Preserving Stability in Cuba After Normalizing Relations with the United States – The Importance of Trading with State-Owned Enterprises

Cuba under Raúl Castro has entered a new period of economic, social, and political transformation. Reforms instituted within the past few years have brought the expansion of private sector entrepreneurial activity, including lifting restrictions on the sales of residential real estate, automobiles, and electronic goods. Additional reforms included, more than a million hectares of idle land has been leased to private farmers, where citizens have been granted permission to stay in hotels previously reserved for tourists, and freedom being granted for most Cubans to travel abroad. Stating that it was time for the “gradual transfer” of “key roles to new generations,” President Raúl Castro announced that he will retire by 2018, and named as his possible successor a man who was not even born at the time of the Cuban Revolution. [1]

The twilight of the Castro era presents challenges and opportunities for U.S. policy makers. Normalization of relations is inevitable, regardless of timing, yet external and internal factors may accelerate or retard the process. The death of Venezuelan President Hugo Chávez is likely to undermine the already dysfunctional Cuban economy, if it leads to reductions in oil imports and other forms of aid. This could bring social chaos, especially among the island’s disaffected youth. Such an outcome would generate adverse consequences for U.S. national and regional security. To maintain Cuba’s social and economic stability while reforms are maturing, the United States must throw itself open to unrestricted bilateral trade with all Cuban enterprises, both private and state-owned.

The collapse of Cuba’s tottering economy could seismically impact the United States and neighboring countries. It certainly did during the Mariel Boatlift of 1980, precipitated by a downturn in the Cuban economy which led to tensions on the island. Over 125,000 Cuban refugees landed in the Miami area, including 31,000 criminals and mental patients. Today, the United States defines its national security interests regarding Cuba as follows:

• Avoid one or more mass migrations;
• Prevent Cuba from becoming another porous border that allows continuous large-scale migration to the hemisphere;
• Prevent Cuba from becoming a major source or transshipment point for the illegal drug trade;
• Avoid Cuba becoming a state with ungoverned spaces that could provide a platform for terrorists and others wishing to harm the United States. [2]

All of these national security threats are directly related to economic and social conditions within Cuba.

U.S. policy specifically supports “a market-oriented economic system” [3] toward Cuba, yet regulations prohibit the importation of any goods of Cuban origin, whether from the island’s potentially booming private sector–including 300,000 agricultural producers–or State-Owned Enterprises (“SOEs”). [4] Such a policy is counterproductive to U.S. interests. Regardless of over 400,000 entrepreneurs, including agricultural cultivators, it could be many years, if ever, when Cuba’s private sector would be ready to serve as the engine of economic growth. SOEs employ 72 percent of Cuban workers. [5] A rational commercial rapprochement towards Cuba would therefore require a change in current laws and in the system of regulations prohibiting the importation of Cuban goods and products. Normalized bilateral trade will benefit the Cuban people by helping to provide economic stability and fostering the growth of a middle class–both of which are essential for the foundation of democratic institutions. Two-way trade must include both Cuba’s private sector as well as SOEs.

Cuban SOEs are in a state of gradual transition like other parts of the economy. In December 2012, the Cuban government authorized a wide range of co-ops that will allow workers to collectively open new businesses or take over existing SOEs in construction, transportation, and other industries. Considered a pilot program that is a prime candidate for an expansion, the co-ops “will not be administratively subordinated to any state entity.” [6] Many Cuban officials, well aware of the limits to small-scale entrepreneurism, appear to harbor hope that co-ops could shift a large portion of the island’s economy to free-market competition from government-managed socialism. In other transitional states, particularly in post-socialist economies, co-ops have served as commercial bridges between state-owned and privatized business. Of the 300 largest co-ops in the world, more than half are in United States, Italy, or France. [7]

Ironically, the outputs of such co-ops, including agricultural products which could find strong demand in the American market, are barred by short-sighted federal regulations, thus hampering, if not defeating, what could be a major U.S. policy goal.

