The Multinational Monitor

APRIL 1989 - VOLUME 10 - NUMBER 4


C U B A

Embargo Economics

Keeping Cuba at Bay

by Donna Rich

Dan Snow knows how serious the U.S. government is about enforcing the U.S. trade embargo against Cuba. Last December, a federal grand jury in Houston indicted Snow for fishing in Cuban waters.

Under the Trading with the Enemy Act, Snow, who has led bass fishing expeditions to the Caribbean island for over a decade, faces a maximum of 100 years in prison and a $500,000 fine.

Snow was merely doing what thousands of American businesspeople do regularly: trade with communists. But the U.S. government believes that trading with the Cuban variety is altogether different from trading with the Soviets or the Chinese. Since 1964, the U.S. government has maintained a total embargo on all direct trade between the United States and Cuba.

Congressman Bill Alexander, D-Ark., is not convinced that the difference between the Soviets and the Cubans merits such double standards. Last year he presented a bill to exempt U.S. agricultural products from the trade embargo. "If a Kansas wheat farmer can sell wheat to the Soviet Union," asks Alexander, "why should an Arkansas rice farmer be forever forbidden from selling his rice to Cuba?" Agricultural trade with Cuba could open up a lucrative rice market to U.S. farmers, says Alexander. He estimates it could mean $50 million per year for U.S. rice farmers alone.

But the total cost of the embargo for U.S. businesses is far higher. American businesses could earn an additional $750 million a year if the United States lifts the Cuba sanctions, according to a recent study by the Johns Hopkins University School of Advanced International Studies. The 25-year trade embargo has cost U.S. businesses at least $30 billion, according to the study.

Nearly all other Western nations, and certainly the chief competitors of the United States, Japan, West Germany and Canada, are currently improving commercial relations with Cuba. Trade between Cuba and market economy countries reached $1.6 billion in 1986.

Cuban Vice Minister of Trade, Miguel Castillo, estimated recently that U.S. businesses, capitalizing on the natural geographic advantage, could capture between 33 and 50 percent of Cuban trade with the West, or up to $800 million per year.

This fact is not lost on Cuba's current western trade partners. "You have to understand that there is a fascination here with things American," noted Bernard White, the Canadian Commercial Attache in Havana in an interview last spring. The British Commercial Attache, Geoffrey Livesey, echoed those sentiments: "If the U.S. re-establishes trade with Cuba, I might as well pack my bags and go home."

It is a market that American businesspeople are watching closely. U.S. businesses have kept abreast of economic developments in Cuba, and have persistently queried Commerce and Treasury Department officials about the possibility of lifting the embargo.

When the Carter administration eased restrictions on American travel to Cuba in 1977, 10,000 American tourists, including hundreds of U.S. business executives, visited the island. U.S. businesses began preparing for a resumption of direct trade, but after Cuba came to the assistance of the Ethiopian government in 1978, Carter no longer encouraged such hopes. And the Reagan administration reinstated the travel restrictions tightening the embargo.

The Commerce Department still gets several phone calls every week from major U.S. corporate executives interested in trading with Cuba. And Cuban trade officials say representatives of U.S. companies have approached them at international trade conferences and private meetings around the world to inquire about trade with Cuba.

If and when trade restrictions are lifted, Cuba would look to the United States for grains, chemicals, medicines, machinery, communications equipment, paper and wood products, textiles and hotel equipment. Cuban trade representatives are already looking at the U.S. market and trade potential. Last year, for the first time, Cuban trade officials disclosed their estimates of the future trade potential between the United States and Cuba. Cuba calculated, for example, that it would buy between $80-100 million per year in grains from the United States, $95 million in chemicals and $60 million in medical supplies each year if the embargo is lifted.

