http://knowledge.wharton.upenn.edu/article/future-u-s-business-cuba/
Listen to the podcast: Gustavo Arnavat and John S. Kavulich discuss the recent changes to U.S. policy on trade with Cuba.
The move last week by the Trump administration to tighten restrictions on travel and trade with Cuba has created new anxieties for individuals and businesses – but it also provides some clear boundaries than can now be navigated, experts say.
Under the new policy changes, individuals will once again only be allowed to travel to Cuba as part of groups licensed by the U.S. Treasury Department as traveling for specific purposes. In addition, Americans will be barred from patronizing 180 businesses that the State Department has determined to be owned by, or that directly benefit, the Cuban military. Businesses will also be restricted from engaging with the 180 entities on the State Department list. The new regulations will not impact some travelers and businesses that had already begun transactions with Cuba – for example, individuals who have already purchased airline tickets or firms that signed contracts prior to the announcements.
Officials say the move is designed to steer investment away from the Cuban military and intelligence and encourage the communist government to further open the island’s economy. It follows restrictions announced in June that rolled back tourist travel and investments in more than half of Cuban industry, but retained many smaller features like permitting family-related travel and professional/academic visits to the country.
The latest actions by the Trump administration create further anxiety for anyone in the U.S. who is interested in relations with Cuba, but the visible impact won’t become clear until the U.S. government fleshes out the new policy.
“The Trump administration’s regulations [on Cuba] were designed to create anxiety and discourage travelers from traveling and businesses from engaging in business,” said John S. Kavulich, president of the U.S.-Cuba Trade and Economic Council, Inc., a not-for-profit that provides liaison services for businesses and the governments in both countries. “And they were successful.”
According to Gustavo Arnavat, a senior adviser at the Center for Strategic and International Studies, a Washington, D.C.-based think tank, the latest Cuba policy appears to permit American companies and individuals to do business with Cuban government-controlled entities, as opposed to those run by its military or its intelligence or security services. Arnavat also represented the U.S. on the board of the Inter-American Development Bank under the Obama administration.
“I think a message is being sent to the Cubans that perhaps the U.S. would be more amenable to trading with them if they would restructure their ownership stakes in companies in order to allow for the military to own fewer of these,” said Arnavat. “I’m not sure that the Cuban government is interested in doing that, but at least that possibility is open.”
Kavulich and Arnavat discussed the implications of the U.S. government’s latest Cuba policy on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
“The [new] regulations were designed to create anxiety and discourage travelers from traveling, businesses from engaging in business.”–John Kavulich
The 180 entities with whom business dealings are banned include 83 hotels, a shopping mall, a couple of rum brands and a cola brand called TropiCola, which Kavulich described as Cuba’s version of Coca-Cola. “What we’re uncertain about is [whether the new policies] mean that U.S. companies can’t deal with these companies, or do they mean a visitor in Cuba can’t buy a TropiCola or these particular rum products?” said Kavulich.
However, Arnavat said the new policy actually lessens the uncertainty on the U.S. approach to Cuba. “We know in terms of regulations what the limits are,” he said. “Any regulation has to be fleshed out, but we at least have a basic understanding of the contours [of the new policy].” He noted that Obama was “very much focused on engagement” with Cuba, while Trump is not. “But at least people now know where Trump stands; whereas before his June 2017 speech [in Miami], they definitely did not know which way he was going.”
According to Kavulich, “the vast majority of economic activity remains under the authority of the Cuban government.” Experts say GAESA, the Cuban military’s business conglomerate, controls almost 60% of the Cuban economy. GAESA’s holdings include the Gaviota hotel chain and TRD, the military retail chain.
While the new policy limits what businesses and individuals could do with respect to Cuba, the reality is that not much will change for many U.S. companies already doing business there. “The Trump administration has grandfathered many U.S. companies that are already engaged with Cuban military entities, specifically airlines, cruise lines and hotels like Marriott, for example,” said Kavulich. “So, it’s not that tremendously impactful. It has a political optic. It creates anxiety, but is any U.S. company being required to stop doing what they were doing? The answer is no.”
Arnavat, while not wanting to be overly optimistic, added that “the new normal” in the U.S. policy on Cuba is “quite positive” in that it retains many features adopted by the Obama administration, which announced that it would re-open diplomatic relations with Cuba in December 2014.
