Opening the Door to Business Between the U.S. and Cuba

While the prospect of a renewed trading relationship between the two nations appears promising, the future is far from certain

In December 2014, President Obama and Cuba’s president, Raul Castro, made surprise and simultaneous announcements that, after a half-century of mutual hostility, the two countries would move toward re-establishing normal relations. The United States also announced the loosening of some of the longstanding Cuban trade and travel restrictions. These developments have generated excitement and media buzz about opportunities in Cuba for U.S. business. While the changes are real and future prospects are interesting, the U.S. trade embargo remains in place and prohibits most business dealings with Cuba, and the Cuban government’s willingness to accommodate large-scale U.S. investment is still uncertain. A full opening of trade and business relations between the U.S. and Cuba will take time. In the meantime, there are niche opportunities for some U.S. businesses and a much-improved climate for visiting the island, investigating the market and developing relationships.

Background

Cuba is an island nation with 11 million people located 90 miles off Florida’s coast. It has a rich history as a cosmopolitan trading capital of the Spanish empire in the Americas. After Cuba’s independence following the Spanish-American War in 1898, the U.S. strongly influenced Cuba’s economy, politics and culture. In 1959, Fidel Castro led a revolution overthrowing the corrupt Batista dictatorship. One of Castro’s goals was to limit U.S. influence over Cuban affairs. In 1961, Castro embraced communism, aligned Cuba with the Soviet Union and expropriated U.S.-owned assets. In response, the U.S. broke diplomatic relations, sponsored the failed Bay of Pigs invasion to oust Castro, and imposed severe trade and travel restrictions that have remained in effect for 54 years. The long break in diplomatic relations finally ended this summer when the two countries reopened their respective embassies.

Why are relations improving?

Developments in both countries set the stage for improved relations. Cuba’s leaders face severe problems on many fronts. The state-controlled economy is stagnant and lacks foreign exchange to pay for critical imports. Cuba’s infrastructure is crumbling. The economy offers few opportunities for its well-educated young people. Cuba’s most important ally and benefactor, Venezuela, is facing its own economic crisis and cannot sustain the subsidies it has provided since the late 1990s. Cuba needs more tourism and foreign investment to reinvigorate its economy and generate growth. Despite the Cuban government’s denunciation of the U.S. for the last half-century as a malignant imperialist, it understands that U.S. trade and investment can play an important role in revitalizing the Cuban economy. There have also been changes in the U.S. political climate with respect to its Cuba policy. President Obama is in his second term and can afford to be less concerned with political repercussions from improving relations. Opposition to an opening by the politically influential Cuban-American community has weakened due to generational and demographic changes. Major U.S. business interests are lobbying more aggressively to open trade with Cuba. Policy experts and interest groups have become more vocal in arguing that the existing policy has accomplished little to weaken the Cuban government or change its policies while placing a heavy burden on the Cuban people.

Why the interest in doing business with Cuba?

U.S. businesses are interested in Cuba for several reasons, including Cuba’s proximity to the U.S.; its history as a sophisticated trade hub for Latin America and the Caribbean; a well-educated, traditionally entrepreneurial population; infrastructure in need of major overhauls; relationships with a thriving Cuban expatriate network; miles of undeveloped beaches, pleasant climate, beautiful architecture and other tourist attractions; and pent-up consumer demand in its internal market. Businesses see obvious opportunities in tourism, manufacturing and agriculture, and in less-obvious sectors such as call centers, distribution and logistics, health, IT and outsourced research and development. Finally, there is the “forbidden fruit” factor: Cuba is so close, and has been walled off from U.S. travel, trade and investment for so long, that it has piqued an interest in the U.S. that may exceed its realistic market potential.

Despite the hype, the U.S. trade embargo on Cuba remains in place

Despite President Obama’s easing of some Cuban trade and travel restrictions, the U.S. trade embargo on Cuba remains firmly in place and prohibits most U.S. companies and individuals from doing meaningful business in Cuba. The embargo, which Cubans refer to as the “blockade,” is enshrined in a law passed by Congress and will remain in force until Congress repeals it. Despite strong lobbying from U.S. business and polls showing public support for lifting the embargo, repeal is unlikely until after the 2016 U.S. presidential election. It will remain a contentious political issue even after the election. President Obama’s loosening of certain embargo regulations was intended to create political momentum for repeal by encouraging more travel and business activity within existing statutory exemptions. However, no one can predict how long the embargo will remain in place. Until the embargo is repealed, business opportunities in Cuba for most U.S. companies and individuals will be limited.

What business activities are allowed?

For years, the embargo statute has permitted limited categories of U.S. exports to Cuba under special license, mainly food and medicine (most of Cuba’s chicken comes from Georgia, for example), which is usually sold to various arms of the Cuban government. There are strings attached to these licensed sales that put U.S. companies at a competitive disadvantage, including a prohibition on extending credit and restrictions on marketing activities. U.S. agricultural sales to Cuba have been declining in recent years as other countries have gained market share. U.S. agricultural interests have been active in lobbying for a repeal of the embargo. In January 2015, shortly after the announcement of the U.S.-Cuba opening, the Obama administration issued new administrative regulations for enforcement of the Cuba embargo by the Offi ce of Foreign Asset Control and the Department of Commerce. An additional set of regulatory changes was announced in September 2015. Together, these changes significantly expand opportunities for travel, commerce and investment between the U.S. and Cuba within the tight constraints of the embargo. The stated purpose of the regulatory changes is to “empower and engage the Cuban people.” As a practical matter, the changes are also intended to further support for repeal of the embargo and put pressure on the Cuban government to liberalize its internal policies.

