The Impact of Ending the U.S. Embargo on Cuba

The embargo on U.S. trade with Cuba was put into place in 1960 and, after a brief thaw under one president that promptly refroze with the next, there it stays today.

That said, for many years the travel embargo has had so many holes in it that plenty of U.S. citizens have gone back and forth, and at least three commercial airlines are ready to transport them there.

As for other types of commercial activities, other countries long ago seized the opportunity to cash in on Cuba’s famous cigars and rum.

That complicates the question of what opportunities U.S. businesses might find in Cuba when and if the embargo actually ends.

Recent Events

In 2015, President Barack Obama announced that the U.S. would ease restrictions on trade and travel with Cuba. The announcement was greeted with enthusiasm by cigar aficionados, rum drinkers, leisure travelers, and some, but by no means all, Cuban ex-pats.

Soon after he was elected, President Donald Trump said that he would roll back that agreement if Cuba did not agree to further concessions. Yet, by the end of his term of the start of 2020, no substantive action has been taken and the restrictions on travel and commerce remain largely in place. 

“Largely” means that there have been small official jabs from time to time that are apparently meant to warn Cuba that the U.S. could get tough if it wanted to. For instance, at the end of 2019, the administration ordered a halt to U.S. flights to Cuban destinations, except for Havana.

In July of 2021, however, the Biden Administration imposed new sanctions on Cuba following the Cuban government crackdown on demonstrators in the streets in Cuba protesting the shortages in medicine and food resulting from the COVID-19 pandemic. Biden’s policy was being framed by Senator Robert Mendez, Chairman of the US Senate Foreign Relations Committee, and the son of Cuban immigrants. Mendez has, in the past, been critical of the Obama Administration’s softer line on Cuba.

Follow the Money

The reality is that Cuban products are already widely available in Europe and other parts of the world. If and when the United States becomes a more active trading partner with Cuba, it is likely that the same European multinational corporations that distribute Cuban products to the rest of the world will control the distribution of those products in the U.S. as well.

To understand the potential opportunities for investors, it is helpful to know a bit of history and have some insight into how big business works in Cuba now.

A Brief History

Before Fidel Castro came to power in 1959, an enormous percentage of the Cuban economy was under the control of U.S. corporations. U.S. companies even dominated the island’s utilities and railroads. They also controlled a significant portion of its natural resources, including its sugar, cattle, tobacco, timber, oil, mining, and farm industries.

Cuba’s new communist government nationalized all of these assets, claiming them in the name of the Cuban people. The US retaliated by slapping a trade embargo in place in hopes of toppling the Cuban government.

Six Decades Later

After the passage of six decades that saw the collapse of the Soviet Union, the end of the Cold War, and the passing of the torch by Fidel Castro to his brother Raul, it is clear to all parties that the trade embargo did not achieve its purpose.

Today, many argue that the embargo makes no real sense and that ending it will not only make U.S. consumers happy but also will further the goal of bringing a greater level of freedom to citizens of the island nation.

Big Business, Communist Style

The Revolution may have freed the island from the dominance of U.S. business interests, but even communists like to make a profit. Accordingly, the Castro government long ago entered into agreements with European-based multi-national firms to distribute Cuban products, including its famous cigars and rum.

British company Imperial Tobacco, which trades on the London stock exchange under the ticker IMT, has exclusive rights to distribute Cuban cigars worldwide (except in the U.S.) via a tangled web of corporate entities that includes a 50% ownership of Corporación Habanos, the Cuban government’s tobacco company.

Habanos, as it is known in Cuba, controls its brand by entering into limited and carefully controlled distribution agreements in each country in which it does business. If you light up a Cuban cigar anywhere in the world, a portion of the profits flows back to Imperial Tobacco.

Rum Doings

Cuba’s rum business weaves a similarly tangled web. When Castro took over, rum makers including Bacardi Limited and Jose Arechabala S.A. were thrown out of the country.

The French entered the fray when Pernod Ricard, which trades in France as RI.PA, joined forces with Cuba’s state-run Cubaexport and began selling the storied Havana Club brand of rum, formerly produced by Jose Arechabala.

(Bacardi produces a rum with the same name in Puerto Rico, using a recipe from the Arechabala family, for sale only in the U.S.)

U.S. Demand

So, the opportunity for distributing the most familiar Cuban products in the U.S. may be long gone. But that doesn’t mean there aren’t other opportunities, both in goods imported to the U.S. and goods exported to Cuba.

There’s still one big hurdle if you’re a stickler for following rules set in the dim past. Reasonable estimates place the total value of U.S. assets seized by the Cuban government at somewhere in the $7 billion range. U.S. law requires that money to be repaid before the trade embargo can be lifted.

It is highly unlikely that the Cuban government will hand over the cash, though there’s always the possibility that some other arrangement could be made that would open the door to new business.

The Tourist Status

On the tourism front, Americans were already making their way to Cuba via Canada, Mexico, Europe, and other countries that have flights headed to Havana long before President Barack Obama lifted the travel embargo in 2015.

To this day, there are exceptions to the ban for university groups, academic research, journalism, and professional meetings. Travel to Cuba by performers and athletic competitors are okay, too. Family visits are permitted. Humanitarian visitors are allowed. In short, just about anybody could get to Cuba on one or more of those exceptions.

At this point, U.S. cruise ships are not permitted to stop in Cuba, but commercial flights from the U.S. are offered by American Airlines, JetBlue, and Southwest airlines. U.S. passports are still welcome in Cuba, no problem.

Cuban Opportunities

Cuba’s tropical beauty has an obvious allure to travelers, but the country offers the possibility of profit for more mundane enterprises. Food, clothing and agricultural implements are all potential Cuban imports. The island’s aging infrastructure badly needs to be updated, which should present opportunities for construction firms, purveyors of cement and other building materials, engineers, architects, and home builders.

Just South of Florida

Real estate agents are also likely to be in demand as Americans seek second homes or retirement homes in a sunnier part of the world. Automobile sales are another possible opportunity. Shipping companies would make money and generate jobs, particularly in the southern portion of the U.S., as an increasing number of products are delivered back and forth between the two nations.

In addition, large and mid-sized businesses and entrepreneurs both on and off the island are likely to identify profitable niche opportunities for everything from seafood to suntan lotion if renewed relations create opportunities.

When Will This Happen?

Just when will all sanctions be lifted and trade relations normalized? Most experts agree it won’t be anytime soon. Economic ties can be slow to develop, the politics relating to Cuba are complex, and businesses may be cautious about entering into relationships with a country known for nationalizing assets, however long ago. In the meantime, Cuba’s forbidden fruit will continue to tantalize its northern neighbors.