What the Future Holds for U.S.-Cuba Relations

US-Cuba

When the Obama administration reestablished U.S. diplomatic relations with Cuba in December 2014, many experts predicted that it would bring a flood of new money to the island, transforming its economy and political culture for the better. Almost two-and-a-half years later, U.S. trade with Cuba continues to languish, and a handful of executive orders on the part of President Donald Trump could soon set back the clock to the days when hardline opposition to ties with Cuba’s communist regime was the norm in Washington. What is the future of U.S.-Cuba ties now that the honeymoon that began under Obama is over? Which aspects, if any, of the Obama administration campaign to open up Cuba are most likely to survive?

On the one hand, during his presidential campaign, “Trump certainly talked about repudiating what Obama has done with Cuba,” says Stephen Kobrin, Wharton emeritus management professor. “Clearly, with the stroke of a pen, he could eliminate a lot of the liberalization that occurred under Obama,” which was enacted as executive orders, not congressionally sanctioned legislation. On the other hand, “the streets have not exactly been paved with gold in Cuba,” Kobrin notes. “There hasn’t been a great rush to do business in Cuba. Right now, there is not a huge amount of interest.” Of the dramatic rapprochement with Cuba undertaken by President Obama, Kobrin adds: “It was an historical event that seems to have come and gone.”

Cuban-American attorney Gustavo Arnavat, senior adviser at the Center for Strategic and International Studies, notes, “One of the missed opportunities is that not as many deals were done” as anticipated. “That’s bad for a number of different reasons. One, I think U.S. companies have missed out. I think the Cuban people and the Cuban government have missed out on great U.S. products and services.” He adds that now — just as the Trump administration is reviewing its Cuba policy — instead of having 100 U.S. companies advocating for liberalization by going to their congressional representatives and saying, ‘Look, we have this business now in Cuba,’ “you only have 25 or 30 or so.” (Editor’s note: Arnavat, who recently returned from Cuba, addressed this topic at the 2017 Wharton Latin American Conference, where Knowledge@Wharton interviewed him. The interview will be published soon.)

Uncertainty and Disappointment

“The impact of Donald Trump’s victory can be defined by one word: ‘uncertainty,’” notes John Kavulich, president of the New York-based U.S.-Cuba Trade and Economic Council. “That uncertainty has negatively impacted interest by U.S. companies [in Cuba].”

In both countries, disappointment has been fueled by misunderstanding of the potential impact of their mutual ties. Charles Shapiro, president of the World Affairs Council of Atlanta, says that “U.S. business people thought that they were going to go to Cuba and see hundred dollar bills floating down the streets. Just as Americans thought that Cuba was going to change pretty quickly after December 2014, individual Cubans also thought that their standard of living was going to change [right away] … [that] their lives were going to get better. Both of those expectations were wrong; real life is more complicated.”

“Clearly, with the stroke of a pen, [Trump] could eliminate a lot of the liberalization that occurred under Obama.”–Stephen Kobrin

Many Americans imagined that the Cuban government would soon liberate political prisoners and make political reforms. When that didn’t happen, critics argued that the U.S. was making all the concessions, but the Cubans were doing nothing to open their economy. Notes Kavulich, “Basically, an overall negative narrative has been created.”

And while uncertainty is growing over which measures Trump might take to unwind the Obama administration’s efforts, “the Cuban government is not doing its part to mitigate any of the uncertainty,” Kavulich notes. “What it could do would be to allow more U.S. companies to have a presence in Cuba, more U.S. companies to directly engage with the licensed independent sector in Cuba. They are not allowing that.” Adds Arnavat, “If you look at Cuba’s plan for economic development, [foreign direct investment by U.S. companies] just doesn’t quite fit into their priorities” at this time for a variety of reasons, including opposition to the embargo.”

It’s not just the Americans who aren’t investing in Cuba now, notes Shapiro.  “The Chinese are not investing in Cuba,” nor are the Brazilians or the Europeans. “It’s because you can make more money investing in Singapore or Atlanta, Georgia” or many other places under the current system in Cuba. He adds, “One gets the sense that the government of Cuba doesn’t understand that foreign direct investment is a competition — that the investor gets to decide where he is going to get the best return on his money. There are not people out there wanting to throw their money at Cuba in a way that doesn’t allow them to make a competitive return on their investment. That’s the issue.”

In the travel sector, explains Kavulich, “The airlines, in their exuberance and enthusiasm to get as many routes as possible, far exceeded what the reality was going to be. All the airlines asked for far more seats than they were going to be able to fill.  They asked for approximately three million seats, when the agreement with the Cubans was for about one to 1.2 million. From the beginning, it was out of whack, but the airlines were all trying to grab as many of the routes as they could.”

As international hotel companies signed building contracts, U.S. arrivals in Cuba ballooned 34% between 2015 and 2016. Hotel rates soared by between 100% and 400%, with rooms previously priced at $150 per night skyrocketing to $650, according to New York-based tour operator Insight Cuba. American Airlines, JetBlue, Spirit and other carriers started operating daily flights to 10 cities, including airports that hadn’t welcomed U.S. airlines in decades. But the novelty has worn off, and hotel rates have normalized. Airlines that overestimated demand for Cuba are cutting back on their routes and using smaller planes.

