What the Future Holds for U.S.-Cuba Relations

What the Future Holds for U.S.-Cuba Relations
Apr 11, 2017 Latin America North America

When the Obama administration reestablished U.S. diplomatic relations
with Cuba in December 2014, many experts predicted that it would bring a
flood of new money to the island, transforming its economy and political
culture for the better. Almost two-and-a-half years later, U.S. trade
with Cuba continues to languish, and a handful of executive orders on
the part of President Donald Trump could soon set back the clock to the
days when hardline opposition to ties with Cuba's communist regime was
the norm in Washington. What is the future of U.S.-Cuba ties now that
the honeymoon that began under Obama is over? Which aspects, if any, of
the Obama administration campaign to open up Cuba are most likely to
survive?

On the one hand, during his presidential campaign, "Trump certainly
talked about repudiating what Obama has done with Cuba," says Stephen
Kobrin, Wharton emeritus management professor. "Clearly, with the stroke
of a pen, he could eliminate a lot of the liberalization that occurred
under Obama," which was enacted as executive orders, not congressionally
sanctioned legislation. On the other hand, "the streets have not exactly
been paved with gold in Cuba," Kobrin notes. "There hasn't been a great
rush to do business in Cuba. Right now, there is not a huge amount of
interest." Of the dramatic rapprochement with Cuba undertaken by
President Obama, Kobrin adds: "It was an historical event that seems to
have come and gone."

Cuban-American attorney Gustavo Arnavat, senior adviser at the Center
for Strategic and International Studies, notes, "One of the missed
opportunities is that not as many deals were done" as anticipated.
"That's bad for a number of different reasons. One, I think U.S.
companies have missed out. I think the Cuban people and the Cuban
government have missed out on great U.S. products and services." He adds
that now — just as the Trump administration is reviewing its Cuba policy
— instead of having 100 U.S. companies advocating for liberalization by
going to their congressional representatives and saying, 'Look, we have
this business now in Cuba,' "you only have 25 or 30 or so." (Editor's
note: Arnavat, who recently returned from Cuba, addressed this topic at
the 2017 Wharton Latin American Conference, where Knowledge@Wharton
interviewed him. The interview will be published soon.)

Uncertainty and Disappointment

"The impact of Donald Trump's victory can be defined by one word:
'uncertainty,'" notes John Kavulich, president of the New York-based
U.S.-Cuba Trade and Economic Council. "That uncertainty has negatively
impacted interest by U.S. companies [in Cuba]."

In both countries, disappointment has been fueled by misunderstanding of
the potential impact of their mutual ties. Charles Shapiro, president of
the World Affairs Council of Atlanta, says that "U.S. business people
thought that they were going to go to Cuba and see hundred dollar bills
floating down the streets. Just as Americans thought that Cuba was going
to change pretty quickly after December 2014, individual Cubans also
thought that their standard of living was going to change [right away] …
[that] their lives were going to get better. Both of those expectations
were wrong; real life is more complicated."

Many Americans imagined that the Cuban government would soon liberate
political prisoners and make political reforms. When that didn't happen,
critics argued that the U.S. was making all the concessions, but the
Cubans were doing nothing to open their economy. Notes Kavulich,
"Basically, an overall negative narrative has been created."

And while uncertainty is growing over which measures Trump might take to
unwind the Obama administration's efforts, "the Cuban government is not
doing its part to mitigate any of the uncertainty," Kavulich notes.
"What it could do would be to allow more U.S. companies to have a
presence in Cuba, more U.S. companies to directly engage with the
licensed independent sector in Cuba. They are not allowing that." Adds
Arnavat, "If you look at Cuba's plan for economic development, [foreign
direct investment] just doesn't quite fit into their priorities. And
then even if it's the right kind of company, and the right opportunity,
they still blame the embargo, right?"

It's not just the Americans who aren't investing in Cuba now, notes
Shapiro. "The Chinese are not investing in Cuba," nor are the
Brazilians or the Europeans. "It's because you can make more money
investing in Singapore or Atlanta, Georgia" or many other places under
the current system in Cuba. He adds, "One gets the sense that the
government of Cuba doesn't understand that foreign direct investment is
a competition — that the investor gets to decide where he is going to
get the best return on his money. There are not people out there wanting
to throw their money at Cuba in a way that doesn't allow them to make a
competitive return on their investment. That's the issue."

In the travel sector, explains Kavulich, "The airlines, in their
exuberance and enthusiasm to get as many routes as possible, far
exceeded what the reality was going to be. All the airlines asked for
far more seats than they were going to be able to fill. They asked for
approximately three million seats, when the agreement with the Cubans
was for about one to 1.2 million. From the beginning, it was out of
whack, but the airlines were all trying to grab as many of the routes as
they could."

As international hotel companies signed building contracts, U.S.
arrivals in Cuba ballooned 34% between 2015 and 2016. Hotel rates soared
by between 100% and 400%, with rooms previously priced at $150 per night
skyrocketing to $650, according to New York-based tour operator Insight
Cuba. American Airlines, JetBlue, Spirit and other carriers started
operating daily flights to 10 cities, including airports that hadn't
welcomed U.S. airlines in decades. But the novelty has worn off, and
hotel rates have normalized. Airlines that overestimated demand for Cuba
are cutting back on their routes and using smaller planes.

