Is the House Agriculture Committee Barking at Big Foot?
by Fernando Martel Garcia
"
Within most issues, there are winners and losers, and we must be true to both."
This, we are told, is a
core value of Texas A&M University's Extension Economics Program Unit, which recently presented a
report to the House Committee on Agriculture estimating the impact of
H.R. 4645, the Travel Restriction Reform and Export Enhancement Act.H.R. 4645, sponsored by Agriculture Committee Chairman Collin Peterson of Minnesota and U.S. Rep. Jerry Moran of Kansas, seeks to eliminate tourism travel and financial restrictions on U.S.-Cuba trade.
According to the Texas A&M report ("the Report"), this bill would "have substantial positive economic impacts on the U.S. economy."
These figures have been regurgitated by the
media and farm lobbyists.
Unfortunately though,
it is highly probable that these estimates are grossly misleading and that the net economic impact of H.R. 4645 would be null or even negative, at least in the short to medium run.
The problem is that, contrary to their core values, the researchers at Texas A&M appear to have ignored the potential loses. Properly understood as only a small part in a much more complex story, there is no reason to question their assumptions, models, and export and job creation estimates. However,
by ignoring the losers, it is simply not possible to conclude that H.R. 4645 would "have substantial positive economic impacts on the U.S. economy." This is highly misleading.
The crux of the matter is somewhat technical and hinges on how increased Cuban imports from the U.S. were introduced into the input-output model used by the researchers.
One can think of
two potential drivers: (1) an exogenous increase in Cuba's income unrelated to the US (such as a Cuban discovery of oil, say) or (2) an increase in U.S. tourism to Cuba (as H.R. 4645 proposes). The latter, in turn, can come about in various ways. For example, existing U.S. tourists may chose Cuba over other foreign destinations, like The Bahamas, or over domestic destinations, like Florida, or citizens that hitherto had not travel plans may now choose to travel to Cuba. In the first two cases, tourism demand is simply reshuffled between destinations. In the later case, there is a net increase in tourist numbers.
Before considering the potential impacts of these sub-categories consider the distinction between drivers (1) and (2).
In the case where the driver of Cuba's income is unrelated to the U.S., rising Cuban incomes will likely fuel import demand for U.S. foodstuffs like pork loins, say. To the extent that this represents additional world demand for U.S. products, it is likely to be a net benefit to the U.S. And as the Report makes clear (and here is where input-output models are useful), the gains are not limited to pork loins, but feed-through to indirect demand for products and services related to pork production and distribution, like animal feed, packaging, and veterinary services. This is indeed the kind of rosy picture presented in the Report.
Now, consider the case where Cuban income rises because of a surge in U.S. tourism to the island, as is the goal of H.R. 4645. In this scenario, it is also likely that some of Cuba's income gain will translate into higher imports of U.S. foodstuffs. But
whether this represents a net national gain is questionable. First, if the measure only reshuffles tourists from one destination in the Caribbean to another, it is unlikely that it will have much of an impact on the U.S. economy. Import levels and patterns in the rest of the Caribbean and Cuba may differ, and so there might be some impacts, but nothing worth alerting your Congressman about. Second,
if the measure shuffles tourists from domestic destinations like Florida, Texas or Louisiana to Cuba, or if it creates new tourists, who would otherwise have remained at home in the U.S., then it is likely that the gains will be substantially smaller, or even negative, at least in the short run.
Why? Because every dollar these U.S. customers spend in Cuba is a dollar less of domestic sales in the U.S. Sure, some of this money will find its way back to the U.S. in the form of Cuban imports -- the only aspect covered by the Report -- but perhaps not all of it (although the devil is in the details). And just as we are told by the Report that some industries clearly benefit from increased exports to Cuba, other industries will undoubtedly lose from decreased domestic sales in the U.S. For example, a forgone pork loin in domestic sales may also imply a lost restaurant meal, tip, valet parking and other related services, which will now be provided in Cuba.
Furthermore, the U.S. service sector will suffer if trips to Cuba come at the expense of domestic trips, hotel stays and other locally consumed non-tradable services. Aside from the removal of tourism travel restrictions, the Report also considers the benefits of allowing exchange of agricultural products for Cuban IOUs. Not surprisingly, it paints a panglossian picture of how increased U.S. price competitiveness will boost exports to Cuba. This is all fine and good so long as – and this is the key implicit assumption -- Cuba honors those IOUs.
Should Cuba fail to cough up when payments are due, these exports will become unrequited transfers – a net loss to the economy. This is a very real possibility. Cuba is currently the second largest debtor to the Paris Club of creditor nations; is undergoing a severe liquidity crisis that may soon transform into insolvency; and has frozen the hard currency accounts of foreign suppliers operating in the island. To be fair, increased U.S. travel may provide some relief (at the cost of other creditors), but the report omits this issue entirely.
As the above examples suggest,
net gains from H.R. 4645 are as elusive and uncertain as Big Foot. The point here is not to argue for one outcome over another, but simply to illustrate the numerous potential downsides from this bill. Their omission from the Report is highly surprising because the one thing we can be completely certain of -- as with all trade reforms -- is that there will be winners and losers.
By presenting a highly distorted and one-sided account of the potential impacts of H.R. 4645, the Report does a great disservice to U.S. legislators. All this being said, trade theory does suggests there will be net gains over the long run (together with winners and losers). As the Cuban tourism sector expands, and as U.S. agriculture increases output to meet rising demand from richer Cubans, productive resources are reallocated towards each country's area of comparative advantage, thereby increasing world output and consumption possibilities. This is the core argument for free trade. But two caveats apply in the Cuban case. First,
Cuba remains a centrally planned oligopoly. This impedes opportunities for specialization and limits the gains from trade. Second, the above analysis ignores inter-temporal trade-offs. H.R. 4645 may delay Cuba's transition to democracy and a market economy, which would be the biggest boon to trade, by providing new funds for the Castro brothers. If so, it will delay the full realization of the gains from trade relative to the current status quo. Put differently, the US will be getting a very small immediate gain at the expense of a potentially delayed -- but much larger -- gain.
Overall, this could be a big net loss. So why has the Agriculture Committee devoted so much valuable legislative time to a measure that may subtract jobs from the U.S. in the short run; has little potential to create a substantial number of jobs in the long run; and runs the risk of delaying what ought to be the central objective of U.S. Cuba policy -- a peaceful transition to a free market economy and a democratic polity? If H.R. 4645 is the best the U.S. Congress can dream up to offset the 8 to 9 million jobs lost since the start of the recession, then we are in for a long jobs recession indeed.
Fernando Martel Garcia is a PhD candidate in Political Economics at NYU.
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