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President Obama’s announcement that the United States and Cuba will resume full diplomatic relations came as a surprise, but it isn’t surprising that the United States and Cuba are rebuilding their economic relations.
Cuba was an important American trading partner before the U.S. trade embargo began in 1960. For instance, exports from the United States to Cuba were about 13 percent of total exports to Latin America in the late 1950s, with the dollar amount of exports from the U.S. to Cuba were equal to American exports to France over the same period. Imports from Cuba to the U.S. were of a similar magnitude.
Limited incomes
With renewed trade, American businesses will gain access to a new market for their goods, but the demand for those products is limited by Cuban incomes. The figure below shows Cuba’s income per capita from two perspectives: in real (inflation-adjusted) dollars and relative to U.S. GDP per capita.
Cuban income per person grew steadily from the mid-1960s until the collapse of the Soviet Union. From 1988 to 1993, Cuba’s income per capita fell by almost 40 percent and did not reach its 1988 level until 2005. All of this meant that Cuba fell further behind the United States in terms of GDP per capita, falling from 22 percent of the US level in 1947 to 12 percent in 2008.
Bright prospects for exports
The prospects for Cuban exports to the U.S. are brighter. First, after the collapse of the Soviet Union, Cuba refocused its economy to encourage tourism. With reduced restrictions on travel, more Americans will head to Cuba to relax with a nice cigar and a bit of rum and they will be able to bring back more of what they sample.
Commodity exports to the U.S. are another potential source of growth for the Cuban economy. Cuba’s sugar is famous around the world, but will likely face a tough time in the United States because we give our sugar producers a defensive barrier through quotas on sugar imports. You can bet that Red River Valley sugar beet farmers will not allow these barriers to fall without a fight.
In addition to sugar, Cuba also exports nickel, a mineral that is used in many industrial processes such as the creation of stainless steel. The U.S. imports around 43% of our nickel from the rest of the world and Cuba could benefit by entering the U.S. market.
Another policy change that President Obama unveiled in his speech was that he was planning to loosen limits on remittances, i.e. money that people living in America can send to friends or family living in Cuba. This will benefit Cubans by increasing the flow of dollars from the U.S. to Cuba.
One of the most important policy initiatives was that the United States is going to begin helping Cuba to develop better internet infrastructure. This is a big change that indicates Cuba is willing to work with U.S. companies and investors, something it was not willing to do during the Cold War and not able to do with the embargo in place.
Unanswered questions from 1959
Thinking about U.S. investments in Cuba is where things start to get a little bit messier. When Fidel Castro came to power in 1959, there was over $1.8 billion worth of U.S. capital in Cuba and all of those assets were nationalized by the Cuban government. This remains a touchy issue because the existing law that enforces the U.S.-Cuban embargo, the Helms-Burton Act of 1996, specifically states that the ownership of all $1.8 billion of U.S. investment that was confiscated after the Cuban Revolution has to be addressed before the embargo can be fully lifted.
President Obama outlined in his speech that he would engage Congress to change the law, but the incoming Congress looks to be very hostile. So it is not without some pressure from home that President Obama has decided to pursue this.
So what will this look like in the long run? Well, don’t buy your plane ticket just yet — there’s still a lot of work that needs to be done for Cuba and the U.S. to have a normal economic relationship. However, with around 2 million Cubans and Cuban descendants living in the United States and serious reforms in Cuba over the last few decades, this looks to be the first of many steps to recovery.
President Obama said something during his speech that would stand out to anyone from Latin America, “Todos somos Americanos,” “We are all Americans.” This, in a sense, is the most convincing piece of evidence that there has been a serious change in attitude towards Cuba, and that we’ll see some serious changes to U.S.-Cuban economic policy. So go ahead, open up a bottle of rum to celebrate — it’s the beginning of a new chapter with Cuba.
Michael S. Hartz is a senior at St. John’s University and a student coordinator at the Eugene J. McCarthy Center for Public Policy and Civic Engagement.
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I was aghast when Republicans were
complaining about this as an economist and I would think a business owner people would be doing back flips. Thanks for out lining the reasons for the economic rationale for the change.
We certainly trade with countries that are worse and where our assets are less secure.
Benefits the Cuban leaders, not the people of Cuba.
The Pope should get the credit for getting Cuba and the US together. Another reason for this change is that Cuba is hurting. As an economist you must know that Cuba gets some of its oil from Venezuela and some from Russia on the European market. With their own falling revenues as the price of oil goes down Venezuela and Russia can no longer give Cuba subsidized oil.
But the communist party still controls Cuba. So how will that affect the economics of this? The benefits will flow to the leaders not the people just as Putin controls companies making money in Russia.
Embargo
It benefits the Cuban people because opening Cuba up will spell the end for the Castro regime. The only reason they have held on so long is because of the embargo. The US position gives the Castros a bogeyman to use to opress their own people. When that ends and the Cuban people are exposed to the freedom we have, the Castros won’t survive. Its a terrible irony that the rabid Castro opponents who have dictated policy are the ones who have kept them in power.
Internet in Cuba still controlled by the Communist leaders.
http://en.wikipedia.org/wiki/Internet_in_Cuba
We’ve been here before. When Clinton re-established diplomatic relations and trade with Vietnam, leftists were making the same claim.
Not only are the human rights abuses continuing unabated, the value of trade with the US is paltry, and for the same reasons; the people have no money to buy the stuff their Communist government will allow into the country.
Paltry
The U.S. exported in excess of $5 billion worth of goods to Vietnam last year and $4.6 billion through October of this year. But ok.
Goods exports [to Vietnam] totaled $5.0 billion; Goods imports [from Vietnam] totaled $24.6 billion. The U.S. good trade deficit with Vietnam was $19.6 billion in 2013.
http://www.ustr.gov/countries-regions/southeast-asia-pacific/vietnam
We export raw materials to Vietnam. They turn it into clothes and electronics and send it back. This is exactly what will happen in Cuba if the embargo is ever lifted (which wont be anytime soon).
No
The fact that there is a trade deficit does not mean that there is no economic value to the U.S., nor does it mean that it will always be that way. Vietnam, like other developing countries, will continue to develop, and trade with the U.S. will spur that along. Cuba is a very, very different country than Vietnam, and to conclude the development will be the same is pure ignorance.
While there are a lot of politicians who continue to support a 50-year policy of failure that has done nothing but prop up a communist regime, but people (including some prominent Republicans) are figuring them out. You may be determined to keep the Castros and their communism around as along as possible, but I (and the president) would like to see them gone.
The trade deficit proves normalization hasn’t done anything for the US economy, but has helped the Vietnamese Communist regime immensely.
You’re right though; there are differences between Cuba and Vietnamese Communist regimes. Cuba’s is worse. To look at the failed 20 year experiment we’ve conducted with Vietnam and expect it to work better with a dictatorship in an isolated island is willful ignorance.
The Soviet Union collapsed under it’s own weight, and Venezuela is nearing the tipping point. Vietnam and North Korea are the only two allies the Castro’s have, and neither is in the position to prop up the Cuban economy.
Rual Castro addressed his imprisoned citizens last week, and after declaring “We have won”, assured the world that Communism isn’t going anywhere. Of course, why would it?