Economic Sanctions - The Case of The American Embargo On Cuba

BUCHAREST ACADEMY OF ECONOMIC STUDIES
FACULTY OF INTERNATIONAL BUSINESS AND ECONOMICS
Dissertation Paper
Economic Sanctions
The Case of the American Embargo on Cuba
Scientific Coordinator:
Prof. Dr. Cojanu Valentin
Student:
Mihailescu AV Andrei-Iustin
Bucharest
2010
Contents
Introduction ................................................................................................................................................... 4
Types of economic sanctions ......................................................................................................................... 6
Trade Sanctions ......................................................................................................................................... 7
Trade embargoes.................................................................................................................................... 8
Financial Sanctions .................................................................................................................................... 9
Asset Freezes ........................................................................................................................................... 10
Economic Mechanism of Sanctions ............................................................................................................ 11
Size of Involved Economies .................................................................................................................... 11
Trade linkages ......................................................................................................................................... 12
Economic health and political stability of target country ........................................................................ 13
Cost of sanctions to targets ...................................................................................................................... 13
Cost of sanctions to senders..................................................................................................................... 14
US Embargo on Cuba .................................................................................................................................. 17
Methodology............................................................................................................................................ 17
Chronology of Key Events in the context of the Cuban Embargo .......................................................... 19
Goals of American Policy Makers........................................................................................................... 22
Reaction of the Target Country ............................................................................................................... 23
Attitude of Other Countries ..................................................................................................................... 24
Economic impact of the Embargo ........................................................................................................... 26
Initial impact of the embargo on Cuba`s Trade ................................................................................... 26
Long-term impact of the embargo ....................................................................................................... 29
Offsetting policies................................................................................................................................ 30
Non-economic effects of the embargo on Cuban citizens ....................................................................... 33
Testing Potential Bilateral Trade between Cuba and the US using the Gravity Model ...................... 34
Contemporary Cuban Economy .............................................................................................................. 39
Recommendations and Conclusions ............................................................................................................ 41
The Cuban Threat to the US National Security ....................................................................................... 41
Cost to the target country......................................................................................................................... 41
Benefits to the communist regime ........................................................................................................... 41
2
Possible Effects of lifting the embargo.................................................................................................... 42
Costs to the United States ........................................................................................................................ 43
Works Cited ................................................................................................................................................. 44
Annex 1: Input Data and Predicted Values of Imports and Exports for the Time Series Model................. 47
Annex 2: Data Smoothing for Time Series Model ...................................................................................... 48
Annex 3: ANOVA Output for Imports Time Series Regression Model...................................................... 48
Annex 4: ANOVA Output for Exports Time Series Regression Model...................................................... 49
Annex 5: Input Data for the Gravity Model ................................................................................................ 49
Annex 6: ANOVA output for the Gravity Model ........................................................................................ 52
3
Introduction
International economic pressure is used by states against states for a variety of political aims, but
one general purpose that characterizes all economic sanctions is as means of coercion in the
international arena. Scholars have defined sanctions as tools that “constitute a means of exerting
international influence that is more powerful than diplomatic mediation but lies below the
threshold of military intervention”1. Hufbauer, Schott, Eliott and Oegg argue that “the use of
sanctions presupposes the sender country`s willingness to interfere in the decision making
process of another sovereign government, but in a measured way that supplements diplomatic
reproach without the immediate introduction of military force”.2
States undoubtedly have many reasons that can be considered justifiable enough to impose
economic sanctions. “Demonstration of resolve”, as a reason for economic sanctions, can be
translated into the idea the states deploy sanctions in order to reassert their position as leaders in
certain fields. The US have applied in many instances such sanctions in order to send the signal
that they are the world hegemon and that they will act as a world guardian of democratic values.
Thus, the US has protested in numerous cases via economic actions against undemocratic
regimes and human rights violations. The US has done so even in cases when the positive
outcome of economically punishing certain states was highly unlikely because the cost of
inaction and the damage done to the US brand as the world`s biggest and strongest democracy
would have been too substantive to bare. While it is hard to quantify the weight in the decision
making process of such psychological and moral factors, such rationale is not to be
underestimated in the analysis of economic sanctions.
The idea that sanctions can be used in order to deter the target country from pursuing
questionable policies has also been cited as reason enough for the deployment of economic
sanctions. In such cases the sender country has the purpose to increase the associated costs with
1
Manfred Kulessa and Dorothee Starck, Peace through sanctions?, Policy Paper 7 of the Development and Peace
Foundation, Bonn, Germany, Presented at a Conference in Bonn, January 15, 1988
2
Gary Clyde Haufbauer, Jeffrey J. Schott, Kimberly Ann Elliott and Barbara Oegg, Economic Sanctions Reconsidered,
rd
3 edition, Peterson Institute of International Economics, November 2007, p.5
4
the policies in question up to the point where it would be too expensive for the target country to
continue with their implementation. One case of such sanctions would be the US sanctions
against the Soviet Union in order to punish the later for invading Afghanistan. The point of the
grain embargo and the threat to boycott the 1980 Olympics was to deter the soviets from further
continuing their occupation policy. The economic sanctions failed3 but they can still be
considered a case where the purpose was deterrence.
In other cases, states decide to use economic sanctions in order to satisfy domestic concerns. In
certain cases where the population has patriotic accesses or feel the need to express their
disapproval towards policies undertaken by central countries economic sanctions may have their
source in the galvanization of public support for such actions. One recent example is the
Tiananmen sanctions in the wake of the 1989 crackdown in China`s Tiananmen Square. The US
Congress passed legislation to continue the suspension of the Overseas Private Investment
Corporation, of the US Trade and Development Agency, of the export licensing for defense
articles and defense services and of many other sanction imposed prior to the 1989 even in order
to express US disapproval of the Chinese government`s actions.4 Other such cases include the
Helms-Burton Sanctions against Cuba, the Iran and Libya Sanctions Act and had as main purpose
to “assuage domestic constituencies, to make moral and historical statements, and to send a
warning to future offenders of the international order”.5
All in all, economic sanctions have a triple purpose in terms of the message conveyed: the target
country is announced that from the point of view of the sender certain policies should not be
endorsed; it reassures the international community that values are important for the sender and
that actions will be taken in order to safeguard these values and last but not least senders transmit
the message to their people that they will take actions to protect a nation`s interests. In any case,
one cannot help but notice the similarities between the rationale for economic sanctions and the
aims of criminal law: to apply punitive measures, to prevent and to rehabilitate. If, when and how
sanctions succeed in their aim is a question of the specifics of the context in which they are
3
Stuart E. Einzanstat, Do Economic Sanctions Work? – Lessons from ILSA and other US Sanctions Regimes,
Occasional Paper, February 2004
4
Dianne E. Rennack, CRS Report for Congress, China: Economic Sanctions, Updated February 1, 2006
5
rd
5
applied: in certain cases they are successful and in other their effects may be completely ignored
or even superfluous.
The first part of this paper reviews the literature on the topic of economic sanctions: it describes
types of economic sanctions, their mechanism and economic factors affecting the outcomes of a
sanctions episode.
The second part of the paper analyzes the American Embargo on Cuba from multiple points of
view. The immediate impact of the embargo will be detailed using a time series regression model.
The long term economic impact is reviewed by analyzing available data. Last but not least, a
gravity model is constructed with the purpose of estimating the level of potential bilateral trade
between the US and Cuba and also to check for trade diversion effects of the embargo. All in all
the findings of this paper lead to suggest that immediate termination of the embargo would be the
most suitable policy.
Types of economic sanctions

Scholars have long tried to come up with a unified and unitary definition of economic sanctions.
Robert A. Pape makes several distinctions between terms related to this field: trade wars,
economic warfare, and economic sanctions. Other scholars have mentioned terms like economic
coercion, embargoes and economic aggression.
Elias Davidson has reviewed the literature defining economic sanctions in a 2003 article entitled
“Towards a Definition of Economic Sanctions” (revised version 2003). Maraget Doxey was cited
in this article in saying that economic sanctions are “penalties threatened or imposed as a
declared consequence of the target`s failure to observe international standards or international
obligations. Barry E Carter defines sanctions as “coercive economic measures taken against one
or more countries to attempt to force a change in policies or at least to demonstrate the
sanctioning country`s opinion of another`s policies”.
In an attempt to clarify the concept of economic sanctions, a definition encompassing the

