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US Continues Gradual Normalisation of Diplomatic Relations with Cuba

Fifty-four years and 90 miles stand between the United States and Cuba's long-time estrangement. Since severing diplomatic relations in 1961, the two countries have co-existed more like intimate antagonists than true enemies. Amidst a stifling Cold War-era trade embargo, negative national sentiment and an overall lack of political will, the United States has struggled to figure out the Cuban conundrum and until recently it continued to support an uncompromising policy toward the island nation that has by and large failed to produce any concrete results and has even proven counterproductive to U.S. interests in Latin America.

Despite the tremendous challenge and numerous roadblocks in the way, in December 2014 President Obama announced the most proactive U.S. policy shift toward Cuba – the re-establishment of full diplomatic relations. While the two countries have just begun the normalisation process and much work still needs to be completed to reverse decades of U.S. policy, more progress and discussion has occurred since December 2014 than at any other time in the last five decades. The ultimate decision to lift the embargo against Cuba remains within the U.S. Congress but that has not stopped the Obama administration from utilising the full extent of executive authority to influence policy change and public perception, both domestically and internationally.

To signify these continuing efforts between the Obama and Castro administrations, Obama and Cuban President Raúl Castro were most recently seen interacting at the Summit of the Americas in Panama. This year's summit marked the first time since its inception in 1994 that Cuba was allowed to participate. In conjunction with this historic event, President Obama notified Congress on 14 April that he intends to rescind Cuba's designation as a state sponsor of terrorism. Cuba was placed on the list in 1982, but a recent review concluded that Cuba has not provided any support for international terrorism during the past six months and has provided assurances that it will not support acts of international terrorism in the future. Although this announcement received praise at the Summit of the Americas as well as from several other countries, including mainland China, Vietnam and Russia, Congress has until 29 May to reject the removal. If that occurs, Obama can and would most likely veto that decision.

The only regulatory change that has taken place to date in the normalisation effort came about in January 2015 when the U.S. Department of Commerce's Bureau of Industry and Security and the Treasury Department's Office of Foreign Assets Control issued amended regulations (15 CFR §515 and 31 CFR §730-774) related to licencing, inspections, investigations and penalties. These regulations effectively relaxed the embargo with regard to air and sea travel, telecommunications, financial services and trade.

Air and Sea Connectivity

Under the amended regulations the 12 existing categories of authorised travel to Cuba that previously required a specific OFAC licence are now authorised under a general licence and do not require an application for travel. While this marks great progress in the relaxation efforts, charter flights remain the only airline flights allowed to Cuba under the previous and amended OFAC rules.

For individuals, private charter companies and commercial companies, flying an aircraft or sailing a vessel to Cuba, even temporarily, constitutes an export or re-export to Cuba. While travellers may journey to the island under the amended regulations, all aircraft and sea vessels require a specific licence under the Export Administration Regulations for the temporary sojourn of a vessel. Even still, some vessels may be eligible for exemption under the licence exception for aircraft and vessels (AVS).

U.S.-based carriers such as American Airlines, JetBlue and Sun Country currently offer charter flights to the island, with American Airlines operating roughly 20 flights from Tampa and Miami airports. All major U.S. carriers have expressed great interest in expanding flight operations and creating new routes to Cuba; however, no timeline has been announced for when the United States will officially announce a bi-lateral air transportation agreement with Cuba.

The Department of Transportation, the Federal Aviation Administration and OFAC, which have jurisdiction in this area of regulation, have jointly deferred any review of existing regulations on air and sea transportation until such a time as U.S. and Cuban negotiators formalise bi-lateral linkages and appropriate legislative changes are adopted. While several bills have been introduced in the 114th Congress to ease the restrictions on U.S. travellers to Cuba, until formal diplomatic relations are re-established with Cuba no major agreements or policy changes can be expected beyond what has already been amended.

Telecommunications and Internet Connectivity

While Congress, the U.S. and Cuban administrations and agencies continue their efforts to work out a more comprehensive policy toward Cuba, the U.S. telecommunications market is already pushing the envelope in an effort to pressure the governments into making a decision. President Obama uneventfully removed certain telecommunications restrictions in 2009 and further changes were made recently to enhance the ability of Americans and Cubans to communicate with each other. Nevertheless, U.S. companies are still forbidden to establish operations and export or re-export goods to the island under general licence, which significantly impacts progress.

Despite trade restrictions that limit the ability of U.S. businesses to promote private enterprise on the island, Cuba was joined to the GlobeNet submarine telecommunications cables in 2001, which until now have been heavily limited by the Cuban government. As the thawing of relations between the United States and Cuba progresses, however, it will become increasingly difficult for Cuban authorities to continue to limit telecommunications access. In a sign of things to come, a U.S. telecom company recently announced that it has reached an agreement with the Cuban state-owned Empresa de Telecomunicaciones de Cuba and has been granted access by the United States to establish the first U.S.-based communications channels. Until that point all calls, signals and connections required completion through non-U.S. based providers. Similarly, in February Netflix announced plans to begin offering its popular on-line streaming service to Cuba and those within the country with access to high-speed Internet.