From the Cubans, the United States could import nickel, frozen concentrate, seafood, tobacco and rum. Contrary to popular belief, in the last 10 years sugar has declined as a percentage of total Cuban exports. In 1975, sugar represented 90 percent of Cuban exports, and in 1987, it represented 77 percent of total Cuban exports. Nickel, seafood and citrus have all experienced a rise as a percentage of Cuban exports. The United States currently imports all of its nickel, primarily from South Africa, Australia and Canada. And U.S. shellfish importers have already met with the Cubans to discuss trade agreements to be implemented after the embargo is lifted.

Companies from Spain, France, Italy and Canada have already signed joint-venture agreements with Cuba to develop large resorts on Cuba's off-shore islands and at Varadero Beach. The 1982 Cuban Joint Venture Law offers foreign investors 50 percent ownership, tax-free investments, land and infrastructure. The Joint Venture law also allows the foreign company to manage hotels with control over hiring and firing personnel, an unusual opportunity for firms investing in socialist countries.

Tourism officials in Havana say that by 1992 the number of hotel rooms available will double to 20,000 and will house one million guests annually. Seventy percent of these rooms will be built as joint ventures.

There are nowhere near that number of tourists coming to the island today, but with the United States only 90 miles away, there is much optimism that the floodgates will open soon. "We know that the embargo will be lifted sooner or later, and when that day comes, Spanish hotels will be ready for American tourists," says the Spanish commercial attache in Havana.

American hotel companies are well-informed about opportunities in Cuba. Anxious not to be left out, executives from the Omni and Hyatt hotel chains are already exploring opportunities in Cuba. And Cuban entrepreneurs say that they would prefer to import hotel equipment from a single source to ensure compatibility. The United States, they say, is the logical choice.

In fact, Otis elevators are being installed in Cuban buildings, and Cubans buy Ford cars. Since 1975 limited trade has been permitted between foreign subsidiaries of U.S. companies and Cuba. This opening was the result of pressure from U.S. allies who complained about the extraterritorial restrictive U.S. trade regulations toward Cuba. In response, the United States permitted the Organization of American States to lift the multilateral embargo on Cuba, and allowed subsidiaries of U.S. companies in third countries to trade with Cuba.

A report by the Treasury Department last year showed that in 1987, 47 percent of Cuba's western imports came from subsidiaries of U.S. companies, and 53 percent of their western exports went to subsidiaries of U.S. companies. This means that Cuba is already conducting about 50 percent of its western trade with American subsidiaries and will presumably be amenable to trading directly with U.S. companies.

The list of U.S. subsidiaries trading with Cuba reads like the Business Week 1,000: Beatrice Foods, Cargill, Continental Grain, Del Monte, Dupont, Exxon, Ford, General Motors, Goodyear, Johnson and Johnson, R.J.R. Nabisco and Otis.

In the last five years alone, 1,235 licenses were granted to U.S. subsidiaries amounting to more than $ 1.3 billion worth of trade with Cuba--a sum that benefits corporate subsidiaries and western competitors, not American workers.

U.S. business executives and workers, however, are not the only people hoping to see a change in U.S. trade laws with Cuba. Recent opinion polls indicate growing public opposition in the United States to sanctions against Cuba. In a 1988 Gallup poll, 72 percent of U.S. political leaders indicated that they thought the Cuban people (not Cuban government officials) were most affected by the U.S. embargo on trade with Cuba. Fifty-five percent of those polled said that, on balance, the United States loses from the trade embargo, and 57 percent believe it should be lifted.

Sentiment has even changed in the Cuban-American community. the traditional heart of political opposition to warmer relations with Castro's government. The Cuban-American community is almost evenly divided on the sanctions issue, according to the Gallup poll. Almost 40 percent of those polled indicated they would like to see the embargo "eased or ended altogether".

Alicia Torres, the director of the Cuban American Committee, a Washington-based Cuban-American organization that supports improved relations between the United States and Cuba, says that sanctions hurt the Cuban-American community on a very personal level. It is difficult for Cuban-Americans to telephone relatives in Cuba because telephone lines between the United States and Cuba predate 1959. Mail between the two countries must go through Mexico or Europe and travel from the United States to Cuba is still extremely limited despite efforts by the Cuban-American community to negotiate directly with the Cuban government.

