BUCHAREST ACADEMY OF ECONOMIC STUDIES FACULTY OF INTERNATIONAL BUSINESS AND ECONOMICS

Dissertation Paper Economic Sanctions

The Case of the American Embargo on Cuba

Scientific Coordinator: Prof. Dr. Cojanu Valentin

Student: Mihailescu AV Andrei-Iustin

Bucharest 2010

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Contents

Introduction ................................................................................................................................................... 4

Types of economic sanctions ......................................................................................................................... 6

Trade Sanctions ......................................................................................................................................... 7

Trade embargoes.................................................................................................................................... 8

Financial Sanctions .................................................................................................................................... 9

Asset Freezes ........................................................................................................................................... 10

Economic Mechanism of Sanctions ............................................................................................................ 11

Size of Involved Economies .................................................................................................................... 11

Trade linkages ......................................................................................................................................... 12

Economic health and political stability of target country ........................................................................ 13

Cost of sanctions to targets ...................................................................................................................... 13

Cost of sanctions to senders..................................................................................................................... 14

US Embargo on Cuba .................................................................................................................................. 17

Methodology ............................................................................................................................................ 17

Chronology of Key Events in the context of the Cuban Embargo .......................................................... 19

Goals of American Policy Makers ........................................................................................................... 22

Reaction of the Target Country ............................................................................................................... 23

Attitude of Other Countries ..................................................................................................................... 24

Economic impact of the Embargo ........................................................................................................... 26

Initial impact of the embargo on Cuba`s Trade ................................................................................... 26

Long-term impact of the embargo ....................................................................................................... 29

Offsetting policies................................................................................................................................ 30

Non-economic effects of the embargo on Cuban citizens ....................................................................... 33

Testing Potential Bilateral Trade between Cuba and the US using the Gravity Model ...................... 34

Contemporary Cuban Economy .............................................................................................................. 39

Recommendations and Conclusions ............................................................................................................ 41

The Cuban Threat to the US National Security ....................................................................................... 41

Cost to the target country......................................................................................................................... 41

Benefits to the communist regime ........................................................................................................... 41

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Possible Effects of lifting the embargo .................................................................................................... 42

Costs to the United States ........................................................................................................................ 43

Works Cited ................................................................................................................................................. 44

Annex 1: Input Data and Predicted Values of Imports and Exports for the Time Series Model ................. 47

Annex 2: Data Smoothing for Time Series Model ...................................................................................... 48

Annex 3: ANOVA Output for Imports Time Series Regression Model ...................................................... 48

Annex 4: ANOVA Output for Exports Time Series Regression Model ...................................................... 49

Annex 5: Input Data for the Gravity Model ................................................................................................ 49

Annex 6: ANOVA output for the Gravity Model ........................................................................................ 52

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Introduction

International economic pressure is used by states against states for a variety of political aims, but

one general purpose that characterizes all economic sanctions is as means of coercion in the

international arena. Scholars have defined sanctions as tools that “constitute a means of exerting

international influence that is more powerful than diplomatic mediation but lies below the

threshold of military intervention”1. Hufbauer, Schott, Eliott and Oegg argue that “the use of

sanctions presupposes the sender country`s willingness to interfere in the decision making

process of another sovereign government, but in a measured way that supplements diplomatic

reproach without the immediate introduction of military force”.2

States undoubtedly have many reasons that can be considered justifiable enough to impose

economic sanctions. “Demonstration of resolve”, as a reason for economic sanctions, can be

translated into the idea the states deploy sanctions in order to reassert their position as leaders in

certain fields. The US have applied in many instances such sanctions in order to send the signal

that they are the world hegemon and that they will act as a world guardian of democratic values.

Thus, the US has protested in numerous cases via economic actions against undemocratic

regimes and human rights violations. The US has done so even in cases when the positive

outcome of economically punishing certain states was highly unlikely because the cost of

inaction and the damage done to the US brand as the world`s biggest and strongest democracy

would have been too substantive to bare. While it is hard to quantify the weight in the decision

making process of such psychological and moral factors, such rationale is not to be

underestimated in the analysis of economic sanctions.

The idea that sanctions can be used in order to deter the target country from pursuing

questionable policies has also been cited as reason enough for the deployment of economic

sanctions. In such cases the sender country has the purpose to increase the associated costs with

1Manfred Kulessa and Dorothee Starck, Peace through sanctions?, Policy Paper 7 of the Development and Peace

Foundation, Bonn, Germany, Presented at a Conference in Bonn, January 15, 1988 2Gary Clyde Haufbauer, Jeffrey J. Schott, Kimberly Ann Elliott and Barbara Oegg, Economic Sanctions Reconsidered,

3rd

edition, Peterson Institute of International Economics, November 2007, p.5

5

the policies in question up to the point where it would be too expensive for the target country to

continue with their implementation. One case of such sanctions would be the US sanctions

against the Soviet Union in order to punish the later for invading Afghanistan. The point of the

grain embargo and the threat to boycott the 1980 Olympics was to deter the soviets from further

continuing their occupation policy. The economic sanctions failed3 but they can still be

considered a case where the purpose was deterrence.

In other cases, states decide to use economic sanctions in order to satisfy domestic concerns. In

certain cases where the population has patriotic accesses or feel the need to express their

disapproval towards policies undertaken by central countries economic sanctions may have their

source in the galvanization of public support for such actions. One recent example is the

Tiananmen sanctions in the wake of the 1989 crackdown in China`s Tiananmen Square. The US

Congress passed legislation to continue the suspension of the Overseas Private Investment

Corporation, of the US Trade and Development Agency, of the export licensing for defense

articles and defense services and of many other sanction imposed prior to the 1989 even in order

to express US disapproval of the Chinese government`s actions.4 Other such cases include the

Helms-Burton Sanctions against Cuba, the Iran and Libya Sanctions Act and had as main purpose

to “assuage domestic constituencies, to make moral and historical statements, and to send a

warning to future offenders of the international order”.5

All in all, economic sanctions have a triple purpose in terms of the message conveyed: the target

country is announced that from the point of view of the sender certain policies should not be

endorsed; it reassures the international community that values are important for the sender and

that actions will be taken in order to safeguard these values and last but not least senders transmit

the message to their people that they will take actions to protect a nation`s interests. In any case,

one cannot help but notice the similarities between the rationale for economic sanctions and the

aims of criminal law: to apply punitive measures, to prevent and to rehabilitate. If, when and how

sanctions succeed in their aim is a question of the specifics of the context in which they are

3Stuart E. Einzanstat, Do Economic Sanctions Work? – Lessons from ILSA and other US Sanctions Regimes,

Occasional Paper, February 2004 4 Dianne E. Rennack, CRS Report for Congress, China: Economic Sanctions, Updated February 1, 2006

5 Gary Clyde Haufbauer, Jeffrey J. Schott, Kimberly Ann Elliott and Barbara Oegg, Economic Sanctions Reconsidered,

3rd

edition, Peterson Institute of International Economics, November 2007, p.5

6

applied: in certain cases they are successful and in other their effects may be completely ignored

or even superfluous.

The first part of this paper reviews the literature on the topic of economic sanctions: it describes

types of economic sanctions, their mechanism and economic factors affecting the outcomes of a

sanctions episode.

The second part of the paper analyzes the American Embargo on Cuba from multiple points of

view. The immediate impact of the embargo will be detailed using a time series regression model.

The long term economic impact is reviewed by analyzing available data. Last but not least, a

gravity model is constructed with the purpose of estimating the level of potential bilateral trade

between the US and Cuba and also to check for trade diversion effects of the embargo. All in all

the findings of this paper lead to suggest that immediate termination of the embargo would be the

most suitable policy.

Types of economic sanctions

Scholars have long tried to come up with a unified and unitary definition of economic sanctions.

Robert A. Pape makes several distinctions between terms related to this field: trade wars,

economic warfare, and economic sanctions. Other scholars have mentioned terms like economic

coercion, embargoes and economic aggression.

Elias Davidson has reviewed the literature defining economic sanctions in a 2003 article entitled

“Towards a Definition of Economic Sanctions” (revised version 2003). Maraget Doxey was cited

in this article in saying that economic sanctions are “penalties threatened or imposed as a

declared consequence of the target`s failure to observe international standards or international

obligations. Barry E Carter defines sanctions as “coercive economic measures taken against one

or more countries to attempt to force a change in policies or at least to demonstrate the

sanctioning country`s opinion of another`s policies”.

In an attempt to clarify the concept of economic sanctions, a definition encompassing the

available literature would be: economic sanctions are measures in the field of economics applied

by one country (or a group of countries) against another country in order to persuade the latter to

alter its domestic or international policies.

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Economic sanctions are to be distinguished from other inauspicious measures allowed under the

WTO statute such as anti-dumping actions, countervailing duties or safeguards actions as a form

of protection from surges of imports6.

Furthermore, so-called sanctions that pertain to the world of economic measures but are not

intentional or predicted to damage the economy of the targeted countries are not to be considered

economic sanctions. Last but not least, diplomatic sanctions (the EU making limitations on high-

level government visits from Cuba after the Cuban administration broke a moratorium on capital

punishment7) and arms embargos do not qualify as economic sanctions.

Trade Sanctions

Generally speaking in the case of trade sanctions, the sender can apply import controls, export

controls or both. In the analyzed cases in Economic Sanctions Revisited senders are more prone

to use export controls rather than import controls (50 uses compared with 168). Several reasons

stand behind the greater use of export controls. On the one hand, sender countries (generally

large economies) are more probable to be in the position to be called exporters of key products on

the international market.

On the other hand, if a country decides not to import goods or services from the targeted

economies, alternative importers can have a great say in the success of the sanction. In the case of

export controls, given the fact that key products such as high capital goods are/were generally

produced in concentrated geographical locations, it is easier to affect an economy by denying it

the possibility of benefitting from such goods.

Another possible reason is that import controls may deny the sender country population the

benefits of imported goods from the targeted country and public support for the sanction may

dwindle as a result, and governments (at least democratic ones) feed off the support of the

citizens.

In recent times, the production of high capital goods or military ones is not geographically

concentrated anymore. And as a result unilateral export controls may not be as efficient as it

6 Understanding the WTO: The agreements – Anti-dumping, subsidies, safeguards: contingencies, etc. –

www.wto.org 7 BBC News, EU condemns Cuba over human rights, 25

th June 2003

8 Gary Clyde Haufbauer, Jeffrey J. Schott, Kimberly Ann Elliott and Barbara Oegg, Economic Sanctions Reconsidered,

3rd

edition, Peterson Institute of International Economics, November 2007, p.92

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used immediately after the 2nd World War. Even for very sophisticated goods, there is more than

just one or two countries producing those goods and as a result, there is a great need for

cooperation in the case of economic sanctions based on trade-related measures.

