How Changes to U.S.-Cuba Policy Will Impact Businesses

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Gustavo Arnavat and Ralph Patino discuss the changing U.S. policy on Cuba.

U.S. President Donald Trump checked one more item on his “To Undo” list of Obama administration actions last Friday when he reset the U.S. policy on Cuba. While the new policy restricts individual tourist travel and business investment in more than half of Cuban industry, it retains many smaller features like permitting family-related travel and professional/academic visits to the country. Among the immediate casualties will be a burgeoning tourism and hospitality industry that sprung up in Cuba after Barack Obama’s friendly overtures began two years ago.

But the symbolic impact is larger in that it dims hopes of improved ties with the island nation, according to experts. The shifting U.S. policy on Cuba brings uncertainty to foreign investment, even if the opportunities in that country for American businesses are limited, they said. The new policy also raises national security issues with the possibility of Russia and China forging closer relationships with that country.

As it happens, the blow is softer than what many feared. “Those of us who believe that strengthening relations with Cuba is the way forward were pleasantly surprised that the revisions were not as drastic as they could have been,” said Gustavo Arnavat, senior adviser at the Center for Strategic and International Studies, a Washington, D.C.-based think tank. “Yet it is not a step forward.” All eyes are now on how the Cuban government will respond, added Arnavat, who represented the U.S. on the board of the Inter-American Development Bank under the Obama administration.

“We anticipated a complete rollback [of the Obama administration’s Cuba policy],” said Ralph Patino, a Miami-based trial attorney, entrepreneur and founding director of the U.S.-Cuba Business Council at the U.S. Chamber of Commerce. He described the Trump administration policy decision to reduce the amount of U.S. tourism to Cuba as “a tremendous mistake.” With the move to tighten U.S. business investments in Cuba, “the only people who will be hurt are the 11 million private citizens in Cuba that are not part of the government,” he said. “Those two things combined are going to have a chilling effect.”

Arnavat and Patino discussed the implications of the latest U.S. policy on Cuba on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

However, the vast majority of the changes the Obama administration brought about remains in place, Arnavat noted. He listed some of those: diplomatic relations continue and the embassies will not be closed; bilateral agreements that promote U.S. national security interests such as cooperation in combating human trafficking or drug trafficking will stay; commercial flights from the U.S. to Cuba will continue; Cuba is not being listed again among state sponsors of terrorism; U.S. banks may continue to offer credit cards for use in Cuba; foreign travel continues to be permitted under the category of professional research and professional meetings; travel by family members and remittances have not been touched; and rum and cigars can be imported into the U.S. by people traveling there.

A Specious Argument?

For the most part, Trump’s policy targets businesses controlled by the Cuban military. “The new policy makes clear that the primary obstacle to the Cuban people’s prosperity and economic freedom is the Cuban military’s practice of controlling virtually every profitable sector of the economy,” the new policy states. Arnavat recalled that some three decades ago when Cuba decided that it needed foreign investment to boost its economy, it turned to the military because it had demonstrated success in running enterprises and was perceived as being less corrupt than other organizations. Over time, the Cuban military has grown to control nearly 60% of the economy, although much of that is in the tourism sector, he said.

“The U.S. government and its changing policies have always been a major source of risk for foreign investors.”Stephen J. Kobrin

According to Wharton professor emeritus of management Stephen J. Kobrin, Trump’s moves on Cuba are “dysfunctional, and will make things a lot worse.” He said the new policy has nothing to do with the Cuban business situation or the prosperity of Cubans; rather, it is a move “just to satisfy an [anti-Castro] constituency in the U.S.” Patino, too, saw it as “merely a payback to a small portion of the Cuban community in Miami for siding with him during the general [presidential] election.”

Kobrin didn’t see any merit in the Trump administration’s argument that U.S. businesses engaging with entities controlled by the Cuban military will hurt the country’s economic prosperity. In fact, he noted that the U.S. has failed in its Cuba policy over the past nearly six decades since the trade embargo began in 1958. “We can’t impose democracy on Cuba,” he said. “What we can do is try to promote economic liberalization and hope that leads to political liberalization.”

More immediately, the new Cuba policy is coinciding with a resetting of U.S. business expectations on the opportunities in that country, most of which were in travel and tourism. Kobrin noted that initial expectations were “overly overoptimistic.” He added that “the Cuban infrastructure isn’t ready for tourism in terms of restaurants and hotels.” U.S. airlines that announced ambitious plans to serve Cuba have pared back their plans or canceled services after the initial euphoria died down, Arnavat pointed out. “Delta had said a month ago that it wants to step up flights, but now it will have to sharpen its pencil to revise its plans.”

The changed circumstances, however, will hurt small entrepreneurs in Cuba who have offered accommodations for visitors via Airbnb and set up restaurants and other businesses to serve the tourism industry, said Kobrin.

