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Cuba: Open for Business?

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Archconservatives eager to trade with known Communists.

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You can't get good Chinese takeout in China and Cuban cigars are rationed in Cuba. That's all you need to know about communism.
- P.J. O'Rourke

The Cuban Assets Control Regulations (known colloquially as the "Cuban Trade Embargo") were issued by the US government on July 8, 1963, under the Trading With the Enemy Act.
In the words of the Treasury Department, "The basic goal of the sanctions is to isolate the Cuban government economically and deprive it of US dollars."

Some maintain that this strategy, on its face, would never work. In his seminal book Capitalism and Freedom, economist Milton Friedman wrote:

"Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power ... By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement."

Last month, at the Summit of the Americas' opening ceremony, President Barack Obama said that "The United States seeks a new beginning with Cuba." He went on to explain, however, that "there is a longer journey that must be traveled to overcome decades of mistrust, but there are critical steps we can take toward a new day."

How would an investor take advantage of the potential end of the embargo? For starters, some are looking at the Herzfeld Caribbean Basin Fund (CUBA), which invests in companies that would benefit directly from a lifting of the ban on Cuban/US trade - like Carnival Cruise Lines (CCL).

Thomas Herzfeld, who runs the fund, told one reporter, "We believe the opening of Cuba could actually double their business in the Caribbean."

Not too shabby.

"Of course, all those visitors are going to need hotel rooms," Herzfeld continued - which would benefit companies such as Starwood (HOT) or Marriott (MAR). Airlines like Continental (CAL), with hubs in the New York Metro area -- which boasts a large Cuban population -- would likely also stand to benefit.

The US International Trade Commission estimates that US agricultural sales would double if the embargo were dropped.

An economy in recession cannot afford to ignore the opportunity for American business the Cuban market presents.

According to Reuters, a large number of US businesses have an estimated 5,000 products trademarked in Cuba waiting for the embargo to be lifted. Among them are companies like Nike (NKE), Visa (V), Starbucks (SBUX), and McDonalds (MCD). Coca-Cola (KO), Google (GOOG), and Ford (F) recently registered trademarks, as well.

Agricultural producers are also critical of the embargo, as it deprives them of a large, practically local opportunity. According to the American Farm Bureau, Cuba could eventually become a $1 billion market.

Back in 1996, Dwayne Andreas, chairman of Archer Daniels Midland (ADM), claimed not to "know a corporate CEO who thinks excluding US business [from Cuba] is a good idea."

"The embargo is a waste of taxpayer dollars and time," added James E. Perrella, CEO of Ingersoll-Rand (IR).
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No positions in stocks mentioned.
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