Trade embargoes

Trade embargoes are included in the category of trade sanctions and represent prohibition of

trading with a soon to be former trading partner either in one area, or more (in same cases in all

areas of trade). One of the most cases of embargoes is the US embargo on Cuba. The trade

embargo was initiated in 1962 and will remain in place as long as the Cuban government refuses

to make reforms towards “democratization and greater respects for human rights”9. The US

embargo on Cuba is one of the most standing cases of embargo and it included not only a trade

embargo but also a financial, and economic one (it can be cited as an example of financial

embargo).

Thomas Pugel explains in the 12th edition of his International Economics textbook how trade

embargoes work. For the purpose of explaining the economic mechanism of a trade embargo, the

graphs Tomas Pugel published in his work will be used.

Figure 1: Effects of an Embargo on Exports to Iraq10

9 Cuban Democracy Act, 1992

10 Thomas Pugel, International Economics, 12

th edition, The McGraw Hill Companies, 2003

9

Figure 1 explains graphically the effects of total embargo on exports to Iraq. The export supply to

Iraq (from both embargoing and non-embargoing countries) is pictured as limited and rather

inelastic. The export supply from the countries that impose the embargo is the difference between

their domestic supply and domestic demand (which is show in Figure 1A). Adding the supply

from the embargoing countries to the supply of non-embargoing one the total export supply can

be derived as being Sn+Se available to Iraq prior to the embargo.

Before the embargo was deployed, the Iraqi import demand equals the total export supply at point

F and at these coordinates the price is p0 and the quantity imported by Iraq is Q0.

After the exports embargo, a share of the world export supply is no longer available to Iraqis

wanting to import. As such, Se is removed by the economic sanction, leaving Iraq with only Sn.

As a consequence, the price increases from po to p1 and the free trade equilibrium F shifts to the

embargo equilibrium E. The costs to Iraq are described by summing areas b and c from figure

1.B. The economic loss suffered by the embargoing countries is measured by area a and it is

shown in two ways: on the left as the difference between producer losses and consumer gains,

and on the right as a loss of surplus on exports. Since, not all countries impose the embargo, after

the embargoing countries no longer export goods to Iraq, other countries gain area b on selling

more goods to Iraq at a higher price. The restriction on trade on a world scale is measured by

areas a+c.

Effects are of course different on the two sides of the embargo. On the one hand, the countries

that apply the embargo will face a lower price (below p0) benefiting consumers and hurting

producers. On the other hand, within Iraq, there may be some producers that are now benefiting

from the effects of the embargo since they are protected from the effects of foreign competition.

Financial Sanctions

Such sanctions take the form of preventing the targeted economies from accessing credits or

grants from the sending countries. Financial sanctions “entail the use of financial instruments and

institutions to apply coercive pressure on transgressing parties – government officials, elites who

support them or members of non-governmental entities – in an effort to change or restrict their

behavior”11. Financial sanctions do not apply to the whole extent of the populations, as in the

11

The Swiss Confederation, United Nations Secretariat, Watson Institute for International Studies, Target Financial

Sanctions, A manual for Design and Implementation 2001

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case of trade sanctions. The recipients of such sanctions typically are the elites and the leaders of

the targeted countries or the so called “operationally responsible individuals”. An example of

such a sanction is the one applied by the EU against Croatia, Serbia and Montenegro. Certain

persons indicted by the International Criminal Tribunal for Former Yugoslavia are not allowed to

access credit facilities from the EU12.

One of the most used types of financial sanctions is the cessation of official development

assistance (OED). Even though political goals have been used as rationale for economic sanctions

(e.g. in support of the opposition movement of building the Three Gorges Dam in China), the vast

majority of cases of financial sanctions involve the “manipulation of bilateral economic and

military assistance to developing countries” according to Economic Sanctions Revisited, 3rd

edition. One such example includes Japan stopping official development assistance to China in

several instances: in the aftermath of the 1989 Tiananmen Square massacre, the 1995-1996 freeze

of grant aid after China`s underground nuclear tests etc.13

Asset Freezes

Asset freezes are characterized by freezing the assets the target country holds in the sender

country. Such sanctions are important because they inhibit financial flows and hurt international

exchanges of goods. Everything that a national from the target country owns in the sender

country is in peril of being frozen once such a sanction is passed; such assets include everything

from property, accounts receivable, bank accounts, merchandise, and inventories.

One example of an asset freeze sanction is the one proposed by the UN Security Council

Resolution 1390 (2002) against Al Qaeda, Osama Bin Laden and the Taliban Regime in

Afghanistan. The resolution infers that “All states […] [should] freeze without delay the funds

and other financial assets or economic resources of these individuals, groups, undertakings and

entities, including funds derived from property owned or controlled, directly or indirectly, by

them or by persons acting on their behalf or at their direction…”.14

12

European Commission, Restrictive Measures (Sanctions) in force, updated 5th

January 2010 13

Mary McCarthy, The Role of the Japanese Media and Public Opinion in Aid Sanctions Against China, paper

presented at the annual meeting of the International Studies Association, 2006 14

United Nations Security Council, Resolution 1390 (2002) – www.un.org

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According to Hufbauer, Schott, Eliott and Oegg, the US asset freezes against Iran in 1979 (with

the purpose of setting expropriation claims and releasing hostages) and UK freezes against

Argentina in 1982 (with the aim of withdrawing troops from the Falkland Islands) greatly

contributed to rendering Iran and Argentina unable to buy weapons and ammunition and thus

leading to the resolution of the disputes. Other cases involve the freezing of Kuwait assets during

the Gulf war in order to prevent Iraqi forces from controlling them for their benefit during the

war.

Economic Mechanism of Sanctions

Obviously, the purpose of any sanction is to convince a foreign government to change its

behavior in relation to the demands of the sender government (the government imposing the

sanctions. Ideally, weakening the economy of the target country would enable its leaders to

change their policies. This is supposed to work by preventing leaders of the target countries from

supplying basic commodities, services and work to the population. Such shortages are expected

to result in domestic constituencies being unsatisfied with their rulers and this public discontent is

expected to create an incentive to the target citizens to desire the change of government of the

change in certain policies. Thus the mechanism of economic sanction is based on a transference

power that such measures may have: social discontent and suffering in theory should be

translated into political change.

Size of Involved Economies

Generally speaking, the sender economy is larger than the target economy. According to

Hufbauer, Schott, Eliott and Oegg in the majority of cases (80%), the ratio between the sender

economy and the target economy is greater than 10. This does not go to say that because an

economy is bigger than another, if the richer economy decides to deploy a sanction on the weaker

one, the punitive policy will be successful because size matters. The fact that in the majority of

cases, large economies impose sanctions conveys the message that in the view of both rich and

poor nations, a large GNP is a prerequisite for the success of a sanctions episode (even though a

big GNP is not sufficient).

In the 2nd part of the past century countries have managed nonetheless to convince equally potent

economies to alter their behavior according to their demands. One example is the US threatening

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to provoke a crisis of the Pound Sterling (by not allowing UK to access IMF short term credits or

dollar loans from US banks).

Some “courageous” states like China have convinced more powerful economies like France in

the 90s to stop selling arms to Taiwan even though its economy measures at the time a mere third

of the French one.15

All in all size matters and it is easier for larger economies to impose sanctions, but size is not the

only important factor driving the success of economic sanctions.

Trade linkages

The trade relations between countries are also an important factor that can affects the success of a

sanctions episode. If a given country does not exchange many goods or services with another

country, then the likelihood of success is diminished since it cannot really affect the economy of

the target. As stated previously, since large economies impose sanctions, it is only expectable that

the target`s trade relations with the sender accounts usually for at least 10% of the target`s total

external trade.16 The message that is sent to the target is such cases is simple yet accurate: “if you

do not change your policies, the effects on your economy can be even greater than this since I am

one of your major trading partners”. In cases that were classified as successes, the sender

accounts for almost 30% of the target`s total external commerce, but as in the case of size ratios

this is not the only governing factor of efficiency, since in failed cases, the average trade linkage

was only a bit smaller, incurring 29% of the target`s total external trade.17

There are cases when trade linkages were very small and yet the sanctions were successful. In

1998, Turkey deployed economic sanctions on Italy in order to persuade it to extradite one of the

leaders of the Kurdish Worker’s Party (PKK), Abdullah Ocalan. Turkey instituted sanctions

against Italian products and accused it of supporting trouble in Turkey. Italy on the other hand,

accused Turkey that it fails to live up to its European expectations18. The episode was successful

even if Turkey accounted for only 2% of Italian exports and less than 1% of its imports.

15

Gary Clyde Haufbauer, Jeffrey J. Schott, Kimberly Ann Elliott and Barbara Oegg, Economic Sanctions

Reconsidered, 3rd

edition, Peterson Institute of International Economics, November 2007, p.89 16

Idem 17, p 90 17

Idem 17, p 90 18

Tzvi Fleicher, Apo-calypse now, The Australia/Israel Review, 9-31 December 1998

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Economic health and political stability of target country

The economic and political environment of the target countries can influence the outcome of a

sanctions episode.

As expected, a weaker economy that is characterized by lower growth and a high rate of inflation

is more likely to suffer more from the effects of economic sanctions and as a result a weak

economy is more likely to alter its policies in order not to expose itself to the effects of economic

sanctions.

On the other hand, the sample size of sanctions used in Economic Sanctions Revisited, 3rd

edition, seems to associate higher political stability with success of economic sanctions. The

reason may be explained by the fact that feeble regimes are not particularly able to respond or

because they perceive the costs of changing their policies as being higher than do more stable

regimes. This may also be caused due to the fact that weak regimes that are characterized by

often government changes need to reassert their people that it is powerful on the international

arena, while stronger regimes already have a position and are not afraid to make compromises

when needed.

Cost of sanctions to targets

There aren`t many cases of economic sanctions inflicting heavy costs on the recipient country.

Out of the 116 cases analyzed in Economic Sanctions Revisited only 14 generate costs that

exceed 10% of the GNP of the target country.

In approximately 25% of cases the cost exceeded 2%, but 2% of the Gross National Product is

still a cost that can generate many problems for the targets ranging from job loss, lost investment

opportunities, damage to inventories to cessation of foreign direct investment or aid.

One of the most extensive cases of economic sanctions the world has ever witnessed is the

multilateral sanctions Iraq suffered in the aftermath of the Gulf War. During the embargo Iraq

lost 90% of its oil sales ($13.6 billion annually); in terms of imports Iraq lost $4.6 billion; the

cessation of US agricultural credits and the freeze of Iraqi assets added 620 million dollars19.

There were certain events such as the economic aid coming from Libya and the Oil for Food

19

Idem 17, p 105

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Program that diminished the cost of the embargo, but the size of the economy post-embargo had

measured over the 90s approximately half of Iraq`s GDP.

