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GFTZ

By on December 19, 2014 in GFTZ with No Comments

GFTZ – A Bridge from America to Cuba

John Latta

December 2014

The historic opening between the US and Cuba on December 17, 2015 offers an opportunity to bridge 50 years of relations between the US and Cuba. As addressed by President Obama in his speech one of the most important elements of these changes is the relationship with the Cuban people. Yet, the ability to foster a normal relation between the US and the Cuban people is severely restricted by the lack of free and open trade. There is a bridge which can enable this – the Guantanamo Free Trade Zone (GFTZ). For a President that uses Executive Action to further his agenda the zone would be another dramatic action to open the island to American capitalism.

I propose an economic opportunity for both Cubans and Americans. The GFTZ uses a small slice of land at the edge of the US Guantanamo Naval Base this zone would be the site of a facility called the American Mall at Guantanamo. The intent is to bring American capitalism to the Cuban population without restriction. Conceptually it is geographically shown below.

Guantanamo Free Trade Zone - adjust #2

 

The company logos are used to illustrate possible occupants. This notion of a Free Trade Zone is not the same as that being implemented at Mariel. The GFTZ is solely for the Cuban individuals where they have unfettered access to American goods and without Cuban taxation and restrictions. Literally Cubans could walk into a slice of Americana. By way of illustration, the logos shown are those which could be of significant value to Cubans and representative of American brands and goods. Some of the attributes of the GFTZ include: Cubans could access bank accounts for remittances or other funds, purchase any goods offered in the zone (only in Dollars) and remove them immediately. Periodically there would be auctions where Cubans could bring goods for sale and immediately receive of cash. The GFTZ represents American capitalism available to any Cuban who enters.

Guantanamo, in this context, is American soil and thus, would not violate the US embargo. The zone would not trade with the Cuban government or its entities. Further, those responsible for GFTZ and its operation would enter and exit on Leeward Point Field flights. The implementation of the GFTZ would be paid for by either an operator of the site, such as a shopping mall operator, or the individual companies. There would be no direct US Government investment.

The GFTZ addresses the greatest need Cubans face today – access to consumer goods and breaking the barriers the Cuban government places on getting such goods. But the zone would also support farmers and their needs. Further, with the presence of American banks, Cuban-Americans can make direct remittances which can then be withdrawn by relatives who come to the zone. An indirect benefit of selling American goods in a new Cuban market would be the support of American jobs.

What then is the reality of the GFTZ? The zone is a direct outreach to the Cuban people and as such challenges the control of Cuban government. How much the government would seek to limit the GFTZ remains to be determined. The government could also claim that the zone is a patent violation of the bi-lateral treaty that established Guantánamo in 1902 and revised in 1934. There are many ways that the Cuban government could seek to nullify the zone. The fact that the US and Cuba are in direct negotiations offers the prospect that an accommodation can be reached.

There are also practical issues with the zone. In spite of being a showcase, many Cubans simply could not afford what is offered. Logistics is a critical issue, both in terms of supply to the zone but also the ability of Cubans to reach the zone. Lastly, if the zone is to be effective it must bring opportunity to Cubans, yet, the US cannot unilaterally seek to build and operate the GFTZ. The Cuban government could effectively say no and obstruct it. The zone should be a part of the opening discussions between the US and Cuba.

Visualize the GFTZ as a theme park of US free market capitalism.

Initiating the GFTZ is both a US Government and commercial sector decision, with American companies playing a critical role. The GFTZ forsakes the rhetoric of the past by placing the betterment of Cuban lives as the priority.

Deeper

The aftermath of the opening of relations with Cuba has many companies expressing interest in establishing a presence in Cuba. Yet, the embargo is codified within six statutes: Trading with the Enemy Act of 1917, the Foreign Assistance Act of 1961, the Cuba Assets Control Regulations of 1963, the Cuban Democracy Act of 1992, the Helms–Burton Act of 1996, and the Trade Sanctions Reform and Export Enhancement Act of 2000. Collectively these prohibit US businesses from conducting business with Cuban interests. An act of Congress will be required to remove this prohibition. Given the paralysis in Congress it is highly unlikely that it will match the actions of the President with changes in the law. It is in this void that the GFTZ fulfills. It is another executive action which could dramatically change the relations between America and the Cuban people.

