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American Business Interests & Entrepreneurial Activity in Cuba: Past, Present, and Future

October 19, 2015

“We are taking steps to increase travel, commerce, and the flow of information to and from Cuba. This is fundamentally about freedom and openness, and also expresses my belief in the power of people-to-people engagement…I believe that American businesses should not be put at a disadvantage, and that increased commerce is good for Americans and for Cubans.”[1]
- President Barack Obama, December 17, 2014

By Louis M. Davis (C’17)

Although there have been some efforts under previous administrations to facilitate trade with Cuba within the bounds of the embargo,[2] President Obama has made U.S.-Cuba normalization one of his key foreign policy objectives in the Western Hemisphere. Since the President’s historic announcement on December 17, 2014, there has been a renewed interest by American entrepreneurs to explore the business potential associated with the détente of U.S.-Cuba relations, especially within the telecommunication, tourism, financial, pharmaceutical, and biotechnology industries. Despite our promising pre-Cold War commercial presence on the island and the Obama administration’s recent efforts, there are several hurdles that must be overcome for long-term success in the Cuban market.

El Capitolio Nacional in Havana, Cuba

 El Capitolio Nacional in Havana, Cuba (Photo taken by Louis Davis)

The “Golden Age” of U.S. Business in Cuba – 1902 to 1959

Prior to the overthrow of the U.S.-backed Batista dictatorship on New Years’ Eve of 1959, American businesses enjoyed a period of great prosperity on the island of Cuba. The total net value of American businesses in Cuba was “greater than in any other Latin American country except Venezuela,”[3] with a total of $956 million and $143 per capita in U.S. direct investment in 1959 alone.[4] U.S. businesses, including Coca-Cola Co., Exxon Corp., and the United Fruit Sugar Co.[5] to name just a few, collectively owned “ninety percent of Cuban mines, eighty percent of its public utilities, fifty percent of its railways, forty percent of its sugar production, and twenty-five percent of its bank deposits,”[6] totaling a property value of at least $1.8 billion.[7][8] With its booming casino industry, vibrant nightclubs, beautiful hotels, and white-sand beaches, Cuba was viewed as a Caribbean playground for American tourists.

Once Fidel Castro gained governmental control, the regime abruptly seized properties owned by American firms, nationalized the Cuban economy, and turned towards the Soviet Union as its key economic partner. The Communist government started to use the capitalistic interests of American businessmen on the island as a scapegoat for the country’s economic problems. In turn, the U.S. government enacted a series of legislation beginning in the early sixties to establish an embargo that effectively cut Cuba off from the rest of the world for over half a century. The opportunity for American entrepreneurial activity in Cuba, once taken for granted by U.S. businesses, suddenly came to a screeching halt.

Thawing of a Cold War Mindset Under the Obama Administration

President Obama is doing everything within his executive power to ease the economic restrictions established under previously enacted legislation. For example, his administration has worked with the Department of Treasury and the Department of Commerce to facilitate the travel of Americans to the island as long as they are granted a general license under one of twelve existing categories,[9] permit American travelers use U.S. credit and debit cards issued by U.S. financial institutions, allow the export of certain commercial telecommunication devices, and enable U.S. banks to open accounts at Cuban financial institutions.[10] Furthermore, on May 29, 2015, the State Department removed Cuba’s designation as a State Sponsor of Terrorism. This move will potentially lower interest rates,[11] eliminate barriers for the Cuban government to apply for IMF and World Bank membership,[12] and remove some of the reputational costs associated with doing American business under the shadow of a Communist regime.[13]

¿Adiós al Bloqueo Cubano? Not So Fast!

Although the President has made an unprecedented commitment to facilitate free trade with Cuba, Congress has the ultimate constitutional authority over the embargo. Laws such as the Foreign Assistance Act of 1961, the Trading with the Enemy Act, Cuban Democracy Act of 1992, the Cuban Liberty and Democratic Solidary Act of 1996, and the Trade Sanctions Reform and Export Enhancement Act of 2000 would need to be repealed or amended in order for American enterprise to have no legal barriers to advancing their commercial agendas on the island.[14] There are several pieces of pending legislation that would do so if enacted, including most recently H.R. 3238, the Cuba Trade Act of 2015, which was introduced by Representative Tom Emmer (R-MN) on July 28, 2015.[15] With a GOP majority in both chambers, it is unlikely that such legislation will pass during this session of Congress, especially with vocal opposition from Cuban-American Members such as Marco Rubio (R-FL) and Bob Menendez (D-NJ) in the Senate and Representatives Ileana Ros-Lehtinen (R-FL) and Mario Díaz-Balart (R-FL) in the House.

Even if the embargo was to be lifted, there are additional challenges that exist for Americans looking to expand their business ventures on the island. Cuba has two currencies, the Cuban convertible peso (CUC) and the Cuban peso (CUP). Although the Cuban government announced last year that it would work towards ending the dual currency, it is currently still in effect and “complicates transactions, bifurcates the economy, and makes market pricing tougher.”[16]According to the U.S.-Cuba Trade and Economic Council, the Cuban government controls over eighty-five percent of the total economy,[17] including manufacturing facilities, distribution centers, large-scale projects, and hiring decisions.[18] These factors, coupled with the limited purchasing power of the majority of Cuban consumers, should be considered by any American enterprise contemplating overseas expansion in the Caribbean.

