TRADE AND ECONOMIC COOPERATION BETWEEN CARIFORUM AND CUBA

Transcription

1 Critical Issues For Business TRADE AND ECONOMIC COOPERATION BETWEEN CARIFORUM AND CUBA In September 1996, private sector representatives from CARIFORUM countries came together in Trinidad & Tobago to discuss a proposed study of trade facilitation between CARIFORUM and non-cariforum territories. The research was funded by Caribbean Export and focussed on trade with Central America (with special emphasis on Costa Rica) and with Cuba. In 1998, when the Caribbean Export report was submitted, initiatives for improving trade with Cuba had not been fully implemented. Since that time, however, considerable strides have been made towards fostering closer relations between CARIFORUM and Cuba. Caribbean Export has opened its Trade and Facilitation Office (TIFO) in Havana and a CARICOM/Cuba Trade and Economic Cooperation Agreement was signed in July Some details of the agreement are still to be finalised but relations between the two parties are expected to increase significantly in the near future. There is every reason to believe that trade between other CARIFORUM territories and Cuba will also increase. In this issue of TRADEWINS, we present highlights of the findings of the original report - an overview of the situation with regard to the liberalisation of the Cuban economy and suggestions for improved access for CARIFORUM exports to Cuba. We have also inserted references to the trade and economic cooperation agreement where appropriate. We hope that CARIFORUM exporters will be encouraged to explore further the possibilities for cooperation with Cuba and to contribute to any outstanding areas of negotiation. 2 Liberalisation and Diversification of the Cuban Economy 3 Market Access 5 Investment 6 Policy TRADEWINS is designed with Caribbean business in mind. The series is intended to bring issues of trade policy to the private sector and other interested parties.

2 2 True! Sensitive area Consumers Background Caribbean governments have, for some time, been discussing the issue of forming closer economic, cultural and political ties with Cuba. The Cuban government has actively supported the formation of the Association of Caribbean States (ACS) and has been admitted into the Caribbean Tourism Organization (CTO) and the Caribbean Broadcasting Union (CBU). In 1993, the Joint Cuba/CARICOM Technical Commission was established to promote cooperation in several areas including trade, tourism, culture, biotechnology, human resource development and the environment. In when the Caribbean Export report on the issue was submitted - expectations within the CARIFORUM business communities regarding the sourcing of goods and services, the exchange of trade and investment information, the harmonisation of trade rules and regulations and the establishment of reciprocal payment and credit systems had not been met. Contact among Chambers of Commerce was minimal and the work of Caribbean Export and other Trade Promotion Organisations (TPOs) in promoting exports to Cuba was only just beginning to produce tangible results. The new Trade and Economic Cooperation Agreement between CARICOM and Cuba and the new Caribbean Export office in Havana have begun to change this situation. However, given Cuba's historical isolation, it is reasonable to assume that members of the private sector within CARIFORUM are still largely unaware of the possibilities for developing closer relationships with Cuba. What are the Issues? While it is true that regulations such as the US Helms-Burton law may have generated some anxiety on the part of CARIFORUM governments regarding the withdrawal of US aid and technical assistance, there are other issues which seem to be preventing closer ties between CARIFORUM and Cuba. Chief among these are the failure to take advantage of the liberalisation and diversification of the Cuban economy and the persistence of several barriers to market access in spite of increasing decentralisation. A) Liberalisation and Diversification of the Cuban Economy The move towards diversification in trade and the economy in Cuba has largely been fuelled by four factors: The breakup of the Soviet Union (formerly Cuba's largest trading partner) The internal economic crisis sparked by the decline in supplies of fuel and raw materials from the former Soviet Union Declining world prices for sugar (Cuba's major foreign exchange earner) The tightening of the US trade embargo Following the breakup of the Soviet Union, preferential trade relations with Cuba were eliminated. Cuba was forced to turn to openly competitive world markets but lacked competitiveness in exportable goods. Cuba's current trade strategy is export-oriented, with high priority being given to the diversification, promotion and expansion of exports. Cuba has made significant advances in expanding the geographic distribution of its trade. As early as 1992, trade with Russia and the European Community accounted for more than 45% of its total foreign commerce. Within the European Union, Spain, France and Italy are its principal trading partners with Spain particularly active in the tourism and agricultural sectors. Canada and China have also become significant trading partners. There has been an overwhelming increase in potential import demand as Cuba has opened up its economy and embarked on its process of economic reform. Local industry has not been able to provide the market (approximately 11 million consumers) with the quality or diversity of manufactured goods required. In addition, the neglect of consumer good production over the last two decades has made Cuba an attractive market for basic consumer goods.

