Can Cuba become the new China if trade is normalized with the U.S.?
With trade policy changes being discussed by Congress and the President, the sourcing of materials needed to manufacture products in the U.S. has become a topic of great interest.
U.S. companies, including those in my home state of Arkansas, must import essential components for manufacturing that are nearly impossible to produce in the U.S. without driving up the cost of the final manufactured goods.
The challenge is that Congress is proposing import duties to make up for anticipated tax cuts to corporations that could reduce their rates from 39 percent to 20 percent. The proposed Border Adjustment Tax of 20 percent, for example, would apply to imports from any country.
Another proposal the President is contemplating is a Border Tax of 35 percent on any imported products from companies that move their factories outside the United States. Finally, a 20 percent “Wall Tax” on imports from Mexico is being proposed to pay for the border wall.
Although it is unclear whether all three taxes will be combined—or if any will be passed by Congress—the potential increases range from 20 percent to 55 percent on all imports. In the case of goods imported from Mexico, the additional 20 percent Wall Tax would effectively push the total tax to at least 40 percent and as high as 75 percent.
Could this dramatic tax revamp reposition Cuba as a new China? When the embargo is finally lifted, Cuba may very well become the preferred country from which to import goods too costly to produce in the United States.
With an average monthly wage of $28 per month, depending on the industry, Cuba has one of the lowest labor wage rates in the world—the average monthly salary in China, by comparison, is $327, and in Mexico $322. Cuba’s monthly wages meanwhile translate to $0.93 per day or $0.11 per hour for an eight-hour work day. Furthermore, Cuban labor is one of the most efficient globally.
In addition to low cost, high-quality labor, the shipping advantages of Cuba are dramatic—sea shipping times of 11 hours or less compared to a few days by land from Mexico and up to 28 days from China. Located 93 miles from the United States and 130 from Mexico, the island is also strategically positioned to send and receive shipments through its new deep sea Port of Mariel to the rest of the world.
Once labor and production efficiencies, proximity to the U.S, current infrastructure improvements, and the special economic development zone of Mariel are all factored in, Cuba looks highly attractive to U.S. companies that want to invest there. In addition to the sourcing of manufacturing components, the U.S. would also benefit from off-season imports of products such as tropical fruits and vegetables that are all organically grown in Cuba by necessity due to the lack of pesticides and chemical fertilizers.
For companies looking to navigate the newly proposed import taxes, Cuba could be the answer to keeping U.S. manufacturers competitive and their doors open for business.
Melvin Torres is the Director of Latin American Trade for the World Trade Center Arkansas. Angela Marshall Hofmann of World Strategies, LLC and Sam Cushman of the WTC Arkansas contributed to this article.