The New U.S.-Cuba Relationship: A Pause to Consider How Cuba Might View the Changes
Kegler Brown Global Business News January 21, 2015
During the past few weeks much has been written in regard to the changes made by the U.S. in its Cuba policy. The changes in policy announced by the President on December 17, 2014 and recently reflected in the amended regulations issued by The Office of Foreign Assets Control (OFAC) and the Department of Commerce's Bureau of Industry and Security (BIS) have raised expectations of greatly improved bilateral relations and increased trade with Cuba. Undoubtedly these changes in U.S. policy are important and welcomed by Cuba and everyone who wants normal diplomatic and commercial relations between the U.S. and Cuba. Nevertheless, now may be a good time to review and reflect on some of the complex issues for bilateral trade and better relations raised by these changes in U.S. policy.
In analyzing the changes in U.S. policy and its possible impact on U.S. - Cuba relations and commerce we must remember that in any cross-border transaction U.S. policy represents only half the equation. As a sovereign nation Cuba controls the entry of people, goods and services into its territory. To Americans the policy changes announced by the President may seem like a new course and an attempt to build a new relationship. However, Cuba may not see U.S. policy quite the same way. In fact, reading the early commentaries in the Cuban press it is clear that some commentators in Cuba view the change in U.S. policy as one of tactics but not a change in the goal to bring about regime change. We can refer to the language in the amended BIS rule to see how Cuban commentators might come to that conclusion:
"This rule amends the Export Administration Regulations to create License Exception Support for the Cuban People (SCP) to authorize the export and reexport of certain items to Cuba that are intended to improve the living conditions of the Cuban people; support independent economic activity and strengthen civil society in Cuba; and improve the free flow of information to, from and among the Cuban people… These actions are among those announced by the President on December 17, 2014, aimed at supporting the ability of the Cuban people to gain greater control over their own lives and determine their country's future"
Regardless of one's view on the matter, it is clear that the above text presupposes that the Cuban people have no control over their lives and cannot determine their future. The White House fact sheet issued in conjunction with the President's announcement made clear that the old policy of isolation had failed to accomplish U.S. objectives for changes in Cuba and a new policy was needed: "We cannot keep doing the same thing and expect a different result."
Hence, the White House fact sheet stated:
"Today, the President announced additional measures to end our outdated approach, and to promote more effectively change in Cuba that is consistent with U.S. support for the Cuban people and in line with U.S. national security interests."
It is important to keep in mind that Cuba has a very different economic and legal model than the U.S. As both nations seek to increase their bilateral interactions it is worth remembering that the process is not necessarily made easier if one party enters the negotiations with the stated purpose of changing and undermining the other party's political, economic and legal system.
As we look closer at the changes in U.S. policy it is evident that some policies will be easier for the Cubans to accept and work with than others. The expanded general licenses to travel to Cuba, and the ability to use credit and debit cards will make it much easier for Americans to qualify under U.S. law to travel to Cuba. Generally, Cuba welcomes American travel to Cuba. However, Americans need to keep in mind that they will still need to obtain visas from Cuba to travel to Cuba. The Cuban visas required may be tourist visas or business visas depending on the reasons for visiting Cuba. The time frame to obtain a Cuban visa will vary depending on the type of visa requested and the purpose for the visit.
The new U.S. policy of allowing exports of construction and building materials, equipment and tools to the private sector is an example of a more complicated matter. Undoubtedly Cuba welcomes the relaxation in export barriers but this U.S. export relaxation is aimed at a very small segment of the Cuban economy. At a time when 85 percent of the Cuban economy is in the hands of the state and Cuba seeks foreign investments in energy, transportation, biomedical fields and infrastructure, the U.S. is going to allow exports directed at small restaurants, barbershops and beauty salons.
These small private businesses will have little impact on the overall economy. Favoring this small sector of the economy at the expense of the rest of the Cuban economy may be perceived in Cuba as raising the risk of economic and social distortions when most Cubans remain employed by the state.
Undoubtedly this appears to be an aim of the U.S. policy. Given that the U.S. continues to prohibit free trade with Cuba it will be interesting to see how Cuba responds. Moreover, it is not clear how exports directed solely at small private entrepreneurs would legally enter Cuba. In Cuba, authorized state owned companies import goods into Cuba. Imports designated by the U.S. for small Cuban entrepreneurs will need to be authorized by Cuba.
The new regulations do provide openings for American businesses that could be of interest to the Cuban state sector. Agricultural, telecommunications and other sales to the Cuban state sector should be eased somewhat by the new definition of "cash in advance," which now permits cash payment "before transfer of title to, and control of, the exported item to the Cuban purchaser."
Likewise, permitting financing of the Cuban purchase by a banking institution located in a third country and allowing U.S. banks to confirm or advise on the financing should open up financing options. In the past, the strict U.S. payment rules requiring cash payment before the U.S. goods arrived at Cuban ports have made it very difficult for Cuba to purchase from the U.S. even when U.S. products were otherwise a better deal. We shall see how Cuba reacts to these new payment options and whether it will lead to an increase in U.S. exports in these categories to Cuba.
Another new opportunity for U.S. businesses may be in the environmental and energy fields. Cuba generates 97 percent of its electrical energy by burning fossil fuels. Cuba has a stated goal of generating 24 percent of its power needs from renewable energy by 2030. Newly amended § 15 CFR 746.2 (6) provides the following with respect to exports to Cuba:
"Application for exports or reexports of items necessary for the environmental protection of the U.S. and international air quality, waters, or coastlines (including related to renewable energy or energy efficiency) will generally be approved."
As set forth in the CFR, "this rule amends the licensing policy for Cuba . . . to add a general policy of approval for exports and reexports of items necessary for the environmental protection of the U.S. and international air quality, waters, and coastlines (including items related to renewable energy or energy efficiency) . . . this revision notifies the public of the U.S. interest in considering applications for such authorizations." See Federal Register Vol. 80, No. 11, January 16, 2015, pg. 2288.
The new U.S. policy towards Cuba certainly has much merit. At the very least the new policy grants Americans greater freedom to travel, and the U.S. and Cuba are engaged in talks to re-establish diplomatic relations. Whether the new regulations lead to any significant increase in commerce depends greatly on Cuba and further U.S. efforts to fully normalize relations with Cuba.