Under the revised regulations, U.S. businesses are permitted to engage in the following activities:

  • Sales of certain telecommunications equipment, and related hardware, software and services. Unlike most of the other permitted activities, this exemption specifically authorizes sales to, and joint ventures with, Cuban government-controlled enterprises. Roaming agreements between U.S. mobile networks and the Cuban national carrier are expressly permitted. Verizon recently announced expensive but available voice and data roaming in Cuba for its U.S. customers, and other U.S. carriers are sure to follow.
  • Sales of certain Internet-based services, including software design, business consulting, IT management and related services, including services relating to instant messaging, chat, email and social networking. Airbnb and Netflix have begun offering services in Cuba under these exemptions. The importation of mobile applications developed in Cuba is also permitted in some cases.
  • Exports of items for use by the small but rapidly growing Cuban private sector, including building materials, tools and supplies and certain microfinance activities.
  • Certain activities related to commercial aviation, passenger ferries and other travel-related services.
  • Renting Cuban facilities, hiring Cuban employees, registering local subsidiaries and engaging in a variety of other activities, but only when they are incidental to some of the primary business activities permitted under the regulations.

The new regulations made significant changes in the following areas:

Travel. Prior to 2015, travelers to Cuba had to apply for a license before the trip. Applications were approved only if travel was for one of the limited purposes permitted under the embargo, including family visits, professional research and meetings, support for the Cuban people and travel in connection with authorized export activities. Under the new regulations, licensing for permitted travel was effectively converted to an honor system – advance permission is not required. U.S. businesspeople who want to visit Cuba to evaluate the market and meet potential business contacts can generally do so within the permitted travel categories and without having to apply for a license. Editor’s note: As this article went to press, the two countries announced an agreement to resume direct commercial flights from the U.S. to Cuba, which should make travel to the island easier and less expensive than the current charter services.

Banking, credit cards and remittances. The new regulations permit U.S. banks to set up correspondent relationships with Cuban banks to facilitate authorized transactions and allow U.S. credit card issuers to process payments made by U.S. travelers in Cuba. U.S. persons may open bank accounts in Cuba to facilitate certain permitted activities there. The regulations also allow U.S. banks and money transmitters to facilitate permitted remittances from the U.S. to Cuba. Remittances from relatives in the U.S. are an important source of shadow finance for the growing Cuban private sector and private real estate markets. The most recent changes eliminated the $2,000 quarterly limit on remittances to most Cuban nationals.

Intellectual Property. Under current law, U.S. companies can register intellectual property in Cuba and pay the registration and professional fees relating to the registrations. Cuba is a “first to file” trademark jurisdiction, so businesses with an interest in the market should consider registering their marks to prevent squatters or others from appropriating them in Cuba. The interplay among the various regulations and laws relating to U.S.-Cuba business remains complicated. The new regulations leave questions unanswered and create gray areas that will need to be clarified. Some changes will have limited practical effect without changes in Cuban government policy. Until the embargo is repealed, U.S. businesses will need to read the regulations carefully and check with their legal advisors before engaging in any business activities relating to Cuba.

Is Cuba ready for U.S. business?

The Cuban government has made significant moves in recent years to encourage foreign investment, including an overhaul of its foreign investment laws and an ambitious free trade zone development at the port of Mariel, with the ability to handle the giant cargo ships that will be passing through the newly widened Panama Canal beginning next year. Many areas of the economy have been opened to small-scale private enterprise and the government is experimenting with larger-scale privatizations through cooperative ownership. Cubans are now allowed to travel freely and to buy and sell homes and cars. While Internet access is still limited, the government tolerates widespread black-market distribution of news, television, sports and films from the U.S. and Latin American countries via portable media. Despite the reforms, Cuba remains a communist country with a centrally planned economy, an ideological hostility to market capitalism and a deep suspicion of foreign economic influence. Ninety percent of Cubans with jobs work for the state or state-owned enterprises. While the government recognizes the need to liberalize parts of the economy and open it to foreign investment, it has limited practical experience with market economics. The government appears determined to remain firmly in control as the reform process unfolds. Even if the encouragement of foreign investment is sincere, the opaque, top-down Cuban bureaucracy is likely to make practical implementation of some reforms difficult. Non-U.S. foreign companies have operated in Cuba on a limited basis for years, mainly through joint ventures in the tourism and natural resource sectors. Potential investors will nevertheless have concerns about the implementation of the new foreign investment laws, including the efficiency of government permitting and regulation, the practical ability to enforce contracts, repatriation of profits, requirements that all employees must be hired through the government, and transferability of investments. Investors will also be mindful that the government could reverse course on reform if internal politics change.

Takeaways

The door has cracked open to business between the U.S. and Cuba. There appears to be strong momentum toward an eventual repeal of the longstanding embargo. Until that happens, opportunities will be limited to the permitted niche areas. Some of these are potentially significant, especially in sectors related to telecom, Internet and ecommerce, and transportation. For businesses interested in current or future opportunities in the Cuban market, it has become much easier to travel to Cuba, arrange meetings, investigate the market and protect IP for future use.