Panel presentation by Dan O’Flaherty at October 16 conference on US-Cuba relations

Tuesday, 16 October 2007
Despite the efforts of the Bush administration to tighten the Cuban embargo, there remain significant export opportunities for U.S. companies, especially in agricultural commodities. But the fact is that these opportunities have been narrowing due to major shifts in Cuba’s external trading patterns.
1. Prior to the embargo Cuba was a significant trading partner.
It is worth noting that in 1958, the year before the revolution, the U.S. took 67% of Cuba’s exports (taking the bulk of its sugar production) and accounted for 70% of its imports. At that time Cuba was the seventh largest market for US exporters and agricultural trade accounted for roughly half of bilateral trade. In fact in 1942 the USDA stated “with no other country does the US have as close economic ties as with Cuba.” Now the International Trade Commission estimates an ongoing annual loss to US exporters of $1.2 billion. The Cuban government estimates that the total direct economic impact on the embargo to be $86 billion.
2. Since 2000 Cuba has become a good market for our agricultural commodity exports, but that has slowed down in the past two years.
The Trade Sanctions Reform and Export Enhancement Act in 2000 allowed the sale of agricultural and goods and medicine to Cuba for humanitarian reasons. In 2002, the first full year of TISRA the US exported $138 million to Cuba. By 2004 exports had risen to and peaked at $392 million, but fell to $350 the following year after the February, 2005 regulation that exports to Cuba had to be paid cash in advance, meaning prior to shipment.  In 2006 exports fell slightly again to $340 million.
 Exports to Cuba under TISRA are overwhelmingly agricultural commodities. This has brought the big American exporters ADM and Cargill into play, but in so doing it has opened a market for US farmers. Indeed the US is the main supplier of foodstuffs to Cuba. Our leading export is cereals (wheat and corn), which account for a third, followed by meats, oil and grain seeds, followed in rapidly decreasing amounts, a variety of fats, vegetables, and dairy products. The Cuban government was recently reported to have plans to import 35 million bushels of corn this year and will double its purchases of dried grains. Trade missions by wheat and corn exporting state officials as well as those of major port states testify to Cuba’s potential.
It is also interesting to look at the bottom of the list of exports as an indication of where growth might take place under a relaxed embargo. There one finds dead last chemical products, oil and vehicles, all at zero in 2006. Also at the bottom are iron and steel, footwear and apparel. The US exports of furniture fell by more than 90% between 2005 and 2006 as did cotton and yarn.
Now, Cuba is a country of 11 million people with a gross domestic product of $39 billion and therefore a per capita income of over $3,500. The World Bank reports GDP growth of 8%. By contrast the Dominican Republic with 9 million people has a GDP of $64 billion and a per capita income of $7,000. It is safe, therefore, to say that given its high educational levels, were the embargo to be lifted, Cuba would once again become a significant export market for many US industries.
4.   As has already been noted, Cuba’s current trade patterns are undergoing dramatic change.
In 2005 the Netherlands took 23.5% of Cuba’s exports, followed by Canada at 22% and China at 8%. Spain and Venezuela each accounted for roughly 15% of Cuba’s imports with the US in third place with 12%.The big story, however, is China and Venezuela. Cuba’s trade with China more than doubled in 2006 to $1.8 billion. It had been just $526 million in 2004. Trade with Venezuela rose to $2.6 billion in 2006 from $2 billion in 2005 and the two countries together account for 35% of all of Cuba’s trade. As further evidence of diversification of supply, Cuba is also importing most of its rice from the East Asia. Cuba’s improved external position is reflected in an increase in foreign reserves and a decrease in foreign debt as reported by the UN Economic Commission for Latin America.
5. A note about Cuban oil.
Cuba produces about 50% of its domestic petroleum needs. The Veradero oil field yields about 40% of Cuban’s production of poor quality, heavy sour crude. Their production has so far been small by international standards: 68,000 million barrels a day compared to Saudi Arabia’s 10 million. The Canadian oil company Sherritt’s onshore drilling is responsible for almost half of Cuba’s oil production.  But in 2004 the Spanish oil company Repsol YPF identified 5 fields of high quality oil in deep water off the Florida straits. The US Geological Survey confirms that the North Cuban basin has 4.6 to 9.3 billion barrels of crude and 9.8 to 21.8 trillion cubic feet of natural gas. Cuba subsequently requested foreign oil company offers for production sharing agreements and Chinese and Canadian companies are in talks with them. Sometime later this year Repsol YPF, Indian and Norwegian companies are likely to begin drilling for oil. The Malaysian oil company Petronas won concessions for four blocks. Obviously, US oil companies are frozen out of Cuban oil, but have clearly taken note. Whether they will enter the political fray opposing the embargo remains to be seen.
5. Finally, there are clear export opportunities for agricultural commodities to Cuba. But the case for expanded trade with Cuba has an obvious political logic as well. This is based on the notion that greater engagement through commerce will over time encourage political reform and ultimately build a basis for change. Under current law trade is a one-way street. One has to say that the commodity exports alone are unlikely to have a transformative political effect, especially since on the Cuban end it only involves the government purchasing officials at Alimport. One must also say that the argument that they merely strengthen the regime is unpersuasive, since not only is there foreign availability of these commodities, albeit at higher cost, but the regime has shown that it can weather economic hardship.
6. We take it as an article of faith that expanded two-way trade, as well as, of course,  investment, would over time create a denser network of contacts, mutually beneficial dependencies and contribute not only to reform in Cuba but also to a political rapprochement. Perhaps the Cuban government will continue to resist that kind of relationship. Phil Peters  spoke this morning about signs of change under Raul Castro. There is no strong sign that his economic plans include a major role for the external sector. Experience elsewhere in the world strongly suggests that ambitions for accelerated economic growth inexorably require foreign direct investment, export expansion to earn convertible currency, and affordable imports of capital and consumer goods.
On a personal note, on our brief trip to Cuba in February two things were most striking: (1) the state controlled economy is extraordinarily inefficient and overburdened by virtue of managing virtually all aspects of commerce and (2) that the US-Cuban bilateral relationship is in some respects childish as best exemplified by the ticker tape messages running around the side of the interests section blocked by a stand of flag poles erected by the Cuban government. Certainly both countries deserve better than that.