The Economics of Normalization with Cuba: Kiss the Embargo Goodbye?

December 30, 2014

On February 24, 2013, Raul Castro appointed 52 year-old Miguel Diaz Canel as his first Vice President. This was the first time someone not from the revolutionary generation was appointed to that post. In addition, Raul declared that he would step down at the end of his current term in 2018. As such, Diaz Canel is the odds-on favorite to succeed Castro in 2018, making him the first non-Castro to lead Cuba since Batista fled the country in 1959. Both changes would be monumental, and given the recent rapprochement between the U.S. and Cuba, seem inevitable. Raul Castro understands this and is seeking to develop the next generation of Cuban leaders.  Although younger people have been appointed to positions of power, each has ultimately been demoted.

The Castros understand that change is coming. By opening relations with the United States and allowing a modicum of trade and investment, they hope to save their regime. This provides an opportunity for the U.S., even as the Cubans seek to manage their political and economic interactions with the United States.

The United States can retain position to influence events only by staying engaged. As one of my colleagues from the State Department said, “If we want to have a presence in Cuba that can take advantage of a potential Cuban Spring once the Castros are gone, then we have to quietly begin laying the groundwork while they are still alive.”

But what about the economic dimension? Our Cold War policy towards Cuba, which has bled into the 21st century, has always been about using economic tools of power – most prominently an embargo – to achieve a political goal: the end of the Castro regime.

The longstanding policy of embargo and isolation, although appropriate during the Cold War when Cuba exported revolution, has not worked to effect change and advance U.S. interests since the end of the Cold War. The worst case if we change our policy would be to create more of the same – i.e. no political or economic change within Cuba. The best case is positive change for American interests in the region. If we don’t change our approach, we cannot position ourselves to influence events towards a positive change.

The “normalization” of relations announced by President Obama raises many questions about the embargo. The fact sheet released by the White House on the subject notes a variety of changes that President Obama had agreed upon. These are changes that President Obama feels he has the legal authority and political capital to make, but he cannot lift or alter the embargo unilaterally. Due to the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, also known as the Helms-Burton Act, Congress has to approve any changes to the embargo. This is guaranteed to be a contentious issue on the road to full normalization of relations between the two countries. The law provides very clear guidance on what reforms the Cuban government must make prior to Congress approving the lifting of the embargo.

As I wrote in 2009, there are four reasons to “kiss the embargo goodbye.” First is the cost to the Cuban people, who have suffered under the embargo more than the Cuban elite. Second, the embargo has historically been the strongest excuse that the Castro regime has to maintain its tyranny. Third, the United States should show the world it is willing to try a new approach to motivate the Cubans to move toward democracy. The last reason is to open up the Cuban market to the United States for the mutual benefit of both countries. I believe those reasons remain valid and will manifest if and when Congress decides to lift the embargo.

Efforts to eliminate the embargo have some promise, but there are many political and economic hurdles in the way. Looming largest of the economic issues is the question of compensation for individuals and families who left property behind in Cuba. The U.S. Department of Justice has been working on claims against the Cuban government for decades. According to the Cuban Claims Owners Association, the Department of Justice has identified three types of claims:

  • Claims of U.S. citizens and corporations certified by the U.S. Justice Department’s Foreign Claims Settlement Commission (FCSC).
  • Claims of U.S. citizens, educational institutions and not-for-profit organizations which were not certified by the FCSC.
  • Legitimate claims of persons who were Cuban nationals at the time of expropriation.

The Department of Justice has identified 8,821 claims and has awarded 5,913 of them. These awards total over $1.9 billion, although the Cuban government has not paid on any of them. While this is the official number that the U.S. government recognizes, Breitbart notes that there are over $7 billion in outstanding claims. With a GDP that the World Bank estimates is $71 billion, the Cuban government will not be able to afford to pay 10% of its GDP to claimants. At the same time, the United States cannot be seen to abandon the outstanding claims of its citizens. This problem will be a significant block for both sides to developing a normal relationship.

Policymakers and U.S. business leaders should also take a hard look future of U.S. investment in Cuba and the role of the Cuban government (especially the military) in its national economy. The government of Cuba has very strict regulations for investment in Cuban properties. These limitations will prove to be an issue when U.S. companies seek to invest in Cuban companies. The Cuban military controls significant sectors of the Cuban economy, including the tourism and transportation sectors. The United States would prefer to see the Cuban military leave the economy; however, a large amount of the Cuban military budget derives from its control over sectors of the economy. Without a replacement for this revenue, the Fuerzas Armadas Revolucionarias (FAR), Cuba’s military, will not want to divest itself of these investments.

Interestingly, no one is yet discussing – in public at least – the inevitable elimination of the U.S. immigration policy that provides Cubans with automatic “green card” status once they arrive in the United States. The Cuban Adjustment Act of 1966 provides for this, while the most current policy dates from the Clinton administration and is called “wet-foot/dry-foot,” whereby people found at sea are returned to Cuba, but those who make it onto U.S. soil are allowed to stay and are allowed expedited application for a green card. Once relations between Cuba and the U.S. are totally normalized, there will be no reason to maintain this policy, which was meant to provide safe harbor for people fleeing the Castro regime. This change is likely to become a point of contention for the Miami Cubans who regard this as a right that they were able to use to tremendous advantage. Their efforts to maintain this advantage on behalf of their countrymen will make already-contentious negotiations even more difficult.

Raul Castro understands that change is inevitable, particularly in the economic realm. When this change occurs, the United States needs to be in a position to positively influence the process. The Obama Administration’s opening has provided the United States with an opportunity to effect that change. The sad state of the Cuban economy and the inability of Cuba’s friends (such as Venezuela and Russia) to continue to support Cuba have combined and may be the overarching reason that Cuba has acceded to normalization. The strength of the U.S. economy, therefore, is the biggest advantage that the United States has vis-à-vis Cuba. Wisely utilized economic tools, such as investment and trade preferences, will be the strongest influence on the Cuban population, so the United States should very carefully consider what, how, and when to deploy these tools. Putting money in the pockets of the Cuban people would be a huge blow to the Communist state and, as we have seen in many former communist countries in Eastern Europe, stands a chance to reform Cuba from the inside out.

 

Dr. G. Alexander Crowther is a Senior Research Fellow at the Institute for National Strategic Studies at the National Defense University. He is a retired U.S. Army Colonel who has spent 15 years living in Latin America and another 10 years working Western Hemisphere issues. The views expressed here are his personal opinions and do not reflect the policies of Institute for National Strategic Studies, the National Defense University, or the Department of Defense.

 

Photo credit: Dirk Ingo Franke