The same source states that the average costs incurred by sanctions imposed after 1985 are

roughly 5% of the GNP of each target. One would argue that the costs of sanctions to targets

could be higher than 5% but in many cases, the sender economy applied only a limited array of

sanctions either because it has limited interests or because it does not want to suffer too much as

a result of imposing a total embargo. What is more, once a sanction in place, target countries are

motivated to find ways to evade the effects of the sanction by way of forming new trade

relationships, finding new allies. Third country firms can be used to create parallel imports for

example: one example can be found during the 90s when UNITA (National Union for the Total

Independence of Angola) managed to redirect its trade flows through friendly Congo and

Zambia. As a result, even is some delays and higher costs are in place, targets can find ways to

escape the effects of sanctions.

In any case, even if escapism is possible, sanctions can have paramount costs for the targets and

in cases where costs are high the sanction is likely to succeed.

Cost of sanctions to senders

The outcome of a sanctions episode not something imposing governments can be sure about.

Such policies are double sided: they may work or not. One thing is certain though: the sending

economy will sacrifice a part of its wealth in order to achieve a political goal

The immediate costs of sanctions represent disruption in the flow of goods, services, money and

finance. If, for example, the sender decides to cease aid for the target, its expenditures may

decrease and the result may be economic gain. However the disruption in other flows of economy

may diminish the effect of cutting expenditure for aid.

In the case of the US, the multitude of US sanctions reduced exports to 26 target countries by $15

to $19 billion dollars in 1995. Translated to the labor market, this meant the loss of

approximately 200,000 jobs in the export sector and an accompanying loss of $1billion in terms

of export sector wage premiums20. Another estimation by the US Department of Commerce states

20

Haufbauer et al., “US Economic Sanctions”, p3

15

that in 1992, $1billion of exported goods creates somewhere between 200,000 and 260,000 jobs

and this further increased the credibility of jobs being lost due to sanctions.21

What is more, it is hard for firms to penetrate the market again, once the sanction was lifted. If

sanctions are unilateral, other rivals may replace sender suppliers and will often develop long-

term relationships with firms from the target economy. Even is sanctions are not lifted, it is hard

to believe that potential customers will easily abandon their long-term customer relationship to do

business with firms from a country that has a history of economic sanctions.

In high-tech fields, market repenetration is even more difficult. Boeing is a notorious case of high

loss. In 1993, the US deployed an embargo against Vietnam. At that time, the Vietnamese

national airlines were hoping to lease 6 narrow-body, medium-range aircraft from the American

aircraft producer. The embargo prevented the conclusion of the business deal and Vietnamese

Airlines chose Airbus. The loss to the American company was around $211 million. However

this loss was increased by the fact that the Vietnamese company had to build its maintenance and

support services around Airbus (since their products were bought from Airbus). A 1997 study

predicted that Boeing`s loss would raise to a staggering $1.6 billion22.

Lost confidence is an important cost as well. Once a country imposes economic sanctions,

recipients of the target country (and even 3rd party nationals) it creates a precedent. Businesses

have a need for certainty – they need to know that contracts will be concluded and that

governments will not interfere with the clauses of business contracts.

Greg Mastel of the Economic Strategy Institute explains in a study that the US tendency to

impose sanctions more than Japan or the EU has partly resulted in European and Japanese exports

to China to grow twice as fast compared to US exports to China.23

Such concerns were recognized by the US administration. In 1979, the US Export Administration

Act was passed in order to provide safeguards for national exporter. In 1985, additional limits

were added through the Export Administration Amendments Act (1985) and included a sunset

21

US Department of Commerce, US jobs supported by Exports of Goods and Services, Washington, November 1996 22

Robert P. O`Quinn, A user`s guide to Economic Sanctions, The Heritage Foundation, Leadership for America, June

15, 1997 23

Idem 24

16

time span for agricultural embargoes, provisions limiting the controls on exports that are already

subject to contracts.

All in all, even though the above mentioned numbers may sound impressive, the total costs of

sanctions are not as dire as they sound. In Hufbauer, Schott, Eliott and Oegg’s studies in 25% of

the cases, senders even enjoyed economic gain as a result of withdrawing financial support for

the targets. They also argue that given the typical GDP ratio of sender and target, the loss to the

sender can be qualified as a “trivial dislocation”. Another point would be that economic costs to

the sender are usually not compared with the cost of inaction and as a result in many of the cases

the cost of inaction may be greater than the cost of economic sanctions.

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US Embargo on Cuba

The embargo the United States of America imposed on the Cuban government in 1962 is one of

the most extensive cases of economic sanctions up to date.

First of all the embargo is total, meaning that the sanctions include not only trade prohibition but

also asset freezes and financial trade flows disruptions. Given the extent of this particular case of

economic sanction one can analyze its effects over time and according to the effects it has had.

Furthermore, the embargo is now unilateral but has also been multilateral. This specific aspect

enables an analysis on its effectiveness given its dual nature: both uni and multilateral.

Last but not least, the goals of the American policy makers have changed over time and as such

multiple goals can be compared to the actual effects of the embargo.

All in all, the rationale for choosing the American Embargo on Cuba for the purpose of this paper

resides in the magnitude of this particular economic sanctions episode: both economic and

political.

Methodology

For the purpose of this paper, the following methodology has been applied:

First of all a chronology of key events will be presented with the purpose of introducing the

context of the embargo.

Secondly, the goals of the American policy makers will be detailed throughout time in order to

clarify the scope the embargo over the period it has been imposed.

Thirdly, the reaction of the target country will be detailed in order to explain how Cuba has dealt

with the embargo.

The reaction of other countries to the embargo will also be mapped out with the purpose of

analyzing how the reaction of other members of the international community has impacted the

effects of the embargo.

18

The short term impact of the embargo will be computed using regression analysis. Regression

function coefficients will be calculated. Two time series models will be constructed, describing

Cuban imports, respectively Cuban exports from and to the world over time. The dependent

variable in the 2 regression models will be the value of Exports and Imports between Cuba and

the rest of the world expressed in millions of $US as current dollar prices. The explanatory

variable will be time.

The data available from the WTO is from the period 1948-2009 and as a result, observations

between 1948-1961 (the year the embargo was imposed) were used. After analyzing the available

observations, a need for smoothing has been created in order to enable the model to predict more

accurately the imports and exports of Cuba over time. For the imports time series, an exponential

smoothing average with a smoothing factor α=0.2 has been conducted. On the point of exports,

because of the fluctuations, a 7-period moving average has been used in order to smooth the data

provided by the observations. The correlation between exports, respectively imports and time will

be computed before the embargo was instated. After the regression coefficients are estimated a

comparison between the level of trade predicted by the function in the first decade of the

embargo and the actual level of trade will be made in order to determine the initial impact the

sanction has had on Cuba`s total level of exports.

The next step of the process is to analyze the long term impact of the embargo. Statistics from

various sources have been employed and interpreted in order to quantify the long term impact of

this particular case of economic sanction. Offsetting events and phenomena such as remittances

and Soviet subsidies have also been taken into account. The long term impact section also

describes non-economic effects of the embargo.

Last but not least, a gravity model has been constructed in order to estimate the level of bilateral

trade between Cuba and other countries in the case of lifting the embargo. The gravity model

estimates have the purpose to approximate the level of exchanges between the US and Cuba as

well as to verify the level of trade diversion.

The estimates of the gravity model will take place in 2 separate stages. Using the ordinary Least

Squares Method, the coefficients of the model will be estimated using cross-section data for the

year 2008. The regression function will have Trade in Merchandise between pairs of countries

(cumulated value of exports and imports) as the dependent variable. The values of the dependent

19

variable will be computed in natural logarithm form. The independent variables will constitute

the natural logarithm of the produce of GDPs of any given two countries, natural logarithm of the

distances between the capitals of the two countries. Last but not least the 3 dummy variables will

be included in the model – Common Language, Common Border and Membership in a Regional

Trade Agreement. After the first stage, the coefficients of the regression function will have been

estimated. Using this coefficients, Cuba`s trade with countries like US, China, and the European

Union countries will be estimated in order to approximate the potential trade between the US and

Cuba and also between Cuba and other countries.

Chronology of Key Events in the context of the Cuban Embargo

After recognizing the government of President Fidel Castro in 1959, the US has started to feel the

relations between it and Cuba deteriorate. In February 1960, a trade agreement between Cuba and

USSR was signed; this agreement stipulated that the Soviet Union would buy sugar and other

products from Cuba and in return, USSR will supply Cuba with crude oil. The Eisenhower

administration advised US oil firms based in Cuba to stop refining Soviet oil. As a result, Cuba

nationalized all the oil distilleries. The next step on the part of the US was to cancel most of

Cuba`s sugar quota (before 1960, sugar exports to US reached levels of around 3 million crops a

year – representing half of Cuba`s sugar production24). The Cuban government decided to

expropriate all US property which was worth at the time $1 billion and also to discriminate

against products and services originating in the US.

In October 1960, US imposed an embargo on exports to Cuba (medicine and food were not

subject to the sanction) and reduced Cuban sugar quota share on the American market to 0. What

is more, vessels carrying merchandise near Cuban ports are blacklisted. In 1962 a presidential

proclamation on the part of the United States of America all imports from Cuba are banned. In

1963, the Trading with the Enemy Act enables US decision makers to freeze all Cuban assets in

the US (worth $33 million)25. In 1964, following the discovery of a Cuban-origin arms cache in

Venezuela, the Organization of American States (OAS) votes for mandatory sanctions covering

24

Peterson Institute for International Economics, Case 60-3 US v Cuba (1960-), Chronology of Key Events 25

Idem previous

20

all industries except for food and medicine. The OAS sanctions are lifted in 1975. In 1981, the

Reagan administration enacts tighter embargo conditions as a result of Cuba sending troops to

Angola and Ethiopia and supporting Marxist movements in Nicaragua and El Salvador. In 1982

the US bans both business and tourist travel to Cuba. In 1989-1990 the American invasion of

Panama further increased the effects of the embargo since, the invasion prevented Cuba from

using the Panama banking system and the free trade zone at Colon to bypass the embargo.

Following the collapse of the Soviet Union in 1990, the Soviet support to Cuba ended and as such

the subsidized petroleum deliveries ended.

In 1992, the US passed the Cuban Democracy Act which forbids foreign subsidiaries of US

companies to have any relationships with natural or legal person of Cuban origin. Also, the bill

prohibits any ship that has anchored in a Cuban port from docking in any US harbor for 180 days.

Furthermore, the act advocated cessation of aid to any country that provided assistance to Cuba26.