A reversal of the U.S. policies on Cuba would cost the U.S. economy $6.6 billion and affect 12,295 American jobs over the course of the first term of the Trump administration, according to an economic impact analysis that was published earlier this month by Engage Cuba, a Washington, D.C.-based coalition of private companies and organizations working to end the travel and trade embargo on Cuba.

“To be frank, the Cuban government was slow to respond to some of the proposals put forward by [some] very good U.S. companies.”–Gustavo Arnavat

Instability for Foreign Investors

Both now and over the long term, the new Cuba policy will hurt foreign investment, said Kobrin. “Business likes stability. Foreign investors like stability,” he said. “If the rules are going to change every two years, every time a new administration comes to power, it’s discouraging. The U.S. government and its changing policies have always been a major source of risk for foreign investors. This [move on Cuba] is another example of that.”

There exists sufficient enthusiasm among U.S. businesses to invest in Cuba, according to Patino. He recalled that soon after the Obama administration announced that it would re-engage with Cuba, the U.S.-Cuba Business Council at the U.S. Chamber of Commerce saw 50 Fortune 500 companies join in the first 10 days. “We took three or four groups including GE and Marriott [to Cuba], and everyone was ready to pull the trigger, get their hands dirty and try and help the country out.”

Other areas for U.S. businesses in Cuba are food exports and the country’s health care and pharmaceutical industries. “One of the things that struck me while we were there is that virtually all their food is imported and how little they grow,” said Kobrin, who visited the island with a Penn group in January 2016. “They put all of their agricultural energy into sugarcane, so it is an export market for American agriculture.” Cuba’s health care sector is also one of its biggest export industries. The country also has enviable health care metrics.

Arnavat said Cuba has needs in energy, infrastructure and housing that U.S. businesses could potentially supply. But finding the financing for those projects is tough, especially as the U.S. embargo crimps Cuba’s revenue flows. That situation could change and funding might be available if Cuba became a member of the World Bank or the Inter-American Development Bank, he added.

Patino agreed with that outlook, but pointed out that before that, Cuba needs to consolidate its confusing monetary system, which has two currencies, with one of them pegged to the U.S. dollar. Cuba also needs to ensure that international rule of law is observed in business transactions to attract investments, he added. “For instance, a General Electric creating a hydroelectric plant in the Cuban province of Matanzas needs assurances that there won’t be an appropriation of their investment in the future.” In order to fully open the doors to financing, the U.S. embargo must end with the abrogation of the 1996 Helms-Burton Act that governs the U.S. embargo against Cuba, he noted.

“[The U.S. embargo on Cuba] has had little to no effect other than to prevent people from [having] a better quality of life.”–Ralph Patino

A Case for Lifting the Embargo?

According to Patino, lifting the U.S. embargo is critical for any meaningful step forward on Cuba, and the biggest task there is to find a sponsor for a bill and push it through Congress. “Most U.S. companies want to lift the embargo,” he said, adding that opinion polls have showed that 60% of people in South Florida also feel the same way. “It has had little to no effect other than to prevent people from [having] a better quality of life.”

Patino also saw national security issues in not improving ties with Cuba. “By having less engagement with Cuba, you are opening doors for [Russian president Vladimir] Putin … to reopen the submarine base in Lourdes, and you have China and its crew to basically become the bank for Cuba,” he said. The Lourdes facility near Havana was operated by Russian intelligence forces for four decades before it was shut down in 2002.

“We [in the U.S.] are the natural trading partners of Cuba,” said Patino, who described the impasse over the past six decades as “a blip in history.” He noted that a new opportunity will present itself when a new president takes over in Cuba after Raul Castro leaves office in February 2018.

According to Arnavat, in order to significantly improve, U.S.-Cuba relations need much more than the two years that have elapsed since Obama’s friendly overtures, and a lot depends also on the quality of the Cuban government’s response. “To be frank, the Cuban government was slow to respond to some of the proposals put forward by [some] very good U.S. companies,” he said.

The immediate next step is for the U.S. Treasury and Commerce departments to issue regulations that will put the new Cuba policy into effect. “The devil will be in the details,” said Arnavat. He expected much lobbying by businesses that might be impacted “to narrowly tailor those regulations in order to have the least impact.”

For now, hopes aren’t exactly bright for a stronger relationship between the two countries. Arnavat noted that after the new Cuba policy was announced, Cuba’s minister for foreign affairs, Bruno Rodríguez Parrilla, said at a press conference in Vienna that his country will not do anything under pressure from the U.S. However, Parrilla also noted Cuba’s strong interest to engage with the U.S. in a respectful fashion going forward. Back home, Arnavat foresaw coldness. Unlike the Obama administration, which avoided criticizing the Cuban regime, “the Trump administration probably will be much more impatient with the Cuban government,” he said.

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