The United States has been actively trading with foreign SOEs for years. China, a one party, communist state, is the United States’s second largest trading partner, and Chinese SOE’s account for a large percentage of the nearly $400 billion USD in goods exported to America each year. Venezuela is in the top fifteen of U.S. trading partners, and the bulk of that country’s exports are petroleum products deriving from the state-owned PDVSA (which in turn owns Houston-based CITCO oil company). Another communist country, Vietnam–which initially was the subject of a U.S. economic embargo similar to that imposed on Cuba–is the second largest source of U.S. clothing imports and a major manufacturing source for footwear, furniture, and electrical machinery. [8] On these matters, the Cuban government has said that it wants to “replicate the paths of Vietnam and China.” [9]

Of relevance to Cuban trade relations, Vietnam has formally requested to be added to the U.S. Generalized System of Preferences (GSP) program as a “beneficiary developing country,” which authorizes the U.S. president to grant duty-free treatment for eligible products. The statute also provides the President with specific political and economic criteria to use, when designating eligible countries and products. “Communist” countries are not eligible for GSP membership unless the president determines that certain conditions have been met, including whether the applicant is “dominated or controlled by international communism.” Furthermore, countries that fail to recognize “internationally accepted workers’ rights” are excluded. [10]

U.S. statutes do not provide a general definition of a “communist” country, and the Obama administration is expected to declare that Vietnam is no longer “communist” in terms of its economic system. The argument will be that even if Vietnam is a “communist” country (hard to deny, considering it has one party government that is officially titled the Communist Party of Vietnam), it is “not dominated or controlled by international communism” because no such entity exists following the collapse of the Soviet Union. Similar arguments may be applied to Cuba in considering normalized relations with the United States.

At the request of the U.S. Congress, the General Accounting Office (GAO) conducted detailed reviews of the frameworks for seven key statutes that govern Cuban sanctions. [11] The resulting reports concluded that (i) the president still maintains “broad discretion” to make additional modifications to Cuban sanctions; and (ii) prior measures, implemented by the executive branch have had the effect of easing specific restrictions of the Cuba sanctions and have been consistent with statutory mandates as well as within the discretionary authority of the president. [12] Some legal scholars assert that absence of such explicit statutory provisions in other areas suggests that Congress did not intend to prohibit the executive branch from issuing general or specific licenses to authorize certain transactions with Cuba when “such licenses are deemed to be appropriate and consistent with U.S. policies.” [13]

Although a complex variety of federal statutes have re-stated the regulatory prohibition on importation of Cuban goods under 31 C.F.R. § 515.204, enabling legislation to codify the restriction, has not been passed. For example, 22 U.S.C. § 6040(a) “notes” that 31 C.F.R. § 515.204 prohibits the importation of goods from Cuba, but does not codify or expressly prohibit such activity, and 22 U.S.C. § 7028 acknowledges that Congress did not attempt to alter any prohibitions on the importation of goods from Cuba under 31 C.F.R. § 515.204. [14]

The complete dismantling of the Cuban economic embargo will undoubtedly require congressional legislation; however, the president has broad powers to modify policy towards Cuba, particularly in an emergency situation that could affect U.S. national security. [15] For example, imports of Cuban origin goods are prohibited under the Cuban Asset Control Regulations (“CACRS”) except as “specifically authorized by the Secretary of the Treasury by means of regulations, rulings, instructions, licenses or otherwise.” [16]

Such authority could allow the president to argue for the modification of 31 C.F.R. § 204’s complete prohibition on the importation of Cuban goods by stating that Cuban exports to the United States help the Cuban people by creating employment and thereby maintaining the island’s social stability. Considering the domestic political constituency and the political obduracy of U.S. Congress, a more realistic presidential rationale for allowing Cuban imports from all types of enterprises could be the protection of U.S. borders during an era of grave concerns about homeland security.

Some policy analysts suggest that bilateral trade with Cuba should be restricted to businesses and individuals engaged in certifiably independent (i.e. non-state) economic activity. [17] While well-intentioned, such a policy would likely have a negligible impact on Cuba’s economic development and fails to recognize that commercial enterprises that the U.S. government would classify as SOEs are actually co-ops or other types of quasi-independent entities that are in the early stages of privatization. Restrictions such as this also fail to address larger national and regional security concerns which are the primary responsibility of the president.

Although ultimately the Cuban people must freely choose their own political and economic systems, President Obama should be seen as having legal authority to support the transition taking place on the island by opening U.S. markets to Cuban imports. Normalized bilateral trade will benefit the Cuban people and help to provide economic and social stability that is in turn vital to U.S. national and regional security.