On February 24, 1996, a Cuban Mig-29 fighter shot down two civilian aircraft pertaining to a

Cuban exile group – Brothers on the Rescue. The rationale behind this was a claim on the part of

the Cuban government arguing that Brothers on Rescue had been violating its air space for over a

year.27 As a response, the Congress passed the Cuban Liberty and Democratic Solidarity Act, also

known as the Helms Burton Act. This legislation incorporated the existing US sanctions against

Cuba in the national legislation. As a result of this incorporation, the sanctions became official

US legislation and are, as a result harder to remove. The bill permits American citizens claiming

property expropriated by the Cuban government to “sue for damages foreign corporations or

individuals that traffick in such property”. What is more, the act also seeks to restrict aid to

countries sharing intelligence with Cuba or providing assistance for the completion of the Juragua

nuclear power plant. International reactions to the Helms-Burton Act have been strong against the

American standpoint. Mexico and Canada have condemned the bill claiming that it opposes the

fundamental principles of NAFTA (businessmen are allowed to travel freely across the NAFTA

area)28. Furthermore, the Mexican Congress passes in 1996, an act that has acted as a

counterbalance for the HBA. The Mexican bill proposes fines of up to $301000 on Mexican

26

Cuban Democracy Act of 1992, www.state.gov 27

The ideology of Free Trade and the Cuba Exception – A thesis, Submited to the Graduate Faculty of Louisiana

State University and Agricultural and Mechanical College, Michael C. Schena, December 2006 28

The Helms-Burton Act: A step in the wrong direction for the United States Policy Towards Cuba, p 213-237,

United States Policy Towards Cuba

21

companies that act according to US legislation. The Canadian parliament also passed legislation

similar to the Mexican act. What is more, the EU approves antiboycott legislation that prohibits

European companies from complying with the HBA unless circumstances are exceptional. Any

US Court awards based on the HBA will not be recognized and can be recovered in the EU if an

US claimant that is successful has properties in the European Union29. In November 1996 the

WTO decided to establish a panel in order to hear the dispute brought against the US by the EU

to what concerns the HBA. The US have informed the World Trade Organization that any

decision on this matter cannot be imposed on the US since the WTO does not have the right to

review the international policy or the national security policy of any of its members30. In 1998,

the EU and the US reach a compromise on the HBA.

Slowly but surely, Cuba starts normalizing its diplomatic relations with countries lile

Guatemala(1996), Spain (1998), Haiti (1998) and Dominican Republic (1998). In July 1999,

Cuba mandates that the EUR will be used in transactions with countries in the Eurozone in order

to simplify financial operations and to decrease conversion costs. In 2004, President Fidel Castro

announces that the $US will be banned from commercial transactions and American dollars will

be converted into pesos.

In October 2000, the Congress of the US voted in favor of a bill entitled the Trade Sanctions

Reform and Export Enhancement Act. This act made possible a relaxation of the embargo and

permitted the commercialization of agricultural goods and medicine between the US and Cuba.

The extent of medicine trade is extremely limited though compared to the trade in food-related

products.31

In September 2009, Barrack Obama issued a statement in which he revealed that the Cuban

Embargo will be in place for the following year: "I hereby determine that the continuation for one

year of the exercise of those authorities with respect to Cuba is in the national interest of the

United States32.

29

European Union News, 29 October 1996 30

Robert S. Greenberger, US Asserts Foreign Policy is Involved in its dispute with the EU over Cuba., Wall St.

Journal, February 21, 1997 31

The US Embargo Against Cuba – Its impact on economic and social rights, Amnesty International, 2009 32

Obama Extends Cuba Embargo one year, 15th

September 2009, The Huffington Post

22

In any case, in recent years, the relations between the 2 countries are not as tensioned as they

used to be and at the time being 5 bills promoting trade openness towards Cuba are being

discussed:

• Promoting American Agricultural and Medical Exports to Cuba Act of 2009;

• Cuba Reconciliation Act – aims at renouncing the Trade Embargo and repealing the

Cuban Democracy Act of 1992;

• The United States- Cuba Trade Normalization Act of 2009;

• Free Trade with Cuba Act;

• The Freedom to Travel to Cuba Act.

Goals of American Policy Makers

The initial purpose of the sanctions against Cuba were to “destabilize the Castro regime, causing

its overthrow, or, at a minimum, to make an example of the regime by inflicting as much damage

on it as possible”33. In 1964, the goal of the embargo is reformulated under Secretary of State

George Ball: the new goal was to show to Cuban citizens that Castro could not act in their best

interest and to prove that communism cannot function in the Western Hemisphere; a secondary

goal was to increase the costs of the USSR maintaining a communist outpost in the region.

The 70s have brought another shift in the purpose of the embargo. On February, 7th 1978

Assistant Secretary for Inter American Affairs Terence A. Todman declared: “The Carter

Administration has begun an effort to improve relations with Cuba, but normalization will take a

long time and will depend on many factors, including Cuba`s international behavior […] The US

desires: improvement in human rights in Cuba, release of political prisoners, thousands of whom

have been jailed for years; more responsible international behavior by Cuba, particularly in

Africa; and compensation to US citizens and businesses whose property was taken over by the

Cuban Government.”34

33

Newfarmer, Richard, ed. 1982. "Relations with Cuba." In From Gunboats to Diplomacy: New Policies for

Latin America. Papers prepared for the Democratic Policy Committee, US Senate, June. Washington. 34

Peterson Institute for International Economics, Case 60-3 US v Cuba (1960-), Goals of Sender Country

23

Other declarations have included as rationale for the embargo the fact that Cuba used to

encourage socialist revolutions in South America and Africa (the case of Angola, El Salvador,

and Ethiopia). Furthermore, some US officials have claimed that trading with Cuba would equal

sponsoring Fidel Castro and his regime, fact that was deemed unacceptable to do for a democratic

country such as the US.

After 2000, the goals of the US have somewhat coagulated. Cuban Democracy and respect for

human rights would be promoted in 4 ways: (a) international pressure on the Cuban government

through economic sanctions and diplomatic measures,(b)support to the Cuban people with the

purpose of developing civil society, (c) cooperation with the Cuban administration in areas of

common interests such as migration, (d) forging a multilateral context to press for human

rights.35. The Bush Administration further enhanced these points and promoted the embargo

claiming that it is a moral statement.

Reaction of the Target Country

After the embargo was imposed, Cuba had to redesign its position on international markets in

order to replaces losses caused by the US Embargo. As a result, in 1963, Cuba negotiated an

agreement with USSR that targeted sugar sales. The price of sugar was decided between the 2

governments and was worth 6 cents/pound of sugar. What is more, Cuba negotiated an aid plan

from the USSR.

A report prepared by Cuban National Bank with the purpose of presenting it to its Paris Club

creditors revealed that the Cuban Administration had been buying cheap sugar from international

markets. This sugar was then re-exported to the Soviet Union at several times the price in order to

purchase Russian petroleum which was then resold in order to obtain hard currency. To give one

example, in 1984, Cuba used its $1.3 billion sugar profits to purchase 6.7 million tons of

subsidized Russian oil. Out of this quantity 4.9 million tons were later resold.36

35

Alan Larson, Assitant Secretary of State, 2000 36

Unidentified State Department official confirm authenticity of the document which was obtained from a

European Bank. It was given to the public by the Cuban-American National Foundation which had proclaimed itself

as being against the Castro regime. – Washington Post, 5 June 1985, Peterson Institute for International Economics,

Case 60-3 US v Cuba (1960-),Chronology of Events.

24

In the 70s Cuba decided to support Marxist revolutions in Africa and South America in order to

safeguard its position in a communist world. It was however futile, since the collapse of the

Soviet Union and declining GDP growth rates have made it impossible to support such

revolutions. Thus, the troops deployed in countries like Angola and Ethiopia and other forms of

support ceased in the late 80s.

After the collapse of communism in Eastern Europe, Russia and other former Soviet Republics, it

was clear for Castro that the financial stability was no longer a given: “For decades, our plans

were based on the existence of a socialist camp, on the existence of several socialist countries in

eastern Europe, in addition to the Soviet Union, with whom we signed agreements and

established extensive economic relations. We do not know what kind of governments these

countries will install. We have no security as to what trade will be like in 1990 and we have

complete uncertainty for the period 1991-1995”37.

Attitude of Other Countries

Since Cuba was a communist outpost in the regions, the USSR was one of the first countries to

start aiding Cuba after the embargo was imposed. Beginning with 1961, USSR was one of the

most important markets for Cuba`s sugar industry. In certain periods, more than half of Cuba`s

sugar production were exported in the Soviet Union. For example between 1981-1985 USSR

absorbed more than 50% of Cuba`s total sugar production and this accounted for 80% of the

value of Cuban exports to USSR38.

In the seventies, the two countries, had found a way to draft contracts in such a way that the trade

between the two countries would be advantageous to Cuba. Contracts provided a minimum price

that was above market prices; what is more, this price was adjusted to the price changes of a

basket of Cuban imports from the USSR. Price levels generated by this formula tended to rise on

a yearly basis even though world prices for sugar stagnated or even decreased. The result was a

considerable premium paid by the Soviet Union to the Cuban administration, in the form of sugar

prices.

37

Toward the termination of licensed U.S. foreign subsidiary trade with Cuba: the legal and political obstacles., Arnold M. Zipper; Law and Policy in International Business, Vol. 23, 1992 38

Cuban-Soviet Sugar Trade: Price and Subsidy Issues, Jorge F. Perez-Lopez, 1988, Bulleting of Latin American

Research

25

As stated previously at the initial negotiations the price for a pound of sugar was set at 6

cents/pound. Starting with the mid sixties, the Soviet Union had begun to pay concessional prices

that were above world market rates in sign of support for the Cuban administration. For example,

the contract price that was set in 1985 was around half a dollar (45 cents) per pound and in 1985

a pound of sugar valued at world prices was 4 cents39.

In addition to the sugar trade, in the early 60s the USSR credited Cuba with $100 million at 2.5%

interest rate in order to purchase goods such as oil and machinery40. Any good purchased using

this credit was bought from Russia and as a result the Cuban economy became interlocked with

that of the Soviet Union. This money would constitute the first step in an aid plan designed by the

Soviets – Cuba received $3.6 billion only in the 60-70 decade.

The Organization of American States favored the embargo when it was first imposed. In 1964, all

members of the OAS except for Mexico ended all commercial relations with Cuba. In time, the

sanctions were lifted by the OAS: in the early 70s Peru, Argentina, Jamaica, Guyana, Barbados

ended the sanctions and in 1975 the Organization of American States completely ceases

sanctions.

The European Union and the 2 NAFTA members apart from the US continued their relations

with Cuba after the embargo was imposed. After the Helms-Burton Act (which had as main

objective to discourage investments in Cuba), tensions were raised between the EU, Mexico,

Canada and the United States. As stated in the Chronology of Events part of this paper, the 3

entities passed bills that countered the effects of the Helms Burton Act for their Citizens. Bill

Clinton and George W. Bush agreed to waivers of the bill for the 3 entities at the end of the

negotiations.

