For more than half a century, relations between Cuba and its superpower neighbour have been frosty. Beginning with an embargo imposed on Cuba by the US, the two countries have spent the past 53 years distrusting and refusing to do business with one another. Undoubtedly, the worse off of the two has been communist-run Cuba, which has been unable to sell its exports to its nearest and largest neighbour as a result of the embargo (see Figs 1 and 2).
However, just before the end of last year, US President Barack Obama delivered a speech that was the most conciliatory stance shown by an American leader since the dispute began. If the speech turns into more than just rhetoric and brings an end to an economic ban that has lasted more than half a century, then the potential for prosperity for Cuba’s downtrodden citizens is vast.
US President Barack Obama delivered a speech that was the most conciliatory stance shown by an American leader since the embargo began
Cuba effectively became an enemy of the US when Fidel Castro led a revolution against US ally Fulgencio Batista at the end of the 1950s. It subsequently embraced the communist ideology espoused by the Soviet Union.
Before the revolution, the US and Cuba had been strong trading partners. Cuba was seen as an exotic location to which the rich and glamorous of American society holidayed, while acting as a strategic link to the rest of Latin America. General Batista was a staunch ally of the US for many years, but his regime was widely condemned for causing mass corruption throughout the country.
Troubled past
Batista’s regime led to more than two decades of close cooperation between the US and Cuba, so much so that the US effectively propped up his government with military and economic aid. US companies flocked to the island during his reign, and there was widespread corruption throughout the country as a result. This ultimately fuelled a huge amount of resentment among the Cuban people, with a rebel group led by Fidel Castro rising up during the 1950s.
The US Government’s part in the conflict and propping up of Batista meant that many Cubans saw their larger neighbour’s interests being pursued at their expense. Eventually, the US ceased supply to Batista’s regime, leading to disgruntled US State Department Advisor William Wieland famously stating: “I know Batista is considered by many as a son of a bitch… but American interests come first… At least he was our son of a bitch.”
Ever since the Cuban Revolution deposed General Batista at the start of 1959, the two countries have had practically no relations whatsoever. John F Kennedy’s government initiated an embargo on all trade from Cuba a year later when the new regime, led by new President Fidel Castro, nationalised a number of US-owned oil refineries without paying a single dollar in compensation. All this changed at the end of last year, however, when Obama announced plans to normalise relations between the US and Cuba, open an embassy in Havana and negotiate the end of the embargo.
Ending the embargo
Announcing the dramatic shift in policy towards Cuba, President Obama said: “In the most significant changes in our policy in more than 50 years, we will end an outdated approach that, for decades, has failed to advance our interests, and instead we will begin to normalise relations between our two countries. Through these changes, we intend to create more opportunities for the American and Cuban people, and begin a new chapter among the nations of the Americas.”
He added that the embargo had become especially outdated in light of improved relations between the US and other communist-run countries. “Neither the American, nor Cuban people are well served by a rigid policy that is rooted in events that took place before most of us were born. Consider that for more than 35 years, we’ve had relations with China – a far larger country also governed by a communist party. Nearly two decades ago, we re-established relations with Vietnam, where we fought a war that claimed more Americans than any Cold War confrontation.”
It’s important to note that the embargo on trade with Cuba is yet to be lifted, and any such move would have to pass through a potentially hostile Republican-led Congress. Nevertheless, the softening of relations between the two countries is a historic moment that came as a surprise to many.
Raul Castro, the current president of Cuba and younger brother of Fidel Castro, was quick to acknowledge the steps taken by Obama. He hailed the news as a huge opportunity for Cuba, and said Obama’s decision “deserves the respect and acknowledgement of our people”. However, Raul Castro also called for the US to go further and end the embargo. “We have agreed to re-establish diplomatic relations, but this does not mean the principal issue has been resolved: the blockade which causes much human and economic damage to our country should end.”
Boosting trade
A key part of the deal between Cuba and the US will be trade, according to Obama – in particular, giving the Cuban people more money through remittances and boosting the country’s nascent private sector. “I also believe that more resources should be able to reach the Cuban people,” he said. “So we’re significantly increasing the amount of money that can be sent to Cuba, and removing limits on remittances that support humanitarian projects, the Cuban people and the emerging Cuban private sector.”
