Jorge Espinosa of Espinosa Trueba Martinez. (AM Holt)
A lot has changed in U.S.-Cuba relations over the past few years, and some things have stayed the same. However, the opening of relations has many thinking about how they can take part in doing business in the Island country. With the embargo still on the books, the answer is to proceed with caution.
There are basically three major ways for Americans to do business with Cuba. The first is to export certain commodities from the U.S. for sale to the Cuban government.
Pursuant to provisions of the Cuban Democracy Act of 1992 and the Trade Sanctions and Export Enhancement Act of 2000, U.S. companies and people can get a special license from the Commerce Department’s Bureau of Export Administration to engage in the sale, export or re-export of medicine and medical supplies, food and agricultural commodities to Cuba.
Such business, which has amounted to tens of millions of dollars, is characterized by two restrictions. First, all sales must be cash in advance or must be financed by third-country banks. Second, all deals will be with the Cuban government since the government maintains a complete monopoly on the importation of goods.
The second way to do business in Cuba is to provide actual manufacturing or services on the island. This can be done through a joint venture, a wholly owned foreign company or a local agent. Tax incentives make the joint venture and the local agent the more appealing alternatives. Also, having a well-connected local partner or agent can make doing business on the island easier. This is how Western Union succeeded in spreading widely over the island.
Fifteen years ago, Western Union started to offer money transfer services in Cuba with 30 locations. Western Union partnered with a Cuban financial services company, FINCIMEX, which is ultimately owned by Grupo Administracion Empresarial S.A., which in turn is owned by the Fuerzas Armadas Revolucionarias, the Cuban military. Because of its deep connections in the Cuban government, FINCIMEX has made it possible for Western Union to expand to nearly 500 locations throughout the island.
Cuba has also invested to encourage manufacturing and distribution activity on the island. In January 2014, Cuba inaugurated the Mariel Special Economic Development Zone, or ZEDM, which provides tax incentives, expedited approval and flexibility on setting employee wages. The zone is adjacent to a newly upgraded containership port with a total capacity of 824,000 20-foot equivalent units, or TEU, and is well-placed as a manufacturing and distribution point to the Americas.
Unilever, the world’s largest manufacturer of consumer products, has already committed to opening a facility in the ZEDM. As in the previous example, this option will also require doing business with Cuban government-owned companies.
The third and most exciting way to do business with the island is the import into the U.S. of products from owner-owned cooperatives. Although the U.S. has exported tens of millions of dollars’ worth of pharmaceutical and agricultural goods to Cuba since 2002, there have been no imports into the U.S. in return. This may have changed.
Cuba has had agricultural cooperatives, but these were government-operated and controlled. In 2012, Cuba put into effect laws creating non-agricultural cooperatives and modifying agricultural cooperatives. The new cooperative model allowed workers, once legalized as a cooperative, to take over formerly centralized manufacturing and services jobs, elect their own leadership, set their own salaries and in some cases set their own prices. These level-one cooperatives can even group together into level-two cooperatives, thereby expanding their flexibility.
Effectively, the cooperative model provides a window for Cuban citizens to practice free enterprise on the socialist island. Hundreds of cooperatives were approved during the first two years of the program, and the numbers continue to grow. These cooperatives can be in fields including tourist restaurants, nightclubs, drivers and hair salons, and the list continues. Cooperatives can now be found operating businesses throughout Havana from horse carriages in the old capital, a nightclub in Vedado, an art exchange and a restaurant by the Morro Castle. These cooperatives have had varying success due to the lack of business experience of many Cubans. Nevertheless, they provide a vehicle for allowing exports to the U.S.
The first historic example of such a shipment of cooperative products to the U.S. occurred in January when a shipment of 40 tons of Cuban charcoal arrived in Port Everglades. The charcoal was produced by Cuban cooperatives from an intrusive African hardwood which has proliferated in Cuba. The deal with CubaExport was allowed by the U.S. government because the charcoal was produced by a Cuban cooperative and therefore the profits were not going to the Cuban state but to the workers of the cooperative.
The future of doing business in Cuba for American companies and individuals is still in its infancy and subject to potentially dramatic swings. Changes in law or policy positions by the Cuban government or by the current U.S. administration could dramatically change the current opportunities. Nevertheless, for the first time in 57 years, there are options.