3 What the Report Recommended CARIFORUM exporters should investigate the possibility of exporting consumer goods to Cuba (a variety of food products and other household goods should be considered). Caribbean Export should consider promoting joint ventures and productionsharing arrangements between CARIFORUM and Cuba (experiences gained in two pilot projects may serve as examples: the United Nations Development Programme/United Nations Industrial Development Organization (UNDP/UNIDO) project identifying and matching industries to service the tourist market; and the UNDP project promoting subcontracting among small firms in Latin America and the Caribbean). Caribbean Export should also explore the possibility of running a match-making subcontracting service on a self-financing basis. Cuban and CARIFORUM exporters should consider joint marketing arrangements. What the Countries Have Agreed to so far The agreement uses a positive list approach to trade relations where only those goods listed will be eligible for preferential treatment. In the case of exports from CARICOM eligible for duty free access into Cuba, the list includes poultry, vegetables, fresh fruit, chocolate, biscuits, tobacco and petroleum oils (other than crude). The agreement acknowledges the need to facilitate joint ventures between the parties. B) Market Access Despite the economic reforms in Cuba, however, the move towards a more decentralised economy is partial and gradual and a number of potential barriers to increased trade and economic integration persist. Importing is still done largely by state corporations with public enterprises controlling the importation of essential goods such as oil and food. Central regulation of prices still exists and there are several articles relating to food, medicine, chemicals and certain aspects of national security which are prohibited and may only be imported with special documentation. In less essential areas, certain firms are allowed to manage their foreign exchange and make decisions about importing. Although payment difficulties have eased recently with the designation of correspondent banks in most CARIFORUM countries, trade with Cuba is still hampered by the country's large debt. Business on a cash basis is preferred over letters of credit. Some mechanism beyond letters of credit must be found in order to stimulate trade. Letters of credit are only paid after they have been fully cleared by the Central Bank in Cuba and this process may take three months. In addition, there are two or three currency exchanges which must take place and two or three exchange commissions must be paid. In response to the credit situation, the Jamaican government has opened a line of credit of Cdn $5 million for imports from Jamaica. It appears that there are no fixed processes governing business with state enterprises in Cuba and this places small exporters at a disadvantage. Shifting import priorities also make business uncertain for small exporters and some Cuban firms appear to prefer to do business with large exporters capable of resisting the embargo and negotiating 3

4 4 Find out!! Gov t business quickly and efficiently. Exporters in Cuba and CARIFORUM are not fully aware of the goods and services available in each territory or the laws which govern trade. (Several representatives of Caribbean companies have taken the initiative of establishing a presence in Cuba.) At the time of the report, Caribbean exporters enjoyed no preferential tariffs in Cuba and this placed them at a disadvantage compared with their Latin American counterparts. What the Report Recommended CARIFORUM countries should examine the possibilities for improving trade credit to Cuba and minimising exchange loss. Caribbean Export and the Centro de Promoción de Exportaciones Cubanas (CEPEC) should explore the possibilities of more regular information exchange. (The two agencies have since collaborated in the areas of market research and trade and information sharing and it is recommended that such undertakings bedeveloped further.) A more official presence is needed to develop links with the Cuban bureaucracy, introduce sellers to buyers, supply information and generally facilitate trade. Export seminars should place increased emphasis on doing business with state enterprises in Cuba and on the diversity of the Cuban import market. What the Countries Have Agreed to so far CARICOM and Cuba have acknowledged the need to establish financial and other payment arrangements to facilitate twoway trade. The countries have also agreed to promote information exchange. Fact-o-File Over the last four years, numerous companies in Cuba have received import licences and the monopoly position of the central importing firms of the Ministry of Foreign Trade in Cuba has therefore been displaced. In general, importing is done in three ways: through import houses (belonging to the Ministry of Trade and operating as sole importers of specific products or groups of products); through Ministry level importers or branch importers (servicing the needs of enterprises and units within specific Ministries); and through autonomous distributors established by the Council of State (mainly facilitating tourism and the US currency markets for goods and services). Only designated national firms are licensed to conduct export activity. Foreign companies wishing to export out of Cuba are therefore required to operate through these firms. Trade and Investment Facilitation Office (TIFO) Caribbean Export opened its Trade & Investment Facilitation Office in Cuba in Its main objective is to facilitate trade and economic relations between CARIFORUM and Cuba and it offers the following on a fee-forservice basis: Market research/intelligence services Needs analyses Marketing advisory services (e.g. formulation of market-entry strategies) Co-ordination of in-market promotion