Torres says that U.S. officials erroneously believe that the Cuban-American community opposes negotiations with Cuba. "I have found that most people think the Cuban-American community is homogeneous in its opposition to normalization of relations. In meetings in Washington, D.C., I have tried to shatter that myth." And, she adds "they are beginning to recognize that Cuban-Americans are victims of the embargo as well."

With the business and the Cuban-American communities supporting normal trade relations with Cuba, and the Cuban-American community advocating easing the restrictions as well, the last line of resistance lies largely in Washington; high-level White House and State Department officials view the embargo as a political tool.

The Cuba embargo spans three decades, eight U.S. presidents, and a changing international political climate. It has been the most consistent feature of U.S. policy toward Cuba during the last 26 years, even though it has failed to achieve any of its main objectives and has cost U.S. businesses more than $30 billion.

Before the embargo, Cuba had extensive economic ties to the United States--the United States accounted for 70 percent of Cuba's imports and 67 percent of its exports. This reliance made Cuba's economy particularly vulnerable to outside pressure.

Despite a CIA report which predicted "a blockade excluding all shipments to Cuba ... would be unlikely, in and of itself, to bring the Castro government down," policy planners in both the Eisenhower and Kennedy administrations believed that economic hardship resulting from the embargo would foment enough internal dissent to lead to Castro's ouster. And if the embargo failed to overthrow the Castro regime, it would make the deepening of Soviet-Cuban ties extremely costly. By 1964 a total embargo was in place prohibiting all commercial contacts between the United States and Cuba. During the same year, the Organization of American States voted to prohibit trade with Cuba, thus making the embargo multilateral.

The embargo did initially pose significant difficulties for the Cuban people. The exodus of much of Cuba's professional and managerial class and the massive cost of socializing the economy diminished productivity.

But rather than inciting rebellion, the embargo strengthened nationalist sentiment and provided a rallying point for the Cuban people against U.S. policy. And Fidel Castro used the embargo as a scapegoat for other economic troubles besetting the island.

The embargo was also very costly to the Soviets, who assumed Cuba's sugar quotas that had been cut off by the United States. But rather than weakening this relationship, the U.S. embargo locked Cuba more tightly into the Soviet Union's economic and political sphere.

Lifting the embargo would give Cuba the opportunity to reduce its reliance on the Soviets, something the Cubans are anxious to do. "We are the world's greatest experts at knowing what happens when all economic eggs are placed in one basket," a Cuban trade official said recently.

It is a process that has already begun. In 1974, for example, the dramatic sugar price rise considerably increased Cuba's hard currency earnings. With surplus foreign exchange, Cuba turned to the West. According to the U.S. Department of Commerce, Cuban trade with the West rose from $678 million in 1970 to $3 billion in 1975. And more recently, according to Cuban National Bank documents, the Soviet Union reduced its trade with Cuba by 12 percent in the first quarter of 1988. This is due in part to the Soviet policy of perestroika, which decentralizes decisions on trade. Individual Soviet companies are finding that other trade partners offer better and cheaper products than Cuba, and Cuba is looking for trade partners to take up the slack.

Opponents of lifting the embargo cite Cuba's debt as an impediment to trade between the United States and Cuba. Cuba's two main sources of hard currency income, sugar and the re- export of Soviet oil, have both experienced declining prices in recent years, contributing to Cuba's 5.5 billion peso debt to the West. (A peso is roughly equivalent to a U.S. dollar.) Cuba has been forced, as a result, to reduce imports from the West. Western commercial attaches in Havana, however, expressed long- term optimism: "Cuba's debt crisis is a temporary problem, and we will wait it out," said the Spanish attache.