Despite Barriers, Optimism Exists for Future American Business Growth

As underscored by a Knowledge@Wharton finance blogger, “companies that take a longer-term view and invest with realistic expectations, Cuba offers a potential windfall as one of the last untapped emerging markets in the world.”[19] With a strong sense of entrepreneurial spirit, access to sufficient initial capital investment, and an eagerness to engage in an arguably risky venture, American business leaders have already started to see Cuba as a viable market for their goods and services. Within the past few months, JetBlue started to offer flights to Cuba, the Florida-based Stonegate Bank opened a Cuban bank account, Netflix expanded its streaming services to the entire island, Mastercard transactions can be now be processed on the island, and Airbnb expanded its hospitality services to Cuba, which its co-founder states is the “company’s fastest-growing market.”[20]

Where Are We Headed? Knowledge@Wharton Will Find Out!

Understanding the future role of American business in this new chapter of the U.S.-Cuba relationship is an exciting yet intricate process, and the Wharton School of Business is at the forefront of this discussion. In conjunction with The Lauder Institute and Momentum, Knowledge@Wharton hosted a Cuba Opportunity Summit last April, bringing together Wharton faculty, present and former U.S. government officials, leading economists, and multinational business leaders to discuss both the areas for growth and challenges associated with investment in the Cuban market. Planning is already underway for additional events next year, including a sold-out immersion trip to Havana, a Cuba Finance, Infrastructure, and Investment Summit, and the U.S.-Cuba Corporate Counsel Summit this fall as well as a second Cuba Opportunity Summit in March 2016. Time will reveal the true potential that is to be expected from commercial ventures on the island only ninety miles from our shore. 


References:

  [1] President Barack Obama, “Statement by the President on Cuba Policy Changes,” December 17, 2014, https://www.whitehouse.gov/the-press-office/2014/12/17/statement-president-cuba-policy-changes
  [2] Most notably under President Clinton with the passage of the Sanctions Reform and Export Enhancement Act of 2000, which authorized the export of certain U.S. agricultural commodities to Cuba. 
  [3]  Leland Johnson, “U.S. Business Interests in Cuba and the Rise of Castro,” The RAND Corporation (June 1964), p. 3, http://www.rand.org/pubs/papers/P2923.html
  [4] Ibid., p. 4.
  [5] According to a NYU background report entitled “Cuba-U.S. Relations Before 1959,” American sugar companies like United Fruit Sugar Co. owned as much as 64% of the Cuban sugar industry by 1924.
  [6] Natasha Geiling, “Before the Revolution,” Smithsonian, July 31, 2007, http://www.smithsonianmag.com/history/before-the-revolution-159682020/?no-ist
  [7] Leon Neyfakh, “Cuba, you owe us $7 billion,” The Boston Globe, April 18, 2014, https://www.bostonglobe.com/ideas/2014/04/18/cuba-you-owe-billion/jHAufRfQJ9Bx24TuzQyBNO/story.html
  [8] Present-day value of approximately $7 billion if a six percent simple interest rate is applied.
  [9] American entrepreneurs will travel most commonly under categories 11 and 12 allowing for the “exportation, importation, or transmission of information or information materials” and “certain export transactions” that may be considered for authorization under existing regulations and guidelines.”
  [10] “FACT SHEET: Treasury and Commerce Announce Regulatory Amendments to the Cuba Sanctions,” U.S. Department of the Treasury, January 15, 2015, http://www.treasury.gov/press-center/press-releases/Pages/jl9740.aspx
  [11] Victoria Burnett, “Barriers Remain for American Business in Cuba,” The New York Times, April 15, 2015, http://www.nytimes.com/2015/04/16/world/americas/barriers-remain-for-american-business-in-cuba.html
  [12] Alan Gomez, “Cuba formally removed from state sponsors of terrorism list,” USA Today, May 29, 2015, http://www.usatoday.com/story/news/world/2015/05/29/state-department-cuba-state-sponsors-terrorism/28148017/
  [13] Stephen Propst, “Cuba Sanctions Update: Removal of Cuba From Terrorism List Will Result in Modest Easing of Trade Sanctions,” Hogan Lovells, April 9, 2015, p. 4, http://f.datasrvr.com/fr1/315/92696/Cuba_Sanctions_Update_04.09.15.pdf
  [14] See legal analysis of Stephen Propst in aforementioned citation for more detailed list of federal statutes that limit the U.S.-Cuba business partnership despite Cuba’s removal as a SSOT. 
  [15] The Senate counterpart to H.R. 3238 is S. 1543, which was introduced on June 10, 2015 by Senator Jerry Moran (R-KS).
  [16]“Foreign Investment in Cuba: Will ‘Serious Changes’ Open a Floodgate?,” Knowledge@Wharton, April 7, 2015, https://knowledge.wharton.upenn.edu/article/foreign-investment-in-cuba-will-serious-changes-open-a-floodgate/
  [17] Patrick Symmes, “The Cuban Money Crisis,” Bloomberg Business, April 1, 2015, http://www.bloomberg.com/news/features/2015-04-01/cuba-s-new-money
  [18] Mike Periu, “What You Should Know About Doing Business With Cuba,” American Express Open Forum, February 9, 2015, https://www.americanexpress.com/us/small-business/openforum/articles/evaluate-cuba-opportunity/
  [19] “Foreign Investment in Cuba: Will ‘Serious Changes’ Open a Floodgate?” Knowledge@Wharton.
  [20] Angela G. Keane and Toluse Olorunnipa, “Obama Plugs Entrepreneurs With Democratic Ties As Cuba Opens,” Bloomberg Politics, May 11, 2015, http://www.bloomberg.com/politics/articles/2015-05-11/obama-promotes-entrepreneurs-with-democratic-ties-as-cuba-opens

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