Financial Services

Despite the brave few that are willing to take the risk of venturing into Cuba, most companies have been hesitant to take bigger steps because of the remaining limitations on access to finance and banking services. The amended regulations remove the restrictions that U.S. travellers have in spending money in the country and allow for the use of credit and debit transactions. However, financial institutions are not required to maintain or facilitate such transactions and no U.S. banks have officially announced that they will be opening branches in the island.

American Express and MasterCard recently expressed significant interest establishing payment facilitation and completion in Cuba, which may encourage other U.S. banks and financial services companies to expand operations to the island. The amended regulations now allow U.S. banks to establish corresponding accounts with Cuban banks but Cuban banks are still restricted from doing the same in the United States.

These efforts by large credit card companies support the amended regulations allowing for the transfer of funds and issuance of remittances to Cuban nationals but banks still maintain the right to refuse or restrict any transactions allowed under general licences. Despite this overall progress, U.S. companies still face the hurdle of being able to process and accept transactions from Cuban nationals.

Trade Linkages

As previously mentioned, the amended regulations maintain the prohibitions of doing business or investing in Cuba unless a specific licence is obtained from OFAC. Although export licences are still generally required, under the revised regulations new exceptions to the export licence requirement have been added to enable the export and re-export of goods that "generally" provide support for the Cuban people in three areas: improving living conditions and supporting independent economic activity, strengthening civil society and improving communications.

The DOC maintains the list of goods approved for export or re-export to Cuba, which currently includes a wide range of products such as building materials; equipment and tools for use by the private sector; items for use in scientific, archaeological, educational and sporting activities; and goods for use by news media personnel and U.S. news bureaus. Similarly, since 2000 agricultural commodities, medical devices and medicines, and consumer communications devices have generally qualified as eligible exports not requiring a specific licence.

U.S. businesses and groups are still restricted from engaging in trade and development activities in Cuba unless allowed under a specific or general licence. Moreover, U.S. citizens are limited to the importation as accompanied baggage of merchandise acquired in Cuba valued at no more than US$400 per person, including no more than US$100 worth of tobacco or alcohol products.

Diplomatic and Economic Linkages

Only time will reveal the extent and pace at which the United States will continue these normalisation efforts. Ultimately, the lifting of the embargo against Cuba remains within the purview of congressional action. Senate and House members in both parties have expressed many views since the historic December 2014 announcement. Through the introduction of nearly 27 bills, the celebration of several congressional hearings and comments from influential members, the battle for normalisation seems to be only starting.

While each party's members have mixed feelings on the re-establishment of diplomatic relations with Cuba, House Speaker John Boehner (Republican-Ohio) has voiced his opposition to the thawing process in several settings. In response to President Obama's call for Cuba's removal from the state sponsor of terrorism list, he stated that: "Cozying up to the oppressive regime in Cuba is a blow to all who long for liberty and dignity. And it's just one more example of this administration focusing more on befriending our enemies than helping our allies. The United States has a responsibility to stand strong for all those who struggle for freedom, and the House of Representatives is committed to doing its part." This viewpoint is generally supported by most Republicans and it is also shared by a number of Democrats. By contrast, the administration and its supporting members of Congress argue that normalisation of diplomatic relationships is long overdue and necessary if the United States is to encourage and foster democratic advancement in Cuba.

It is worth mentioning that the original U.S. embassy structure remains in Havana and still houses roughly 50 U.S. staff and 300 Cuban employees tasked with various operations, including the daily processing of visas for Cuban travel to the United States. Maintained currently as an "interest section" and managed by Chief of the Mission Jeffery DeLaurentis, further progress must necessarily come from the U.S. State Department and the ability of U.S. negotiators to reach an agreement with their Cuban counterparts on the re-establishment and repurposing of the U.S. embassy in Cuba.

Impact on Hong Kong and Mainland China

Normalisation of U.S. diplomatic relations with Cuba is expected to have a relatively modest impact on Hong Kong and mainland China. However, there is little question that sales of mainland Chinese consumer goods in Cuba would increase if the United States decides to end the trade embargo and allow U.S. companies to export their goods to Cuba without restriction. The main reason for this is that U.S. companies in the apparel, footwear, toy and game, household appliance and other sectors that make their goods in the mainland primarily for sale in the U.S. market could begin exporting their products to Cuba, especially if they are already doing business in other Caribbean or Latin American countries.

Normalisation of bi-lateral relations could also result in a considerable influx of foreign investment into the island nation, especially in tourism- and infrastructure-related activities, which could in turn have a positive effect on sales of mainland Chinese construction and related materials to Cuba. Moreover, the removal of financial, travel and other restrictions imposed by the United States in combination with the potential adoption of increasingly business-friendly policies by the Cuban government could create a suitable environment for investors from all over the world, including Hong Kong and mainland China, to venture into Cuba in order to gain a foothold in a relatively virgin market with tremendous potential.

Content provided by Picture: HKTDC Research
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