available literature would be: economic sanctions are measures in the field of economics applied
by one country (or a group of countries) against another country in order to persuade the latter to
alter its domestic or international policies.
6
Economic sanctions are to be distinguished from other inauspicious measures allowed under the
WTO statute such as anti-dumping actions, countervailing duties or safeguards actions as a form
of protection from surges of imports6.
Furthermore, so-called sanctions that pertain to the world of economic measures but are not
intentional or predicted to damage the economy of the targeted countries are not to be considered
economic sanctions. Last but not least, diplomatic sanctions (the EU making limitations on high-
level government visits from Cuba after the Cuban administration broke a moratorium on capital
punishment7) and arms embargos do not qualify as economic sanctions.
Trade Sanctions
Generally speaking in the case of trade sanctions, the sender can apply import controls, export
controls or both. In the analyzed cases in Economic Sanctions Revisited senders are more prone
to use export controls rather than import controls (50 uses compared with 168). Several reasons
stand behind the greater use of export controls. On the one hand, sender countries (generally
large economies) are more probable to be in the position to be called exporters of key products on
the international market.
On the other hand, if a country decides not to import goods or services from the targeted
economies, alternative importers can have a great say in the success of the sanction. In the case of
export controls, given the fact that key products such as high capital goods are/were generally
produced in concentrated geographical locations, it is easier to affect an economy by denying it
the possibility of benefitting from such goods.
Another possible reason is that import controls may deny the sender country population the
benefits of imported goods from the targeted country and public support for the sanction may
dwindle as a result, and governments (at least democratic ones) feed off the support of the
citizens.
In recent times, the production of high capital goods or military ones is not geographically
concentrated anymore. And as a result unilateral export controls may not be as efficient as it
6
Understanding the WTO: The agreements – Anti-dumping, subsidies, safeguards: contingencies, etc. –
www.wto.org
7 th
BBC News, EU condemns Cuba over human rights, 25 June 2003
8
rd
7
used immediately after the 2nd World War. Even for very sophisticated goods, there is more than
just one or two countries producing those goods and as a result, there is a great need for
cooperation in the case of economic sanctions based on trade-related measures.
Trade embargoes
Trade embargoes are included in the category of trade sanctions and represent prohibition of
trading with a soon to be former trading partner either in one area, or more (in same cases in all
areas of trade). One of the most cases of embargoes is the US embargo on Cuba. The trade
embargo was initiated in 1962 and will remain in place as long as the Cuban government refuses
to make reforms towards “democratization and greater respects for human rights”9. The US
embargo on Cuba is one of the most standing cases of embargo and it included not only a trade
embargo but also a financial, and economic one (it can be cited as an example of financial
embargo).
Thomas Pugel explains in the 12th edition of his International Economics textbook how trade
embargoes work. For the purpose of explaining the economic mechanism of a trade embargo, the
graphs Tomas Pugel published in his work will be used.
Figure 1: Effects of an Embargo on Exports to Iraq10
9
Cuban Democracy Act, 1992
10 th
Thomas Pugel, International Economics, 12 edition, The McGraw Hill Companies, 2003
8
Figure 1 explains graphically the effects of total embargo on exports to Iraq. The export supply to
Iraq (from both embargoing and non-embargoing countries) is pictured as limited and rather
inelastic. The export supply from the countries that impose the embargo is the difference between
their domestic supply and domestic demand (which is show in Figure 1A). Adding the supply
from the embargoing countries to the supply of non-embargoing one the total export supply can
be derived as being Sn+Se available to Iraq prior to the embargo.
Before the embargo was deployed, the Iraqi import demand equals the total export supply at point
F and at these coordinates the price is p0 and the quantity imported by Iraq is Q0.
After the exports embargo, a share of the world export supply is no longer available to Iraqis
wanting to import. As such, Se is removed by the economic sanction, leaving Iraq with only Sn.
As a consequence, the price increases from po to p1 and the free trade equilibrium F shifts to the
embargo equilibrium E. The costs to Iraq are described by summing areas b and c from figure
1.B. The economic loss suffered by the embargoing countries is measured by area a and it is
shown in two ways: on the left as the difference between producer losses and consumer gains,
and on the right as a loss of surplus on exports. Since, not all countries impose the embargo, after
the embargoing countries no longer export goods to Iraq, other countries gain area b on selling
more goods to Iraq at a higher price. The restriction on trade on a world scale is measured by
areas a+c.
Effects are of course different on the two sides of the embargo. On the one hand, the countries
that apply the embargo will face a lower price (below p0) benefiting consumers and hurting
producers. On the other hand, within Iraq, there may be some producers that are now benefiting
from the effects of the embargo since they are protected from the effects of foreign competition.
Financial Sanctions
Such sanctions take the form of preventing the targeted economies from accessing credits or
grants from the sending countries. Financial sanctions “entail the use of financial instruments and
institutions to apply coercive pressure on transgressing parties – government officials, elites who
support them or members of non-governmental entities – in an effort to change or restrict their
behavior”11. Financial sanctions do not apply to the whole extent of the populations, as in the
11
The Swiss Confederation, United Nations Secretariat, Watson Institute for International Studies, Target Financial
Sanctions, A manual for Design and Implementation 2001
9
case of trade sanctions. The recipients of such sanctions typically are the elites and the leaders of
the targeted countries or the so called “operationally responsible individuals”. An example of
such a sanction is the one applied by the EU against Croatia, Serbia and Montenegro. Certain
persons indicted by the International Criminal Tribunal for Former Yugoslavia are not allowed to
access credit facilities from the EU12.
One of the most used types of financial sanctions is the cessation of official development
assistance (OED). Even though political goals have been used as rationale for economic sanctions
(e.g. in support of the opposition movement of building the Three Gorges Dam in China), the vast
majority of cases of financial sanctions involve the “manipulation of bilateral economic and
military assistance to developing countries” according to Economic Sanctions Revisited, 3rd
edition. One such example includes Japan stopping official development assistance to China in
several instances: in the aftermath of the 1989 Tiananmen Square massacre, the 1995-1996 freeze
of grant aid after China`s underground nuclear tests etc.13
Asset Freezes
Asset freezes are characterized by freezing the assets the target country holds in the sender
country. Such sanctions are important because they inhibit financial flows and hurt international
exchanges of goods. Everything that a national from the target country owns in the sender
country is in peril of being frozen once such a sanction is passed; such assets include everything
from property, accounts receivable, bank accounts, merchandise, and inventories.
One example of an asset freeze sanction is the one proposed by the UN Security Council
Resolution 1390 (2002) against Al Qaeda, Osama Bin Laden and the Taliban Regime in
Afghanistan. The resolution infers that “All states […] [should] freeze without delay the funds
and other financial assets or economic resources of these individuals, groups, undertakings and
entities, including funds derived from property owned or controlled, directly or indirectly, by
them or by persons acting on their behalf or at their direction…”.14
12 th
European Commission, Restrictive Measures (Sanctions) in force, updated 5 January 2010
13
Mary McCarthy, The Role of the Japanese Media and Public Opinion in Aid Sanctions Against China, paper
presented at the annual meeting of the International Studies Association, 2006
14
United Nations Security Council, Resolution 1390 (2002) – www.un.org
10
According to Hufbauer, Schott, Eliott and Oegg, the US asset freezes against Iran in 1979 (with
the purpose of setting expropriation claims and releasing hostages) and UK freezes against
Argentina in 1982 (with the aim of withdrawing troops from the Falkland Islands) greatly
contributed to rendering Iran and Argentina unable to buy weapons and ammunition and thus
leading to the resolution of the disputes. Other cases involve the freezing of Kuwait assets during
the Gulf war in order to prevent Iraqi forces from controlling them for their benefit during the
war.
Economic Mechanism of Sanctions

Obviously, the purpose of any sanction is to convince a foreign government to change its
behavior in relation to the demands of the sender government (the government imposing the
sanctions. Ideally, weakening the economy of the target country would enable its leaders to
change their policies. This is supposed to work by preventing leaders of the target countries from
supplying basic commodities, services and work to the population. Such shortages are expected
to result in domestic constituencies being unsatisfied with their rulers and this public discontent is
expected to create an incentive to the target citizens to desire the change of government of the
change in certain policies. Thus the mechanism of economic sanction is based on a transference
power that such measures may have: social discontent and suffering in theory should be
translated into political change.
Size of Involved Economies

Generally speaking, the sender economy is larger than the target economy. According to
Hufbauer, Schott, Eliott and Oegg in the majority of cases (80%), the ratio between the sender
economy and the target economy is greater than 10. This does not go to say that because an
economy is bigger than another, if the richer economy decides to deploy a sanction on the weaker
one, the punitive policy will be successful because size matters. The fact that in the majority of
cases, large economies impose sanctions conveys the message that in the view of both rich and
poor nations, a large GNP is a prerequisite for the success of a sanctions episode (even though a
big GNP is not sufficient).
In the 2nd part of the past century countries have managed nonetheless to convince equally potent
economies to alter their behavior according to their demands. One example is the US threatening
11
to provoke a crisis of the Pound Sterling (by not allowing UK to access IMF short term credits or
dollar loans from US banks).
Some “courageous” states like China have convinced more powerful economies like France in
the 90s to stop selling arms to Taiwan even though its economy measures at the time a mere third
of the French one.15
All in all size matters and it is easier for larger economies to impose sanctions, but size is not the
only important factor driving the success of economic sanctions.
Trade linkages
The trade relations between countries are also an important factor that can affects the success of a
sanctions episode. If a given country does not exchange many goods or services with another
country, then the likelihood of success is diminished since it cannot really affect the economy of
the target. As stated previously, since large economies impose sanctions, it is only expectable that
the target`s trade relations with the sender accounts usually for at least 10% of the target`s total
external trade.16 The message that is sent to the target is such cases is simple yet accurate: “if you
do not change your policies, the effects on your economy can be even greater than this since I am
one of your major trading partners”. In cases that were classified as successes, the sender
accounts for almost 30% of the target`s total external commerce, but as in the case of size ratios
this is not the only governing factor of efficiency, since in failed cases, the average trade linkage
was only a bit smaller, incurring 29% of the target`s total external trade.17
There are cases when trade linkages were very small and yet the sanctions were successful. In
1998, Turkey deployed economic sanctions on Italy in order to persuade it to extradite one of the
leaders of the Kurdish Worker’s Party (PKK), Abdullah Ocalan. Turkey instituted sanctions
against Italian products and accused it of supporting trouble in Turkey. Italy on the other hand,
accused Turkey that it fails to live up to its European expectations18. The episode was successful
even if Turkey accounted for only 2% of Italian exports and less than 1% of its imports.
15
Gary Clyde Haufbauer, Jeffrey J. Schott, Kimberly Ann Elliott and Barbara Oegg, Economic Sanctions
rd
Reconsidered, 3 edition, Peterson Institute of International Economics, November 2007, p.89
16
Idem 17, p 90
17
Idem 17, p 90
18
Tzvi Fleicher, Apo-calypse now, The Australia/Israel Review, 9-31 December 1998
12
Economic health and political stability of target country
The economic and political environment of the target countries can influence the outcome of a
sanctions episode.
As expected, a weaker economy that is characterized by lower growth and a high rate of inflation
is more likely to suffer more from the effects of economic sanctions and as a result a weak
economy is more likely to alter its policies in order not to expose itself to the effects of economic
sanctions.
On the other hand, the sample size of sanctions used in Economic Sanctions Revisited, 3rd
edition, seems to associate higher political stability with success of economic sanctions. The
reason may be explained by the fact that feeble regimes are not particularly able to respond or
because they perceive the costs of changing their policies as being higher than do more stable
regimes. This may also be caused due to the fact that weak regimes that are characterized by
often government changes need to reassert their people that it is powerful on the international
arena, while stronger regimes already have a position and are not afraid to make compromises
when needed.
Cost of sanctions to targets

There aren`t many cases of economic sanctions inflicting heavy costs on the recipient country.
Out of the 116 cases analyzed in Economic Sanctions Revisited only 14 generate costs that
exceed 10% of the GNP of the target country.
In approximately 25% of cases the cost exceeded 2%, but 2% of the Gross National Product is
still a cost that can generate many problems for the targets ranging from job loss, lost investment
opportunities, damage to inventories to cessation of foreign direct investment or aid.
One of the most extensive cases of economic sanctions the world has ever witnessed is the
multilateral sanctions Iraq suffered in the aftermath of the Gulf War. During the embargo Iraq
lost 90% of its oil sales ($13.6 billion annually); in terms of imports Iraq lost $4.6 billion; the
cessation of US agricultural credits and the freeze of Iraqi assets added 620 million dollars19.
There were certain events such as the economic aid coming from Libya and the Oil for Food
19
Idem 17, p 105
13
Program that diminished the cost of the embargo, but the size of the economy post-embargo had
measured over the 90s approximately half of Iraq`s GDP.
The same source states that the average costs incurred by sanctions imposed after 1985 are
roughly 5% of the GNP of each target. One would argue that the costs of sanctions to targets
could be higher than 5% but in many cases, the sender economy applied only a limited array of
sanctions either because it has limited interests or because it does not want to suffer too much as
a result of imposing a total embargo. What is more, once a sanction in place, target countries are
motivated to find ways to evade the effects of the sanction by way of forming new trade
relationships, finding new allies. Third country firms can be used to create parallel imports for
example: one example can be found during the 90s when UNITA (National Union for the Total
Independence of Angola) managed to redirect its trade flows through friendly Congo and
Zambia. As a result, even is some delays and higher costs are in place, targets can find ways to
escape the effects of sanctions.
In any case, even if escapism is possible, sanctions can have paramount costs for the targets and
in cases where costs are high the sanction is likely to succeed.
Cost of sanctions to senders