Cuba has demonstrated that when given the opportunity, it chooses to trade with the West. Although Cuba's trade with the West has declined slightly since 1986, a Cuban trade official said last year, "Cuba will not import less than it is now importing from market economies." And Cuba's Western trade partners seem to be "muddling through" the current crisis.

The Cuba sanctions were also intended to deprive the Cuban government of hard currency earnings which, the United States argued, could be used to finance Cuba's "export of revolution." But the embargo has never pre-vented Cuba from supporting revolutionary movements in the developing world. During the early years of the embargo, from 1963 to 1968, when the economy was going through its worst period, Cuba was most active in supporting militant left-wing groups in Latin America.

Today, the embargo appears to have little influence on the Cuban government's foreign policy decisions. Since the U.S. government has cut all economic ties with Cuba, the United States lacks the leverage and inducements that trade partners normally have with one another.

Moreover, the softening of Castro's rhetoric has contributed to Cuba's improving relations in the hemisphere. The Cuban government now has diplomatic relations with all of the Latin American nations except Paraguay, Chile, El Salvador, and Costa Rica. (Castro does have relations with Columbia, although the two countries do not exchange ambassadors.) And Cuba has growing trade relations with Latin America: Cuba's total trade with Latin America increased from 160 million pesos in 1975 to 347 million pesos in 1987. Argentina is Cuba's largest Latin American trade partner. In 1986, Argentine exports to Cuba amounted to 162 million pesos.

The embargo, finally, was imposed to punish Cuba for nationalizing U.S. property, in particular the holdings of sugar and oil companies, and to dissuade other countries from contemplating similar action. Cuba expropriated an estimated $1.8 billion worth of American property after Castro came to power. In the mid-1960s an amendment was added to the embargo laws that tied lifting of the embargo to compensation for nationalized U.S. property.

Although compensation will have to be part of discussions on lifting the embargo, the Cubans do not have sufficient hard currency reserves to pay the full bill. Renewed trade with the United States, however, would help Cuba earn the money it needs to pay off the claims.

On numerous occasions, the Cuban government has expressed interest in discussing and resolving compensation with the United States. Every other country that had held claims against Cuba has settled. And the United States has settled claims with other communist countries.

There is no question that Cuba is interested in trading with the United States. Manuel Davis, first secretary of the Cuban Interests Section —they have no embassy— in Washington, said that during the waning months of the Reagan administration, his government widened contacts with the U.S. government. Havana, he says, "stands ready to negotiate and meet the United States halfway." Miguel Castillo, Cuban Vice Minister of Trade, expressed interest in lifting the embargo and desire to trade with their "natural partner." And in a speech in January, Fidel Castro complained, "Not a single aspirin enters Cuba from the United States."

Perhaps Cuba's "natural partner" is taking a second look, too. The Reagan administration, which arrived at the White House promising never to negotiate with Castro, left Washington with a series of practical agreements with Cuba on immigration, radio interference and nu-clear energy.

Before leaving office, President Reagan also signed a new trade bill repealing a federal law that prohibited the import of books, films, records and other informational material from Cuba. Although this was only the beginning of the process of easing the U.S. embargo on trade with Cuba, it set a positive tone for the incoming Bush administration.

Meanwhile, Dan Snow promises to continue to fight for his right to fish for Cuban bass — which he maintains are the "best bass in the world." " "I'm going to fight this to the bitter end, until they lock me up and throw the key away," Snow said. "I was taught that this is the freest country in the world and I want the freedom to travel."

But for two Cuban youths at a Havana pizzeria, the conflict is less about ideology than about fads and fashion. "More than anything, we want the trade embargo to be lifted," they said. "It's not fair that the Soviets can buy McDonald's hamburgers and Levi's blue jeans, but we cannot." An older woman interjected, "and I remember Uncle Ben's Rice...." ^


Donna Rich is a research analyst for the Cuban Policy Project at Johns Hopkins University School of Advanced International Studies. She has travelled frequently to Cuba.


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