39

Idem 17 40

An Embargo for the Ages, Gregory M. Crum, Bruce Lusignan, March 2004

26

Economic impact of the Embargo

Initial impact of the embargo on Cuba`s Trade

A Time Series Model

A time series is generally defined as a set of quantitative observations arranged in chronological

order. With the help of regression analysis, one can detect regularities in the observations of a

variable and derive correlations and laws of movement for the variables.

For the purpose of this paper, a regression analysis has been conducted in order to find out the

trends in exports and imports for Cuba. On the one hand, a regression analysis has been

conducted in order to deduct the correlation between time and Cuba`s exports with the world. On

the other hand, another analysis has been conducted with the aim of computing the correlation

between time and Cuba`s imports with the world.

Data Selection

The dependent variables, exports, respectively imports are collected from the WTO Time Series

Database41. Value are expressed in millions of $US at current prices.

Estimation Results

Imports Regression Model

The coefficient of determination for the function is 56% which implies that the function captures

56% of the variation of exports over time. The coefficient of correlation is 75% which shows a

very powerful correlation between the level of merchandise Cuba imported from the rest of the

world.

After computing the coefficients the regression function takes the following form

ImportsCuba-World= -43596.5+22.6*Time

The function`s intercept is -43596 and has no statistic significance. The coefficient of the time

variable suggests that with each passing year Cuba imported in the analyzed period goods and

services worth of $22.6 million dollars more.

41

http://stat.wto.org/StatisticalProgram/WSDBStatProgramHome.aspx?Language=E

27

As can be seen from Graph 1, before the embargo was imposed, between 1948-1961 the level of

the predicted imports from the rest of the world gravitated around the values predicted by the

regression function. Starting with 1960 (the moment when Cuban-American relations have

started to get tense) and with 1962 (the year the embargo was put in place), one can notice that

the level of imports from the world still gravitated around the values of the regression line. As a

result one can draw the conclusion that with the embargo in place, Cuba has lost one of its most

important import markets, the US and the OAS. Nonetheless, its agreement with Russia has

enabled Cuba to still import the goods it needed.

All in all, the difference between the level of actual imports and predicted imports between 1962-

1973 has been $2372 million dollars. Thus, one can state that the conclusion of the trade

agreement between Russia and Cuba has enabled Cuba to still get the products its economy

needed. As a result, from this point of view, the embargo did not have much effect in its first

years.

Graph 1: Cuba`s

Imports from the

World

Source: WTO Trade Statistics

28

Exports Regression Model

The coefficient of determination for the function is 25% which implies that the function captures

25% of the variation of exports over time. The coefficient of correlation is 50% which shows a

powerful correlation between the level of merchandise Cuba exported to rest of the world.

After computing the coefficients the regression function takes the following form

ExportsCuba-World= =-5771.5+3.3 * Year

The function`s intercept is -5771.5 and has no statistic significance. The coefficient of the time

variable suggests that with each passing year Cuba exported in the analyzed period goods and

services worth of $3.3 million dollars more

As one can see between 1948-61, the values of actual exports gravitated around the regression

line. After the embargo was imposed one (and even earlier) one can see that the level of exports

have started to decrease. Before the embargo, the US was Cuba`s main partner and as a result of

the loss of this export market the total level of trade have been below the predicted values.

All in all, the difference between the predicted values of the exports and the actual exports is $US

4863 million which suggests that the embargo put in place by the OAS led by the US has

constituted for Cuba a considerable export markets loss. The deficit can aslo be further explained

by the advantageous trading relation between Cuba and USSR. The subsidies provided by the

Source: WTO Trade Statistics

Graph 1:

Cuba`s Exports

to the Rest of

the World

29

Soviet Union discouraged Cuba from developing new sources of convertible foreign exchange

and thus the export sector has been damaged42.

Nonetheless, after 1975 when the OAS embargo was lifted, Cuba`s export level skyrocketed.

Long-term impact of the embargo

The American administration claims that the embargo on Cuba has not caused much economic

distress on its economy. Likewise, the Cuban administration claims that the effects of the

embargo are not particularly dire. There is however, enough evidence to suggest that the impact

of the embargo has taken a toll on both parties involved in the process.

The US International Trade Commission states that over the year the costs on Cuba until 2000

amount to $67 billion dollars. Also the ITC approximates that the annual loss to American

Exporters at an estimate of $1.2 billion yearly.43

The initial toll suffered by Cuba was a considerable increase in freight costs – transportation costs

increased by $50 million/year due the US blacklisting policy of ships harboring in Cuban

docks.44 The same source claims that “one quarter of the island`s buses were out of operation for

want of spare parts late in 1961. Only one half of Cuba`s 1400 railroad passenger cars were

functioning in 1962 […]The sugar industry was particularly affected, especially by the failure of

the transport system and mill breakdowns. […] By 1965 nine sugar mills had been cannibalized.

Of the 161 mills existing in 1969 only 115 functioned in April 1972.”

The collapse of the communism in Eastern Europe and USSR meant lost markets for Cuba. Since

these countries supplied Cuba with machinery, spare parts, capital etc, the loss of these markets,

the Cuban economy contracted by 34% from 1990-199445. Trade with the United States could

have been a cushion for the Cuban Economy in these times. As a result, the economic slowdown

in the period was aggravated by a lack of trade with the US.

Costs that cannot are hard to calculate have also been incurred. For example the costs of doing

business have increased during the embargo time. Regarding the Helms-Burton Act, the

42

Has Cuba definitely found the path to economic growth? Robert Orro, 2000 43

Policy Analysis, October 2001, Report from Havana, Time for a Reality Check on US Policy towards Cuba,

Jonathan G. Clark and William Ratliff 44

Peterson Institute for International Economics citing Losman, Donald L. 1979. International Economic Sanctions:

The Cases of Cuba, Israel, and Rhodesia. Albuquerque: University of New Mexico Press. 45

Economist Intelligence Unit, Country Profile, 1996-1997

30

economists of the Peterson Institute for International economics claim that “it is difficult to find

concrete evidence of companies disinvesting from Cuba as a direct result of the HBA”46. The

same source cites the 12th March 1997 issue of Financial Times when stating that the Cuban

administration admits to have noticed some investors being frightened by the Helms-Burton Act

since the bill has complicated financial flows and made investment possibilities more

complicated. Red tape barriers have also increased the costs of conducting business not only in

Cuba, but around the world. For example, foreign manufacturers have to certify that their

exported products in the US do not contain any Cuban primary or intermediary products.

Furthermore, since in 1986 Cuba decided to stop paying its debt to non-socialists countries,

commercial credit has been unavailable for Cuba (except at very dire terms). One option would

have been getting loans from the IMF and the World Bank. However, the United States has

vetoed Cuban membership in wither of these institutions. Therefore, it has been very hard for

Cuba to loan money on advantageous terms.

Offsetting policies

Soviet Subsidies

On the other hand, the effects of the embargo on Cuba have somewhat been offset by the

considerable amount of money coming from the Soviet Union. The level of Soviet subsidies

peaked at 6 billion/year in the 80s.47 Between 1961-1973 the average level of Soviet support was

on average $270 million annually. This sum decreased the impact of the subsidies from 17.25%

of the GDP to 6.9%. Between 1975-1989 the average level of the USSR subsidies is estimated at

around $2,850/annum and is estimated to have reduced the impact of the sanctions from 21% to

1% of the GDP48.

The level of Soviet aid is hard to compute as scholars point out. There are different

approximations on the amount of subsidies USSR provided to Cuba. These figures range from

20% of Cuban GDP to 26% and even 37% of the GDP.49

46

Peterson Institute for International Economics, Case 60-3 US v Cuba (1960-), Observed Economic Statistics 47

Idem 20 48

Peterson Institute for International Economics, Case 60-3 US v Cuba (1960-), Observed Economic Statistics 49

Has Cuba definitely found the path to economic growth? Robert Orro, 2000, ASCE

31

Commerce with the USSR gave Cuba the possibility to rip the benefits of technology, spare parts

and intermediary products. Apart from the benefits this has also resulted in a Cuban industry

dependent on imports for its survival which augmented even further the crisis Cuba would suffer

after the collapse of the USSR.

The collapse of communism was particularly harsh on Cuba. The country had lost the protection

provided by the Soviets and the access to USSR products at subsidized prices. Without the

support of the Soviets the costs of the embargo reached 14% of the GDP50.

Remittances

Remittances are rather important to Cuba`s economy to the extent that they are important for

other countries in the Caribbean. Cuba receives money from abroad to the same extent as the

Dominican Republic and twice as more than Haiti51. What is more, a survey conducted in 1998

covering Latin American countries revealed that more Cuban Americans send remittance to their

home countries than to Mexican-Americans and sensitively equal (yet lower) than Dominican-

Americans52.

Historically speaking, both Cuba and the US initially prohibited remittances. In the period 1969-

1993 Cuba prohibited the circulation of foreign currencies and only allowed remittances in kind.

The United States have also prohibited financial flows between the two countries in question.

Nonetheless, in time, both the sender and the target country diminished the level of regulation of

remittances. Beginning in 1993 (partly due to the collapse of the USSR), Cuba has legalized the

dollar and adopted a strategy meant to augment the inflow of dollars sent by Cuban emigrants in

the US. The US has often times attempted to impose a maximum limit of remittances ever since it

first legalized the practice in 1978.

50

Idem Previous 51

Remittance to Cuba: An evaluation of Cuban and US Government Policy Measures, Lorena Barberia, September

2002 52

Based on a survey of on Latino Television Portrayals, DeSipio (2000) – the percentages were confirmed further

using regression analysis tools.

32

According to a 2004 Report of the Commission for Assistance to a Free Cuba53, cash remittances

to Cuba amount to $400 - $800 million per annum. The report also mentions other sources

estimating that the sum could even reach $1 billion/year.

Current restrictions on remittances are managed by CACR (Cuban Assets Control Regulations.

As of 2004, $300 can be sent from the US to Cuba every trimester to immediate family members

(child, grandchild, husband/wife, and sibling) and up to $300 can be carried by authorized

travelers to Cuba. In 2009, President Barack Obama released a statement in April 2009

announcing that remittance limitations to family members in Cuba would be lifted. Institutions

that channel remittances do not need specific licenses any longer but data collection showing that

compliance with remittance sending regulations has been met is still required (Cuban government

officials, members of the communist party and non-immediate family members are not allowed

to receive inflows from the US).54

The 2007 Cuban Telephone survey55 reviewed remittance receiving practices in Cuba. When it

comes to the receiving channel 49.4% of the respondents reported to have received money

through non-official channels like friends. This suggests that the level of remittance may actually

be twice as much as that suggested by statistical date. Only 39.1% use channels like banks or

money-transfer companies.

The top source country for remittances is the US despite the tight regulations of the practice.

62.2% reported to receiving money from the US. Other top source countries include Italy, Spain,

Costa Rica and Mexico.

