MEMORANDUM

Under the most conservative methodology, I estimate that the U.S. embargo against Cuba will cost Texas approximately $685 million in revenue a year this decade.

The US embargo on Cuba has been in effect for over 40 years. Prior to the Revolution in 1958, the US accounted for two thirds of Cuba's imports. While it is not possible to know what would have happened in the absence of the embargo, it is clear that the US policy has not been without cost to US exporters.

In 1995, the Office of the Comptroller of Texas issued a report which estimated export losses to Texas at that time to be between $200 and $300 million per year. These losses were based on an estimate by a Johns Hopkins study that US firms could export between $1.3 and $2 billion in the first year after "normalization" of relations with Cuba. The Texas Comptroller's study assumed that Texas would capture 15% on US exports to Cuba, a number reflecting Texas' share of US exports to other Latin American countries, excluding Mexico.

In 1994 two Cuban scholars visiting the University of Texas - El Paso, Luis Rene Fernandez and Jorge Mario Sanchez, estimated Texas export losses for1992 to be between US$300 and $800 million per year. The lower figure assumed that without sanctions, Texas' exports to Cuba would be equivalent to the sum of exports to Costa Rica, Jamaica and the Dominican Republic which, they argued were similar to Cuba in terms of total population, labor force and other characteristics. The authors suggested that this was a reasonable estimate of what Texas' exports would be during the year following the end of sanctions. The higher number is based on examining exports from US foreign subsidiaries and Canada to Cuba, determining which exports could be produced in Texas and assuming that Texas would supplant these other sources for those commodities where it competes with them. It was suggested that this level of exports could be achieved within 4 to 6 years after the end of the embargo. This estimate is clearly overly optimistic since it is unlikely that Texas would supplant all imports of competing goods from US from US subsidiaries and Canada.

In hearings before the Subcommittee on Trade of the House Ways and Means Committee in 1998, Ernest Preeg of the Center for Strategic and International Studies estimated that Cuban imports would rise to between $5 and $6 billion within a short time of the end of the embargo. Using an assumption that the US could capture 60% of this trade, he estimates that the embargo costs the US between $3 and $4 billion in lost exports. Assuming that Texas' share is 15% of that, his estimate would imply an annual loss to Texas of between $450 and $600 million in 1998 dollars.

Some estimates of the value of lost Texas exports to Cuba in 1999, the last year for which we have data, are as follows.

1. The most conservative estimate is to base losses on Cuba's actual trade in 1999. For that year the Central Bank of the Republic of Cuba reported total imports of US$ 4.3 billion of goods and services. Using the assumptions that the US would capture at least 60% of this trade and that Texas would account for 15% of the US share, the estimated loss for Texas comes to $387 million. This number, based on the existing level of Cuban imports is a lower limit since it assumes that Cuba's imports would not increase once the embargo is lifted.

2. Using the assumption that Texas exports to Cuba would equal the sum of exports to Costa Rica, the Dominican Republic and Jamaica gives a total of $480 million in 1999.

3. A more optimistic estimate of potential Texas exports to Cuba can be derived by looking at possible increases in foreign exchange available to Cuba following the end of the embargo and normalization of relations between Cuba and the US. These increases will come from several sources.
First, Cuban Americans are likely to increase remittances to their families in Cuba. Under existing law, remittances are limited to $1200/year. The Economic Commission for Latin America (ECLA) estimated these remittances are estimated to have been $600 and $800 million for 1995 and 1996 respectively. Remittances in 1999 were most likely to be at least equal to the $800 million level. Even a modest 10% increase in remittances would add $80 million a year to Cuban foreign exchange earnings.

Second, without the embargo ordinary Americans would be free to travel to Cuba. Currently US tourists account for 60% of all tourists to other Caribbean islands. Ernest Preeg estimates that lifting the embargo could add an addition $1 billion to Cuban tourist earnings within a few years. That number would be larger in terms on current prices. In addition, the number of tourists visiting from other countries will continue to grow. During 1999-2000 gross income from tourism to Cuba grew by 8.1% - although this increase includes a growing number of US citizens travelling to Cuba. With these adjustments, an increase in Cuban foreign exchange earnings from tourism of $1.2 billion within 5-7 years seems conservative.

Third, Cuba will begin to export goods and services to the U.S. With access to more finance and foreign investment and technology, Cuban exports to its existing markets should also increase. In 1999, Cuban exports were $1.4 billion. Within 5-7 years it is not unreasonable to expect exports to grow by $200 million or by 14%.