The outcome of a sanctions episode not something imposing governments can be sure about.
Such policies are double sided: they may work or not. One thing is certain though: the sending
economy will sacrifice a part of its wealth in order to achieve a political goal
The immediate costs of sanctions represent disruption in the flow of goods, services, money and
finance. If, for example, the sender decides to cease aid for the target, its expenditures may
decrease and the result may be economic gain. However the disruption in other flows of economy
may diminish the effect of cutting expenditure for aid.
In the case of the US, the multitude of US sanctions reduced exports to 26 target countries by $15
to $19 billion dollars in 1995. Translated to the labor market, this meant the loss of
approximately 200,000 jobs in the export sector and an accompanying loss of $1billion in terms
of export sector wage premiums20. Another estimation by the US Department of Commerce states
20
Haufbauer et al., “US Economic Sanctions”, p3
14
that in 1992, $1billion of exported goods creates somewhere between 200,000 and 260,000 jobs
and this further increased the credibility of jobs being lost due to sanctions.21
What is more, it is hard for firms to penetrate the market again, once the sanction was lifted. If
sanctions are unilateral, other rivals may replace sender suppliers and will often develop long-
term relationships with firms from the target economy. Even is sanctions are not lifted, it is hard
to believe that potential customers will easily abandon their long-term customer relationship to do
business with firms from a country that has a history of economic sanctions.
In high-tech fields, market repenetration is even more difficult. Boeing is a notorious case of high
loss. In 1993, the US deployed an embargo against Vietnam. At that time, the Vietnamese
national airlines were hoping to lease 6 narrow-body, medium-range aircraft from the American
aircraft producer. The embargo prevented the conclusion of the business deal and Vietnamese
Airlines chose Airbus. The loss to the American company was around $211 million. However
this loss was increased by the fact that the Vietnamese company had to build its maintenance and
support services around Airbus (since their products were bought from Airbus). A 1997 study
predicted that Boeing`s loss would raise to a staggering $1.6 billion22.
Lost confidence is an important cost as well. Once a country imposes economic sanctions,
recipients of the target country (and even 3rd party nationals) it creates a precedent. Businesses
have a need for certainty – they need to know that contracts will be concluded and that
governments will not interfere with the clauses of business contracts.
Greg Mastel of the Economic Strategy Institute explains in a study that the US tendency to
impose sanctions more than Japan or the EU has partly resulted in European and Japanese exports
to China to grow twice as fast compared to US exports to China.23
Such concerns were recognized by the US administration. In 1979, the US Export Administration
Act was passed in order to provide safeguards for national exporter. In 1985, additional limits
were added through the Export Administration Amendments Act (1985) and included a sunset
21
US Department of Commerce, US jobs supported by Exports of Goods and Services, Washington, November 1996
22
Robert P. O`Quinn, A user`s guide to Economic Sanctions, The Heritage Foundation, Leadership for America, June
15, 1997
23
Idem 24
15
time span for agricultural embargoes, provisions limiting the controls on exports that are already
subject to contracts.
All in all, even though the above mentioned numbers may sound impressive, the total costs of
sanctions are not as dire as they sound. In Hufbauer, Schott, Eliott and Oegg’s studies in 25% of
the cases, senders even enjoyed economic gain as a result of withdrawing financial support for
the targets. They also argue that given the typical GDP ratio of sender and target, the loss to the
sender can be qualified as a “trivial dislocation”. Another point would be that economic costs to
the sender are usually not compared with the cost of inaction and as a result in many of the cases
the cost of inaction may be greater than the cost of economic sanctions.
16
US Embargo on Cuba
The embargo the United States of America imposed on the Cuban government in 1962 is one of
the most extensive cases of economic sanctions up to date.
First of all the embargo is total, meaning that the sanctions include not only trade prohibition but
also asset freezes and financial trade flows disruptions. Given the extent of this particular case of
economic sanction one can analyze its effects over time and according to the effects it has had.
Furthermore, the embargo is now unilateral but has also been multilateral. This specific aspect
enables an analysis on its effectiveness given its dual nature: both uni and multilateral.
Last but not least, the goals of the American policy makers have changed over time and as such
multiple goals can be compared to the actual effects of the embargo.
All in all, the rationale for choosing the American Embargo on Cuba for the purpose of this paper
resides in the magnitude of this particular economic sanctions episode: both economic and
political.
Methodology
For the purpose of this paper, the following methodology has been applied:
First of all a chronology of key events will be presented with the purpose of introducing the
context of the embargo.
Secondly, the goals of the American policy makers will be detailed throughout time in order to
clarify the scope the embargo over the period it has been imposed.
Thirdly, the reaction of the target country will be detailed in order to explain how Cuba has dealt
with the embargo.
The reaction of other countries to the embargo will also be mapped out with the purpose of
analyzing how the reaction of other members of the international community has impacted the
effects of the embargo.
17
The short term impact of the embargo will be computed using regression analysis. Regression
function coefficients will be calculated. Two time series models will be constructed, describing
Cuban imports, respectively Cuban exports from and to the world over time. The dependent
variable in the 2 regression models will be the value of Exports and Imports between Cuba and
the rest of the world expressed in millions of $US as current dollar prices. The explanatory
variable will be time.
The data available from the WTO is from the period 1948-2009 and as a result, observations
between 1948-1961 (the year the embargo was imposed) were used. After analyzing the available
observations, a need for smoothing has been created in order to enable the model to predict more
accurately the imports and exports of Cuba over time. For the imports time series, an exponential
smoothing average with a smoothing factor α=0.2 has been conducted. On the point of exports,
because of the fluctuations, a 7-period moving average has been used in order to smooth the data
provided by the observations. The correlation between exports, respectively imports and time will
be computed before the embargo was instated. After the regression coefficients are estimated a
comparison between the level of trade predicted by the function in the first decade of the
embargo and the actual level of trade will be made in order to determine the initial impact the
sanction has had on Cuba`s total level of exports.
The next step of the process is to analyze the long term impact of the embargo. Statistics from
various sources have been employed and interpreted in order to quantify the long term impact of
this particular case of economic sanction. Offsetting events and phenomena such as remittances
and Soviet subsidies have also been taken into account. The long term impact section also
describes non-economic effects of the embargo.
Last but not least, a gravity model has been constructed in order to estimate the level of bilateral
trade between Cuba and other countries in the case of lifting the embargo. The gravity model
estimates have the purpose to approximate the level of exchanges between the US and Cuba as
well as to verify the level of trade diversion.
The estimates of the gravity model will take place in 2 separate stages. Using the ordinary Least
Squares Method, the coefficients of the model will be estimated using cross-section data for the
year 2008. The regression function will have Trade in Merchandise between pairs of countries
(cumulated value of exports and imports) as the dependent variable. The values of the dependent
18
variable will be computed in natural logarithm form. The independent variables will constitute
the natural logarithm of the produce of GDPs of any given two countries, natural logarithm of the
distances between the capitals of the two countries. Last but not least the 3 dummy variables will
be included in the model – Common Language, Common Border and Membership in a Regional
Trade Agreement. After the first stage, the coefficients of the regression function will have been
estimated. Using this coefficients, Cuba`s trade with countries like US, China, and the European
Union countries will be estimated in order to approximate the potential trade between the US and
Cuba and also between Cuba and other countries.
Chronology of Key Events in the context of the Cuban Embargo
After recognizing the government of President Fidel Castro in 1959, the US has started to feel the
relations between it and Cuba deteriorate. In February 1960, a trade agreement between Cuba and
USSR was signed; this agreement stipulated that the Soviet Union would buy sugar and other
products from Cuba and in return, USSR will supply Cuba with crude oil. The Eisenhower
administration advised US oil firms based in Cuba to stop refining Soviet oil. As a result, Cuba
nationalized all the oil distilleries. The next step on the part of the US was to cancel most of
Cuba`s sugar quota (before 1960, sugar exports to US reached levels of around 3 million crops a
year – representing half of Cuba`s sugar production24). The Cuban government decided to
expropriate all US property which was worth at the time $1 billion and also to discriminate
against products and services originating in the US.
In October 1960, US imposed an embargo on exports to Cuba (medicine and food were not
subject to the sanction) and reduced Cuban sugar quota share on the American market to 0. What
is more, vessels carrying merchandise near Cuban ports are blacklisted. In 1962 a presidential
proclamation on the part of the United States of America all imports from Cuba are banned. In
1963, the Trading with the Enemy Act enables US decision makers to freeze all Cuban assets in
the US (worth $33 million)25. In 1964, following the discovery of a Cuban-origin arms cache in
Venezuela, the Organization of American States (OAS) votes for mandatory sanctions covering
24
Peterson Institute for International Economics, Case 60-3 US v Cuba (1960-), Chronology of Key Events
25
Idem previous
19
all industries except for food and medicine. The OAS sanctions are lifted in 1975. In 1981, the
Reagan administration enacts tighter embargo conditions as a result of Cuba sending troops to
Angola and Ethiopia and supporting Marxist movements in Nicaragua and El Salvador. In 1982
the US bans both business and tourist travel to Cuba. In 1989-1990 the American invasion of
Panama further increased the effects of the embargo since, the invasion prevented Cuba from
using the Panama banking system and the free trade zone at Colon to bypass the embargo.
Following the collapse of the Soviet Union in 1990, the Soviet support to Cuba ended and as such
the subsidized petroleum deliveries ended.
In 1992, the US passed the Cuban Democracy Act which forbids foreign subsidiaries of US
companies to have any relationships with natural or legal person of Cuban origin. Also, the bill
prohibits any ship that has anchored in a Cuban port from docking in any US harbor for 180 days.
Furthermore, the act advocated cessation of aid to any country that provided assistance to Cuba26.
On February 24, 1996, a Cuban Mig-29 fighter shot down two civilian aircraft pertaining to a
Cuban exile group – Brothers on the Rescue. The rationale behind this was a claim on the part of
the Cuban government arguing that Brothers on Rescue had been violating its air space for over a
year.27 As a response, the Congress passed the Cuban Liberty and Democratic Solidarity Act, also
known as the Helms Burton Act. This legislation incorporated the existing US sanctions against
Cuba in the national legislation. As a result of this incorporation, the sanctions became official
US legislation and are, as a result harder to remove. The bill permits American citizens claiming
property expropriated by the Cuban government to “sue for damages foreign corporations or
individuals that traffick in such property”. What is more, the act also seeks to restrict aid to
countries sharing intelligence with Cuba or providing assistance for the completion of the Juragua
nuclear power plant. International reactions to the Helms-Burton Act have been strong against the
American standpoint. Mexico and Canada have condemned the bill claiming that it opposes the
fundamental principles of NAFTA (businessmen are allowed to travel freely across the NAFTA
area)28. Furthermore, the Mexican Congress passes in 1996, an act that has acted as a
counterbalance for the HBA. The Mexican bill proposes fines of up to $301000 on Mexican
26
Cuban Democracy Act of 1992, www.state.gov
27
The ideology of Free Trade and the Cuba Exception – A thesis, Submited to the Graduate Faculty of Louisiana
State University and Agricultural and Mechanical College, Michael C. Schena, December 2006
28
The Helms-Burton Act: A step in the wrong direction for the United States Policy Towards Cuba, p 213-237,
United States Policy Towards Cuba
20
companies that act according to US legislation. The Canadian parliament also passed legislation
similar to the Mexican act. What is more, the EU approves antiboycott legislation that prohibits
European companies from complying with the HBA unless circumstances are exceptional. Any
US Court awards based on the HBA will not be recognized and can be recovered in the EU if an
US claimant that is successful has properties in the European Union29. In November 1996 the
WTO decided to establish a panel in order to hear the dispute brought against the US by the EU
to what concerns the HBA. The US have informed the World Trade Organization that any
decision on this matter cannot be imposed on the US since the WTO does not have the right to
review the international policy or the national security policy of any of its members30. In 1998,
the EU and the US reach a compromise on the HBA.
Slowly but surely, Cuba starts normalizing its diplomatic relations with countries lile
Guatemala(1996), Spain (1998), Haiti (1998) and Dominican Republic (1998). In July 1999,
Cuba mandates that the EUR will be used in transactions with countries in the Eurozone in order
to simplify financial operations and to decrease conversion costs. In 2004, President Fidel Castro
announces that the $US will be banned from commercial transactions and American dollars will
be converted into pesos.
In October 2000, the Congress of the US voted in favor of a bill entitled the Trade Sanctions
Reform and Export Enhancement Act. This act made possible a relaxation of the embargo and
permitted the commercialization of agricultural goods and medicine between the US and Cuba.
The extent of medicine trade is extremely limited though compared to the trade in food-related
products.31
In September 2009, Barrack Obama issued a statement in which he revealed that the Cuban
Embargo will be in place for the following year: "I hereby determine that the continuation for one
year of the exercise of those authorities with respect to Cuba is in the national interest of the
United States32.
29
European Union News, 29 October 1996
30
Robert S. Greenberger, US Asserts Foreign Policy is Involved in its dispute with the EU over Cuba., Wall St.
Journal, February 21, 1997
31
The US Embargo Against Cuba – Its impact on economic and social rights, Amnesty International, 2009
32 th
Obama Extends Cuba Embargo one year, 15 September 2009, The Huffington Post
21
In any case, in recent years, the relations between the 2 countries are not as tensioned as they
used to be and at the time being 5 bills promoting trade openness towards Cuba are being
discussed:
• Promoting American Agricultural and Medical Exports to Cuba Act of 2009;

