CUBAN FREE TRADE ZONES
by
Marc M. HarrisCuba's foreign investment minister, Mr. Ibrahim Ferradaz, recently opened the first of four free trade zones planned in Cuba. These new trade zones, which will offer unashamedly material incentives to foreign capitalists and local workers alike in the Communist ruled island, are yet the latest Cuban experiment with free-market reforms.
The Cuban free zones, or zonas francas, are part of a government strategy to attract foreign investment that will generate jobs, bring in new technology and open new markets. Two free trade and industrial zones in Havana, one at Wajay next to Havana's international airport and another at Berroa on the city's eastern outskirts were opened in May. Both were created from existing "in bond" warehouse complexes already used by dozens of foreign and Cuban companies Two other locations, formerly military installations, are being developed at the port of Mariel, west of Havana, and at Cienfuegos port, on Cuba's south coast. These are to open later this year.
Modeled on free trade zones in the Caribbean and Latin America, the Cuban zones offer total exemption from customs duties and calibrated exemptions from corporate and labor taxes depending on whether manufacturing or services such as offshore banking are involved. Companies have to export the bulk of their goods or services, although up to 25% of the total can be sold in Cuba. Labor and operating costs were competitive for the region, according to Cuban government sources.
The free trade zones will not escape the US economic embargo against Cuba, which rules out the nearby huge US market as an export destination. This initially might look like a handicap, although Cuban officials play down its significance and mention that the embargo will not last forever. The Cuban government emphasizes the increased trade with other markets such as Canada, Mexico, the Caribbean, and Latin America. Europe is also seen as a potential export destination, but as Cuba is not part of the Lomé Convention the island cannot benefit from the concessions enjoyed by some other Latin American and Caribbean countries in their trade with the European Union.
At least seven foreign companies have been granted licenses to operate in the new Cuban trade zones. One of these is a Dutch firm, whose representative happily noted that the zones offered all the basic infrastructure and advantages that a foreign investor could need. He mentioned Cuba's good geographical location for export and distribution, an educated workforce and a streamlined approval and administration process that aims to cut out red tape. Other foreign companies granted licenses include a Canadian maker of construction materials, a Jamaican powdered drinks manufacturer, and an Italian pasta-maker as well as several Spanish companies.
Government officials stated that ten other requests were awaiting approval and there was interest from some fifty other possible investors, thus leading them to note the project is off to a good start. The free trade zones will keep Cuban labor regulations that require foreign employers to hire and pay their workers through a Cuban intermediary. Under this arrangement the foreign employers pay their workers' salaries in hard currency to the intermediary, who pays the workers in Cuban pesos, although a system of hard currency incentives can be negotiated into the labor contract.
Cuba's free trade zones will initially be run by two Cuban corporations, Almacenes Universales and Zona Franca Ciudad Habana, which will act as employment agencies. Foreign investors can expect a touch of discipline from the two Cuban corporations chosen to run the zones. Alamacenes Universales is linked to Cuba's Revolutionary Armed Forces (FAR), while Zona Franca Ciudad Habana, which runs the Berroa site, is a subsidiary of the Cimex Corporation, whose origins can be traced to the interior ministry.
In spite of the US government's characteristically stupid embargo, Cuba continues down its own path to economic liberalization and reform and is attracting much needed capital from abroad. To take advantage of the dynamic changes taking place in Cuba, TW Investment Advisory suggests its Havana Holdings Fund.
About the Author Marc M. Harris is a certified public accountant and president of The Harris Organisation, a large investment banking firm headquartered in Panama.
Copyright © 1997 by Marc M. Harris
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