5 activities (e.g. trade fairs, trade missions, market visits and appointments) Follow-up activities for companies (including payment collection) Trademark and health registration Identification of export and investment Opportunities (including joint venture partnerships) These services are offered to companies in the Caribbean and abroad seeking to export to Cuba, as well as to Cuban companies wishing to access the CARIFORUM and other markets. How Might we Address These Issues? There are two major areas of cooperation which could facilitate greater integration between Cuba and CARIFORUM countries - investment and policy. absence of structured financial and banking sectors; the need for bilateral investment treaties of promotion and protection (as signed recently between Jamaica and Cuba); and the lack of a large investment capital base such as those found among European investors (which would allow them to undertake this type of risk). There are several advantages, however, to investing in Cuba: Cuba is the single largest market in the Caribbean Cuba is a new market where neither American nor Japanese companies are present Cuba has a diverse and sophisticated infrastructure Cuba has great technological capacity with over 200 research centres Cuba possesses a highly skilled, low wage labour force Investment weaknesses include: Wow!! A) Investment The Cuban government has committed to restructuring its financial and economic policies to encourage investment. It has identified several priorities for negotiation in joint venture investments. These include: reactivating idle capacities; increasing the added value for traditional exportable products; acquiring new technologies; saving fuels; promoting new exports; and promoting import substitution. The government has also identified the hotel trade, multi-destination tourism, the chemical industry and agriculture as areas with immediate prospects for bilateral relations with a number of countries in the region. (Joint ventures in sugar by-products, medicines, and civil engineering are also areas of potential interest to Caribbean investors.) Caribbean businesses, however, have been slow to respond to the challenge. Jamaica and the Bahamas are the only two CARICOM countries investing in Cuba's tourism industry - with joint marketing arrangements in the area of multi-destination travel. There is some suggestion that the poor investment showing of CARICOM countries (particularly the larger, more industrialised countries such as the Dominican Republic, Jamaica and Trinidad & Tobago) is due to the following factors (among others): a lack of investment information; uncertainty about Cuba's political future; the Inadequate financial structures and regulations and the absence of standard business traditions Absence of a diversified banking system and lack of financial linkages Inadequate air and sea transportation Insufficient information on investment flows Although approval of foreign investment initiatives is still granted on a case-by-case basis, Cuba significantly modernised its investment legislation and provisions in The new legislation allows for the following: Foreign ownership of 100% as opposed to a maximum of 49% Investment in Cuban real estate (previously an area controlled by the State) Creation of free zones and export manufacturing centres Foreign investment in all sectors excluding health, education and defence Free transfer abroad of capital and utilities by investors Priorities Good 5

6 Good Free trade No expropriation except for reasons of national interest, with compensation No taxation on shared dividends Assured three year returns on investment (limited to the tourism sector) Exemptions on customs duties Economic associations with foreign capital began in 1988 in the area of tourism but have since spread to other areas of the economy. By April 1995, companies from 57 countries - mainly Spain, Canada, Mexico, France and the United Kingdom - had invested in Cuba. Of the 207 ventures, 28 were from Latin America and the Caribbean. These ventures include not only foreign equity investment in the form of joint ventures, but also special contractual arrangements, e.g. risk investment in oil exploration, production sharing arrangements, joint accounts and marketing associations in several industrial sectors. At the end of 1996, it was estimated by sources inside and outside of Cuba that foreign investment agreements represented some US$2.1 billion. Principal areas have been tourism, industry, mining and nickel, oil, biotechnology, pharmaceutical products, banking representations, agriculture and sugar. The CARICOM/Cuba agreement includes an Agreement on Reciprocal Promotion and Protection of Investments. This agreement deals with such issues as convertibility and transfer of funds and entry of foreigners for the purpose of conducting investment-related business. There is also a Draft Agreement on Tourism and a commitment to improve transportation services between the parties. clear whether the pre-conditions for an FTA exist. There was no clear indication of support for an FTA among businesses in Cuba and CARIFORUM. Cuba needed to undertake macroeconomic and structural reforms to ensure the following: an open and freely convertible foreign exchange system; less state control and subsidisation of production; greater liberalisation of the import market; some degree of balance of payments viability; and further industrial restructuring. The report suggested that a partial scope arrangement might serve the immediate trade interests and capacity of Cuba and CARIFORUM since greater policy sustainability and preparedness for free trade seemed necessary. The current CARICOM/Cuba Trade and Economic Cooperation Agreement may be considered a partial scope agreement. However, the governments of CARICOM and Cuba are committed to launching negotiations for a Free Trade Area and plan to begin these deliberations in the year Currently, there are positive lists of goods from CARICOM which will receive duty free access into Cuba and goods from Cuba which will receive like treatment in the More Developed Countries (MDCs) of CARICOM. There are also lists of goods which will be eligible for phased reduction of the Most Favoured Nation (MFN) rate of duty (to zero) over a period of four years. 6 B) Policy The report found that closer trade relations between Cuba and CARIFORUM were desirable but it suggested several reasons for delaying a Free Trade Agreement (FTA) between the territories. Although Cuba is a member of the world Trade Organization (WTO), it was not Cuba has partial scope arrangements with several countries within the Latin American Association for Integration (ALADI). Cuba enjoys a Preferential Trade Agreement with Mexico with which it also has signed a Limited-Range Agreement. An important objective in Cuban-Mexican bilateral relations is a reduction in the existing trade imbalance. Cuban exports to Mexico have declined while Mexican exports have increased. Despite this, Mexico is one of Cuba's principal trading

