Will Trump's Demand for Reforms Halt U.S.-Cuba Rapprochement?

People march in celebration of the 164th birth anniversary of Cuba's independence hero Jose Marti in Havana, Cuba. Reuters

In the year following Obama's historic visit to Cuba, there has been a flurry of activity among American businesses eyeing the potential of the Cuban market. Last March, the U.S. luxury hotel chain Starwood Hotels acquired Hotel Inglaterra, Havana's oldest, making it the first hotel in the country to be managed by an American company in more than 55 years. Starwood received special authorization from the Treasury Department to operate hotels in Cuba.

The Starwood deal was a significant tangible result of the Obama administration's diplomatic overtures toward Havana, which began in 2009 and culminated with the presidential visit. In 2014, the U.S. government ended the limitations on visits by Cuban-Americans and on financial remittances to their families. The improvement in bilateral relations, coupled with the increased flow of information to Cuba—by way of greater numbers of visitors and access to the internet—provided an impetus for the government to accelerate the pace of reforms.

Although over the past decade the Cuban regime has stepped up efforts to introduce private enterprise and integrate elements of market competition into Cuba's centrally planned economy, further liberalization—particularly greater political freedoms—has been demanded by many Republicans before the restoration of trade relations with the U.S. can be considered.

However, what seemed like a clear trajectory in the spring of 2016 was much less so in the fall. The events of last November—specifically the death of Fidel Castro and the election of Donald Trump as U.S. president—ushered in a new period of uncertainty in U.S.-Cuba relations. Trump's campaign rhetoric suggested he might reverse progress made by Obama on improving relations between the two countries. Earlier this month, the administration announced that it was undertaking a full review of U.S. policy toward Cuba, with Havana's human rights record likely to be a key consideration.

But to focus solely on the moves of the new U.S. government would be misguided, as any meaningful cooperation would require the commitment of both sides.

In the 60 years that it has been in power, the Cuban revolutionary regime was forced to adapt to a changing international order, becoming flexible and resilient. As economic hardship emerged as the chief threat to the regime in recent years, it sought out new ways to pay for public services like universal health care and education.

The regime realized that in order to preserve the integrity of the centrally planned system, it had to include private enterprise in its planning, and embarked on the largest expansion of non-state socioeconomic activity in socialist Cuba's history. In the absence of Fidel's charismatic leadership, the regime embraced the premise of market socialism as a way of strengthening Cuba's economy without abandoning its revolutionary ideals.

Restoring trade relations with the U.S. appears to be a logical step, allowing Cuba to procure much needed goods and sell some of its own output. But although state funds are in dire need of replenishment, particularly with the collapse of close economic ally Venezuela, what is the likelihood of Cuba agreeing to tough reforms—Trump's probable price of continuing rapprochement?

Over the past decade Cuba's leadership has found new ways to generate income elsewhere. Among its most successful initiatives has been the deployment of its army of medics across the world. Since 2003 Cuban doctors and nurses have been working in Venezuela under government contracts paid in cash and crude oil. In 2013, Havana signed a similar deal with the Brazilian authorities, which is estimated to contribute some $270 million annually to Cuba's state coffers. According to latest estimates, in 2015 there were 37,000 Cuban health professionals working in 77 countries, generating about $8 billion in foreign exchange revenue.

While lacking the brand status of other traditional exports such as cigars or rum, Cuba's medical services are now the island's chief export and have the potential of becoming a significant national industry. As the U.S. government is planning to scrap much of Obamacare, Cuba might become an attractive destination for Americans seeking health care. Thousands of medical tourists already travel to Cuba each year for treatment that is cheaper or not available where they live. Recent reports suggest that some U.S. hospitals have already expressed an interest in forming partnerships with Cuban medical institutions. So market forces could lead to further economic engagement with Cuba even if Trump seeks to delay the process.

Trump also is coming under pressure from other sectors of the economy. In January, a group of U.S. agricultural businesses and associations sent the president an open letter urging him to support American agriculture by advancing the relationship between the U.S. and Cuba. The letter argued that faced with decreasing farm income—which is down 46 percent from just three years ago—America's farmers are in urgent need of new export markets. Cuba, which imports nearly 80 percent of its food, is an attractive market.

Trump's policies revolve around increasing import tariffs and putting American producers first. Ironically, however, it was largely due to trade restrictions that the U.S. has fallen from its position as the largest exporter of agricultural products in 2003 to fifth in 2012, behind the European Union, Brazil, Argentina and Vietnam. Re-establishing trade relations with Cuba, the farming lobby argues, could help America become number one again.

As with much else, it is hard to predict the direction of the U.S.-Cuba relationship in the Trump era. Many in America's business community, and a number of Republicans, clearly want greater engagement, which may prompt Trump to lessen his apparent resistance to closer ties. The Cuban regime will be mistrustful of demands for more robust reforms, but it is likely to come under domestic pressure to implement them. While private enterprise and other new income streams Havana has evolved in recent years are commendable, they are unlikely to raise sufficient funds to address the country's financial shortfalls, particularly if Venezuela continues its downward descent.

Renata Legierska is a senior associate at Alaco, a London-based business intelligence consultancy.