President Barack Obama’s re-establishment of diplomatic relations with Cuba is a breath of good sense in an otherwise dismal phase in U.S. foreign policy. It will enhance U.S. standing, at least marginally, with many countries in this hemisphere, and in Europe, Africa and Asia. For many, such as Canada, France, Germany and Brazil, it will be as if an old friend finally came around after years of holding an unreasonable grudge.
It won’t mean much, however, to U.S.-Cuba diplomatic, cultural or economic interactions if Congress does not go along and eliminate the U.S. embargo on trade and financial commerce with Cuba, which has been more of a self-defeating “own goal” for the U.S. than have the broken diplomatic ties.
This embargo has been a political lifeline extended to Fidel Castro and his regime for 53 years. It gave the Cuban regime an alibi for its failures and allowed it to gain status in the region as a nation that was heroically defying a bullying Uncle Sam. Discarding the embargo is good for us.
From an economic point of view, however, the agreed-on resumption of diplomatic ties, coupled with any eventual end to the trade embargo, is of trivial importance to the U.S. economy and of much less importance to Cuba than many assume.
It is a reminder that in evaluating economic policies or events, one must assess the direction of any effects. Ending the trade embargo will increase U.S. exports to Cuba and imports from there. Investment in Cuba will increase.
However, one must assess the magnitude of such results. It is in this aspect that the economic importance of the embargo and of ending it is overblown and always has been.
Let’s start with the point of view of the United States. We are a country of some 315 million people. Cuba’s population is about 11 million. U.S. output of goods and services is nearly 240 times as great as Cuba’s at prevailing exchange rates.
Even after making a generous adjustment for “purchasing power parity,” to reflect the fact that such exchange rates are imperfect in comparing the actual domestic buying power of a currency, the U.S. economy is 80 times as large.
So allowing imports of Cuban sugar or nickel or bananas or oranges or anything else is going to be small compared to overall U.S. demand for any such product. And if Cuba starts to import soybean meal or pacemakers or airplanes from our country rather than from elsewhere, this additional demand for our products will be small relative to what already was being produced or sold abroad.
Moreover, despite 53 years of the Cuban government’s squawking that it was the victim of a U.S. “blockade,” which is quite different from an “embargo,” Cuba already is quite integrated into the global economy, at least potentially.
Despite the embargo, many other countries are entirely ready to buy Cuban sugar, nickel, etc., at prevailing world prices. Cuba’s problem is that its productive sector is so inefficient that it cannot make money at global market prices. Hence Cuba has had historic dependence on sweetheart deals from Russia in purchasing its exports, or from Venezuela in supplying petroleum for Cuba to import.
Yes, early on, Cuba’s historic close, and very subordinate, business ties with our country meant that a sudden severing of such relations imposed real costs on Cuba until it could adjust. And yes, there also were periods in which our country was especially aggressive in trying to deter other countries and their companies from doing business in or with Cuba.
This was particularly true during the Reagan administration, when we went to great lengths to punish multinational corporations that had ties to Cuba and also operated in or traded with the United States.
But such clout has faded dramatically over the years. Canada, France, Spain and many other countries have trade and investment links with the island.
After its return to civilian rule in 1985, Brazil was quick to reestablish diplomatic relations and establish trade with Cuba. Brazil is large and has corporations that are world-class in agricultural production and processing, heavy construction and mining and other sectors. There is no important sector of Cuban production that would lack a Brazilian firm as a stiff competitor for any Johnny-come-lately company from the United States.
Yes, the total output of Brazilian and Canadian and Spanish and other international corporations in Cuba remains small. But again, this is the fault of a Cuban economic system that is a failure in terms of production, regardless of its concrete achievements in education and health. It is affected only to a piffling degree by U.S. policy.
U.S. agricultural industry associations have called for open U.S.-Cuba trade for a couple of decades. These groups’ clout in Washington has created farm export loopholes in the embargo. But wheat, soybeans, corn, beef, pork and dairy products already trade in remarkably efficient global markets.
If Cubans buy less of any such product from Brazil or Argentina or Canada and more from our country, there may be some slight advantage to Cuban consumers and U.S. producers because shipping costs will be less. But this will involve small amounts, at the margin. There will not be a sudden cornucopia for Cubans or a bonanza of extra sales for our producers.
The key question is: What will make the Cuban economy grow faster? This depends mostly on domestic Cuban economic policies.
China did not suddenly start to grow faster in 1978 because other countries allowed more trade and investment flows. It grew because, under the leadership of Deng Xiaoping, it discarded much, though certainly not all, of its central planning. It allowed private property and market forces to assume major roles.
The Cuban people are resourceful and hard-working. If given the market incentives and rights to property that, over the past 60 years, propelled South Korea, Taiwan, Thailand, China and other Asian nations to greater prosperity, Cubans easily could make their enervated economy grow at 7 percent or more a year.
With higher incomes, Cuba would buy more of everything, whether produced on the island, in the United States or anywhere else. With higher productivity, Cuba would have more to sell, either to Cubans themselves or as exports. That certainly would benefit Cuba, but would stem from domestic policy changes and not from U.S. policy reversals.
Is the Cuban regime more likely to restructure if ties are established? Marco Rubio, Ted Cruz, most other Republicans and older Cuban-Americans argue no.
I think yes, but again — politically as well as economically — our nation’s influence is much less than our U.S. centrism commonly leads us to imagine. Cuba will change and more exposure to our nation’s people, goods and services will foster that at the margins.
But we have no control and precious little influence over the pace of such change or exactly how it unrolls.