7 partners, with trade reaching US$400 million in Significant business relationships have been established; regular maritime shipping lines with specialised services exist; and there is a bilateral customs agreement. Conclusions Much progress has been made in the area of trade negotiations between CARIFORUM and Cuba in recent years. Economic reform in Cuba - and increasing interest on the part of other Caribbean governments - has greatly facilitated this move. The CARICOM/Cuba agreement is one example of increased cooperation and others are likely to follow. As the Cuban market is liberalised even further, it will be crucial for exporters in the region to make full use of opportunities for market research, exchange and joint ventures. It will also be important for Cuban producers to utilise the services provided by Caribbean Export's Trade and Investment Office and other TPOs to gain full access to information on CARIFORUM markets. Useful References Gonzales, A. & D.E. Lewis (1998). The Development of Trade and Economic Cooperation Between CARIFORUM and Cuba. (Report prepared for the Caribbean Export Development Agency.) 7

8 TRADEWINS is a publication of the Caribbean Export Development Agency (Caribbean Export). It is an important part of the agency's advocacy programme - making trade information accessible to those who need it most. Caribbean Export has identified a need to broaden and consolidate private sector involvement in the business of trade - identifying markets, improving market access, increasing competitiveness and playing a key role in the development of trade policy. TRADEWINS is a series of edited reports, treaties and agreements reflecting trends in regional business and pointing the way to future development. The series will be published occasionally - as new documents come to hand. Through TRADEWINS, we aim to inform members of the private sector, and others, of the important role of research, policy and negotiation in the development of regional and international trade. We hope that they will be encouraged to better organise themselves, to increase the present levels of research and to lobby their governments for changes which can improve the way they do business. Caribbean Export welcomes your feedback on this series. Please feel free to contact us at the addresses below: (Headquarters) (Sub-Regional Office) Caribbean Export Development Agency Caribbean Export Development Agency Mutual Building Calle 6, No. 10 Hastings Main Road Ens. Paraíso Christ Church Santo Domingo BARBADOS DOMINICAN REPUBLIC Mailing Address: Tel: (809) Fax: (809) P.O. Box 34B c.export@codetel.net.do BARBADOS Tel: (246) Fax: (246) info@carib-export.com Website: (Trade & Investment Facilitation Office) Caribbean Export Development Agency Miramar Trade Centre Ave. 3rd, Esq. 80, Edificio Havana (1-B) 4th Piso, Apt. 410, Miramar Ciudad Habana CUBA Tel: (537) /810 Fax: (537) info@carib-export.com The Caribbean Export Development Agency serves the Caribbean Forum of ACP States (CARIFORUM). CARIFORUM comprises CARICOM states (Caribbean Community and Common Market), Haiti and the Dominican Republic. The CARIFORUM Secretariat is located in Georgetown, Guyana. (Member States of CARICOM are: Antigua & Barbuda, the Bahamas, Barbados, Belize, the Commonwealth of Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts & Nevis, Saint Lucia, St. Vincent & the Grenadines, Suriname and Trinidad & Tobago.) (Haiti has been provisionally accepted into the Community and will attain full status once its accession has been completed. The Bahamas is a member of the Caribbean Community but not of the Common Market.) 8 Text: Gabrielle Hezekiah Design and Layout: Artistech Inc.