• Cuba Reconciliation Act – aims at renouncing the Trade Embargo and repealing the
Cuban Democracy Act of 1992;
• The United States- Cuba Trade Normalization Act of 2009;
• Free Trade with Cuba Act;
• The Freedom to Travel to Cuba Act.
Goals of American Policy Makers
The initial purpose of the sanctions against Cuba were to “destabilize the Castro regime, causing
its overthrow, or, at a minimum, to make an example of the regime by inflicting as much damage
on it as possible”33. In 1964, the goal of the embargo is reformulated under Secretary of State
George Ball: the new goal was to show to Cuban citizens that Castro could not act in their best
interest and to prove that communism cannot function in the Western Hemisphere; a secondary
goal was to increase the costs of the USSR maintaining a communist outpost in the region.
The 70s have brought another shift in the purpose of the embargo. On February, 7th 1978
Assistant Secretary for Inter American Affairs Terence A. Todman declared: “The Carter
Administration has begun an effort to improve relations with Cuba, but normalization will take a
long time and will depend on many factors, including Cuba`s international behavior […] The US
desires: improvement in human rights in Cuba, release of political prisoners, thousands of whom
have been jailed for years; more responsible international behavior by Cuba, particularly in
Africa; and compensation to US citizens and businesses whose property was taken over by the
Cuban Government.”34
33
Newfarmer, Richard, ed. 1982. "Relations with Cuba." In From Gunboats to Diplomacy: New Policies for
Latin America. Papers prepared for the Democratic Policy Committee, US Senate, June. Washington.
34
Peterson Institute for International Economics, Case 60-3 US v Cuba (1960-), Goals of Sender Country
22
Other declarations have included as rationale for the embargo the fact that Cuba used to
encourage socialist revolutions in South America and Africa (the case of Angola, El Salvador,
and Ethiopia). Furthermore, some US officials have claimed that trading with Cuba would equal
sponsoring Fidel Castro and his regime, fact that was deemed unacceptable to do for a democratic
country such as the US.
After 2000, the goals of the US have somewhat coagulated. Cuban Democracy and respect for
human rights would be promoted in 4 ways: (a) international pressure on the Cuban government
through economic sanctions and diplomatic measures,(b)support to the Cuban people with the
purpose of developing civil society, (c) cooperation with the Cuban administration in areas of
common interests such as migration, (d) forging a multilateral context to press for human
rights.35. The Bush Administration further enhanced these points and promoted the embargo
claiming that it is a moral statement.
Reaction of the Target Country
After the embargo was imposed, Cuba had to redesign its position on international markets in
order to replaces losses caused by the US Embargo. As a result, in 1963, Cuba negotiated an
agreement with USSR that targeted sugar sales. The price of sugar was decided between the 2
governments and was worth 6 cents/pound of sugar. What is more, Cuba negotiated an aid plan
from the USSR.
A report prepared by Cuban National Bank with the purpose of presenting it to its Paris Club
creditors revealed that the Cuban Administration had been buying cheap sugar from international
markets. This sugar was then re-exported to the Soviet Union at several times the price in order to
purchase Russian petroleum which was then resold in order to obtain hard currency. To give one
example, in 1984, Cuba used its $1.3 billion sugar profits to purchase 6.7 million tons of
subsidized Russian oil. Out of this quantity 4.9 million tons were later resold.36
35
Alan Larson, Assitant Secretary of State, 2000
36
Unidentified State Department official confirm authenticity of the document which was obtained from a
European Bank. It was given to the public by the Cuban-American National Foundation which had proclaimed itself
as being against the Castro regime. – Washington Post, 5 June 1985, Peterson Institute for International Economics,
Case 60-3 US v Cuba (1960-),Chronology of Events.
23
In the 70s Cuba decided to support Marxist revolutions in Africa and South America in order to
safeguard its position in a communist world. It was however futile, since the collapse of the
Soviet Union and declining GDP growth rates have made it impossible to support such
revolutions. Thus, the troops deployed in countries like Angola and Ethiopia and other forms of
support ceased in the late 80s.
After the collapse of communism in Eastern Europe, Russia and other former Soviet Republics, it
was clear for Castro that the financial stability was no longer a given: “For decades, our plans
were based on the existence of a socialist camp, on the existence of several socialist countries in
eastern Europe, in addition to the Soviet Union, with whom we signed agreements and
established extensive economic relations. We do not know what kind of governments these
countries will install. We have no security as to what trade will be like in 1990 and we have
complete uncertainty for the period 1991-1995”37.
Attitude of Other Countries
Since Cuba was a communist outpost in the regions, the USSR was one of the first countries to
start aiding Cuba after the embargo was imposed. Beginning with 1961, USSR was one of the
most important markets for Cuba`s sugar industry. In certain periods, more than half of Cuba`s
sugar production were exported in the Soviet Union. For example between 1981-1985 USSR
absorbed more than 50% of Cuba`s total sugar production and this accounted for 80% of the
value of Cuban exports to USSR38.
In the seventies, the two countries, had found a way to draft contracts in such a way that the trade
between the two countries would be advantageous to Cuba. Contracts provided a minimum price
that was above market prices; what is more, this price was adjusted to the price changes of a
basket of Cuban imports from the USSR. Price levels generated by this formula tended to rise on
a yearly basis even though world prices for sugar stagnated or even decreased. The result was a
considerable premium paid by the Soviet Union to the Cuban administration, in the form of sugar
prices.
37
Toward the termination of licensed U.S. foreign subsidiary trade with Cuba: the legal and political obstacles.,
Arnold M. Zipper; Law and Policy in International Business, Vol. 23, 1992
38
Cuban-Soviet Sugar Trade: Price and Subsidy Issues, Jorge F. Perez-Lopez, 1988, Bulleting of Latin American
Research
24
As stated previously at the initial negotiations the price for a pound of sugar was set at 6
cents/pound. Starting with the mid sixties, the Soviet Union had begun to pay concessional prices
that were above world market rates in sign of support for the Cuban administration. For example,
the contract price that was set in 1985 was around half a dollar (45 cents) per pound and in 1985
a pound of sugar valued at world prices was 4 cents39.
In addition to the sugar trade, in the early 60s the USSR credited Cuba with $100 million at 2.5%
interest rate in order to purchase goods such as oil and machinery40. Any good purchased using
this credit was bought from Russia and as a result the Cuban economy became interlocked with
that of the Soviet Union. This money would constitute the first step in an aid plan designed by the
Soviets – Cuba received $3.6 billion only in the 60-70 decade.
The Organization of American States favored the embargo when it was first imposed. In 1964, all
members of the OAS except for Mexico ended all commercial relations with Cuba. In time, the
sanctions were lifted by the OAS: in the early 70s Peru, Argentina, Jamaica, Guyana, Barbados
ended the sanctions and in 1975 the Organization of American States completely ceases
sanctions.
The European Union and the 2 NAFTA members apart from the US continued their relations
with Cuba after the embargo was imposed. After the Helms-Burton Act (which had as main
objective to discourage investments in Cuba), tensions were raised between the EU, Mexico,
Canada and the United States. As stated in the Chronology of Events part of this paper, the 3
entities passed bills that countered the effects of the Helms Burton Act for their Citizens. Bill
Clinton and George W. Bush agreed to waivers of the bill for the 3 entities at the end of the
negotiations.
39
Idem 17
40
An Embargo for the Ages, Gregory M. Crum, Bruce Lusignan, March 2004
25
Economic impact of the Embargo
Initial impact of the embargo on Cuba`s Trade
A Time Series Model

A time series is generally defined as a set of quantitative observations arranged in chronological
order. With the help of regression analysis, one can detect regularities in the observations of a
variable and derive correlations and laws of movement for the variables.
For the purpose of this paper, a regression analysis has been conducted in order to find out the
trends in exports and imports for Cuba. On the one hand, a regression analysis has been
conducted in order to deduct the correlation between time and Cuba`s exports with the world. On
the other hand, another analysis has been conducted with the aim of computing the correlation
between time and Cuba`s imports with the world.
Data Selection
The dependent variables, exports, respectively imports are collected from the WTO Time Series
Database41. Value are expressed in millions of $US at current prices.
Estimation Results
Imports Regression Model

