How Diplomatic Relations With Cuba Could Affect the US Economy

image from http://newsfirst.lk by Kayleigh Yerdon, Summer Intern 2015, Cornell University

On Monday, the President of the United States set foot in Havana, Cuba. This marks the first time that the President has been to Cuba in the past 90 years. This is the biggest step towards diplomatic relations between the United States and Cuba since the beginning of the Cold War – diplomatic relations that could possibly result in the lift of a 54-year economic embargo of Cuba. To fully understand the significance of the President’s trip to Havana, let’s back track a little into the history of the poor relations between the United States and Cuba:

In 1959, Cold War tension between the US and Cuba came to a head when Fidel Castro overthrew the existing Cuban president, Fulgencio Batista. He proceeded to establish a revolutionary socialist regime in Cuba. From there, the Cuban government under Castro established many trade deals with the Soviet Union – with knowledge of ongoing conflict between the US and the Soviet Union – and raised taxes on American imports. Viewing this as an adversarial tactic, President Dwight Eisenhower established an almost complete trade embargo on Cuba in 1960 and cut off all diplomatic ties with the Castro administration – indefinitely.

In 1962, the Kennedy administration turned the “almost complete trade embargo” into a full trade embargo, limiting all travel and trade between the US and Cuba. And relations between the two nations have been nothing shy of excruciating ever since.

However, in 2008, Fidel Castro handed down the presidency of Cuba to his younger brother, Raul (who is now 84 years of age). Although the US government had previously agreed not to negotiate with Cuba until both Fidel and Raul Castro were removed from office, Raul began to set a slightly more diplomatic precedent towards the United States. In 2009, Obama lifted travel restrictions to Cuba (for Cuban-Americans only, to see family members or to return for religious purposes). Castro followed him up by lifting exit visa restrictions – laws that had required Cubans to obtain government permission to travel abroad. In 2014, Cuba and the US moved to restore diplomatic ties. Since then, the question has become: when (if ever) will the US lift the full economic embargo of Cuba?

Now, here comes the significance of this week: after meeting with Raul Castro in Havana on Monday, President Obama called on Congress to lift the embargo. While Obama said he recognizes that re-establishing long lost economic ties will likely be a lengthy and slow process, he believes that the United States and Cuba are ready to make a step that will last long after his administration.

While this change would obviously affect political relations with our southern neighbors, lifting the embargo might create widespread economic changes for both the US and Cuba, as well. With a population of upwards of eleven million people, Cuba would be granted access to many American goods. At the same time, rescinding the embargo would open the US economy to trade with an entirely untouched market. By investing in Cuba, American companies could completely alter the Cuban way of life and could possibly grow at the same time. In fact, we are seeing the beginning phases of the expansion of United States industries into Cuba this week.

On Saturday, Starwood Hotels and Resorts became the first US hotel company to sign a deal with Cuba since 1959, announcing that they would manage three properties in Havana. Here, we already see an expansion of the hotel industry (which may be further associated with travel and restaurant industries as people start travelling to Cuba more in the future).  Furthermore, Google announced a plan this week to help bring the Internet to the population of Cuba (as only 5% of Cubans have access to the Internet as we know it).

As we are already seeing, barriers between the US and Cuba that have been strong for the better part of a century are beginning to fall. As investors, we might look to these slow changes to direct our future investing decisions. Which companies are strong enough to succeed in completely new markets? Will their entry and potential growth in new markets affect their respective stocks heavily? These questions will be answered in the future based on the investment decisions we make today!