GFTZ

It is important to note that the use of a Free Trade Zone in this context is not as an isolated parcel of land which fosters international commerce. It is simply to promote free trade between American business and Cuban citizens. This is not to imply that Cuba will not seek to limit what Cubans can do as they return from the zone. Such actions would potentially limit its effectiveness and are discussed below.

Conceptually, the GFTZ is similar to a small American town whose only occupant is a large shopping mall, an office building, an open covered space, banks and hotels. As we will see below there are variations unique to its presence in Cuba.

The attributes of this zone (GFTZ) include the following.

  • Cubans and non-state Cuban companies could freely purchase any goods offered in the zone by its US retailers and companies. A sample is shown above with the logos of possible participants.
  • Most goods would be removed immediately once purchased.
  • Cubans could gain access to remittances directly from banks in the zone.
  • All transactions would be in US Dollars.
  • Periodic auctions would be held in a facility on the GFTZ where Cubans would bring their goods, including automobiles, for sale to Americans, under auction conditions, so that they obtain fair market prices. Such purchases would be shipped back to the US on returning supply ships. Americans would be permitted to attend the auctions including inspection of the items to be sold – as in most auctions.
  • All goods would initially go into and out of the GFTZ via the Naval Base and no Cuban port facilities. (see below on the logistics considerations.) Note also that the only out goods would be those purchased at auction.
  • The commercial entity could be called the American Mall at Guantánamo, simply the American Mall.
  • To the extent possible the American Mall would be widely publicized in Cuba. Given the vast informal communications network within the populace it is expected that word will spread very rapidly, especially after the mall opens.
  • Americans working at the GFTZ would stay at quarters built on the zone. It is the intent that the number of permanent staff would decline significantly once operations are established.
  • It is the objective that most of the employees of the businesses would be Cuban but only under the condition that they are employees of the respective companies or the property manager. The US would set the rules for such employment so as to be fair and uniform.
  • A business building(s) would be in the GFTZ to allow for sales of larger items. Reflective of this is Boeing or other large companies not needed a retail footprint. It would not be necessary that a company have a long term presence at the building but could rent space as required. This aspect of the GFTZ walks a fine line in offering goods that might be bought by the Cuban government and must be avoided.
  • As with any mall the American Mall would not be a static entry. Businesses would come and go, the physical structures could change and the interactions with the Cubans would evolve. This is a part of the ecosystem which would form and change as the mall is developed.
  • The development and implementation of the GFTZ would be done with no US Government funds. The land would be made available on a long term lease to a property management firm that would handle the relationships with the companies.
  • Americans coming to the GFTZ would enter only via Guantánamo and not Cuba. Charter flights would be set up from the US to Leeward Point Field. This may be adjusted based on the modified rules issued by the Obama administration and implemented by OFAC.
  • Cargo flights would be supported at Leeward Point Field. The runway supports most cargo aircraft. However, it is expected that most of the supply would arrive by ship.
  • The zone would be responsible for its own internal security but the entry and exit security would be the responsibility of the military at Guantanamo.
  • Crowd control would be implicit in the management of the zone, its entry and exit. The scope of this is not to be underestimated.

The GFTZ has important policy and visibility implications for the US.

  • Guantánamo would be seen in a positive light not only in Cuba and around the world by its support of the Cuban people.
  • The GFTZ has with it a shock factor in its impact and presence in Cuba. It signals a significant change and is consistent with the announcements on December 17, 2014.
  • The GFTZ would hopefully serve as a beachhead of capitalism and an example how this could work on the rest of the island. Some might consider it as a Trojan horse but not a very subtle one.
  • The major impact of the GFTZ would be in the near term. That is, if GFTZ was a success this could promote the movement of the retailers into other parts of Cuba into malls and other outlets based on their success in the zone and the expansion of the Cuban economy. This, of course, assumes that the Cuban government has policies favorable to business operations in Cuba. There is also the assumption that a successful GFTZ would put pressure on the Cuba government to allow it to be replicated.
  • The President would have to direct the military to support the zone. The Guantanamo Naval base would experience a significant increase in activity, especially the airport and roads.
  • This could be implemented rather quickly. Parts of the initial implementation could even be done in tents or canvas covered structures in order to open even limited operations quickly. There is enough land in the zone that the implementation could be accomplished in phases. The mantra should be: begin with an impact as soon as practical.
  • The initial analysis is that the GFTZ could be built, open and operate based only on Presidential executive orders. For example, all transactions would be done on American soil. Consider, it is not illegal for Cubans on a valid visa while in the US to buy US goods. The transactions in the zone would not be trading in Cuba and thus do not represent a violation of Trading with the Enemy Act, the Foreign Assistance Act, the Cuban Democracy Act and Cuban Liberty and Democratic Solidarity (Libertad) Act. Note that the Cuban government could not use the GFTZ as a means to buy goods or services.
  • The visible role of Guantánamo and the prisoners there would be lessened and hopefully eliminated when all the prisoners are transferred. The view of Guantánamo would be radically transformed both in Cuba and around the world.