On the point of remittance use, 47.6% of respondents claim to use the money for food and 42.5%

report using the money to take care of problems. Therefore, 97.6% of the respondents use the

money in order to live on a daily basis. As such one can conclude that remittance send to Cuba

have alleviated the impact of the embargo.

53

Commission for Assistance to a Free Cuba, Report to the President, May 2004, p. 34 54

Cuba: US Restrictions on Travel and Remittances, Congressional Research Service, Mark P. Sullivan, Octover 16,

2009 55

Remittances to Cuba: An Update, Sergio Diaz-Briquets, 2008, The survey has an 8% error margin and a 95% level

of confidence; the sample is statistically significant for the whole Cuban population.

33

Non-economic effects of the embargo on Cuban citizens

One of the most notable repercussions of the embargo is related to Cuban Public Health. The

damages stem from the fact that the embargo forces Cuba to buy products and equipment from

markets that are geographically far. This results in a need to use intermediaries and these factors

subsequently bring price increases in medicinal products and equipments.

Furthermore, Cuban scientists and health practitioners are denied visas in the US. As a result they

cannot attend scientific congresses and event hosted in the US. Therefore, the embargo can be

considered an obstacle preventing professional up-dating in the medical field.

Last but not least, donations of medical equipment, medicine and medical products require

export licenses even if the donation has a humanitarian purpose56. The same report also mentions

that the embargo “contributed particularly to malnutrition affecting especially women and

children, poor water quality, lack of access to medicine and medical supplies and limited

exchange of medical and scientific information due to travel restrictions and currency

regulations”. Furthermore, UNICEF reported that Cuba was unable to import nutritional products

meant for children and at-school, hospital and day-care consumption. The effect of this had been

adverse in the sense that it is believed to be a contributing factor in the high prevalence of iron

deficiency anemia affecting 37.5% of children under 3 years old in 200757. HIV/AIDS programs

have also suffered since UNICEF could not offer their products for the implementation of the

programs and as such transaction with more distant suppliers resulted in higher prices and delays.

On the point of the food issues, even though exports to Cuba have been legal since 2000, they are

regulated by strict legislation and compliance with a very large bureaucratic system of granting

licenses, in many cases by more than just one institution. In 2008, Cuba could have bought, at

current market prices, more than 339,000 tons of wheat or 615,000 tons of corn or 126,700 tons

of chicken more if the embargo was not in place58.

56

Amnesty International, The US Embargo against Cuba and its Impact on Economic and Social Rights, September

2009 57

Necessity of ending the economic, commercial and financial embargo imposed by the US against Cuba, Report of

the Secretary General, August 2008 58

Report by Cuba on Resolution 63/7 of the UN, presented to the UNGA on October 28, 2009

34

When it comes to education, the Cuban government reports that the effects of the embargo

transform into daily shortages in school supplies. It is estimated that the freight costs for

importing school supplied from Asia are double than what they would be if these products were

imported from the US59.

Testing Potential Bilateral Trade between Cuba and the US using the Gravity Model

The Gravity Model

The gravity model is considered to be a simple empirical model used for analyzing bi-lateral

trade flows between any two given countries. The model translated Newtonian physics into

economics in the sense that it explains trade flows between a pair of countries by taking into

account their “mass” (GDP) and the distance between them.

The Gravity Model can be summed by using the following equation:

(1)

Where:

Tradeij represents the level of bilateral trade between Country i and Country j (cumulated value of

exports and imports);

GDPi and GDPj represent the Gross Domestic Products of Countri i, respectively Country j;

Distij represents the distance between the two countries;

α,β1,β2 are parameters - β1 is positive and β2 is negative.

In order to create a linear form of the gravity model, one needs to take the natural logarithms of

equation (1). As such the model becomes:

log(Tradeij) = α + β1 log(GDPi x GDPj) - β2 log(Distij) + e (2) 59

Idem Previous

35

The 3 coefficients α,β1,β2 will be estimated and e represents the error term that captures other

events that are not characterized by the model.

In order for the model to capture the variation in bilateral trade levels, dummy variables have

been added and an augmented gravity model has been created for the purpose of this paper.

log(Tradeij) = α + β1 log(GDPi x GDPj) - β2 log(Distij) + β3(Langij) + β4 (Borderij) + β5 (RTAij) (3)

The independent variables in the Augmented Gravity Model can be explained in the following

way:

(GDP) - The model will employ GDP at nominal rated expressed in $US.

(Dist.ij) – Distance between country i and country j will be estimated in great circle distances –

the air distance between the capitals of the two countries. In case of the EU27, the capital was

considered to be Prague for the purpose of this paper. Prague finds itself approximately in the

geographical middle of the European Union territory.

Dummy variables have also been added to the model in order to describe the impact of qualitative

variables on bilateral trade:

(Langij) – If the two countries share a common official or commercial language the value for this

variable will be 1 and if otherwise, 0. A positive correlation between this variable and bilateral

trade is expected since a common language reduces transaction costs in the form of making

communication easier. What is more a common language reduces the cognitive distance between

two countries and as such, closer relations between the citizens are facilitated.

(Borderij) – If the two countries share a common border the value of this variable will be 1 and 0

if the two countries are not neighbors. If two countries have a common border they are expected

to trade more due to facility of transactions and also due to possible historical and cultural

similitude.

(RTAij) – If the two countries in question have signed a regional trade agreement the dummy

variable will register 1 and 0 if otherwise. This variable does not make differences between types

of regional trade agreements like free trade areas, customs unions, regional economic integration

36

agreements or special trade agreements. It predicts though that trade will increase if a regional

trade agreement is signed.

Data Selection

The dependent variable is the natural logarithm of total bilateral trade measured in nominal

values and expressed in $US for the year 2008. Up to 100 total bilateral trade in merchandise

observations have been collected from the European Commission Trade Statistics.60

The gross domestic products of countries have been collected from the World Bank: World

Development Indicators database - World Bank, 1st July 2009.61

The great circle distances between the capitals of any of the two sampled countries have been

collected using the “Great Circle Distances between Capital Cites” calculator62.

In order to get the values for the RTA variable, the Regional Trade Agreements Information

System63 (RTA-IS) of the World Trade organization was used.

For purposes of setting values of the Lang and Border variables, the CIA World Factbook64,

Country Profile Section was used.

Estimation Results

The regression model seems to accurately predict the variations of the bilateral trade between any

two given countries. The coefficient of determination is 83.9% suggesting that the regression

function captures 83.9% of the variation of bilateral trade between any two given countries. The

rest of 16.1% is not explained by the function and is influenced by other factors than the GDP

levels, distance, common language/border or inclusion in the same Regional Trade Agreement.

The Correlation Coefficient has the value of 91.6% and pinpoints a strong correlation between

the dependent and explanatory variables. As can be noticed, the value of this coefficient is close

to its maximum possible value; therefore one can state that there is a strong relation between the

bilateral trade of two given countries and the size of their GDPs, the distance between them.

60

http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/statistics/ 61

http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf 62

http://www.chemical-ecology.net/java/capitals.htm 63

http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx 64

https://www.cia.gov/library/publications/the-world-factbook/geos/al.html

37

Furthermore a common language/border and membership to an RTA seem to further increase the

correlation.

After computing the coefficients using OLS the equation becomes:

log(Tradeij) = -10.94+ 0.82 log(GDPi x GDPj) -0.37 log(Distij) + 0.85 (Langij) + 0.75 (Borderij) +

0.97 (RTAij)

The intercept has the value -10.94 and has no statistic significance.

The coefficient of the GDP variable is positive and seems to suggest that a 1% increase in the

size of a given pair of countries would translate to 0.82% more trade between the two countries

(the increase is less than proportionate).

The coefficient of the distance variable has, as expected a negative sign. The coefficient indicated

that a 1% increase in the distance between two countries would result in a decrease in the level of

bilateral trade with 0.37%.

The coefficient of the dummy variable for a common language is 0.85. Since the quantitative

variables are expressed in natural logarithmic form, the coefficient of the dummy variable has to

be recomputed as following: -1)%, where α is the coefficient in question.

Using the above mentioned technique we can infer that a coefficient of 0.85 for language implies,

ceteris paribus, implies that two countries sharing a common language are 120% more likely to

trade than two countries with no common language. The coefficient for the common border

suggests that two countries sharing a common border will engage in 2 times more trade than

countries with no border. Furthermore, membership in a Regional Trade Agreement may lead to

144% more trade as it otherwise likely for a pair of countries.

38

In 2008, the level of bilateral trade between Cuba and the United States is estimated at $784

million dollars by the European Commission. Without the embargo the potential trade between

the US and Cuba would amount to $6251 million – roughly 8 times more bilateral trade between

the US and Cuba. On the one hand, without the embargo, the US would become Cuba`s most

important trade partner and flows between the two countries would reach 41% of the total import

- export flows of the two countries. On the other hand, Cuba would not be among the top 10 trade

partners of the United States. However it would be a more important trade partner than Honduras

and Costa Rica are now. Furthermore, the exchanges between US and Cuba would classify Cuba

as a major trade partner for the US being in the top 40 trader countries with the United States.

The model seems to suggest that the EU and Cuba are not trading at their potential. According to

the model, the EU and Cuba should trade $4,201 million each year. The actual data from the

European Commission shows a difference of approximately $1,000 between the actual and the

potential trade. Surely the deficit must also come from the fact that Cuba still does not benefit

from a market economy. Nonetheless, part of this deficit can be explained by the sanction. The

Helms-Burton Act might have scared off some possible European investors in Cuba and may

have deteriorated the relations between the two parties.

39

On the point of its relations with Venezuela, the two countries seem to be trading over what the

model predicts. In 2008, Cuba and Venezuela traded merchandise valued at $3667 million dollars

and their potential trade estimated by the gravity model is $1915 million. This data seems to

suggest that some of the potential exports to the United States or the European Union may have

been diverted to countries like Venezuela. Evidence seems to suggest that trade may have been

diverted to China either due to ideological reasons or to try to offset the effects of the embargo

(overtrade with China amounts to $1035 million). Canada is the 4th largest trade partner of Cuba,

the two countries trading merchandise valued at $1645 million. The Gravity Model suggests that

the two countries overtrade by approximately $710 million only in 2008.

The findings of the model pinpoint that countries in the area trade more than their estimated

potential suggesting that the embargo has resulted in trade diversion on the part of the Cuban

government with the purpose of offsetting the embargo.

Contemporary Cuban Economy

After the collapse of the Soviet Union, the Cuban Economy suffered greatly as shown earlier in

this paper. Cuba took its path to economic recovery in 1994. With the loss of the Soviet

subsidies, Cuba had to redirect its economy to face the West more than it had ever done.

