Preserving Stability In Cuba After Normalizing Relations With US: Importance Of Trading With State Owned Enterprises

Preserving Stability In Cuba After Normalizing Relations With US:

Importance Of Trading With State Owned Enterprises – Analysis

By COHA -- (March 30, 2013)

By Dr. Timothy Ashby



Cuba under Raul Castro has entered a new period of economic, social, and

political transformation. Reforms instituted within the past few years

have brought the expansion of private sector entrepreneurial activity,

including lifting restrictions on the sales of residential real estate,

automobiles, and electronic goods. Additional reforms included, more

than a million hectares of idle land has been leased to private farmers

where, citizens have been granted permission to stay in hotels

previously reserved for tourists, and freedom being granted for most

Cubans to travel abroad. Stating that it was time for the "gradual

transfer" of "key roles to new generations," President Raul Castro

announced that he will retire by 2018, and named as his possible

successor a man who was not even born at the time of the Cuban

Revolution. [1]



The twilight of the Castro era presents challenges and opportunities for

U.S. policy makers. Normalization of relations is inevitable, regardless

of timing, yet external and internal factors may accelerate or retard

the process. The death of Venezuelan President Hugo Chávez is likely to

undermine the already dysfunctional Cuban economy if it leads to

reductions in oil imports and other forms of aid. This could bring

social chaos, especially among the island's disaffected youth. Such an

outcome would generate adverse consequences for U.S. national and

regional security. To maintain Cuba's social and economic stability

while, reforms are maturing, the United States must throw itself open to

unrestricted bilateral trade with all Cuban enterprises, both private

and state-owned.



The collapse of Cuba's tottering economy could seismically impact the

United States and neighboring countries. It certainly did during the

Mariel Boatlift of 1980, precipitated by a downturn in the Cuban economy

which led to tensions on the island. Over 125,000 Cuban refugees landed

in the Miami area, including 31,000 criminals and mental patients.

Today, the United States defines its national security interests

regarding Cuba as follows:



Avoid one or more mass migrations;

Prevent Cuba from becoming another porous border that allows

continuous large-scale migration to hemisphere;

Prevent Cuba from becoming a major source or transshipment point

for the illegal drug trade;

Avoid Cuba becoming a state with ungoverned spaces that could

provide a platform for terrorists and others wishing to harm the United

States. [2]



All of these national security threats are directly related to economic

and social conditions within Cuba.



U.S. policy specifically supports "a market-oriented economic system"

toward Cuba, yet regulations prohibit the importation of any goods of

Cuban origin, whether from the island's potentially booming private

sector – including 300,000 agricultural producers – or State Owned

Enterprises ("SOEs"). [3],[4] Such a policy is counterproductive to U.S.

interests. Regardless of over 400,000 entrepreneurs, including

agricultural cultivators, it could be many years, if ever, when Cuba's

private sector would be ready to serve as the engine of economic growth.

SOEs employ 72 percent of Cuban workers. [5] A rational commercial

rapprochement towards Cuba would; therefore, require a change in current

laws and in the system of regulations prohibiting the importation of

Cuban goods and products. Normalized bilateral trade will benefit the

Cuban people by helping to provide economic stability and fostering the

growth of a middle class – both of which are essential for the

foundation of democratic institutions. Two-way trade must include both

Cuba's private sector as well as SOEs.



Cuban SOEs are in a state of gradual transition like other parts of the

economy. In December 2012, the Cuban government authorized a wide range

of co-ops that will allow workers to collectively open new businesses or

take over existing SOEs in construction, transportation and other

industries. Considered a pilot program that is a prime candidate for an

expansion, the co-ops "will not be administratively subordinated to any

state entity."[6] Many Cuban officials, well aware of the limits to

small-scale entrepreneurism, appear to harbor hope that co-ops could

shift a large portion of the island's economy to free-market competition

from government-managed socialism. In other transitional states,

particularly in post-socialist economies, co-ops have served as

commercial bridges between state-owned and privatized business. Of the

300 largest co-ops in the world, more than half are in United States,

Italy, or France. [7]



Ironically, the outputs of such co-ops, including agricultural products

which could find strong demand in the American market, are barred by

short-sighted federal regulations, thus hampering if not defeating what

could be a major U.S. policy goal.



The United States has been actively trading with foreign SOEs for years.

