Diplomatic and Trade Relations Between US and Cuba Analysis of Economic Policy Impact on US Term Paper

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Diplomatic and Trade relations between U.S. And Cuba

Cuba: Diplomatic & Trade Relations

Analysis of Economic Policy

The purpose of this work is to examine the Economic Policy in Diplomatic and Trade relations between the United States and Cuba and in Analysis of the Economic Policy determine the impact that this has had on the United States.

Tension and confrontation are the definitions used to describe the relations between the United States and Cuba over the last forty years

Due to Cuba's establishment of very close ties with the Soviet Union and the part Cuba played in fueling the Cold War frictions between the United States and Cuba have been of a long-running nature. While President Clinton was in office the policy with Cuba was one that promoted the 'peaceful transition' of Cuba to a stable and democratic government and held respect for human rights. Two complements of the policy were first the maintenance of pressure on the government in Cuba for bringing about changes through the embargo and Libertad Act while at the same time making provisions for humanitarian assistance to the people of Cuba.

I. Background and History:

Cuba is an island that is located approximately ninety miles off the coast of Florida and is one of the last communist regimes left in the world today. A long history that is defined by 'mistrust' is share between Cuba and the United States. There is much disagreement within the United States concerning how the situation in Cuba should be handled. The Cuban Democracy Act was passed in 1992 by Congress and prohibits any foreign-based subsidiaries of U.S. companies from doing any trade with Cuba. The goal in this bill was to have a 'crippling effect' on the economy in Cuba in order to bring Castro down out of power. In February, 1996 the Helms-Burton Act was signed by President Clinton and is a law that is of a retaliatory nature after the Cuba military shot down two unarmed civilian U.S. airplanes. The Helms-Burton Act gives American citizens the right to sue foreign investors who use American property that has been seized by the government in Cuba. In October 2000, legislation passed by the U.S. congress and signed into law changed the U.S. -- Cuba relationship in trade through the enacting of exceptions to the U.S. sanctions legislation concerning agricultural and medical exports. The Trade Sanctions Reform and export Enhancement Act of 2000 relaxed some of the economic sanctions against Cuba and allows food and agricultural sales to Cuba by the U.S.

II. Current Level of Cuba-U.S. Agricultural Trade:

Currently Cuba imports approximately $600 million annually in grain, pulses, meat, soybeans, and vegetable oil and dairy products. Due to the current economic hardship in Cuba the amount has witnessed a downward trending in recent years. The income per capital in Cuba is estimated to be approximately $1,500 for its 1.1 million individuals living in Cuba. President Bush mandated that:

"The Commission for Assistance to a Free Cuba identify additional means by which the United States can help the Cuban people bring about an expeditions end to the Castro dictatorship."

III. Cuba: The Economic State

According to the U.S.-Cuba Trade and Economic Council, Inc.'s report of May 2004:

"The Cuban economic system is broken; it will not be easily fixed. It will take time to build national institutions as well as develop in individuals the attitudes, expertise and skills capable of managing Cuba's reconstruction. Lessons learned from other transition countries demonstrate that it is extremely important to identify and prioritize the needs, and to manage expectations correctly .The reconstruction effort in a free Cuba will be costly ....Cuba's infrastructure has slightly deteriorated ....as a result of years of inadequate investment and neglect of repairs and maintenance."

Further stated was that:

"The assist a transition government in Cuba and meet humanitarian as well as reconstruction challenges significant infrastructure investments will be needed in transportation systems, energy, telecommunications, water resources and sanitation."

IV. Effects and Impacts of the Economic Policy on the U.S.

One effect that the Helms-Burton law has been noted for is that it 'created a more uncertain and riskier business environment" which has the results of foreign lenders making provisions of credits to the island at higher rates of interest. Interest rates for bank and other financing has reached as high as 20% and even higher. It appears the Helms-Burton act may have provided foreign companies more power in negotiation of their projects with the authorities in Cuba. Also an effect is that some foreign investors that have holdings in the United States have created 'spin-off" companies in doing business with Cuba in order to avoid possible attacks on their holdings under Title III of the act. Finally the Helms-Burton Law has been seen to affect U.S. nationals. For example, individuals that are subject to the Helms-Burton under U.S. law presently hold 16% of share of Sol Melia' (as of 1999).

The policy is viewed by many as one that has failed due to the fact that foreign capital delivered to Cuba has seen constant growth since the Act was passed, many of the foreign companies are seeing high profit margins as they take advantage of the lack of competition by the United States and finally, the hindering of economic recovery of the Castro regime has not been accomplished.

From all appearances and reports the effect of this policy on the United States is demonstrated through the fact that foreign companies are seeing profits while the companies in the United States that generally interact in trade with Cuba have been limited in trade, this has effected an advantage for foreign companies in decreasing the trade with U.S. companies thereby removing competition from the market and giving foreign companies an advantage in trade. Also, due to the laws contained in the Helms-Burton Act, the profits of the foreign companies are driven even higher by their ability to demand higher rates of interest from Cuba on purchases due to the lack of choice in Cuban trade in receiving goods because of the limitations set out by the Helms-Burton Act whereby companies with U.S. assets or holdings stand to be in effect punished for trade with Cuba. Findings are that the U.S. Sanctions have reduced U.S. exports to 26 countries by approximately $15 to $19 billion which equates to a reduction of more than 200,000 jobs in the export sector as well as $1 billion loss annually in the export sector in wage premiums. This shows a high cost being affected against the United States economy while the sanctions in trade against Cuba remain in place.

The impact of economic sanctions on bilateral trade flows is seen to have the effect of reducing the bilateral trade flows on a consistent basis by approximately 90%. However, due to the allowed shipment of humanitarian relief the impacts are not as bad as they might have been otherwise. The sanctions have certainly decreased the employment potential in exports and evidence of this is seen in the present unemployment rate in the United States.

Summary and Conclusion:

Although humanitarian relief has kept the economic impacts on the United States to a somewhat minimal level in the effect being seen due to U.S. sanctions in U.S. -- Cuba trade, there still have been losses in employment due to the sanctions and approximately $15 to $19 billion estimated loss in trade over the past few years. A problem that has also resulted from the U.S. sanctions is the realization of larger profits by foreign companies involved in trade with the Cuban government. The sanctions have not seen realization of the hope for effects and the regime of Fidel Castro is still in power and has witnessed the advancing recovery of the economy in Cuba despite the Helms-Burton Act and…[continue]

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