The coefficient of determination for the function is 56% which implies that the function captures
56% of the variation of exports over time. The coefficient of correlation is 75% which shows a
very powerful correlation between the level of merchandise Cuba imported from the rest of the
world.
After computing the coefficients the regression function takes the following form
ImportsCuba-World= -43596.5+22.6*Time
The function`s intercept is -43596 and has no statistic significance. The coefficient of the time
variable suggests that with each passing year Cuba imported in the analyzed period goods and
services worth of $22.6 million dollars more.
41
http://stat.wto.org/StatisticalProgram/WSDBStatProgramHome.aspx?Language=E
26
Graph 1: Cuba`s
Imports from the
World
Source: WTO Trade Statistics
As can be seen from Graph 1, before the embargo was imposed, between 1948-1961 the level of
the predicted imports from the rest of the world gravitated around the values predicted by the
regression function. Starting with 1960 (the moment when Cuban-American relations have
started to get tense) and with 1962 (the year the embargo was put in place), one can notice that
the level of imports from the world still gravitated around the values of the regression line. As a
result one can draw the conclusion that with the embargo in place, Cuba has lost one of its most
important import markets, the US and the OAS. Nonetheless, its agreement with Russia has
enabled Cuba to still import the goods it needed.
All in all, the difference between the level of actual imports and predicted imports between 1962-
1973 has been $2372 million dollars. Thus, one can state that the conclusion of the trade
agreement between Russia and Cuba has enabled Cuba to still get the products its economy
needed. As a result, from this point of view, the embargo did not have much effect in its first
years.
27
Exports Regression Model
The coefficient of determination for the function is 25% which implies that the function captures
25% of the variation of exports over time. The coefficient of correlation is 50% which shows a
powerful correlation between the level of merchandise Cuba exported to rest of the world.
After computing the coefficients the regression function takes the following form
ExportsCuba-World= =-5771.5+3.3 * Year
The function`s intercept is -5771.5 and has no statistic significance. The coefficient of the time
variable suggests that with each passing year Cuba exported in the analyzed period goods and
services worth of $3.3 million dollars more
Graph 1:
Cuba`s Exports
to the Rest of
the World
Source: WTO Trade Statistics
As one can see between 1948-61, the values of actual exports gravitated around the regression
line. After the embargo was imposed one (and even earlier) one can see that the level of exports
have started to decrease. Before the embargo, the US was Cuba`s main partner and as a result of
the loss of this export market the total level of trade have been below the predicted values.
All in all, the difference between the predicted values of the exports and the actual exports is $US
4863 million which suggests that the embargo put in place by the OAS led by the US has
constituted for Cuba a considerable export markets loss. The deficit can aslo be further explained
by the advantageous trading relation between Cuba and USSR. The subsidies provided by the
28
Soviet Union discouraged Cuba from developing new sources of convertible foreign exchange
and thus the export sector has been damaged42.
Nonetheless, after 1975 when the OAS embargo was lifted, Cuba`s export level skyrocketed.
Long-term impact of the embargo

The American administration claims that the embargo on Cuba has not caused much economic
distress on its economy. Likewise, the Cuban administration claims that the effects of the
embargo are not particularly dire. There is however, enough evidence to suggest that the impact
of the embargo has taken a toll on both parties involved in the process.
The US International Trade Commission states that over the year the costs on Cuba until 2000
amount to $67 billion dollars. Also the ITC approximates that the annual loss to American
Exporters at an estimate of $1.2 billion yearly.43
The initial toll suffered by Cuba was a considerable increase in freight costs – transportation costs
increased by $50 million/year due the US blacklisting policy of ships harboring in Cuban
docks.44 The same source claims that “one quarter of the island`s buses were out of operation for
want of spare parts late in 1961. Only one half of Cuba`s 1400 railroad passenger cars were
functioning in 1962 […]The sugar industry was particularly affected, especially by the failure of
the transport system and mill breakdowns. […] By 1965 nine sugar mills had been cannibalized.
Of the 161 mills existing in 1969 only 115 functioned in April 1972.”
The collapse of the communism in Eastern Europe and USSR meant lost markets for Cuba. Since
these countries supplied Cuba with machinery, spare parts, capital etc, the loss of these markets,
the Cuban economy contracted by 34% from 1990-199445. Trade with the United States could
have been a cushion for the Cuban Economy in these times. As a result, the economic slowdown
in the period was aggravated by a lack of trade with the US.
Costs that cannot are hard to calculate have also been incurred. For example the costs of doing
business have increased during the embargo time. Regarding the Helms-Burton Act, the
42
Has Cuba definitely found the path to economic growth? Robert Orro, 2000
43
Policy Analysis, October 2001, Report from Havana, Time for a Reality Check on US Policy towards Cuba,
Jonathan G. Clark and William Ratliff
44
Peterson Institute for International Economics citing Losman, Donald L. 1979. International Economic Sanctions:
The Cases of Cuba, Israel, and Rhodesia. Albuquerque: University of New Mexico Press.
45
Economist Intelligence Unit, Country Profile, 1996-1997
29
economists of the Peterson Institute for International economics claim that “it is difficult to find
concrete evidence of companies disinvesting from Cuba as a direct result of the HBA”46. The
same source cites the 12th March 1997 issue of Financial Times when stating that the Cuban
administration admits to have noticed some investors being frightened by the Helms-Burton Act
since the bill has complicated financial flows and made investment possibilities more
complicated. Red tape barriers have also increased the costs of conducting business not only in
Cuba, but around the world. For example, foreign manufacturers have to certify that their
exported products in the US do not contain any Cuban primary or intermediary products.
Furthermore, since in 1986 Cuba decided to stop paying its debt to non-socialists countries,
commercial credit has been unavailable for Cuba (except at very dire terms). One option would
have been getting loans from the IMF and the World Bank. However, the United States has
vetoed Cuban membership in wither of these institutions. Therefore, it has been very hard for
Cuba to loan money on advantageous terms.
Offsetting policies
Soviet Subsidies
On the other hand, the effects of the embargo on Cuba have somewhat been offset by the
considerable amount of money coming from the Soviet Union. The level of Soviet subsidies
peaked at 6 billion/year in the 80s.47 Between 1961-1973 the average level of Soviet support was
on average $270 million annually. This sum decreased the impact of the subsidies from 17.25%
of the GDP to 6.9%. Between 1975-1989 the average level of the USSR subsidies is estimated at
around $2,850/annum and is estimated to have reduced the impact of the sanctions from 21% to
1% of the GDP48.
The level of Soviet aid is hard to compute as scholars point out. There are different
approximations on the amount of subsidies USSR provided to Cuba. These figures range from
20% of Cuban GDP to 26% and even 37% of the GDP.49
46
Peterson Institute for International Economics, Case 60-3 US v Cuba (1960-), Observed Economic Statistics
47
Idem 20
48
Peterson Institute for International Economics, Case 60-3 US v Cuba (1960-), Observed Economic Statistics
49
Has Cuba definitely found the path to economic growth? Robert Orro, 2000, ASCE
30
Commerce with the USSR gave Cuba the possibility to rip the benefits of technology, spare parts
and intermediary products. Apart from the benefits this has also resulted in a Cuban industry
dependent on imports for its survival which augmented even further the crisis Cuba would suffer
after the collapse of the USSR.
The collapse of communism was particularly harsh on Cuba. The country had lost the protection
provided by the Soviets and the access to USSR products at subsidized prices. Without the
support of the Soviets the costs of the embargo reached 14% of the GDP50.
Remittances
Remittances are rather important to Cuba`s economy to the extent that they are important for
other countries in the Caribbean. Cuba receives money from abroad to the same extent as the
Dominican Republic and twice as more than Haiti51. What is more, a survey conducted in 1998
covering Latin American countries revealed that more Cuban Americans send remittance to their
home countries than to Mexican-Americans and sensitively equal (yet lower) than Dominican-
Americans52.
Historically speaking, both Cuba and the US initially prohibited remittances. In the period 1969-
1993 Cuba prohibited the circulation of foreign currencies and only allowed remittances in kind.
The United States have also prohibited financial flows between the two countries in question.
Nonetheless, in time, both the sender and the target country diminished the level of regulation of
remittances. Beginning in 1993 (partly due to the collapse of the USSR), Cuba has legalized the
dollar and adopted a strategy meant to augment the inflow of dollars sent by Cuban emigrants in
the US. The US has often times attempted to impose a maximum limit of remittances ever since it
first legalized the practice in 1978.
50
Idem Previous
51
Remittance to Cuba: An evaluation of Cuban and US Government Policy Measures, Lorena Barberia, September
2002
52
Based on a survey of on Latino Television Portrayals, DeSipio (2000) – the percentages were confirmed further
using regression analysis tools.
31
According to a 2004 Report of the Commission for Assistance to a Free Cuba53, cash remittances
to Cuba amount to $400 - $800 million per annum. The report also mentions other sources
estimating that the sum could even reach $1 billion/year.
Current restrictions on remittances are managed by CACR (Cuban Assets Control Regulations.
As of 2004, $300 can be sent from the US to Cuba every trimester to immediate family members
(child, grandchild, husband/wife, and sibling) and up to $300 can be carried by authorized
travelers to Cuba. In 2009, President Barack Obama released a statement in April 2009
announcing that remittance limitations to family members in Cuba would be lifted. Institutions
that channel remittances do not need specific licenses any longer but data collection showing that
compliance with remittance sending regulations has been met is still required (Cuban government
officials, members of the communist party and non-immediate family members are not allowed
to receive inflows from the US).54
The 2007 Cuban Telephone survey55 reviewed remittance receiving practices in Cuba. When it
comes to the receiving channel 49.4% of the respondents reported to have received money
through non-official channels like friends. This suggests that the level of remittance may actually
be twice as much as that suggested by statistical date. Only 39.1% use channels like banks or
money-transfer companies.
The top source country for remittances is the US despite the tight regulations of the practice.
62.2% reported to receiving money from the US. Other top source countries include Italy, Spain,
Costa Rica and Mexico.
On the point of remittance use, 47.6% of respondents claim to use the money for food and 42.5%
report using the money to take care of problems. Therefore, 97.6% of the respondents use the
money in order to live on a daily basis. As such one can conclude that remittance send to Cuba
have alleviated the impact of the embargo.
53
Commission for Assistance to a Free Cuba, Report to the President, May 2004, p. 34
54
Cuba: US Restrictions on Travel and Remittances, Congressional Research Service, Mark P. Sullivan, Octover 16,
2009
55
Remittances to Cuba: An Update, Sergio Diaz-Briquets, 2008, The survey has an 8% error margin and a 95% level
of confidence; the sample is statistically significant for the whole Cuban population.
32
Non-economic effects of the embargo on Cuban citizens
One of the most notable repercussions of the embargo is related to Cuban Public Health. The
damages stem from the fact that the embargo forces Cuba to buy products and equipment from
markets that are geographically far. This results in a need to use intermediaries and these factors
subsequently bring price increases in medicinal products and equipments.
Furthermore, Cuban scientists and health practitioners are denied visas in the US. As a result they
cannot attend scientific congresses and event hosted in the US. Therefore, the embargo can be
considered an obstacle preventing professional up-dating in the medical field.
Last but not least, donations of medical equipment, medicine and medical products require
export licenses even if the donation has a humanitarian purpose56. The same report also mentions
that the embargo “contributed particularly to malnutrition affecting especially women and
children, poor water quality, lack of access to medicine and medical supplies and limited
exchange of medical and scientific information due to travel restrictions and currency
regulations”. Furthermore, UNICEF reported that Cuba was unable to import nutritional products
meant for children and at-school, hospital and day-care consumption. The effect of this had been
adverse in the sense that it is believed to be a contributing factor in the high prevalence of iron
deficiency anemia affecting 37.5% of children under 3 years old in 200757. HIV/AIDS programs
have also suffered since UNICEF could not offer their products for the implementation of the
programs and as such transaction with more distant suppliers resulted in higher prices and delays.
On the point of the food issues, even though exports to Cuba have been legal since 2000, they are
regulated by strict legislation and compliance with a very large bureaucratic system of granting
licenses, in many cases by more than just one institution. In 2008, Cuba could have bought, at
current market prices, more than 339,000 tons of wheat or 615,000 tons of corn or 126,700 tons
of chicken more if the embargo was not in place58.
56
Amnesty International, The US Embargo against Cuba and its Impact on Economic and Social Rights, September
2009
57
Necessity of ending the economic, commercial and financial embargo imposed by the US against Cuba, Report of
the Secretary General, August 2008
58
Report by Cuba on Resolution 63/7 of the UN, presented to the UNGA on October 28, 2009
33
When it comes to education, the Cuban government reports that the effects of the embargo
transform into daily shortages in school supplies. It is estimated that the freight costs for
importing school supplied from Asia are double than what they would be if these products were
imported from the US59.
Testing Potential Bilateral Trade between Cuba and the US using the Gravity Model
The Gravity Model