We must be careful not to look at the GFTZ in rose colored glasses. There are significant issues connected with the GFTZ. Our initial assessment includes the following:

  • For many Cubans the GFTZ would not touch them. Some of the reasons include: it is too far away, the goods are too expensive, they receive no remittances and it is too difficult to travel to. The reality is that these are individuals the US would want to reach. As the zone evolves it would be important to develop programs which broaden access to the zone. For example, there could be NGO programs for transportation and funding and even small subsidies. Consider the prospect of a neighborhood drawing for transportation tickets and some “trading cash.” This would enable transportation, a stipend and meals to come to the American Mall. Going to the Mall would be like going to a theme park in the US.
  • The treaty which establishes the Guantanamo Naval Station places a significant blocking factor on the operation of the GFTZ:

TREATY SERIES, No. 426 LEASE OF COALING OR NAVAL STATIONS AGREEMENT BETWEEN THE UNITED STATES OF AMERICA AND CUBA Signed at Habana, July 2, 1903, Approved by the President of the United States, October 2, 1903, Ratified by the President of Cuba, August 17, 1903, Ratifications exchanged at Washington, October 6, 1903. Contain terms which could be used by Cuba as a basis to deny the GFTZ.

There are restrictions in the Article III. “The United States of America agrees that no person, partnership, or corporation shall be permitted to establish or maintain a commercial, industrial or other enterprise within said areas.”

Article V further states: “Materials of all kinds, merchandise, stores and munitions of war imported into said area~ for exclusive use and consumption therein shall not be subject to payment of customs duties nor any other fees or charges and the vessels which may carry same shall not be subject to payment of port, tonnage, anchorage or other fees, except in case said vessels shall be discharged without the limits of said areas; and said vessels .shall not be discharged without .the limits of said areas otherwise than through a regular port of entry of the Republic of Cuba when both cargo and vessel shall be subject to all Cuban Customs laws and regulations and payment of corresponding duties and fees. It is further agreed that such materials, merchandise, stores and munitions of war shall not be transported from said areas into Cuban territory.”

It is been stated that already the US is in violation of the treaty in that the following commercial establishments exist on the base: Commissary, Exchange, McDonalds, Subway, KFC & A&W restaurant in the bowling alley, a Pizza Hut Express, Taco Bell, Baskin-Robbins, and the Triple C shop that sells Starbucks coffee and Breyers ice cream.

  • The Cuban government could do much to deny access to the zone. This includes blocking it off or failing to support vehicular traffic to the zone (even including parking). If it seeks to do so, it could render the zone ineffectual. However, the assumption is that with high visibility within Cuba and public expectations that the political risk of denying access would be deemed inappropriate by the Cuban government. That is, the downside risk is less than the upside gain. Specifically, the US government should make the upside benefits greater than the perceived downside impact to the Cuban government.
  • It appears that Cuba has still not removed its land mines around Guantánamo. This would make the area around the zone impossible to transit safely. Cuba may need the assistance of the US in removing the mines.
  • The Cuban government could decide to levy high taxes on everything purchased in the zone. This could discourage purchases and limit the effectiveness of the zone.
  • As with the recent limitations on the importation of goods into Cuba, which spurred the expanded Customs Law, there may be individuals who seek to take advantage of the Zone. That is, to buy at zone prices and resell in other parts of the country at significantly inflated prices. This is an abuse of the intent of the zone but one that is difficult to control within the zone. There are ways this can be countered including purchase limits.
  • The Cuban government would not allow workers in the zone making staffing difficult. Given that employees in the zone are employed by the companies and not the Cuban government this is contradistinction to the rules established for Mariel.
  • The port at Guantánamo does not have container cranes. These may be required to support the volume of goods in and out. That is, the port at Guantánamo could be a weak link in the supply chain.
  • If the GFTZ proves successful the logistics supply chain could be significant and strain the infrastructure at Guantánamo. As with any successful large retail structure, the supply chain is extensive and, to most, largely hidden. Given the special conditions which exist at the GFTZ it would not be so hidden.