The People's Republic of China – a one party and communist state – is

the United States' second largest trading partner, and Chinese SOE's

account for a large percentage of the nearly $400 billion USD in goods

exported to America each year. Venezuela is in the top fifteen of U.S.

trading partners, and the bulk of that country's exports are petroleum

products deriving from the state-owned PDVSA (which in turn owns

Houston-based CITCO oil company). Another communist country, Vietnam –

which initially was the subject of a U.S. economic embargo similar to

that imposed on Cuba – is the second-largest source of U.S. clothing

imports and a major manufacturing source for footwear, furniture, and

electrical machinery. [8] On these matters, the Cuban government has

said that it wants to "replicate the paths of Vietnam and China." [9]



Of relevance to Cuban trade relations, Vietnam has formally requested to

be added to the U.S. Generalized System of Preferences (GSP) program as

a "beneficiary developing country," which authorizes the U.S. President

to grant duty-free treatment for eligible products. The statute also

provides the President with specific political and economic criteria to

use, when designating eligible countries and products. "Communist"

countries are not eligible for GSP membership unless the President

determines that certain conditions have been met, including whether the

applicant is "dominated or controlled by international communism."

Furthermore, countries that fail to recognize "internationally accepted

workers' rights" are excluded. [10]



U.S. statutes do not provide a general definition of a "Communist"

country, and the Obama administration is expected to declare that

Vietnam is no longer "Communist" in terms of its economic system. The

argument will be that even if Vietnam is a "Communist" country (hard to

deny, considering it has one party government that is officially titled

the Communist Party of Vietnam), it is "not dominated or controlled by

international communism" because no such entity exists following the

collapse of the Soviet Union. Similar arguments may be applied to Cuba

in considering normalized relations with the United States.



At the request of the U.S. Congress, the General Accountability Office

(GAO) conducted detailed reviews of the frameworks for seven key

statutes that govern Cuban sanctions. [11] The resulting reports

concluded that (i) the President still maintains "broad discretion" to

make additional modifications to Cuban sanctions; and (ii) prior

measures, implemented by the executive branch have had the effect of

easing specific restrictions of the Cuba sanctions and have been

consistent with statutory mandates as well as within the discretionary

authority of the President. [12] Some legal scholars asset that absence

of such explicit statutory provisions in other areas suggests that

Congress did not intend to prohibit the executive branch from issuing

general or specific licenses to authorize certain transactions with Cuba

when "such licenses are deemed to be appropriate and consistent with

U.S. policies." [13]



Although, a complex variety of federal statutes have re-stated the

regulatory prohibition on importation of Cuban goods under 31 C.F.R. §

515.204, enabling legislation to codify the restriction, has not been

passed. For example, 22 U.S.C. § 6040(a) "notes" that 31 C.F.R. §

515.204 prohibits the importation of goods from Cuba, but does not

codify or expressly prohibit such activity, and 22 U.S.C. § 7028

acknowledges that Congress did not attempt to alter any prohibitions on

the importation of goods from Cuba under 31 C.F.R. § 515.204. [14]



The complete dismantling of the Cuban Economic Embargo will undoubtedly

require Congressional legislation; however, the President has broad

powers to modify policy towards Cuba, particularly in an emergency

situation that could affect US national security. [15] For example,

imports of Cuban origin goods are prohibited under the Cuban Asset

Control Regulations ("CACRS") except as "specifically authorized by the

Secretary of the Treasury by means of regulations, rulings,

instructions, licenses or otherwise." [16]



Such authority could allow the President to argue for the modification

of 31 C.F.R. § 204's complete prohibition on the importation of Cuban

goods by stating that Cuban exports to the United States help the Cuban

people by creating employment and thereby maintaining island's social

stability. Considering the domestic political constituency and the

political obduracy of U.S. Congress, a more realistic presidential

rationale for allowing Cuban imports from all types of enterprises could

be the protection of U.S. borders during an era of grave concerns about

homeland security.



Some policy analysts suggest that bilateral trade with Cuba should be

restricted to businesses and individuals engaged in certifiably

independent (i.e., non-state) economic activity. [17] While

well-intentioned, such a policy would likely have a negligible impact on

Cuba's economic development, and fails to recognize that commercial

enterprises that the U.S. government would classify as SOEs are actually

co-ops or other types of quasi-independent entities that are in the

early stages of privatization. Restrictions such as this also fail to

address larger national and regional security concerns which are the

primary responsibility of the President.



Although ultimately the Cuban people must freely choose their own

political and economic systems, President Obama should be seen as heavy

legal authority to support the transition taking place on the island by

opening U.S. markets to Cuban imports. Normalized bilateral trade will

benefit the Cuban people and help to provide economic and social

stability that is in turn vital to U.S. national and regional security.