The gravity model is considered to be a simple empirical model used for analyzing bi-lateral
trade flows between any two given countries. The model translated Newtonian physics into
economics in the sense that it explains trade flows between a pair of countries by taking into
account their “mass” (GDP) and the distance between them.
The Gravity Model can be summed by using the following equation:
(1)
Where:
Tradeij represents the level of bilateral trade between Country i and Country j (cumulated value of
exports and imports);
GDPi and GDPj represent the Gross Domestic Products of Countri i, respectively Country j;
Distij represents the distance between the two countries;
α,β1,β2 are parameters - β1 is positive and β2 is negative.
In order to create a linear form of the gravity model, one needs to take the natural logarithms of
equation (1). As such the model becomes:
log(Tradeij) = α + β1 log(GDPi x GDPj) - β2 log(Distij) + e (2)

59
Idem Previous
34
The 3 coefficients α,β1,β2 will be estimated and e represents the error term that captures other
events that are not characterized by the model.
In order for the model to capture the variation in bilateral trade levels, dummy variables have
been added and an augmented gravity model has been created for the purpose of this paper.
log(Tradeij) = α + β1 log(GDPi x GDPj) - β2 log(Distij) + β3(Langij) + β4 (Borderij) + β5 (RTAij) (3)
The independent variables in the Augmented Gravity Model can be explained in the following
way:
(GDP) - The model will employ GDP at nominal rated expressed in $US.
(Dist.ij) – Distance between country i and country j will be estimated in great circle distances –
the air distance between the capitals of the two countries. In case of the EU27, the capital was
considered to be Prague for the purpose of this paper. Prague finds itself approximately in the
geographical middle of the European Union territory.
Dummy variables have also been added to the model in order to describe the impact of qualitative
variables on bilateral trade:
(Langij) – If the two countries share a common official or commercial language the value for this
variable will be 1 and if otherwise, 0. A positive correlation between this variable and bilateral
trade is expected since a common language reduces transaction costs in the form of making
communication easier. What is more a common language reduces the cognitive distance between
two countries and as such, closer relations between the citizens are facilitated.
(Borderij) – If the two countries share a common border the value of this variable will be 1 and 0
if the two countries are not neighbors. If two countries have a common border they are expected
to trade more due to facility of transactions and also due to possible historical and cultural
similitude.
(RTAij) – If the two countries in question have signed a regional trade agreement the dummy
variable will register 1 and 0 if otherwise. This variable does not make differences between types
of regional trade agreements like free trade areas, customs unions, regional economic integration
35
agreements or special trade agreements. It predicts though that trade will increase if a regional
trade agreement is signed.
Data Selection
The dependent variable is the natural logarithm of total bilateral trade measured in nominal
values and expressed in $US for the year 2008. Up to 100 total bilateral trade in merchandise
observations have been collected from the European Commission Trade Statistics.60
The gross domestic products of countries have been collected from the World Bank: World
Development Indicators database - World Bank, 1st July 2009.61
The great circle distances between the capitals of any of the two sampled countries have been
collected using the “Great Circle Distances between Capital Cites” calculator62.
In order to get the values for the RTA variable, the Regional Trade Agreements Information
System63 (RTA-IS) of the World Trade organization was used.
For purposes of setting values of the Lang and Border variables, the CIA World Factbook64,
Country Profile Section was used.
Estimation Results
The regression model seems to accurately predict the variations of the bilateral trade between any
two given countries. The coefficient of determination is 83.9% suggesting that the regression
function captures 83.9% of the variation of bilateral trade between any two given countries. The
rest of 16.1% is not explained by the function and is influenced by other factors than the GDP
levels, distance, common language/border or inclusion in the same Regional Trade Agreement.
The Correlation Coefficient has the value of 91.6% and pinpoints a strong correlation between
the dependent and explanatory variables. As can be noticed, the value of this coefficient is close
to its maximum possible value; therefore one can state that there is a strong relation between the
bilateral trade of two given countries and the size of their GDPs, the distance between them.
60
http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/statistics/
61
http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf
62
http://www.chemical-ecology.net/java/capitals.htm
63
http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx
64
https://www.cia.gov/library/publications/the-world-factbook/geos/al.html
36
Furthermore a common language/border and membership to an RTA seem to further increase the
correlation.
After computing the coefficients using OLS the equation becomes:
log(Tradeij) = -10.94+ 0.82 log(GDPi x GDPj) -0.37 log(Distij) + 0.85 (Langij) + 0.75 (Borderij) +
0.97 (RTAij)
The intercept has the value -10.94 and has no statistic significance.
The coefficient of the GDP variable is positive and seems to suggest that a 1% increase in the
size of a given pair of countries would translate to 0.82% more trade between the two countries
(the increase is less than proportionate).
The coefficient of the distance variable has, as expected a negative sign. The coefficient indicated
that a 1% increase in the distance between two countries would result in a decrease in the level of
bilateral trade with 0.37%.
The coefficient of the dummy variable for a common language is 0.85. Since the quantitative
variables are expressed in natural logarithmic form, the coefficient of the dummy variable has to
be recomputed as following: -1)%, where α is the coefficient in question.
Using the above mentioned technique we can infer that a coefficient of 0.85 for language implies,
ceteris paribus, implies that two countries sharing a common language are 120% more likely to
trade than two countries with no common language. The coefficient for the common border
suggests that two countries sharing a common border will engage in 2 times more trade than
countries with no border. Furthermore, membership in a Regional Trade Agreement may lead to
144% more trade as it otherwise likely for a pair of countries.
37
In 2008, the level of bilateral trade between Cuba and the United States is estimated at $784
million dollars by the European Commission. Without the embargo the potential trade between
the US and Cuba would amount to $6251 million – roughly 8 times more bilateral trade between
the US and Cuba. On the one hand, without the embargo, the US would become Cuba`s most
important trade partner and flows between the two countries would reach 41% of the total import
- export flows of the two countries. On the other hand, Cuba would not be among the top 10 trade
partners of the United States. However it would be a more important trade partner than Honduras
and Costa Rica are now. Furthermore, the exchanges between US and Cuba would classify Cuba
as a major trade partner for the US being in the top 40 trader countries with the United States.
The model seems to suggest that the EU and Cuba are not trading at their potential. According to
the model, the EU and Cuba should trade $4,201 million each year. The actual data from the
European Commission shows a difference of approximately $1,000 between the actual and the
potential trade. Surely the deficit must also come from the fact that Cuba still does not benefit
from a market economy. Nonetheless, part of this deficit can be explained by the sanction. The
Helms-Burton Act might have scared off some possible European investors in Cuba and may
have deteriorated the relations between the two parties.
38
On the point of its relations with Venezuela, the two countries seem to be trading over what the
model predicts. In 2008, Cuba and Venezuela traded merchandise valued at $3667 million dollars
and their potential trade estimated by the gravity model is $1915 million. This data seems to
suggest that some of the potential exports to the United States or the European Union may have
been diverted to countries like Venezuela. Evidence seems to suggest that trade may have been
diverted to China either due to ideological reasons or to try to offset the effects of the embargo
(overtrade with China amounts to $1035 million). Canada is the 4th largest trade partner of Cuba,
the two countries trading merchandise valued at $1645 million. The Gravity Model suggests that
the two countries overtrade by approximately $710 million only in 2008.
The findings of the model pinpoint that countries in the area trade more than their estimated
potential suggesting that the embargo has resulted in trade diversion on the part of the Cuban
government with the purpose of offsetting the embargo.
Contemporary Cuban Economy
After the collapse of the Soviet Union, the Cuban Economy suffered greatly as shown earlier in
this paper. Cuba took its path to economic recovery in 1994. With the loss of the Soviet
subsidies, Cuba had to redirect its economy to face the West more than it had ever done.
First of all, trading with capitalist countries enabled Cuba to trade at world market prices. This
removed one of the main distortions in the Cuban economy since its previous trading relations
were not based on market prices. Secondly it has opened the door to Foreign Direct Investment
which has greatly benefitted Cuba over the year,
In terms of economic growth, from 1994-2000 growth averaged 3.7% annualy. From 2001-2006
the levels of GDP growth reached 5%. In 2005 the level of 9% growth was reached whereas in
2006 GDP growth registered a record 12% level. For the following 3 years, levels have remained
around to 6% due to damaged cause by hurricanes Dennis, Wilma, Gustav and Ike.65 The same
source argues that the economy has benefited from increasing level of exports in the nickel and
tourism sectors. Furthermore, support has been coming from China and Venezuela in the form of
investment commitments and credit lines. Cuba has a preferential oil agreement with Venezuela,
65 th
CRS Report for Congress, Cuba: Issues for the 110 Congress, September 24, 2008, Mark P Sullivan.
39
by which the latter supplies Cuba with more than 90,000 barrels of oil daily. Some obervers
claim that Venezuela`s oil subsidies amounted to more than $3 billion in 2006 and more than $4
billion in 2007.
FDI levels have been growing steadily in Cuba since 1990 when only 2 million dollars were
invested. In 2000, 74 million dollars entered the Cuban borders as investment and in 2006 the
FDI stock of the country was around 78 million dollars. In 2008 the level reached 185 million
dollars66. The FDI in Cuba remains however one of the lowest in the region of the Caribbean:
Cuba attracts only 0.09% of the FDI in the area.
When it comes to economic freedom, the country is ranked as one of the least free countries in
the world, ahead of only Zimbabwe and North Korea. Compared to 2009, in 2010 its economic
freedom has decreased by 1.2 points, reflecting a worsened score in investment freedom.67 The
freedom of the Cuban economy is still hampered by severe institutional constraints as the private
sector is very limited. The same report mentiones that “no courts are free of political interference,
entrepreneurship is impeded and private property is striclty regulated. Lack of excessive
regulations limit trade and investment”.
One can draw the conclusion that it is not the economic embargo that puts the strain on the Cuban
economy, but the strategies of the Cuban policymakers. In fact, Cuba's 2009 report to United
Nations on the US economic blockade estimates the cost of the embargo to be 236 million dollars
in 200968 which is a mere 0.04% of the 2009 Cuban GDP.
66
World Investment Report 2009, Transnational Corporations, Agricultural Productions and Development
67
2010 Index of Economic Freedom Report, Cuba
68
Report by Cuba on resolution 63/7 of the United Nations General Assembly, Presented to the UNGA on October
28, 2009
40
Recommendations and Conclusions
The Cuban Threat to the US National Security
In 1970, out of the 26 Latin American and Caribbean countries, 17 were ruled by authoritarian
regimes. In 2010, the only country in the region to have a dictatorial regime is Cuba.
Indeed during the Cold War, Cuba offered the Soviets a permanent military base on the island
and an intelligence post approximately 90 miles of the coast of Floria69. Also, it allowed Soviet
vessels free port access rights. What is more during the Cold War, Cuba tried to export socialist
revolutions in countries like Angola, Nicaragua and Ethiopia. However, with the collapse of the
Soviet Union and the disappearance of a socialist trend in the area, Cuba can no longer be
considered a credible threat to the United States national security.
Cost to the target country