The value of the GFTZ lies in both the near term and the example it sets. Consider:

  • If the Congress should repeal the embargo quickly, in 2015, this could mitigate the near term impact of the GFTZ. This is under the assumption that if the embargo is lifted that Cuba would be open to large scale US commercial entrance. Given the halting support of private enterprise in Cuba it is highly unlikely that the Cuban government would permit the rapid unfettered entrance of American companies. Both of these assumptions are questionable and will only be borne out in time. This proposal for the GFTZ assumes that Congress with not take substantive action to enable open Cuban trade in the near term.
  • The significant value of the GFTZ is in its direct impact on the populace. This is an outreach program. It is the best of the American economic engine running for the Cuban people. Thus, rapid action maximizes the impact by setting expectations for what the future of a capitalistic Cuba would be like.

Given all these issues, proceeding with the GFTZ can only be done through bilateral negotiations. Let us consider some of the negotiation points as we focus on the diplomacy aspect of the ecosystem. 

Framework for Negotiations

At this point in the discussion we are assuming that the US desires serious consideration of the zone. Cuba is willing to talk and it is important to prepare positions for discussion. This section explores this and, as a result, provides useful insight into the issues around making the zone possible. In bureaucratic speak – here are some of the initial talking points.

There is considerable preparation required to reach this point. Since the zone relies on its economic success and the participation of businesses it is essential that businesses be a part of the framework and well prepared. The GFTZ is not an abstract diplomatic concept, e.g. the notion of an ecosystem illustrates this.

We begin first by assessing how Cuba may evaluate the zone. This may not be an altogether objective analysis from a socialist Cuban perspective but it nonetheless is worth exploring.

Positive for Cuba

Significant influx of US $ which could ease the transition from the dual currency system.

It is a virtual direct subsidy to the Cuban people from the US, with the attendant assumption of a higher level of remittances and possible charity/NGO donations which would flow through the GFTZ bank(s).

Farm equipment trade at the GFTZ could revitalize the farm sector of the economy – new equipment and indirect investment. This is consistent with the announcements made by President Obama.

The GFTZ would be a temporary diversion from other issues, mostly economic, being faced by the Cuban population and directly builds on the overtures of the Obama administration.

The GFTZ could raise the GDP during the initial operations due to the high influx of cash.

The companies in the GFTZ are potential significant users of Port Mariel.

Potential that the Cuban government could levy a “gate tax” to enter/exit the GFTZ.

No direct threat to the Cuban Government.

Negative for Cuba

Cuban government does not control the GFTZ.

The rate of change of the impacts of the GFTZ could be relatively fast which could start months before and continue after its opening, as events and flow of commerce unfold directly with and into the Cuban population.

Has the potential of making Guantanamo Naval Base a permanent presence on the Island – the Cuban population could become dependent on the GFTZ. There remains resentment within the Cuban government on the presence of Guantanamo Naval Base and a desire to return its possession to Cuba.

Difficult for Cuban government officials to realize personal gain from the zone, stated more directly, the GFTZ has no direct corruption potential.

Cuban investment required, mostly infrastructure, to enable the GFTZ to operate or minimize the safety risk to those who enter the facility. Another investment could be in transportation services.

The GFTZ is a virtual bank in Cuba which is not under control of the Cuban government.

The GFTZ may lessen the impact of some of the economic reforms being carried out by the Cuban government. For example, the GFTZ could make the US $ the dominant foreign currency. Trading at the auction site on the GFTZ could disrupt the market reforms as Cubans rush to sell goods and receive cash. How and in what ways the zone would impact Cuban reforms would require more analysis.

The GFTZ does not directly remove the embargo. Activities and commerce at GFTZ could be a diversion away from the “US remove the embargo” issue as the population seeks to get the greatest benefit from the GFTZ. However, it could have the opposite effect of showing how direct commerce can impact the Cuban economy and create pressure to remove the embargo.

Crowds at the GFTZ could be seen as a security threat – aggregation of population in one place.