Fourth, removal of the embargo will lead to an increase in the amount of foreign investment in Cuba. ECLA reports that to date there are 370 joint ventures with the Cuban government representing a total investment in excess of US$ 4 billion. Estimates by the US Treasury Department are lower indicating that from 1990 to beginning of 1999, foreign firms have committed or delivered only $1.77 billion of investments. However, the Treasury Department estimates that a total of $6.12 billion in investments have been announced by foreigners. In the absence of the uncertainties surrounding future US policy towards Cuba, many of these announced investments will take place. Total foreign investment including that by US companies could increase sharply. An additional $500 million per year in private capital inflow to Cuba is within reason. By comparison, countries such as Costa Rica, Dominican Republic and Jamaica had foreign direct investments in 1999 equal to US$669, $1,338 and $524 million respectively. Collectively they received US$2.5 billion.

Fifth, with a rapproachment between the US and Cuba, Cuba would be eligible for membership in the World Bank and the IMF and hence for loans from these institutions. The initial commitments of these institutions could be quite generous given Cuban needs for investment in infrastructure and balance of payments support.
Finally, the growth in commercial telecommunications to Cuba will add to Cuban receipts as US businesses become more involved in the Cuban economy. In 1998 payments to Cuba from US phone companies approximated $80 million. About 65% of this represents calls by Cuban-Americans to their families in Cuba. Assuming that commercial traffic from the US to Cuba in 5-7 years would equal the 1999 level of family calls would add $50 million to Cuba's foreign exchange earnings.

Estimating the sum of these potential increases in foreign exchange earnings is difficult given the many factors which will influence them. Some guesses have been given above for some of the components. A reasonable number for the total increase in Cuba's capacity to import ranges from the 1999 level of $4.3 to $7.6 billion within 5 to 7 years of the end of the embargo. Under this scenario, Texas' exports to Cuba would be $684 million within a 5 to 7 year period after the end of the embargo. This would be equivalent to assuming that Cuban imports from Texas (and Texas' exports to Cuba) would grow at an annual rate between 10% and 12% once the embargo is removed. By comparison, since 1987 Texas exports to Mexico have grown at a rate of 14 percent per year in real terms (after adjustment for inflation) despite a severe contraction of the Mexican economy resulting from the peso crisis in 1994.

This longer term estimate refers only the benefit to Texas exporters. In addition, other Texas enterprises will experience increased revenues from all the auxiliary services such as transport, short term financing, insurance and freight handling and forwarding, that are necessary to facilitate those additional exports. Texas firms and especially the Houston port, will also benefit from handling exports originating from other states that flow through Texas. The Houston Port Authority estimates that 30% of the cargo it handles originates outside of Texas.
Finally, the total benefit to the Texas economy could be higher still as the increase in the demand for exports and export services draws additional resources into Texas.

To summarize, conservative estimates of the Cuban embargo's cost to Texas, in terms of lost exports, range from US$ 390 million in the short run (assuming that total Cuban imports do not increase beyond the 1999 level following the lifting of the embargo) to $685 million within 5 to 7 years, making modest assumptions about the effects of ending the embargo on Cuba's capacity to import. The total cost to Texas' businesses would be larger that both of these estimates.

At a more specific level, removal of the embargo will help several important industries in Texas. These include agriculture, electronics and electrical equipment, transportation equipment, industrial machinery and computer equipment. Cuba currently imports rice from China, Vietnam and Thailand. The US can expect to capture much of the Cuban market when sanctions end. (Before the revolution Cuba was a major importer of American rice accounting for 25% of all US rice exports). Another important commodity which Texas will export to Cuba is cotton. The largest component of exports will be manufactured goods. The market for computer equipment is especially promising given low levels of computer use and the low penetration of household electronics in Cuba. Data for computers are not available but it may be an indication of the potential for computer sales that the number of main telephone lines per 1,000 persons was only 27 in 1996 compared with 83 in the Dominican republic, 155 in Costa Rica and 142 in Jamaica.

Finally, it is interesting to note that in 1989, before the collapse of the Soviet Block, which cut off the large foreign aid and subsidies provided by the USSR, Cuba imported $8.12 billion - in 1989 prices. If Cuban imports were to increase to even $8 billion in today's prices the gain to Texas' exporters would be $720 million per year.