As mentioned earlier in this paper, the embargo has taken its greatest toll on Cuba after the
collapse of the Soviet Union. At that point the embargo costs were estimated at 14% of the GDP
(compared to 6.9% between 1962-73 and 1% between 1975-1989). At the time being, the
embargo costs Cuba less than 1% of its GDP. One could assert that if there was a right time for
the embargo to function, then this time would have been right before the collapse of the Soviet
Union.
At that particular moment, Cuba had lost most of its import-export markets; it was unable to
provide technology, spare parts and the much needed oil. What is more, its industry was heavily
dependent on used, obsolete capital. As such, the position of the country was critical and it is
very unlikely that the country will undergo a disturbance of this level in the foreseeable future.
Benefits to the communist regime

Continued hostilities on the part of Washington can only benefit the communist regime in Cuba.
The embargo continues to be the best excuse Raul Castro (the new leader of Cuba) has for the
disastrous policies of his policymakers. A Hoover Institution Report on Cuba points out: “Castro
knows that the embargo to some degree keeps him from becoming just another in a century long-
string of failed Latin American dictators […] Nothing would come so close to ‘killing’ him while
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CATO Handbook for Congress, Policy Recommendations for the 108 Congress, 2003
41
he is still alive as lifting the embargo”70. Basically, as long as both Raul and Fidel Castro can
pinpoint the US as being an external threat to the wellbeing of the Cubans, they will be successful
in harboring dissent among the Cubans. What is more, the embargo can be used as a justification
for stirring nationalist and anti-US feelings on the island.
Possible Effects of lifting the embargo

The gravity model detailed earlier in this paper has explained that if the embargo would be lifted
the total bilateral trade between the US and Cuba will increase eight fold. On the one hand, the
US will become the top trading partner of Cuba and on the other Cuba will become again a very
important country for the United States in terms of it trade capacities.
It is clear that the embargo has resulted in trade diversion and the cessation of the embargo could
reinstate the natural flow of trade in the area. Without the embargo Cuba would trade less with
countries like China, Venezuela and Canada and would exchange foods for more favorable prices
with the United States.
The Helms-Burton Act was intended to prevent investments in Cuba. Fears that investments
would save the communist regime in Cuba are inherently flawed. Significant capital flows to
Cuba will not occur unless the country decides to undertake free market restructuring measures.
Indeed the available evidence shows that FDI in Cuba has very low levels and even American
officials claim that the Helms-Burton Act did not have much effect.
What is more, openness to investment and trade in goods and services could promote democracy
better than can isolation. It seems apparent that the Cuban officials are aware of this fact. To give
just one example, Cuba`s opening to tourism foreign investors is accompanied by harsh measures
intended to restrict ordinary citizens from visiting tourist facilities and foreign hotels. The
phenomenon of “tourism apartheid” has as main rationale the fact that ordinary Cubans could get
a taste of what democracy means in their interaction with foreigners and this touch of democracy
could instigate social unrest against the regime. Therefore, openness may actually contribute
more to democracy by exposing Cubans to other options rather than a blockade.
70
Idem previous
42
Costs to the United States
It is undeniable that the United States has lost a very important market once the embargo was in
place. Restoring this market will result in 6 billion dollars more trade between USA and Cuba.
This of course will create jobs in the US and also generate income through exports. Other
benefits of lifting the embargo will be reduction of the costs of the big bureaucratic system that
deals with commercial relations with Cuba at the time being and economies of scale resulting
from more trade. While the loss to the US has been modest as the authors of Economic Sanctions
Revisited 3rd Edition claim, it cannot be denied that the even small costs should not be bore when
there is no positive effect.
The embargo has incurred losses in terms of international relations capital for the US. The
Helms-Burton policy has had more impact on the US than it had on Cuba. It impaired US`s
relations with friendly countries like Mexico, Canada and the EU27. These countries had passed
legislation acting as a counter-balance for the HBA. In 2008, an agreement was reached between
the EU and the US that would exclude EU countries from being punished under the provision of
the HBA. However, only the US Congress can waiver this piece of legislation and US President
cannot postpone its application indefinitely. Thus this act has risked poisoning the relations
between the UN and major trading partners that could take retaliatory measures against the US.
Another point is that, the embargo has left Cuba in a very uncomfortable position in its relations
with this country. Should another Cuban crisis arise, the US has depleted its options for dealing
with Cuba. Given the lack of economic warfare options, the US will have as an only option
military intervention which could result in chaos and even more costs to the average American.
All in all, the US Congress should annul Helms-Burton Act along with the Cuban Democracy
Act, end all trade sanctions on Cuba, allow both Cuban and American citizens to travel between
the two countries, permit Americans to conduct business in Cuba and start normalizing
diplomatic relations with Cuba.
43
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over Cuba., Wall St. Journal, February 21, 1997;
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New Policies for Latin America. Papers prepared for the Democratic Policy Committee,
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political obstacles., Arnold M. Zipper; Law and Policy in International Business, Vol. 23,
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45
29. Commission for Assistance to a Free Cuba, Report to the President, May 2004’
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46
Annex 1: Input Data and Predicted Values of Imports and Exports for the Time Series
Model
Values are expressed in Current US Dollars, Source: WTO
Year Exports Predicted Exports Imports Predicted Imports

1948 710 658.8877551 527 489.5787879
1949 578 662.1887755 451 512.2102564
1950 667 665.4897959 563 534.8417249
1951 806 668.7908163 698 557.4731935
1952 694 672.0918367 690 580.104662
1953 675 675.3928571 547 602.7361305
1954 563 678.6938776 555 625.3675991
1955 611 681.994898 575 647.9990676
1956 695 685.2959184 649 670.6305361
1957 845 688.5969388 813 693.2620047
1958 763 691.8979592 808 715.8934732
1959 638 695.1989796 742 738.5249417
1960 618 698.5 638 761.1564103
1961 625 701.8010204 703 783.7878788
1962 521 705.1020408 759 806.4193473
1963 544 708.4030612 867 829.0508159
1964 714 711.7040816 1019 851.6822844
1965 686 715.005102 866 874.3137529
1966 593 718.3061224 926 896.9452214
1967 705 721.6071429 999 919.57669
1968 651 724.9081633 1102 942.2081585
1969 671 728.2091837 1222 964.839627
1970 1046 731.5102041 1311 987.4710956
1971 860 734.8112245 1387 1010.102564
1972 835 738.1122449 1292 1032.734033
1973 1410 741.4132653 1793 1055.365501
1974 2660 744.7142857 2648 1077.99697
1975 3677 748.0153061 3883 1100.628438
47
Annex 2: Data Smoothing for Time Series Model
exponential
smoothing with 7period moving
Year Exports Imports a=0.2 average
1948 710 527
1949 578 451 683.6
1950 667 563 595.8
1951 806 698 694.8 670.4285714
1952 694 690 783.6 656.2857143
1953 675 547 690.2 673
1954 563 555 652.6 698.4285714
1955 611 575 572.6 692.2857143
1956 695 649 627.8 684.2857143
1957 845 813 725 676.1428571
1958 763 808 828.6
1959 638 742 738
1960 618 638 634
Annex 3: ANOVA Output for Imports Time Series Regression Model

SUMMARY
OUTPUT
Regression Statistics
Multiple R 0.751989202
R Square 0.56548776
Adjusted R Square 0.522036536
Standard Error 75.01880768
Observations 12
ANOVA
Significance
df SS MS F F
Regression 1 73242.22161 73242.22 13.01431 0.004787646
Residual 10 56278.21506 5627.822
Total 11 129520.4367
Upper
Coefficients Standard Error t Stat P-value Lower 95% 95%
Intercept -43596.52191 12261.35568 -3.5556 0.005219 -70916.5248 -16276.52
X Variable 1 22.63146853 6.273387852 3.607535 0.004788 8.653489384 36.609448
48
Annex 4: ANOVA Output for Exports Time Series Regression Model
SUMMARY OUTPUT
R Square 0.251152541
Observations 7
ANOVA
df SS MS F Significance F
Regression 1 305.1086006 305.1086 1.676927 0.25190206
Residual 5 909.7252187 181.945
Total 6 1214.833819
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept -5771.5 4980.99248 -1.1587 0.298906 -18575.54879 7032.548788
X Variable 1 3.301020408 2.549124806 1.294962 0.251902 -3.251713512 9.853754329
Annex 5: Input Data for the Gravity Model