First of all, trading with capitalist countries enabled Cuba to trade at world market prices. This

removed one of the main distortions in the Cuban economy since its previous trading relations

were not based on market prices. Secondly it has opened the door to Foreign Direct Investment

which has greatly benefitted Cuba over the year,

In terms of economic growth, from 1994-2000 growth averaged 3.7% annualy. From 2001-2006

the levels of GDP growth reached 5%. In 2005 the level of 9% growth was reached whereas in

2006 GDP growth registered a record 12% level. For the following 3 years, levels have remained

around to 6% due to damaged cause by hurricanes Dennis, Wilma, Gustav and Ike.65 The same

source argues that the economy has benefited from increasing level of exports in the nickel and

tourism sectors. Furthermore, support has been coming from China and Venezuela in the form of

investment commitments and credit lines. Cuba has a preferential oil agreement with Venezuela,

65

CRS Report for Congress, Cuba: Issues for the 110th

Congress, September 24, 2008, Mark P Sullivan.

40

by which the latter supplies Cuba with more than 90,000 barrels of oil daily. Some obervers

claim that Venezuela`s oil subsidies amounted to more than $3 billion in 2006 and more than $4

billion in 2007.

FDI levels have been growing steadily in Cuba since 1990 when only 2 million dollars were

invested. In 2000, 74 million dollars entered the Cuban borders as investment and in 2006 the

FDI stock of the country was around 78 million dollars. In 2008 the level reached 185 million

dollars66. The FDI in Cuba remains however one of the lowest in the region of the Caribbean:

Cuba attracts only 0.09% of the FDI in the area.

When it comes to economic freedom, the country is ranked as one of the least free countries in

the world, ahead of only Zimbabwe and North Korea. Compared to 2009, in 2010 its economic

freedom has decreased by 1.2 points, reflecting a worsened score in investment freedom.67 The

freedom of the Cuban economy is still hampered by severe institutional constraints as the private

sector is very limited. The same report mentiones that “no courts are free of political interference,

entrepreneurship is impeded and private property is striclty regulated. Lack of excessive

regulations limit trade and investment”.

One can draw the conclusion that it is not the economic embargo that puts the strain on the Cuban

economy, but the strategies of the Cuban policymakers. In fact, Cuba's 2009 report to United

Nations on the US economic blockade estimates the cost of the embargo to be 236 million dollars

in 200968 which is a mere 0.04% of the 2009 Cuban GDP.

66

World Investment Report 2009, Transnational Corporations, Agricultural Productions and Development 67

2010 Index of Economic Freedom Report, Cuba 68

Report by Cuba on resolution 63/7 of the United Nations General Assembly, Presented to the UNGA on October

28, 2009

41

Recommendations and Conclusions

The Cuban Threat to the US National Security

In 1970, out of the 26 Latin American and Caribbean countries, 17 were ruled by authoritarian

regimes. In 2010, the only country in the region to have a dictatorial regime is Cuba.

Indeed during the Cold War, Cuba offered the Soviets a permanent military base on the island

and an intelligence post approximately 90 miles of the coast of Floria69. Also, it allowed Soviet

vessels free port access rights. What is more during the Cold War, Cuba tried to export socialist

revolutions in countries like Angola, Nicaragua and Ethiopia. However, with the collapse of the

Soviet Union and the disappearance of a socialist trend in the area, Cuba can no longer be

considered a credible threat to the United States national security.

Cost to the target country

As mentioned earlier in this paper, the embargo has taken its greatest toll on Cuba after the

collapse of the Soviet Union. At that point the embargo costs were estimated at 14% of the GDP

(compared to 6.9% between 1962-73 and 1% between 1975-1989). At the time being, the

embargo costs Cuba less than 1% of its GDP. One could assert that if there was a right time for

the embargo to function, then this time would have been right before the collapse of the Soviet

Union.

At that particular moment, Cuba had lost most of its import-export markets; it was unable to

provide technology, spare parts and the much needed oil. What is more, its industry was heavily

dependent on used, obsolete capital. As such, the position of the country was critical and it is

very unlikely that the country will undergo a disturbance of this level in the foreseeable future.

Benefits to the communist regime

Continued hostilities on the part of Washington can only benefit the communist regime in Cuba.

The embargo continues to be the best excuse Raul Castro (the new leader of Cuba) has for the

disastrous policies of his policymakers. A Hoover Institution Report on Cuba points out: “Castro

knows that the embargo to some degree keeps him from becoming just another in a century long-

string of failed Latin American dictators […] Nothing would come so close to ‘killing’ him while

69

CATO Handbook for Congress, Policy Recommendations for the 108th

Congress, 2003

42

he is still alive as lifting the embargo”70. Basically, as long as both Raul and Fidel Castro can

pinpoint the US as being an external threat to the wellbeing of the Cubans, they will be successful

in harboring dissent among the Cubans. What is more, the embargo can be used as a justification

for stirring nationalist and anti-US feelings on the island.

Possible Effects of lifting the embargo

The gravity model detailed earlier in this paper has explained that if the embargo would be lifted

the total bilateral trade between the US and Cuba will increase eight fold. On the one hand, the

US will become the top trading partner of Cuba and on the other Cuba will become again a very

important country for the United States in terms of it trade capacities.

It is clear that the embargo has resulted in trade diversion and the cessation of the embargo could

reinstate the natural flow of trade in the area. Without the embargo Cuba would trade less with

countries like China, Venezuela and Canada and would exchange foods for more favorable prices

with the United States.

The Helms-Burton Act was intended to prevent investments in Cuba. Fears that investments

would save the communist regime in Cuba are inherently flawed. Significant capital flows to

Cuba will not occur unless the country decides to undertake free market restructuring measures.

Indeed the available evidence shows that FDI in Cuba has very low levels and even American

officials claim that the Helms-Burton Act did not have much effect.

What is more, openness to investment and trade in goods and services could promote democracy

better than can isolation. It seems apparent that the Cuban officials are aware of this fact. To give

just one example, Cuba`s opening to tourism foreign investors is accompanied by harsh measures

intended to restrict ordinary citizens from visiting tourist facilities and foreign hotels. The

phenomenon of “tourism apartheid” has as main rationale the fact that ordinary Cubans could get

a taste of what democracy means in their interaction with foreigners and this touch of democracy

could instigate social unrest against the regime. Therefore, openness may actually contribute

more to democracy by exposing Cubans to other options rather than a blockade.

70

Idem previous

43

Costs to the United States

It is undeniable that the United States has lost a very important market once the embargo was in

place. Restoring this market will result in 6 billion dollars more trade between USA and Cuba.

This of course will create jobs in the US and also generate income through exports. Other

benefits of lifting the embargo will be reduction of the costs of the big bureaucratic system that

deals with commercial relations with Cuba at the time being and economies of scale resulting

from more trade. While the loss to the US has been modest as the authors of Economic Sanctions

Revisited 3rd Edition claim, it cannot be denied that the even small costs should not be bore when

there is no positive effect.

The embargo has incurred losses in terms of international relations capital for the US. The

Helms-Burton policy has had more impact on the US than it had on Cuba. It impaired US`s

relations with friendly countries like Mexico, Canada and the EU27. These countries had passed

legislation acting as a counter-balance for the HBA. In 2008, an agreement was reached between

the EU and the US that would exclude EU countries from being punished under the provision of

the HBA. However, only the US Congress can waiver this piece of legislation and US President

cannot postpone its application indefinitely. Thus this act has risked poisoning the relations

between the UN and major trading partners that could take retaliatory measures against the US.

Another point is that, the embargo has left Cuba in a very uncomfortable position in its relations

with this country. Should another Cuban crisis arise, the US has depleted its options for dealing

with Cuba. Given the lack of economic warfare options, the US will have as an only option

military intervention which could result in chaos and even more costs to the average American.

All in all, the US Congress should annul Helms-Burton Act along with the Cuban Democracy

Act, end all trade sanctions on Cuba, allow both Cuban and American citizens to travel between

the two countries, permit Americans to conduct business in Cuba and start normalizing

diplomatic relations with Cuba.

44

Works Cited

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Development and Peace Foundation, Bonn, Germany, Presented at a Conference in Bonn,

January 15, 1988;

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2003;

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edition, Pearson;

9. Kern Alexander, Economic Sanctions, Law and Public Policy, 2009, Palgrave

Macmillan;

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Washington, November 1996;

11. Robert P. O`Quinn, A user`s guide to Economic Sanctions, The Heritage Foundation,

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differences between New Zealand and France arising from the Rainbow Warrior affair, 6

July 1986, Volume XIX;

45

13. Jan Palmowski, A Dictionary of Contemporary World History, 2004 –

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Work?

15. Kern Alexander, Economic Sanctions, Law and Public Policy, 2009, Palgrave Macmillan;

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of Key Events;

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Faculty of Louisiana State University and Agricultural and Mechanical College, Michael

C. Schena, December 2006;

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Towards Cuba, United States Policy Towards Cuba;

20. Robert S. Greenberger, US Asserts Foreign Policy is Involved in its dispute with the EU

over Cuba., Wall St. Journal, February 21, 1997;

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International, 2009;

22. Newfarmer, Richard, ed. 1982. "Relations with Cuba." In From Gunboats to Diplomacy:

New Policies for Latin America. Papers prepared for the Democratic Policy Committee,

US Senate, June. Washington.

23. Toward the termination of licensed U.S. foreign subsidiary trade with Cuba: the legal and

political obstacles., Arnold M. Zipper; Law and Policy in International Business, Vol. 23,

1992;

24. Cuban-Soviet Sugar Trade: Price and Subsidy Issues, Jorge F. Perez-Lopez, 1988,

Bulleting of Latin American Research;

25. An Embargo for the Ages, Gregory M. Crum, Bruce Lusignan, March 2004;

26. Has Cuba definitely found the path to economic growth? Robert Orro, 2000;

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Policy towards Cuba, Jonathan G. Clark and William Ratliff;

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Lorena Barberia, September 2002;.

