The Potential Economic Consequences of Free Trade with Cuba

Joel Anderson |

cuba, united states, obama, normalize relations, trade with cubaPresident Barrack Obama will be taking the “damn the torpedos” approach to his final two years in office, which may be fitting after the Republicans appeared to be committed to the “torpedo this damn administration” approach for his first six years.

In his most recent move, Barrack Obama declared Wednesday that he was planning to normalize relations with Cuba, a long overdue move that may bring to a close an absurd, ineffective relic of the Cold War: the American trade embargo on Cuba. This was precisely the sort of move that only a second-term President could make, given that Obama no longer needs to worry about winning a general election in Florida barring a really, really bizarre post-Presidency career move.

However, with this change brings new questions about what a normalization of trade relations with Cuba might really mean. This is not to say we’re there yet, the current lifting of regulations remains limited. But this could be the early steps of Cuban goods starting to flow to the United States and vice versa. So, what do we need to know about the Cuban economy?

Sugar

Sugar was long the most prominent industry in Cuba. In fact, one of the only reasons Cuba wasn’t actually annexed as a U.S. state at some point after the Spanish-American War was because western sugar beet farmers weren’t keen on the competition. The island was once the world’s largest sugar exporter and, until the 1960s and the embargo, was responsible for a third of the sugar imported by the United States.

Times have changed and the United States is now the world’s largest sugar producer, growing both cane and beets. Cuban sugar, meanwhile, took a huge blow when struck by the twin blows of a lengthy collapse of sugar prices from 1990 to 1993 and the collapse of the Soviet Union, who had been a key economic partner and had price guarantees on its sugar imports. The result was Cuba’s GDP crashing by more than a third and a lengthy recovery now known as the Special Period.

Today, Cuba’s no longer as dependent on sugar, but it’s still a major export. Production has fallen from 8 million metric tons to 3.2 million metric tons for the 2015 period, a significant portion of which is exported to China. How might this affect the $1.5 billion (ish) American sugar industry? Only time will tell, but the Cuban sugar industry appears to be small enough that it won’t create a major ripple. Cuban sugar has been exported globally for years despite the embargo. The ability to sell to buyers closer to home will likely create some changes, but it’s hard to see the global sugar trade being altered significantly. Particularly when you consider that Brazil produces about five times the American output.

Citrus

The largest agricultural product in Cuba is now citrus fruit. Grapefruit account for only 36% of the citrus with oranges accounting for 60%. Again, while opening up trade will likely have some effect, Cuba’s dwarfed in western hemisphere citrus production, let alone worldwide. The United States produces nearly 10 times the grapefruit that Cuba does, and both the U.S. and Brazil produce a lot more oranges.

Once again, it’s hard to see Cuba being able to export directly to the United States causing all that much upheaval in the market for oranges or grapefruit as Cuba’s a much smaller player than Brazil or the U.S. and it’s already been exporting to pretty much everywhere else for years.

Tourism

Tourism in Cuba is likely only familiar to a large swath of the American public due to The Godfather: Part II, but it’s actually the nation’s largest industry. Tourism passed sugar as the country’s key lifeline in the mid-1990s during the Special Period.

Today, tourism brings about 3 million visitors a year and pulls in over $3 billion per annum, good for almost 5% of total GDP. Here is one area where a complete lifting of the existing bans could mean a major, major shift. The proximity of Cuba to the United States meant that there was a thriving hotel/resort industry prior to the revolution.

Now? Cuba’s economy could be looking at a much needed bump that could bring a new influx of cash into a country currently ranked 118 out of the world’s 195 nations in per-person purchasing power.

Fun Stuff

Okay, lets talk turkey. Cigars and rum. Sorry about talking your ear off about sugar and grapefruit for that first section, there. Had to make this look legit.

Cuban cigars have long been acknowledged to be the highest-quality product available. Or, at least, available for people living anywhere but the United States. Embargo or not, the United States has remained the largest consumers of Cuban cigars and that’s something that should only be bolstered if/when it becomes legal to import these puppies in large quantities. The cigar market is relatively modest when compared to sugar or citrus, but it’s one that Cuban tobacco growers can expect to dominate in the United States once the shackles come off.

Similarly, rum drinkers are no-doubt giddy about the prospects of the embargo being lifted. Regardless of the volume produced, Cuban rum is coveted by rum drinkers for its unique flavor and could provide a lot of new variety to people’s fancy cocktails.

American Agricultural/Manufactured Goods

While American farmers shouldn’t exactly be sweating it out in terms of the new competition open trade relations might create, the opportunities for expanding their business abound. Cuba imports a lot of food, and the United States produces a lot of food. Products like corn and flower could potentially start flowing into the island nation.

“Over time, if relations normalize and Cuba rejoins the global trading system, there are enormous opportunities for U.S. companies,” writes Kevin G. Hall of McClatchyDC.

Baseball

Cuba has long held a passion for baseball and fielded a strong national team, but the travel restrictions have limited the number of Cuban players who actually made it to Major League Baseball. Last year, Cuban-born Dodgers outfielder Yasiel Puig finished second in the NL Rookie of the Year voting to Cuban-born Marlins pitcher Jose Fernandez. This year, it was Cuban-born White Sox first baseman Jose Abreu taking home the AL Rookie of the Year honors.

Of course, those players all took big risks in getting to the United States against the will of their government. Should the lifting of the embargo result in a free flow of talent between the two countries, a number of major baseball talents could make their way into the Major League ranks within a few years.

This is arguably not a major issue from an economics perspective, but it’s the one I’m most interested in, so there you go.

Caribbean Nations

Maybe the big losers in this change of events are other Caribbean nations. With similar economies and similar exports, nations like the Dominican Republic and Jamaica are suddenly looking at a playing field with a massive new competitor for American dollars, both in agricultural exports and for tourism. Cuba is the largest Caribbean nation, with a population of 11 million and a surface area well above any other islands in the region.

Conclusion

On the whole, there doesn’t appear to be any reason, at this moment, to believe that normalizing trade relations with Cuba is going to have a drastic impact on the American economy. A little more domestic competition for some sugar and citrus producers, but hardly on a scale that will seriously alter the current state of affairs.

For Cuba, however, the influx of money that could come from new markets for its products and a big uptick in tourism could mean a dramatic improvement in the quality of life for the Cuban people. At the very least, it would close one lengthy chapter of Cold War history that has long been an embarrassment to American foreign policy.

This is, however, all still speculative. Today’s rollbacks fell far short of a wide-spread opening of trade relations and there’s no guarantee that those are going to be an eventuality. That said, I’m already looking forward to holding my first annual Rum and Cigars Party if and when the embargo is finally lifted.

 

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