‘Free Trade’ With Cuba Is A Dangerous Fantasy

‘Free Trade’ With Cuba Is A Dangerous Fantasy

President Obama announced a radical change in U.S. policy towards Cuba today, and reactions range from the ecstatic to the outraged. According to a White House fact sheet on the topic that was sent to congressional offices on Capitol Hill, the new policy will allow Americans to import up to $400 in Cuban goods, of which up to $100 can be alcohol or tobacco products (like cigars). The new policy will also increase the threshold on remittances — payments sent from people in the U.S. to people in Cuba, most likely family members — from $500 to $2,000.

And here’s what the White House’s Cuba fact sheet said about commercial exports:

The expansion will seek to empower the nascent Cuban private sector. Items that will be authorized for export include certain building materials for private residential construction, goods for use by private sector Cuban entrepreneurs, and agricultural equipment for small farmers. This change will make it easier for Cuban citizens to have access to certain lower-priced goods to improve their living standards and gain greater economic independence from the state.

Oh, yeah: the Obama administration also, just by coincidence, announced a hostage swap at the same time.

Lawmakers with family ties to Cuba, like Sens. Marco Rubio (R-Fla.) and Bob Menendez (D-N.J.) lashed out at the Obama administration’s decision.

Free traders like Sen. Jeff Flake (R-Ariz.) applauded the move, basically saying that more trade would eventually lead to more freedom:

I want to believe the free trade rhetoric. I want to believe that any type of relaxation of the embargo would benefit the Cuban people. I really do. But I don’t, and here’s why.

Cuba’s economy is not normal by any stretch of the imagination. In fact, it actually has two economies: the dollar economy, and the peso economy. Americans who are allowed to visit get to participate in the dollar economy, and only the dollar economy. Cubans who live there are required to participate in the peso economy, and only the peso economy. The markets are completely segregated.

So, when an American goes down there, he buys things with either the dollar, or the Cuban version of the dollar (CUC), which generally has a 1:1 conversion ratio. Cubans are forced to use only the peso (CUP), which has roughly a 25:1 conversion ratio to the dollar (for every 25 CUP, you get one dollar; or for every 1 CUP, you get about $0.04). That rate is set by the Cuban government. That leaves Cuban vendors who accept dollars with only two ways of using those dollars to get the things they need to survive: 1) purchase them on the black market using dollars, a risky proposition for obvious reasons, or 2) exchange the dollars for CUP.

There’s no trading the CUP on the open currency market. Apart from sentimental souvenir value, it’s worthless everywhere else in the world. Whenever a Cuban gets his hand on a dollar, he either has to put himself at risk by using it on the black market, or he has to turn the dollar into the government in order to receive a pittance which he can use to buy food for his family.

The Cuban government, in turn, has two ways of screwing its people out of their hard-earned money: 1) it can either tax them to death, or 2) it can just manipulate its exchange rate, a way to effectively tax them to death. Different means, same ends. Cuba’s communist, after all, and communism is not a system that has ever put the welfare of its people ahead of the welfare of its rulers.

The result of the Cuban two-currency economy — one of which is forbidden to its people — is that every dollar will eventually find its way into the hands of the Cuban government. Since their internal currency, the CUP, is worthless, it’s not like they can just exchange it for dollars on the open market, like most other countries do. No, if the Cuban government wants dollars and the wealth that comes with them, it has to import them. And more dollars don’t mean more prosperity for the people of Cuba; more dollars means more wealth and power concentrated in the hands of Cuba’s communist regime.

I’m a big fan of free trade, in the real sense of the term. Free markets, free people, and free flow of capital benefit everyone. But you can’t have ‘free trade’ if you don’t have each of those components. Sure, more dollars may now flow into Cuba, but that won’t result in freer people, freer markets, or freer capital, because the current communist regime has no interest in allowing any of those to happen.

If Cuba truly wants free trade, then it needs to free its people, free its markets, and free its currency. Until then, any changes to the trade embargo are just going to be free money for corrupt Cuban communists.

Sean Davis is the co-founder of The Federalist.
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