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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