However, the likely impact of the restrictions on individual travel to Cuba is clearer. The new regulations revert to requiring group travel instead of individual “people-to-people” trips. Kavulich said that move would hurt the airlines because they have seen a surge in individuals traveling from the U.S. to Cuba in the past two years. By contrast, the cruise lines will benefit from the new policy because they are better suited for group travel.
“The Cubans could have been much more creative, could have been much faster, and could have been much more giving in entering into agreements with the United States.”–Gustavo Arnavat
Arnavat noted that tourism per se within Cuba by U.S. persons has always been prohibited either under embargo-related regulations or specifically under a law passed by the U.S. Congress in 2000. What the latest policy change does is to eliminate the category of people-to-people travel on an individual basis because the Trump administration felt that was “the most abused.” Some Americans, for example, might say that they are visiting Cuba to meet with Cubans to comply with the official requirement for that category of travel, “but instead they would just simply go to the beach, and hang out.”
Missed Opportunities
According to Kavulich, the new Cuba policy could have been pre-empted. “It’s important to focus on culpability,” he said. “One of the only reasons that President Trump was able to do what he is doing is because of what the Obama administration and the Castro administration didn’t do during the period from December 17, 2014, when Obama first moved to rebuild U.S. ties with Cuba, through January 20, 2017, when Trump assumed office as president.”
The Obama administration could have allowed more regulatory changes, specifically permitting direct correspondent banking, and allowed more than charcoal and coffee to be imported, Kavulich explained. On its part, the Cuban government could have done more to allow the Obama administration initiatives to take their course, “which basically they didn’t.”
Arnavat agreed with Kavulich that “the Cubans could have been much more creative, could have been much faster, and could have been much more giving in entering into agreements with the United States.” However, he noted that the Trump administration has not reversed all of the Obama administration’s initiatives — and that should bring some relief to U.S. companies that had feared much worse.
Kavulich pointed out that 52 U.S. companies have a presence in Cuba, including John Deere, which signed a deal to export farm tractors; Caterpillar, whose Puerto Rico-based distributor is setting up a warehouse and distribution center in Cuba’s Mariel Special Economic Development Zone, and General Electric, which is reportedly interested in setting up a hydroelectric power plant in Cuba’s Matanzas province. However, those companies do not have offices in Cuba, he added. “If the Cuban government had allowed U.S. companies to sell products directly to the self-employed, you would have had such a root system that the Trump administration would have found it difficult to move against it.”
Kavulich noted that those 52 companies have total global revenues of $1 trillion annually. “These are not small players. Yet, most of them, if they are doing anything in Cuba, will not issue a media release. They don’t want to talk about it. And that’s tragic.”
For those 52 companies and others looking to do business outside the United States, including in Cuba, “there’s always political uncertainty,” said Arnavat. That is in addition to the “political risk in the U.S., and that is the change in administration” from Obama to Trump.
“These are not small players. Yet, most of them, if they are doing anything in Cuba, will not issue a media release. They don’t want to talk about it. And that’s tragic.”–John Kavulich
Disenchantment in Cuba
People in Cuba are not happy with the latest policy, said Kavulich. “There’s frustration in that many of those who are either self-employed or are in cooperatives that dealt with U.S. companies feel as though they’re hostages to a greater political good,” he added. “And they don’t see how it helps them.”
Cubans have had anxiety-ridden days of late, Kavulich noted. Looming above all else is the uncertainty around the stepping-down of Raul Castro as president in February, and the likely ascension to that post of first vice president Miguel Díaz-Canel. They also feared retaliation from the U.S. after nearly two dozen U.S. diplomats in Cuba suddenly faced “health issues” such as hearing loss and cognitive difficulties. The Trump administration withdrew nonessential staff from Cuba, but that issue cast dark shadows on U.S.-Cuba ties. Kavulich also pointed to Cuba’s issues with Venezuela not being able to provide the support it once did due to that nation’s own economic struggles, low commodity prices, and high import prices, and also the weather — Hurricane Irma made landfall in Cuba in September. “They’ve gotten pretty much hammered,” he added.
A new regime in Cuba could present new opportunities for U.S. businesses, aided by a change of heart in the White House, some analysts say. However, a new president in Cuba, even if it is Miguel Díaz-Canel, will likely not move to change the country’s relationship with the U.S., Kavulich predicted. “Don’t get your hopes up. The revolution continues,” he said. Arnavat agreed. “Whoever takes over is going to be spending time underscoring his or her revolutionary bona fides. There’s no question about that.”
