U.S. takes a positive “negative” approach to trade with Cuban entrepreneurs

Opinion | February 19, 2015

U.S. takes a positive "negative" approach to trade with Cuban entrepreneurs
By: Ashley Miller and Ted Piccone

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In keeping with the Obama Administration's fresh approach to relations
with Cuba, on Friday the State Department released its list of goods and
services eligible for importation from the nascent but growing Cuban
private sector. Americans can now directly support independent Cuban
entrepreneurs and cooperatives through commerce, a move policymakers
hope will empower them to determine their own economic and political
futures.

The Section 515.582 list, characterized as a "living document" that will
be updated periodically, further clarifies the path breaking Commerce
and Treasury Department regulations released in January. It takes a
permissive, "negative" approach that identifies specific prohibited
categories of items and allows everything not specifically listed as
permissible items for importation to the United States. It lays out a
flexible framework and sets the right tone for encouraging trade with
the approximately 500,000 registered self-employed workers.

Certain goods like some agricultural products (sugar, tobacco), some
textiles (cotton, wool) pharmaceuticals, and base metals (nickel) are,
not surprisingly, excluded, since these products are almost exclusively
produced by state owned enterprises. Notably, unlike the itemized list
of goods, the new regulations authorize importation of all private
sector services, which will allow U.S. businesses to access the human
capital for which the island is well known. For example, Americans can
now hire Cuban entrepreneurs or cooperatives to design software, provide
accounting support, or translate documents, as long as they are
certified as independent of the state. The negative approach looks like
a very positive approach indeed.

The execution of this policy, however, is fraught with challenges
stemming from the fifty-plus years of icy relations and the current
Cuban context.

Shipping. Cuba and the United States still do not have direct mail
services and the U.S. embargo precludes most global providers (UPS,
FedEx, DHL) from shipping between the two countries. The most workable
alternative to standard shipping is unaccompanied baggage transported on
the daily charter flights between (primarily) Florida and the island.
While not well suited to commercial shipping, this arrangement would
facilitate initial micro-exchanges, build confidence and work out the kinks.

Tariffs. Goods imported from Cuban entrepreneurs valued over $800 in
total will be subject to Smoot-Hawley level tariffs, as high as 50% in
some cases. As a member of the WTO, Cuba enjoys Most Favored Nation
status but a national security exception in the U.S. embargo permits
these highway robbery level tariffs. At least in the short- to
medium-term, importers face cost-prohibitive fees.

Financial transactions. The January 16 regulatory changes permit the use
of debit and credit cards on the island and allow U.S. financial
institutions to open correspondent accounts on the island to "facilitate
the processing of authorized transactions." However, this will take time
to implement and requires that the relevant actors (Visa, Mastercard,
Western Union and major U.S.-based banks) be prepared to take the risk
given the uncertain regulatory environment in Cuba. Most Cubans deal in
cash rather than through the highly overregulated Cuban state banking
system, which is smaller now than it was in 1959. Until financial
institutions set up the necessary infrastructure, it may still be
difficult to issue payment for services rendered or goods sent, outside
of cash transactions.

Categories of entrepreneurs. U.S. importers can only engage in
transactions with independent Cuban entrepreneurs demonstrated by
documentation such as the entity's self-employment or "cuentapropista"
license issued by the Cuban government. At present, the Cuban government
has identified only 201 categories of activities authorized for
self-employment. Huge swaths of Cuba's human capital are excluded from
participating in this emerging sector, primarily highly educated
professions like economists, engineers, lawyers, and doctors. It remains
to be seen if the Cuban government will expand the number of permissible
categories or switch to a negative list, like the State Department
imports list.

Communication. Cuba remains one of the lowest ranked countries in terms
of internet access, making it difficult to receive and fill orders,
communicate with buyers, or establish call centers. Cuban citizens are
eager to modernize and expand their telecommunications infrastructure,
but the Cuban government has been very slow in expanding access and will
likely be reticent to cede control. The new regulations issued in
Janaury allow U.S. telecommunications companies to compete more readily
in the Cuban market but it remains to be seen whether Havana is interested.

The greatest unknown is how the Cuban government will react to these and
other elements of the President's new policy of engagement. It is
unclear, for example, whether entrepreneurs will even be permitted to
export goods and services in the short term. To create a more business
friendly environment and attract much-needed investment, Cuba's
regulatory framework and judicial system require significant reforms.
This is a much longer-term challenge that Cuba must grapple with, but as
the international community and incipient Cuban private sector become
more active, pressure for deeper and faster reform should grow.

This policy shift and resulting regulatory changes are complex issues
and, by government standards, they have been drafted and implemented
swiftly. It will take time for companies to catch up and evaluate
whether to take on the risks of engagement. But the benefits are clear:
the authorization of imports from Cuban entrepreneurs inserts capital
into the non-state sector, builds relationships between Cuban and
American citizens, and perhaps even facilitates some much-needed
reconciliation between the two countries. Congress would do well to
consider the positive impact trade could have on Cuban citizens as it
considers the recently introduced bipartisan legislation to end the embargo.

This piece was originally published by The Huffington Post.

Source: U.S approach to trading with Cuban entrepreneurs | Brookings
Institution -
http://www.brookings.edu/research/opinions/2015/02/19-us-trade-approach-to-cuba-piccone