Such trade must include both the island's small, yet growing private

sector, and State Owned Enterprises. In this regard, it would be both

unfair and strategically unwise to treat Cuban differently from its

stated models, China and Vietnam.



Dr. Timothy Ashby, Senior Research Fellow at the Council on Hemispheric

Affairs.



Dr. Ashby, who recently joined COHA's Board, served in the U.S. Commerce

Department, International Trade Administration, as Director of the

Office of Mexico and the Caribbean and acting Deputy Assistant Secretary

of Commerce for the Western Hemisphere. Currently a Counsel with the

international law firm Dentons, he has PhD, JD and MBA degrees.



References



[1] "Raúl Castro Says His New 5-Year Term as Cuba's President Will Be

His Last," New York Times, Feb. 24, 2013, accessed Feb. 27, 2013,

http://www.nytimes.com/2013/02/25/world/americas/raul-castro-to-step-down-as-cubas-president-in-2018.html



[2] Gary H. Maybarduk, "The US Strategy for Transition in Cuba," in A

Changing Cuba in a Changing World edited by Mauricio A. Font (The

Graduate Center, City University of New York, March, 2008), 226,

http://web.gc.cuny.edu/dept/bildn/publications/documents/Maybarduk12_001.pdf.



[3] Cuban Democracy Act of 1992, 22 U.S.C. § 6007(a) (1992).



[4] 31 C.F.R. § 515.204 prohibits the importation of any Cuban origin

goods, goods located in or transported from Cuba, or goods derived in

whole or in part from Cuba, unless expressly authorized by the Secretary

of the Treasury.



[5] CIA World Factbook, accessed Feb. 27, 2013,

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



[6]"Co-op Laws in Cuba Are Seen as Progress," The New York Times, Dec.

11, 2012, accessed Feb. 27, 2013,

http://www.nytimes.com/2012/12/12/world/americas/new-laws-for-cuban-co-ops-seen-as-economic-progress.html?_r=0

[7] "Global 300 list reveals world's largest cooperatives," USDA Rural

Development, Cooperative Programs, accessed Feb. 27, 2013,

http://www.rurdev.usda.gov/rbs/pub/jan07/global.htm



[8] Michael F. Martin, U.S.-Vietnam Economic and Trade Relations: Issues

for the 112th Congress, (Congressional Research Service, April 5, 2011),

accessed Feb. 27, 2013,

http://fpc.state.gov/documents/organization/161323.pdf



[9] "Easing of Restraints in Cuba Renews Debate on U.S. Embargo." New

York Times, Nov. 19, 2012, accessed Feb. 27, 2013,

http://www.nytimes.com/2012/11/20/world/americas/changes-in-cuba-create-support-for-easing-embargo.html?pagewanted=all&_r=0.



[10] "Easing of Restraints in Cuba Renews Debate on U.S. Embargo." New

York Times, Nov. 19, 2012, accessed Feb. 27, 2013,

http://www.nytimes.com/2012/11/20/world/americas/changes-in-cuba-create-support-for-easing-embargo.html?pagewanted=all&_r=0.



[11] Stephen F. Propst, Presidential Authority To Modify Economic

Sanctions Against Cuba, (Hogan Lovells US LLP, Feb. 15, 2001) 2,

accessed Feb. 27, 2013,

http://www.hoganlovells.com/files/Publication/57d34e80-51b8-4ee0-ae64-750f65ee7642/Preview/PublicationAttachment/55896b90-840a-42bf-8744-752a7a206333/Cuba%20Aritcle%20FINAL.pdf.



[12] United States General Accounting Office, U.S. Embargo on Cuba:

Recent Regulatory Changes and Potential Presidential or Congressional

Actions, GAO-09-951R (September 2009), accessed March 26, 2013,

http://www.gao.gov/products/GAO-09-951R; and Cuban Embargo: Selected

Issues Relating to Travel, Exports, and Telecommunications,

GAO/NSIAD-99-10 (December 1998), accessed March 26, 2013,

http://www.gao.gov/products/NSIAD-99-10.



[13] Propst, Presidential Authority, 9.



[14] Seven Steps the U.S. President Can Take to Promote Change in Cuba

by Adapting the Embargo. AS/COA, Feb. 20. 2013, accessed Feb. 27, 2013,

http://www.as-coa.org/articles/seven-steps-us-president-can-take-promote-change-cuba-adapting-embargo



[15] Such as H.R.214 – the Cuba Reconciliation Act, introduced on

January 3, 2013.



[16] 31 C.F.R. § 515.204(a) (1996).



[17] Seven Steps the U.S. President Can Take, supra.



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