Roadmap for Economic Normalization from Peterson Institute

Economic Normalization with Cuba: A Roadmap for US Policymakers

May 5, 2014

WASHINGTON—Relations between the United States and Cuba, frozen in hostility for more than a half century, are starting to thaw. In a new Peterson Institute study, Gary Clyde Hufbauer and Barbara Kotschwar argue that once the two countries enter negotiations for political and economic normalization, the United States should pursue a gradual and strategic easing of sanctions rather than lifting the longstanding embargo against Cuba in one grand gesture. Although many voices sympathetic to the suffering of the Cuban people will urge instant one-way economic normalization by Washington, the authors say a gradual approach would be more effective in avoiding a shift from communist dictatorship to oligarchic autocracy in Cuba.

The United States is already missing out on opportunities since Cuba has established trade and investment relations with Canadian, European, and, increasingly, Chinese firms. However by rushing to dismantle US sanctions and unilaterally opening US markets to Cuban goods and services, without proper institutions in place in Cuba and with Cuba's barriers to trade and investment intact, the United States could lose an opportunity to help US companies and their workers gain access to a new Cuban economy.

In the book to be released May 5, 2014, Economic Normalization with Cuba: A Roadmap for US Policymakers, Hufbauer and Kotschwar suggest markers for the path to restoring normal economic relations between the United States and Cuba. The markers would link each step forward in the normalization of US economic ties with appropriate measures to ensure that US firms and workers gain additional rights in the Cuban economy.

Cuba will face severe economic challenges, whatever the transition scenario between an autocratic state-centered economy and a democratic market-centered economy. But both the United States and Cuba stand to gain much from greater economic integration.

In their study, Hufbauer and Kotschwar discuss how US merchandise exports to Cuba could reach $4.3 billion annually, while Cuban merchandise exports to the United States could reach $5.8 billion annually. Over the past six years, US merchandise exports to Cuba have been a fraction of that, generally ranging between $300 million and $500 million annually. For the United States, there is currently no recorded trade in services, causing the United States to miss out on $1.6 billion in potential sales to Cuba. Conversely Cuba is missing out on potential sales of $0.9 billion to the United States.

"Transition to capitalism in Cuba has promise and pitfalls. The United States will have a unique opportunity to incentivize a successful Cuban economic transformation," said Adam S. Posen, president of the Peterson Institute. "Hufbauer and Kotschwar offer farsighted practical guidance on sequencing to ensure good outcomes for both the United States and Cuba."

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Economic Normalization with Cuba: A Roadmap for US Policymakers
Gary Clyde Hufbauer and Barbara Kotschwar
Assisted by Cathleen Cimino and Julia Muir
ISBN paper 978-0-88132-682-6
April 2014  |  135pp.  |  $23.95

About the Authors

Gary Clyde Hufbauer, Reginald Jones Senior Fellow since 1992, was formerly the Maurice Greenberg Chair and Director of Studies at the Council on Foreign Relations (1996–98), the Marcus Wallenberg Professor of International Finance Diplomacy at Georgetown University (1985–92), senior fellow at the Institute (1981–85), deputy director of the International Law Institute at Georgetown University (1979–81); deputy assistant secretary for international trade and investment policy of the US Treasury (1977–79); and director of the international tax staff at the Treasury (1974–76).

Barbara Kotschwar, research fellow, has been associated with the Peterson Institute for International Economics since 2007. She is also adjunct professor of Latin American studies and economics at Georgetown University. Before joining the Institute, she was chief of the Foreign Trade Information System at the Organization of American States. She has advised Latin American and Caribbean governments on trade-related issues and has worked with multilateral and regional development banks on a variety of trade and development projects.

Cathleen Cimino and Julia Muir assisted with the study.

About the Peterson Institute

The Peterson Institute for International Economics is a private, nonprofit institution for the rigorous, open, and intellectually honest study and discussion of international economic policy. Its purpose is to identify and analyze important issues to making globalization beneficial and sustainable for the people of the United States and the world and then to develop and communicate practical new approaches for dealing with them. The Institute is widely recognized as nonpartisan. It receives its funding from a wide range of corporations, foundations, and private individuals from the United States and around the world, as well as from income on its endowment.