Such trade must include both the island’s small, yet growing, private sector and State-Owned Enterprises. In this regard, it would be both unfair and strategically unwise to treat Cuba differently from its stated models, China and Vietnam.

Dr. Timothy Ashby, Senior Research Fellow at the Council on Hemispheric Affairs.

Dr. Ashby, who recently joined COHA’s Board, served in the U.S. Commerce Department’s International Trade Administration as Director of the Office of Mexico and the Caribbean and as acting Deputy Assistant Secretary of Commerce for the Western Hemisphere.  Currently a counsel with the international law firm Dentons, he has PhD, JD and MBA degrees.

Please accept this article as a free contribution from COHA, but if re-posting, please afford authorial and institutional attribution. Exclusive rights can be negotiated.

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References

[1] “Raúl Castro Says His New 5-Year Term as Cuba’s President Will Be His Last,” New York Times, February 24, 2013, http://www.nytimes.com/2013/02/25/world/americas/raul-castro-to-step-down-as-cubas-president-in-2018.html.

[2] Gary H. Maybarduk, “The US Strategy for Transition in Cuba,” in A Changing Cuba in a Changing World edited by Mauricio A. Font (The Graduate Center, City University of New York, March, 2008), 226, http://web.gc.cuny.edu/dept/bildn/publications/documents/Maybarduk12_001.pdf.

[3] Cuban Democracy Act of 1992, 22 U.S.C. § 6007(a) (1992).

[4] 31 C.F.R. § 515.204 prohibits the importation of any Cuban origin goods, goods located in or transported from Cuba, or goods derived in whole or in part from Cuba, unless expressly authorized by the Secretary of the Treasury.

[5] CIA World Factbook, accessed February 27, 2013, https://www.cia.gov/library/publications/the-world-factbook/geos/cu.html.

[6]“Co-op Laws in Cuba Are Seen as Progress,” The New York Times, Dec. 11, 2012, accessed Feb. 27, 2013, http://www.nytimes.com/2012/12/12/world/americas/new-laws-for-cuban-co-ops-seen-as-economic-progress.html?_r=0.

[7] “Global 300 list reveals world’s largest cooperatives,” USDA Rural Development, Cooperative Programs, http://www.rurdev.usda.gov/rbs/pub/jan07/global.htm.

[8] Michael F. Martin, U.S.-Vietnam Economic and Trade Relations: Issues for the 112th Congress, (Congressional Research Service, April 5, 2011), http://fpc.state.gov/documents/organization/161323.pdf.

[9] “Easing of Restraints in Cuba Renews Debate on U.S. Embargo.” New York Times, November 19, 2012,  http://www.nytimes.com/2012/11/20/world/americas/changes-in-cuba-create-support-for-easing-embargo.html?pagewanted=all&_r=0.

[10] Ibid.

[11] Stephen F. Propst, Presidential Authority To Modify Economic Sanctions Against Cuba, (Hogan Lovells US LLP, February 15, 2001) 2, http://www.hoganlovells.com/files/Publication/57d34e80-51b8-4ee0-ae64-750f65ee7642/Preview/PublicationAttachment/55896b90-840a-42bf-8744-752a7a206333/Cuba%20Aritcle%20FINAL.pdf.

[12] United States General Accounting Office, U.S. Embargo on Cuba: Recent Regulatory Changes and Potential Presidential or Congressional Actions, GAO-09-951R (September 2009), http://www.gao.gov/products/GAO-09-951R; and Cuban Embargo: Selected Issues Relating to Travel, Exports, and Telecommunications, GAO/NSIAD-99-10 (December 1998), http://www.gao.gov/products/NSIAD-99-10.

[13] Propst, Presidential Authority, 9.

[14] Seven Steps the U.S. President Can Take to Promote Change in Cuba by Adapting the Embargo. AS/COA, February 20, 2013, http://www.as-coa.org/articles/seven-steps-us-president-can-take-promote-change-cuba-adapting-embargo.

[15] Such as H.R.214 – the Cuba Reconciliation Act, introduced on January 3, 2013.

[16] 31 C.F.R. § 515.204(a) (1996).

[17] Seven Steps the U.S. President Can Take, supra.