Macro, Micro, Minnesota

Reopening economic ties between the U.S. and Cuba will benefit both countries

By Michael S. Hartz and Louis D. Johnston | 12/19/14

 

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 GDP per capita, 1947–2008

Cuban GDP dropped precipitously after the fall of the Soviet Union and only recovered its 1988 level in 2005.

2008
GDP per capita in 1990 dollars: $3,764
GDP per capita relative to U.S.: 12%

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.