Two major factors have changed since the high-profile restoration of
diplomatic ties during the Obama administration, says Wharton management
professor Mauro Guillen. "The first is the change in the U.S.
administration. The second is that Raul Castro has said that he will
step down in a couple of years. There is a power struggle going on in
Cuba between those who are traditional and others who believe, like
Raul, that there should be a change towards more freedoms in Cuba. Both
factors are making it difficult to get things moving in that direction."

Guillen adds: "Trump has not been president for even 100 days yet; we're
going to have to wait and see. It's not so much that [everyone has] lost
interest, but that there are so many other things going on that require
the attention" of lobbyists and policy makers in the U.S.

Travel: 'A Bad Telenovela'

Trump's first statement about changes in U.S. policy is expected soon,
but no one knows for sure what to expect. The Trump administration is
"not going to sit around with a majority in the [U.S.] House, Senate and
… the Supreme Court — and not do anything. They're taking their time
until they think the President and people around him have time to act,"
says David Lewis, president of Manchester Trade, a Washington
consultancy. "My view is that they are not going to leave this
[situation] as it is." That doesn't necessarily mean that Trump will
undo every policy change made by Obama, he adds.

According to Kavulich, "If they decide to go with increased enforcement
[of the travel rules] — which it seems they will do — that could lead to
the demise of the 'self-defined trips' that have become a popular way
for Americans to visit Cuba," despite the official ban on tourism. "One
change the Obama administration made was to allow people to go to Cuba
on their own. They didn't have to go with a group, and they could
self-certify. It was the honor system on steroids."

Lewis argues that the changes made in the travel sector "are going to
remain as is — not because [the Trump administration] thinks it's good,
but because to try and reverse travel is going to be a major quagmire, a
whirlpool, like a bad telenovela that will never end. You're going to
have to start fighting with the nuns who go to Cuba, with the college
kids who go to Cuba, with the NGOs. It will be a never-ending mad house,
which could engulf [the administration's] limited bench."

However, in order to pressure the Cuban government to liberalize its
economy, the Trump administration could tighten the screws on U.S.
visitors in various ways. Kavulich notes that it may try to make travel
harder for U.S. visitors to Cuba who don't comply with the official
rules, which make it impossible for Americans to visit as a tourist, by
requiring them to go through several inspections at customs. Overall,
the Trump administration "can do a lot without seeming as though they
are being punitive, simply by enforcing the regulations."

The Trump administration could also "make it clear that no further
licenses will be given to any [U.S.] company that wants to engage with
the Cuban military, which controls the Cuban hospitality sector," adds
Kavulich. "If they act retroactively, that means the Sheraton [in
Havana, the first hotel to operate under a U.S. brand since the 1959
revolution] gets closed; U.S. cruise ships can't dock at the ports; and
U.S. [air] carriers can't land at the airports because the Cuban
military controls all of it."

"With Trump, you're reading tea leaves," says Kobrin. "You never know
what's real and isn't. But he is not viscerally anti-communist. He isn't
part of the old Republican Cold War establishment. He doesn't seem to
have trouble dealing with Hungary, for example, and his problems with
China have more to do with what he perceives as 'American first' and
U.S. interests, rather than their political system." Moreover, "the
opposition to establishing relations with Cuba comes especially from
Congress and Cuban-American members of Congress, who are concerned about
the political system."

Reasons for Optimism

Originally, the expectation was that an announcement by the
administration regarding Cuba would be made in early February and then
March. "It seems as though the announcement is being held hostage to
whatever events are happening each day," Kobrin says. "It could end up
that the decision could be a tweet that is a response to something the
Cuban government does that we don't know about yet."

Overall, Kobrin says, "I've always felt that once liberalization occurs,
Cuba is just another island in the sun. It has some advantages in terms
of its medical system, the education of the populace, and so forth, but
then it has to compete with every other Caribbean island, once the
novelty has worn off. Cuba is not a logical place to put much in the way
of manufacturing or other sorts of industry, [except] maybe some health
care initiatives."

Shapiro is more optimistic. "The private sector in Cuba is growing.
Cubans call [self-employed workers] cuentapropistas — which means they
are 'working on their own account.' And they are [becoming] a larger
percentage of the work force. Lots of people in Cuba have their
government job, but they are doing other things as well. They can't
exist on a government salary.… Everybody in Cuba is working a deal."
Internet access has actually skyrocketed, he adds, with Wi-Fi hot spots
available in parks around the country. "Lots of people use them, and
they are owned by the government. Unlike the case in China, you can
access The New York Times in Cuba, and more importantly, El Pais from
Spain."

"I'm still a little bit hopeful and optimistic," Guillen says. "At
least, a framework has been established for the basic relationships….
Now we have cruise ships going through Havana, we have regularly
scheduled flights, and we have some broadening of the kinds of trade
that can be done. Let's give this first round of reforms some time to
sink in. Then, the [Trump] administration will have a better idea of
what it wants to do."

Source: What the Future Holds for U.S.-Cuba Relations -
Knowledge@Wharton -
http://knowledge.wharton.upenn.edu/article/future-holds-u-s-cuba-relations/