Imports+Exports GDP P1 GDP P2 Distance
Partner 1 Partner 2 Lang Border RTA
(ec.europa.eu) (WB) (WB) (KM)
EU27 Russia 407004.5561 16474214 1607816 1671 0 1 0
EU27 Switzerland 259658.4615 16474214 488470 621 1 1 1
EU27 Canada 72855.17142 16474214 1400091 6327 1 0 0
EU27 Algeria 63744.92006 16474214 173882 1732 0 0 1
EU27 Peru 8926.711691 16474214 127434 11129 0 0 0
US EU27 647482.0071 14204322 16474214 6897 1 0 0
US Canada 596215.6377 14204322 1400091 742 1 1 1
US China 424634.8654 14204322 4326187 11147 0 0 0
US Ukraine 4326.694315 14204322 180355 9642 0 0 0
Japan China 266692.2083 4909272 4326187 2094 1 0 0
Japan Iraq 1686.240441 4909272 68000 8342 0 0 0
Japan Argentina 1666.915393 4909272 328385 18345 0 0 0
China Japan 266995.9614 4326187 4909272 2094 1 0 0
China Hong Kong 244581.5665 4326187 215355 1974 1 1 1
China Costa Rica 3056.151849 4326187 29834 14072 0 0 0
Brazil United Arab 2203.843596 1612530 163296 11933 0 0 0
49
Emirates
Brazil Aruba 500.5426566 1612530 2248 3902 0 0 0
India Norway 845.6931871 1217490 449996 5978 0 0 0
India Philippines 808.8407942 1217490 166909 4751 0 0 0
India New Zealand 623.5722736 1217490 130693 12641 0 0 0
Saudi
Philippines 4274.04309 467601 166909 7763 0 0 0
Arbia
Saudi
Syria 3966.934553 467601 55204 1412 1 1 1
Arbia
Saudi
Jordan 3949.624599 467601 20013 1333 1 1 1
Arbia
Norway EU27 199371.9856 449996 16474214 1117 1 1 1
Norway United States 12226.13013 449996 14204322 6233 0 0 0
Norway Congo 87.02674122 449996 10699 7143 0 0 0
South
Pakistan 448.6299286 276764 168276 8130 0 0 0
Africa
South
New Zealand 377.9584432 276764 130693 11797 1 0 0
Africa
South
Iraq 375.7152364 276764 68000 6786 0 0 0
Africa
Nigeria United States 39869.38578 212080 14204322 8858 0 0 0
Nigeria EU27 38405.31885 212080 16474214 4591 0 0 0
Nigeria Brazil 10034.90917 212080 1612539 6667 0 0 1
Malaysia Japan 39051.2279 194927 4909272 5320 0 0 1
Malaysia Thailand 19483.42603 194927 260693 1185 1 0 1
Malaysia Kuwait 970.2041479 194927 112116 6352 0 0 0
Malaysia Argentina 969.543038 194927 328385 15948 0 0 1
Ukraine EU27 59743.93037 180355 16474214 7442 0 1 0
Ukraine Russia 42878.61572 180355 1607816 5908 1 1 1
Ukraine Libya 129.7559028 180355 99926 9062 0 0 0
Ukraine Chile 116.1635086 180355 169458 17263 0 0 0
New
Japan 5366.323906 130693 4909272 9265 0 0 0
Zealand
New
Singapore 2199.198952 130693 181948 8520 1 0 1
Zealand
New
Vietnam 315.8813441 130693 90705 9899 0 0 1
Zealand
Croatia Russia 3376.174557 69332 1607816 1872 0 0 0
Bosnia-
Croatia 2975.454787 69332 18452 288 1 1 1
Herzegovina
Croatia Australia 25.66117754 69332 1015217 15941 0 0 0
Croatia Iraq 21.21010328 69332 68000 2782 0 0 0
Cuba Venezuela 3776.716743 55430 313799 2156 1 0 1
Cuba EU27 3257.609537 55430 16474214 8513 0 0 0
Cuba China 2337.026408 55430 4326187 12729 0 0 0
Cuba Canada 1645.437272 55430 1400091 2550 0 0 0
Cuba United States 784.000544 55430 14204322 1815 0 0 0
50
Sri Lanka United States 2177.790319 40714 14204322 14387 0 0 0
Sri Lanka China 1612.727933 40714 4326187 5163 0 0 1
Tunisia Libya 2150.05548 40180 99926 512 1 1 1
Tunisia Turkey 1179.501917 40180 794228 2001 1 0 1
Tunisia United States 1155.332703 40180 14204322 7336 0 0 0
Honduras Brazil 173.8871607 14077 1612539 5445 1 0 0
Trinidad and
Honduras 135.083434 14077 23898 2813 1 0 0
Tobago
Honduras Thailand 88.87754088 14077 260693 16794 0 0 0
Chad South Korea 1.36096966 8361 929121 11037 0 0 0
Chad Senegal 1.31469496 8361 13209 3519 1 0 0
Chad Russia 1.27591152 8361 1607816 5228 0 0 0
United Arab
Tajikistan 89.075257 5134 163296 2075 0 0 0
Emirates
Tajikistan Azerbaijan 84.88283196 5134 46259 1631 1 0 1
Tajikistan Kyrgyz Republic 70.15018074 5134 4420 694 1 1 1
India China 81987.1468 1,217,490 4,326,187 3774 0 1 1
India United States 65464.4728 1,217,490 14,204,322 12040 0 0 0
India Singapore 30346.1438 1,217,490 181,948 4147 1 0 1
India Hong Kong 20610.017 1,217,490 215,355 3758 1 0 0
India Russia 11261.18878 1,217,490 1,607,816 4331 0 0 0

India Brazil 7735.84358 1,217,490 1,612,539 14230 0 0 1
India Canada 6575.83708 1,217,490 1,400,091 11324 0 0 0
India Israel 5956.19994 1,217,490 199,498 4024 0 0 0
India South Africa 5818.33652 1,217,490 276,764 7998 0 0 0
Brazil United States 91313.7874 1,612,539 14,204,322 6778 0 0 0
Brazil China 71482.5636 1,612,539 4,326,187 16921 0 0 0

Brazil Argentina 51114.7314 1,612,539 328,385 2340 1 1 1
Brazil Russia 12830.91362 1,612,539 1,607,816 11175 0 0 0
Brazil Israel 2657.419 1,612,539 199,498 10290 0 0 1
China United States 514586.198 4,326,187 14,204,322 11147 0 0 0
China Japan 391149.038 4,326,187 4,909,272 2094 1 0 0

China Russia 84357.267 4,326,187 1,607,816 5785 0 1 0
China Mexico 26139.2414 4,326,187 1,085,951 12449 0 0 0
China South Africa 25458.0054 4,326,187 276,764 11661 0 0 0
China Argentina 21662.7062 4,326,187 328,385 19257 0 0 0

China Nigeria 9971.45544 4,326,187 212,080 10940 0 0 0
China Algeria 7166.50782 4,326,187 173,882 9102 0 0 0
51
Russia Ukraine 57447.5252 1,607,816 180,355 5908 1 1 1
Russia United States 40279.8962 1,607,816 14,204,322 7825 0 0 0
Russia India 10092.10838 1,607,816 1,217,490 4331 0 0 0

Russia Moldova 2609.49158 1,607,816 6,048 1148 1 1 1
Annex 6: ANOVA output for the Gravity Model
SUMMARY
OUTPUT
R Square 0.83914206
Observations 92
ANOVA
Significance
df SS MS F F
Regression 5 649.5521916 129.9104 89.72665 1.291E-32
Residual 86 124.5148223 1.447847
Total 91 774.0670139
Standard Upper
Coefficients Error t Stat P-value Lower 95% 95%
-
Intercept -10.896388 1.930763787 -5.64356 2.1E-07 -14.73462 7.0581568
X Variable 1 0.82730933 0.041485819 19.94198 5.27E-34 0.7448383 0.9097804
X Variable 2 -0.3770036 0.198334402 -1.90085 0.060671 -0.771279 0.0172721
X Variable 3 0.8574456 0.364388084 2.353111 0.020899 0.1330661 1.5818251
X Variable 4 0.75657804 0.43261485 1.748849 0.083885 -0.103432 1.6165879
X Variable 5 0.97882509 0.353531259 2.768709 0.006892 0.2760282 1.681622
52

Economic Sanctions - The Case of The American Embargo On Cuba

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Economic Sanctions - The Case of The American Embargo On Cuba

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BUCHAREST ACADEMY OF ECONOMIC STUDIES

FACULTY OF INTERNATIONAL BUSINESS AND ECONOMICS

Types of economic sanctions

In an attempt to clarify the concept of economic sanctions, a definition encompassing the

Figure 1: Effects of an Embargo on Exports to Iraq10

Economic Mechanism of Sanctions

Size of Involved Economies

Cost of sanctions to targets

Cost of sanctions to senders

Chronology of Key Events in the context of the Cuban Embargo

• Promoting American Agricultural and Medical Exports to Cuba Act of 2009;

Goals of American Policy Makers

Reaction of the Target Country

Attitude of Other Countries

Initial impact of the embargo on Cuba`s Trade

A Time Series Model

Imports Regression Model

Source: WTO Trade Statistics

ExportsCuba-World= =-5771.5+3.3 * Year

Source: WTO Trade Statistics

Long-term impact of the embargo

The Gravity Model

The Gravity Model can be summed by using the following equation:

Distij represents the distance between the two countries;

α,β1,β2 are parameters - β1 is positive and β2 is negative.

log(Tradeij) = α + β1 log(GDPi x GDPj) - β2 log(Distij) + e (2)

log(Tradeij) = α + β1 log(GDPi x GDPj) - β2 log(Distij) + β3(Langij) + β4 (Borderij) + β5 (RTAij) (3)

After computing the coefficients using OLS the equation becomes:

Contemporary Cuban Economy

Cost to the target country

Benefits to the communist regime

Possible Effects of lifting the embargo

Year Exports Predicted Exports Imports Predicted Imports

Annex 3: ANOVA Output for Imports Time Series Regression Model

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Annex 5: Input Data for the Gravity Model

India United States 65464.4728 1,217,490 14,204,322 12040 0 0 0

India Singapore 30346.1438 1,217,490 181,948 4147 1 0 1

India Hong Kong 20610.017 1,217,490 215,355 3758 1 0 0

India Russia 11261.18878 1,217,490 1,607,816 4331 0 0 0

India South Africa 5818.33652 1,217,490 276,764 7998 0 0 0

Brazil United States 91313.7874 1,612,539 14,204,322 6778 0 0 0

Brazil China 71482.5636 1,612,539 4,326,187 16921 0 0 0

China United States 514586.198 4,326,187 14,204,322 11147 0 0 0

China Japan 391149.038 4,326,187 4,909,272 2094 1 0 0

China South Africa 25458.0054 4,326,187 276,764 11661 0 0 0

China Argentina 21662.7062 4,326,187 328,385 19257 0 0 0

Russia United States 40279.8962 1,607,816 14,204,322 7825 0 0 0

Russia India 10092.10838 1,607,816 1,217,490 4331 0 0 0

Annex 6: ANOVA output for the Gravity Model

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