“One gets the sense that the government of Cuba doesn’t understand that foreign direct investment is a competition.”–Charles Shapiro

Two major factors have changed since the high-profile restoration of diplomatic ties during the Obama administration, says Wharton management professor Mauro Guillen. “The first is the change in the U.S. administration. The second is that Raul Castro has said that he will step down in a couple of years. There is a power struggle going on in Cuba between those who are traditional and others who believe, like Raul, that there should be a change towards more freedoms in Cuba. Both factors are making it difficult to get things moving in that direction.”

Guillen adds: “Trump has not been president for even 100 days yet; we’re going to have to wait and see. It’s not so much that [everyone has] lost interest, but that there are so many other things going on that require the attention” of lobbyists and policy makers in the U.S.

Travel: ‘A Bad Telenovela’

Trump’s first statement about changes in U.S. policy is expected soon, but no one knows for sure what to expect. The Trump administration is “not going to sit around with a majority in the [U.S.] House, Senate and … the Supreme Court — and not do anything. They’re taking their time until they think the President and people around him have time to act,” says David Lewis, president of Manchester Trade, a Washington consultancy. “My view is that they are not going to leave this [situation] as it is.” That doesn’t necessarily mean that Trump will undo every policy change made by Obama, he adds.

According to Kavulich, “If they decide to go with increased enforcement [of the travel rules] — which it seems they will do — that could lead to the demise of the ‘self-defined trips’ that have become a popular way for Americans to visit Cuba,” despite the official ban on tourism. “One change the Obama administration made was to allow people to go to Cuba on their own. They didn’t have to go with a group, and they could self-certify. It was the honor system on steroids.”

Lewis argues that the changes made in the travel sector “are going to remain as is — not because [the Trump administration] thinks it’s good, but because to try and reverse travel is going to be a major quagmire, a whirlpool, like a bad telenovela that will never end. You’re going to have to start fighting with the nuns who go to Cuba, with the college kids who go to Cuba, with the NGOs. It will be a never-ending mad house, which could engulf [the administration’s] limited bench.”

However, in order to pressure the Cuban government to liberalize its economy, the Trump administration could tighten the screws on U.S. visitors in various ways. Kavulich notes that it may try to make travel harder for U.S. visitors to Cuba who don’t comply with the official rules, which make it impossible for Americans to visit as a tourist, by requiring them to go through several inspections at customs. Overall, the Trump administration “can do a lot without seeming as though they are being punitive, simply by enforcing the regulations.”

“There is a power struggle going on in Cuba between those who are traditional and others who believe … that there should be a change towards more freedoms in Cuba.”–Mauro Guillen

The Trump administration could also “make it clear that no further licenses will be given to any [U.S.] company that wants to engage with the Cuban military,  which controls the Cuban hospitality sector,” adds Kavulich. “If they act retroactively, that means the Sheraton [in Havana, the first hotel to operate under a U.S. brand since the 1959 revolution] gets closed; U.S. cruise ships can’t dock at the ports; and U.S. [air] carriers can’t land at the airports because the Cuban military controls all of it.”

“With Trump, you’re reading tea leaves,” says Kobrin. “You never know what’s real and isn’t. But he is not viscerally anti-communist. He isn’t part of the old Republican Cold War establishment. He doesn’t seem to have trouble dealing with Hungary, for example, and his problems with China have more to do with what he perceives as ‘American first’ and U.S. interests, rather than their political system.” Moreover, “the opposition to establishing relations with Cuba comes especially from Congress and Cuban-American members of Congress, who are concerned about the political system.”

Reasons for Optimism

Originally, the expectation was that an announcement by the administration regarding Cuba would be made in early February and then March. “It seems as though the announcement is being held hostage to whatever events are happening each day,” Kobrin says. “It could end up that the decision could be a tweet that is a response to something the Cuban government does that we don’t know about yet.”

Overall, Kobrin says, “I’ve always felt that once liberalization occurs, Cuba is just another island in the sun. It has some advantages in terms of its medical system, the education of the populace, and so forth, but then it has to compete with every other Caribbean island, once the novelty has worn off. Cuba is not a logical place to put much in the way of manufacturing or other sorts of industry, [except] maybe some health care initiatives.”

Shapiro is more optimistic. “The private sector in Cuba is growing. Cubans call [self-employed workers] cuentapropistas — which means they are ‘working on their own account.’ And they are [becoming] a larger percentage of the work force. Lots of people in Cuba have their government job, but they are doing other things as well. They can’t exist on a government salary.… Everybody in Cuba is working a deal.” Internet access has actually skyrocketed, he adds, with Wi-Fi hot spots available in parks around the country. “Lots of people use them, and they are owned by the government. Unlike the case in China, you can access The New York Times in Cuba, and more importantly, El Pais from Spain.”

“I’m still a little bit hopeful and optimistic,” Guillen says. “At least, a framework has been established for the basic relationships…. Now we have cruise ships going through Havana, we have regularly scheduled flights, and we have some broadening of the kinds of trade that can be done. Let’s give this first round of reforms some time to sink in. Then, the [Trump] administration will have a better idea of what it wants to do.”

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