With so many Cubans fleeing the country for the US over the past 50 years, there has been a substantial amount of money sent back to the country to family members. It is thought that every year around $2bn is sent to Cuba, but the US has restricted the amount that individuals can send to $500. With the reforms, Cuban Americans are likely to be allowed to send back as much as $2,000, which would prove a huge boost to Cuba’s economy. Private citizens will suddenly have a lot more cash to spend, while the wider economy will benefit from more money being available.
Obama has been keen to stress the importance of opening up Cuba to US firms, with the benefits to the Cuban population being a key offshoot of increased trade. “I believe that American businesses should not be put at a disadvantage, and that increased commerce is good for Americans and for Cubans. So we will facilitate authorised transactions between the US and Cuba. US financial institutions will be allowed to open accounts at Cuban financial institutions. And it will be easier for US exporters to sell goods in Cuba.”
Increased trade will ultimately improve the fortunes of a number of industries, both in the US and Cuba. While opportunities for US firms looking to expand into a potentially lucrative new market will exist, it is Cuban industry that should see the biggest financial shot in the arm from the relaxing of relations between the two countries.
Tourism surge
One of the industries most likely to be transformed by the new relationship is tourism. Although a popular destination for many global travellers (see Fig 3), Cuba has been cut off from direct access to the US for decades. Currently, the island sees three million visitors each year, but just 90,000 of those come from the US – instead, Americans that have wanted to travel to Cuba have had to do so via airports in nearby Mexico or other Caribbean islands. The costly flights have deterred many travellers, as has the general assumption that Americans aren’t welcome in Cuba. However, according to the IMF, Cuba could see around 180,000 US citizens travel to the country once the restrictions are lifted.
The attractions on offer in Cuba are vast, with stunning (if poorly maintained) early-20th-century architecture throughout the country. An influx of American tourists could also see Cuba’s many tropical beach resorts transformed into thriving destinations. Beach locations like Varadero already have high-end hotel facilities, but US hotel groups will likely swarm these tropical destinations once they are able to. US groups looking for a prestigious home in the country’s capital could also target other historic hotels, like Havana’s Hotel Nacional de Cuba.
It is thought that the tourism industry could treble in size as a result of the new rules between the two countries. And yet, whether the country is ready for such a massive influx of tourists remains to be seen. Its tourism infrastructure is largely state-run, with costs kept down and little investment made in higher-end services that many US tourists might expect. The wider infrastructure of the country could also do with substantial improvements.
Infrastructure investment
Cuba’s creaking infrastructure has seen minimal investment over the last few decades, with little in the way of a modern transport network and its crumbling housing rarely invested in. There will certainly need to be more hotels built, and there are signs that this has already begun, with reports of Swiss luxury hotel chain Kempinski looking to build a 200-room resort. There is even a $350m luxury golf course being built by UK firm Esencia close to the Varadero resort, five decades after Fidel Castro ordered all golf courses to be closed for being “elitist”.
Aside from tourism infrastructure, the country is in dire need of a digital revolution. Its internet penetration is one of the worst in the world, currently standing at just five percent. Obama is hoping the reforms will see US telecoms giants enter the market and drastically improve the Cuban population’s access to the internet and other modern technologies.
There have even been other tentative steps from US firms moving into the Cuban market. Online video streaming service Netflix has recently started offering its product in Cuba, although a lack of high-speed internet in the country could hinder its chance for wider expansion. However, it is a symbolic step towards the country opening itself up to US firms, not least ones that will widen the population’s perception of America.
Another industry likely to enjoy a rapid increase in business is Cuba’s aviation sector; domestic airlines like Cubana, the country’s largest, could expand their services to the US. With a lifting of the embargo, many US airlines will also look to offer services from across the country to Havana. United Airlines has already said it plans to start offering flights to Havana from its hubs at Newark and Houston, while American Airlines, Southwest, Spirit and JetBlue are also said to be enthusiastic about serving the country in the future.
