Commentary: Washington’s Decision to “Normalize” Relations with Cuba..."

Date the commentary was written: 21/ 09 /2016

Read the original article on Global Research: "Washington’s Decision to “Normalize” Relations with Cuba: Impede China’s Growing Influence in Latin America?" by Birsen Filip - 28.08.2016

The article under consideration is about the possible lifting of the Cuban embargo imposed by the American Government in 1936. The idea of removing this historic embargo has been introduced recently and is in the process of becoming a reality due to Barrack Obama. Barrack Obama, the present president of the United States according to the article, shocked the world by officially reestablishing diplomatic relations with Cuba and furthermore slowly lifting the historical embargo. However, this article explores the embargo lifting as a means of the USA to impede China’s International Market power growth in Latin America in light of the recent trade deal between China and Cuba.

In this commentary, I shall be exploring the probable effects of lifting the embargo, with respect to the International Market and the Cuban economy. According to the article, it can be deduced that the USA is trying to prevent China from becoming a “monopoly” in the International Market.

An embargo is a government order that restricts commerce or exchange with a specified country or the exchange of specific goods. An embargo is usually created as a result of unfavorable political or economic circumstances between nations. The restriction looks to isolate the country and create difficulties for its governing body, forcing it to act on the underlying issue.[1]  In the case of the US embargo on Cuba, it is due to the relation Cuba was having with Communist powers. The Cuban embargo majorly affected the tourism in Cuba, sugar production, many other agricultural sectors and cigar firms. 

Figure 1:  Current agricultural production in the Cuban economy

As illustrated on the graph above, as the embargo technically prohibits Cuba from trading internationally (as the USA “penalizes” other countries that trade with Cuba) their agricultural goods although having an advantage of the lower price in comparison to the world price, Cuba cannot exploit that advantage. However, if the embargo is to be lifted Cuba would benefit greatly as they can produce many agricultural goods at a lower price than most countries and furthermore specialize in agricultural goods to even greatly increase their production. This would lead to an increase in jobs, increase in GDP and incomes in Cuba.

Due to the embargo many goods and services have to be produced domestically as Cuba cannot benefit from international trade. Due to the production of a vast array of goods and services domestically Cuba cannot efficiently produce all goods and services, and the quality is quite low. For instance, it is not efficient for Cuba to produce heavy duty farming machines, whereas China having a comparative advantage in heavy duty machines can effectively produce them. A country has a comparative advantage in producing a product when it has the lowest opportunity cost for producing the product.

Figure 2: Electronics and technological devices Market in Cuba currently

As illustrated in the diagram above, currently Cuba’s technological industry and many other industries are producing at a higher price than the World Price. This mainly due to lack of specialization. The people of Cuba are subjected to some high priced goods and services which are very low in quality. However, if the embargo is to be lifted Cubans would have access to the lower priced, higher quality goods and services from the international market.

Due to the large diversification in goods and services produced domestically, the Cuban economy has not specialized in particular products, hence does not hold any significant comparative advantage in any good or service production when compared to most countries. As Cuba would be able to trade much easier in the international market, hence would have access to cheaper raw resources from Africa and Americas, cheaper labor from Asia and greater capital from Europe and North America.

Figure 3: Effect of lifting the Embargo in the Cuban Economy

As shown on the diagram above, the lifting of the embargo would be highly beneficial for the Cuban economy. Aggregate demand and supply would increase. The total output of the economy increases from Y1 to Y2. The average price level of goods and services increases, but this increase is actually quite beneficial for Cuba as incomes would increase and producers make larger profits.

The lack of specialization due to the embargo hinders the growth of the Cuban economy. However with the lifting of the embargo, this would increase economic activity and boost economic growth in Cuba.

[1] http://www.investopedia.com/