Increased road traffic and pressure on public transportation to get to and from Guantanamo could be a focal point of public anger against the Cuban government if not adequately addressed.

We will now go a step farther and put down positions that that the US could take and possible Cuban responses.

US Proposal Cuban Gain 
Allow the Mariel Port to be used for shipment of goods for the GFTZ subject to these conditions.Use of the port at fair and reasonable fees;Duty free entry and exit;US reserves the right to provide all logistics, including security, to and from GFTZ.Cubans working directly in support of GFTZ logistics can be direct employees of American government or firms. Utilizes and builds support for Mariel Port.
Build infrastructure at the entrance of the GDFZ, including:Roadway to the entrance;Public transport;Traffic management;Parking andMine clearing  US Government or its contractors could provide assistance.
Allow Cubans to work as employees on any aspect of the GFTZ including the supply chain.The individuals would be employees of the respective companies or organizations. The US would set terms of employment.Allow the GFTZ to operate within the existing treaty This would create highly sought after jobs which would demonstrate the value of full employment.Direct benefit to the Cuban economy and its people

 

 

To cap, there is a significant opportunity created by the zone, if both parties approach the discussion seriously.

Surrounding the GFTZ is an ecosystem. This is considered below.

GFTZ Ecosystem

Even in this conceptual stage of the GFTZ there is an ecosystem. It consists of: diplomacy, politics, economics and business. The economics is widespread. First, are the economic consequences in Cuba and the impact on those that use the zone. Then there are the economic impacts on the businesses, the supply chain and even the US economy. Lastly are the businesses.

One tends to get absorbed by the diplomatic issues but the ecosystem is much larger than this. The business element includes, at a minimum, execution, ROI and the ability to make a profit based on the horizons set by the individual companies, i.e., tactical and strategic. Given the fact that company participants are those who make the zone operate it is critical that conditions are established which allow the companies to succeed. Thus, just like any mall operator is concerned about the performance of the stores in a mall, the same applies here.

Another part of the ecosystem is the interaction of business and the political factors within the ecosystem. Specifically, if companies see a significant potential, under conditions favorable to them, they can exert considerable political pressure. There are many dynamics even in this rather simple ecosystem at this early stage of development. The notion of an ecosystem requires that we consider all the elements when seeking to make the GFTZ a reality. 

Summary

There was high level of business interest in Cuba following the announcement on December 17th. The zone is a start to this participation without the need for Congress to remove the embargo. If businesses in the zone see a positive response and there is support of the Cuban government to the GFTZ this could change the role the businesses play throughout Cuba and serve as a trigger for changes in Cuban and US laws/policy. US businesses that stand to gain from the zone should be directly involved in its definition, negotiations and implementation. Ultimately business participation is about economics – the companies must see an economic benefit – even if it is in the long term. Thus, the zone is has three parties to make it a success.

The GFTZ is a change agent. If the government will let the advantages out weight the negatives is a matter of how the leaders of Cuba perceive the threat posed by the GFTZ. In spite of words otherwise, the actions of the Cuba regime has not been focused on improving the lives of Cubans. The constraints of socialism, as modified, are more important than significant economic reforms. The GFTZ has as its centrum economic opportunity for all touched by it.

What then are the realities of the GFTZ?

  • The US could build and open it for business. The US ability to execute on the zone is not an issue.
  • If allowed to operate, as outlined here, with a continuous supply of goods and initially with money from remittances, the GFTZ would be a capitalist beacon which lights the whole island with excitement and opportunity.
  • With Cuban government acceptance of the GFTZ, there is the opportunity to bring economic benefit to Cuba vis-à-vis the Mariel Port, transport, roadways and infrastructure and the creation of jobs.
  • The Cuban government could seek to halt its operation as a violation of the Treaty under which the base is established.
  • The Cuban government could erect physical and economic barriers that significantly limit the utility of the zone.
  • The GFTZ is about economic opportunity for all parties: each government and the businesses that make the zone work.

If successful this could both transform the US – Cuban relations and change how the Cuban people see the US. Making the GFTZ a reality is another executive order of President Obama that builds on the announcement of December 17th. The zone is a bridge from America to Cuba to help its people.

 

About the Author

About the Author: With a background in Electrical Engineering technology is both a career and passion. As can be seen here visiting the world, asking questions and learning are other passions. Attempting to pass ones experiences and that learning on to others is the a motivator for this blog. .

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