U.S. Takes a Positive "Negative" Approach to Trade With Cuban Entrepreneurs

02/19/2015 02:01 pm ET | Updated Apr 21, 2015
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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.