuba do have a trade relationship; however, it is restricted primarily to agricultural commodities and products, medicines and health care products. However, U.S. commodity exports to Cuba have declined by nearly 57 percent during the last six years. Under the Obama plan, U.S. firms would be permitted to export building supplies, inputs for small farmers, and products that Cuban entrepreneurs could use to establish small businesses. Removal of the embargo in its entirety could create huge opportunities for telecom equipment and a wide range of industrial exports from the U.S. and selected Cuban imports (e.g., rum, cigars).

One big caveat, however: Who is going to finance trade with Cuba and under what terms? Without U.S government guarantees (the Export-Import Bank or Small Business Administration) for trade financing and insurance, neither banks nor companies will extend credit to a nation that is notorious for failing to make good on its loans. And one should not forget that all import, wholesale and retail operations must go through Cuban state companies, all controlled by the military, that will earn a windfall of revenue in both tariffs and mark-ups on goods for final sale.

  • Access and affordability of goods. Cubans can buy a wide range of imported goods — providing they are available and affordable (doubtful on both counts). Samsung products (South Korea), Toshiba laptops (Japan), Adidas athletic shoes (Germany), Diesel jeans (Italy) as well as gray market goods coming from third countries can be purchased. But at what price? The average annual income in Cuba is $240. It is seven times greater in the Dominican Republic, nearly five times more in Haiti, and 15 times more in Jamaica. So even without the embargo, how attractive is the Cuban consumer market — a market where the monthly wage is equal to one Cohiba cigar?
  • Property. Compensation for confiscated property is a requirement of the Helms-Burton Act for removing the embargo. The 6,000 claims, valued today at $7 billion, were filed by individuals (80 percent of the claims) and companies such as Coca-Cola, Exxon, Starwood and Colgate-Palmolive. The Cuban government does not have the financial capacity to meet these claims, so how will they by settled? (Laughingly, Cuba claims the U.S. owes it $100 billion for harm caused by the embargo.)

While Dostoyevky reminds us that to live without hope is to cease to live, hope must be grounded in realism. One-sided deals do not work. The next steps are up to the Cuban government — further and faster economic reform and initiatives toward political liberalization. As José Martí, Cuba’s national hero, exclaimed: “It is a sin not to do what one is capable of doing.”

Jerry Haar is a professor of business at Florida International University and a non-resident senior research fellow at the McDonough School of Business, Georgetown University. His email is jerry.haar@fiu.edu.