Cuba's Problems Beyond the Embargo _ Stratfor

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OnTuesday,RepublicanU.S.RepresentativeTomEmmerintroducedtheCubaTradeActof2015,abillintendedtolifttheUnitedStates'54yeartradeembargoonCuba.Thebillisoneofseverallegislativeeffortsintroducedoverthepastyeartoendthetradeban.LiftingtheembargoisthenextlogicalstepintheUnitedStates'eightmonthoutreachtoCuba.U.S.PresidentBarackObamahasalreadyissueddirectivestoexpandfinancialinteractionwithCubaandmakeiteasierforU.S.citizenstotraveltotheislandcountry,butpresidentialpoweronlygoessofar.AccordingtoU.S.law,muchoftheauthoritytoamendorannulthe

provisionsoftheembargodependsonCongress'determinationthatatransitionalgovernmentisinplaceinHavana.Consequently,thelawmustbechangediftheUnitedStatesistoproceedwithliftingtheembargoanytimesoon.

WithCubanPresidentRaulCastrosteppingdownin2018,theUnitedStatescouldwaituntilthentoseeifCubameetsthelegislativecriteriatolifttheembargo.Asecondoption,whichEmmerandothersarepromoting,isforCongresstoamendthelawunderpinningtheembargo,therebyremovingthelegalrationaleformaintainingtheban.BothoptionswouldeventuallyrequirenegotiationswithintheRepublicancontrolledCongressandperhapswithCuba.However,ifresistancewithinCongresswearsdown,thesecondoptioncouldresultintheembargobeingliftedbeforeCuba'stransitionofpowerin2018.

ForCubaacapitalpoorislandonly90milesfromtheworld'slargesteconomyliftingtheembargowouldbringsignificanteconomicbenefits.TheCubangovernmentiseagertoshiftawayfromitsstateledeconomicmodeltowardamoresustainablesystemthatallowsCubatogenerate

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morewealthdomesticallyandreduceitsdependenceonexternalpatrons.ButevenwithWashington'sgrowingwilltolifttheembargo,HavanawillnotbeinapositiontoreceivethefullbenefitsofeconomictradewiththeUnitedStatesforseveralyears.

EvenifCongressbeginsseriousdeliberationsonliftingtheembargoafteritsAugustrecess,themainimpedimentstoCubaexpandingtradetieswiththeUnitedStatesaremostlyinternaleconomicconsiderations.DespiteHavana'sgreaterattemptstospurthenationaleconomy,startingwiththelegalizationofCuba'sinformalbusinessactivityin2010,theimbalancescreatedbyfivedecadesofeconomicisolationwillremaintheprincipalconstraintsonCuba'seconomicgrowth.TheCubangovernmentisbyfarthelargestemployerontheisland,andstateownedexportingbusinesses(aswellaslimitedjointventureswithforeignfirms)arehighlyinefficientcomparedtoforeigncompetitors.Cuba'stwotieredcurrencyexchangeratealsocreatessignificantdistortionsanddissuadesforeigninvestment.Moreover,thecountry'srestrictiveforeigninvestmentlaw,whichtaxesforeignownedfirmsheavilyandlimitsinternationalarbitrationtosettledisputes,isamajordragonforeigninvestment.IfCongressliftstheembargoandtravelbaninthenearterm,Cuba'seliteswillstillbenefitfromincreasedtourism(alreadyamultibilliondollarindustrycontrolledbyCubanmilitaryfirms),althoughtheylikelywillcontinuemissingoutonpotentiallyhighervalueeconomicactivityforyears.

Overthenextfewyears,theCubanswilllikelyturntheirattentiontoaddressingtheseissues,andtheendoftheembargowouldaddtothesenseofurgencysurroundingeconomicreform.TheCubangovernmentalreadyplanstohavealegaldraftinplacefortheunificationofthedualcurrencyratesbysometimein2016.ButthepaceofCuba'sopeningtoforeigncapitalwillultimatelydependonwhethertheU.S.proposalstoendtheCubanembargocometofruitioninthenextfewyears.

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