46

29. Commission for Assistance to a Free Cuba, Report to the President, May 2004’

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P. Sullivan, Octover 16, 2009;

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Social Rights, September 2009;

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against Cuba, Report of the Secretary General, August 2008;

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2009;

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37. CATO Handbook for Congress, Policy Recommendations for the 108th Congress, 2003;

47

Annex 1: Input Data and Predicted Values of Imports and Exports for the Time Series

Model

Values are expressed in Current US Dollars, Source: WTO

Year Exports Predicted Exports Imports Predicted Imports

1948 710 658.8877551 527 489.5787879

1949 578 662.1887755 451 512.2102564

1950 667 665.4897959 563 534.8417249

1951 806 668.7908163 698 557.4731935

1952 694 672.0918367 690 580.104662

1953 675 675.3928571 547 602.7361305

1954 563 678.6938776 555 625.3675991

1955 611 681.994898 575 647.9990676

1956 695 685.2959184 649 670.6305361

1957 845 688.5969388 813 693.2620047

1958 763 691.8979592 808 715.8934732

1959 638 695.1989796 742 738.5249417

1960 618 698.5 638 761.1564103

1961 625 701.8010204 703 783.7878788

1962 521 705.1020408 759 806.4193473

1963 544 708.4030612 867 829.0508159

1964 714 711.7040816 1019 851.6822844

1965 686 715.005102 866 874.3137529

1966 593 718.3061224 926 896.9452214

1967 705 721.6071429 999 919.57669

1968 651 724.9081633 1102 942.2081585

1969 671 728.2091837 1222 964.839627

1970 1046 731.5102041 1311 987.4710956

1971 860 734.8112245 1387 1010.102564

1972 835 738.1122449 1292 1032.734033

1973 1410 741.4132653 1793 1055.365501

1974 2660 744.7142857 2648 1077.99697

1975 3677 748.0153061 3883 1100.628438

48

Annex 2: Data Smoothing for Time Series Model

Year Exports Imports

exponential smoothing with

a=0.2 7period moving

average

1948 710 527

1949 578 451 683.6

1950 667 563 595.8

1951 806 698 694.8 670.4285714

1952 694 690 783.6 656.2857143

1953 675 547 690.2 673

1954 563 555 652.6 698.4285714

1955 611 575 572.6 692.2857143

1956 695 649 627.8 684.2857143

1957 845 813 725 676.1428571

1958 763 808 828.6

1959 638 742 738

1960 618 638 634

Annex 3: ANOVA Output for Imports Time Series Regression Model

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.751989202

R Square 0.56548776

Adjusted R Square 0.522036536

Standard Error 75.01880768

Observations 12

ANOVA

df SS MS F

Significance

F

Regression 1 73242.22161 73242.22 13.01431 0.004787646

Residual 10 56278.21506 5627.822

Total 11 129520.4367

Coefficients Standard Error t Stat P-value Lower 95%

Upper

95%

Intercept -43596.52191 12261.35568 -3.5556 0.005219 -70916.5248 -16276.52

X Variable 1 22.63146853 6.273387852 3.607535 0.004788 8.653489384 36.609448

49

Annex 4: ANOVA Output for Exports Time Series Regression Model

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.501151216

R Square 0.251152541

Adjusted R Square 0.101383049

Standard Error 13.48870059

Observations 7

ANOVA

df SS MS F Significance F

Regression 1 305.1086006 305.1086 1.676927 0.25190206

Residual 5 909.7252187 181.945

Total 6 1214.833819

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept -5771.5 4980.99248 -1.1587 0.298906 -18575.54879 7032.548788

X Variable 1 3.301020408 2.549124806 1.294962 0.251902 -3.251713512 9.853754329

Annex 5: Input Data for the Gravity Model

Partner 1 Partner 2 Imports+Exports

(ec.europa.eu) GDP P1

(WB) GDP P2

(WB) Distance

(KM) Lang Border RTA

EU27 Russia 407004.5561 16474214 1607816 1671 0 1 0

EU27 Switzerland 259658.4615 16474214 488470 621 1 1 1

EU27 Canada 72855.17142 16474214 1400091 6327 1 0 0

EU27 Algeria 63744.92006 16474214 173882 1732 0 0 1

EU27 Peru 8926.711691 16474214 127434 11129 0 0 0

US EU27 647482.0071 14204322 16474214 6897 1 0 0

US Canada 596215.6377 14204322 1400091 742 1 1 1

US China 424634.8654 14204322 4326187 11147 0 0 0

US Ukraine 4326.694315 14204322 180355 9642 0 0 0

Japan China 266692.2083 4909272 4326187 2094 1 0 0

Japan Iraq 1686.240441 4909272 68000 8342 0 0 0

Japan Argentina 1666.915393 4909272 328385 18345 0 0 0

China Japan 266995.9614 4326187 4909272 2094 1 0 0

China Hong Kong 244581.5665 4326187 215355 1974 1 1 1

China Costa Rica 3056.151849 4326187 29834 14072 0 0 0

Brazil United Arab 2203.843596 1612530 163296 11933 0 0 0

50

Emirates

Brazil Aruba 500.5426566 1612530 2248 3902 0 0 0

India Norway 845.6931871 1217490 449996 5978 0 0 0

India Philippines 808.8407942 1217490 166909 4751 0 0 0

India New Zealand 623.5722736 1217490 130693 12641 0 0 0

Saudi

Arbia Philippines 4274.04309 467601 166909 7763 0 0 0

Saudi

Arbia Syria 3966.934553 467601 55204 1412 1 1 1

Saudi

Arbia Jordan 3949.624599 467601 20013 1333 1 1 1

Norway EU27 199371.9856 449996 16474214 1117 1 1 1

Norway United States 12226.13013 449996 14204322 6233 0 0 0

Norway Congo 87.02674122 449996 10699 7143 0 0 0

South

Africa Pakistan 448.6299286 276764 168276 8130 0 0 0

South

Africa New Zealand 377.9584432 276764 130693 11797 1 0 0

South

Africa Iraq 375.7152364 276764 68000 6786 0 0 0

Nigeria United States 39869.38578 212080 14204322 8858 0 0 0

Nigeria EU27 38405.31885 212080 16474214 4591 0 0 0

Nigeria Brazil 10034.90917 212080 1612539 6667 0 0 1

Malaysia Japan 39051.2279 194927 4909272 5320 0 0 1

Malaysia Thailand 19483.42603 194927 260693 1185 1 0 1

Malaysia Kuwait 970.2041479 194927 112116 6352 0 0 0

Malaysia Argentina 969.543038 194927 328385 15948 0 0 1

Ukraine EU27 59743.93037 180355 16474214 7442 0 1 0

Ukraine Russia 42878.61572 180355 1607816 5908 1 1 1

Ukraine Libya 129.7559028 180355 99926 9062 0 0 0

Ukraine Chile 116.1635086 180355 169458 17263 0 0 0

New

Zealand Japan 5366.323906 130693 4909272 9265 0 0 0

New

Zealand Singapore 2199.198952 130693 181948 8520 1 0 1

New

Zealand Vietnam 315.8813441 130693 90705 9899 0 0 1

Croatia Russia 3376.174557 69332 1607816 1872 0 0 0

Croatia Bosnia-

Herzegovina 2975.454787 69332 18452 288 1 1 1

Croatia Australia 25.66117754 69332 1015217 15941 0 0 0

Croatia Iraq 21.21010328 69332 68000 2782 0 0 0

Cuba Venezuela 3776.716743 55430 313799 2156 1 0 1

Cuba EU27 3257.609537 55430 16474214 8513 0 0 0

Cuba China 2337.026408 55430 4326187 12729 0 0 0

Cuba Canada 1645.437272 55430 1400091 2550 0 0 0

Cuba United States 784.000544 55430 14204322 1815 0 0 0

51

Sri Lanka United States 2177.790319 40714 14204322 14387 0 0 0

Sri Lanka China 1612.727933 40714 4326187 5163 0 0 1

Tunisia Libya 2150.05548 40180 99926 512 1 1 1

Tunisia Turkey 1179.501917 40180 794228 2001 1 0 1

Tunisia United States 1155.332703 40180 14204322 7336 0 0 0

Honduras Brazil 173.8871607 14077 1612539 5445 1 0 0

Honduras Trinidad and

Tobago 135.083434 14077 23898 2813 1 0 0

Honduras Thailand 88.87754088 14077 260693 16794 0 0 0

Chad South Korea 1.36096966 8361 929121 11037 0 0 0

Chad Senegal 1.31469496 8361 13209 3519 1 0 0

Chad Russia 1.27591152 8361 1607816 5228 0 0 0

Tajikistan United Arab

Emirates 89.075257 5134 163296 2075 0 0 0

Tajikistan Azerbaijan 84.88283196 5134 46259 1631 1 0 1

Tajikistan Kyrgyz Republic 70.15018074 5134 4420 694 1 1 1

India China 81987.1468 1,217,490 4,326,187 3774 0 1 1

India United States 65464.4728 1,217,490 14,204,322 12040 0 0 0

India Singapore 30346.1438 1,217,490 181,948 4147 1 0 1

India Hong Kong 20610.017 1,217,490 215,355 3758 1 0 0

India Russia 11261.18878 1,217,490 1,607,816 4331 0 0 0

India Brazil 7735.84358 1,217,490 1,612,539 14230 0 0 1

India Canada 6575.83708 1,217,490 1,400,091 11324 0 0 0

India Israel 5956.19994 1,217,490 199,498 4024 0 0 0

India South Africa 5818.33652 1,217,490 276,764 7998 0 0 0

Brazil United States 91313.7874 1,612,539 14,204,322 6778 0 0 0

Brazil China 71482.5636 1,612,539 4,326,187 16921 0 0 0

Brazil Argentina 51114.7314 1,612,539 328,385 2340 1 1 1

Brazil Russia 12830.91362 1,612,539 1,607,816 11175 0 0 0

Brazil Israel 2657.419 1,612,539 199,498 10290 0 0 1

China United States 514586.198 4,326,187 14,204,322 11147 0 0 0

China Japan 391149.038 4,326,187 4,909,272 2094 1 0 0

China Russia 84357.267 4,326,187 1,607,816 5785 0 1 0

China Mexico 26139.2414 4,326,187 1,085,951 12449 0 0 0

China South Africa 25458.0054 4,326,187 276,764 11661 0 0 0

China Argentina 21662.7062 4,326,187 328,385 19257 0 0 0

China Nigeria 9971.45544 4,326,187 212,080 10940 0 0 0

China Algeria 7166.50782 4,326,187 173,882 9102 0 0 0

52

Russia Ukraine 57447.5252 1,607,816 180,355 5908 1 1 1

Russia United States 40279.8962 1,607,816 14,204,322 7825 0 0 0

Russia India 10092.10838 1,607,816 1,217,490 4331 0 0 0

Russia Moldova 2609.49158 1,607,816 6,048 1148 1 1 1

Annex 6: ANOVA output for the Gravity Model

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.91604698

R Square 0.83914206

Adjusted R Square 0.82978986

Standard Error 1.20326505

Observations 92

ANOVA

df SS MS F

Significance

F

Regression 5 649.5521916 129.9104 89.72665 1.291E-32

Residual 86 124.5148223 1.447847

Total 91 774.0670139

Coefficients

Standard

Error t Stat P-value Lower 95%

Upper

95%

Intercept -10.896388 1.930763787 -5.64356 2.1E-07 -14.73462 -

7.0581568

X Variable 1 0.82730933 0.041485819 19.94198 5.27E-34 0.7448383 0.9097804

X Variable 2 -0.3770036 0.198334402 -1.90085 0.060671 -0.771279 0.0172721

X Variable 3 0.8574456 0.364388084 2.353111 0.020899 0.1330661 1.5818251

X Variable 4 0.75657804 0.43261485 1.748849 0.083885 -0.103432 1.6165879

X Variable 5 0.97882509 0.353531259 2.768709 0.006892 0.2760282 1.681622