Lighting up
Cuba’s most famous export is undoubtedly tobacco. Cuban cigars are widely regarded as being the best in the world, but getting them into the US has been particularly hard. With a new market being opened up to Cuban tobacco farmers, huge amounts of cash could be brought into the country. The US is already the world’s largest market for premium cigars, but because of the embargo and the country’s refusal to recognise well-known Cuban trademarks, rival firms have been selling cigars under Cuban brand names for years. This may result in a series of trademark disputes over world-renowned brands like Cohiba, Partagas and Romeo y Julieta – for instance, there has been a dispute between the General Cigar Company and Cuba over ownership of the Cohiba brand since 1997.
Aside from tobacco, Cuba’s agricultural sector is dominated by sugar. It has huge potential, and could see a big boost from having the US market opened to it. However, Cuba imports a lot of its food from abroad – as much as 65 percent, according to some reports – and so outside investment could help it harness its own industry potential. For US agricultural firms, there will be significant gains to be made from having Cuba open for business.
Alvaro Vargas Llosa, a senior fellow at the liberal US think tank the Independent Institute, wrote in The Globe and Mail newspaper in January that, despite the tough talk of proponents of the embargo for many decades, the reality has seen many businesses trade with Cuba regardless of the restrictions. He explained: “Given the somewhat flexible conditions of the embargo, the US is already Cuba’s fifth-biggest trading partner and its largest supplier of food and agricultural products. This limited economic exchange will not vary much and the tiny amount of private enterprise allowed in Cuba will continue to see some 300,000 very small businesses go about their daily routine.”
Wider impact
The impact of this normalisation of relations could be felt far and wide. Cuba has relied upon the assistance of countries like Venezuela, Russia and China in the past, but its existing trade partners are beginning to become less reliable. Venezuela’s economy is in turmoil thanks in large part to the collapse in the price of oil and recent political upheaval. Russia has its own troubles to be dealing with, not least as a result of the western-imposed sanctions over the Ukraine crisis, and China is beginning to be more selective with where it invests its money overseas. If the US is to offer Cuba an alternative source of investment, it will prove a timely boost to the struggling Castro regime.
This thawing of relations between Cuba and the US could even see the country rejoin the IMF. Though Cuba was one of the original 40 founding members in 1945, Fidel Castro renounced the country’s membership in 1964 after a series of delays in paying back loans to the organisation. However, having relied heavily upon financial assistance from the Soviet Union until its fall in 1991, Cuba has reportedly been trying to rejoin the IMF ever since. Were the country to gain access in the future, it would no longer be reliant on getting financial assistance from countries like Venezuela, which is itself in economic turmoil.
However, some observers feel that the deal to normalise relations between the US and Cuba will likely benefit the Castro regime, rather than ordinary Cubans. Vargas Llosa believes that the deal will give the Castro brothers both political and financial benefits, but will “have only tiny economic impact on the people”.
He added: “The substance of the new agreement is that the Cuban hierarchy is now recognised as part of the civilised community of states and will be granted access to foreign exchange at a time when the Venezuelan subsidy is in grave peril due to that country’s economic collapse. No political change is even insinuated in the accords; the Cuban people will at best pick up a few economic crumbs spilled on the floor by their masters. The only way the Cuban people could truly benefit from an agreement would be if the island was inundated with US investment and trade, none of which will happen because the federal embargo prohibits this. Only the US Congress could lift it.”
The Castro regime, however, has control over Cuba’s currency, the Cuban peso, and so any US dollars that come into the country as a result of trade will go to the regime, rather than into the wider economy, according to Vargas Llosa. “The new measures entail a small increase of US dollars that flow to Cuba by way of travel and remittances. But because the Castro regime has complete control of Cuba’s currency, the foreign exchange will go directly into its pockets. Under the prevailing system, the ordinary people will obtain only Cuban pesos [which are] worth very little.”
A hugely divisive and passionate issue among Cuban nationals and the Cuban-Americans who fled Castro’s regime over 50 years ago, the embargo has proven a popular piece of policy for many US politicians. Getting it lifted will prove especially difficult with a Congress and Senate dominated by Republicans ideologically opposed to recognising Cuba’s communist leadership. Nonetheless, Obama’s intent and changing the relationship between the US and Cuba, and offering an olive branch to the country, should be welcomed as the first serious attempt in a generation to bring back such a historically important neighbour into the international fold.
