In 2018, Cuban President Raúl Castro, brother of former dictator Fidel Castro, plans to step down from his position as Cuba’s president, marking the end of the Castro family’s 57-year reign. In his place, the Communist Party of Cuba prepares to welcome Miguel Díaz-Canel, who has been the Vice President since 2013. Before this historic transition occurs, however, President Raúl Castro intends to reaffirm the Party’s hold on the nation and, for the first time, he is looking beyond the traditionally employed mechanisms of oppression, such as restrictions on the freedom of movement and economic activity. In a surprisingly progressive move, Castro intends to ease Cuba through this period of transition by committing to economic reforms that seek to reintegrate the nation into the global economy.

To go about this, President Castro has sought to ameliorate relations with major players in the global market, namely the United States. The Obama Administration, which in recent years acknowledged the failure of the Cold War embargo placed upon Cuba, views the situation as an opportunity to capitalize on Cuba’s much needed liberalization. The formally estranged countries have just recently begun their efforts to normalize relations, primarily by loosening travel and trade restrictions. The US State Department removed Cuba from the international terror watchlist, which has led to a restoration of commercial flights as the Cuban borders opened to American tourists for the first time in over fifty years. But an important question remains: how exactly will this normalization impact the Cuban business climate and, subsequently, the Cuban populace?

As of now, many Americans and Cubans regard the recent détente as well as the proposed normalization and liberalization efforts with skepticism. Critics of the Obama Administration’s strategy claim that Cuban officials, who wield unlimited power over their extensive propaganda machine, will extract the financial benefits of this newfound trade without relinquishing political control or allowing for the development of an increasingly vocal Cuban middle class. Critics have also pointed out that there are still seven billion dollars in active American property claims held up in Cuba — the total worth of property seized when Fidel Castro nationalized the Cuban economy. American firms risk a great deal by entering a country with such an unchecked government, especially one with such a poor track record with American corporations.

Furthermore, despite its commitment to economic liberalization, the Cuban government remains hesitant to reach agreements during bilateral negotiations with American businesses. The telecommunication sector has proved a particularly difficult sell, as the Cuban government fears U.S. surveillance. The Castro government points to U.S. immigration laws, which incentivize emigration and brain drain from Cuba, as significant barriers to building trust with American corporations. Cuban officials fear reliance upon American ideas, capital and products as the economy opens up to trade and labor mobility with its neighbor. Fidel Castro’s venomous letter to “Brother Obama” has recently aggravated this Cuban sentiment, as the notorious dictator commented rather caustically that “we [Cubans] do not need the empire to give us anything.”

Cuba is no exception to the old maxim: Old habits die hard. Since the Cuban Revolution (1953–59), Cuba has maintained a centrally planned socialist economy. The Castro regime has made a practice of repressing its constituents, frequently coming under fire by the Human Rights Watch for encroaching on even the most fundamental rights. According to the Harvard Business Review, the government still owns most of the means of production and employs more than 80 percent of the work force. While the Cuban government boasts its low unemployment rate, which averaged 2.74 percent from 2000 to 2015, the international community has responded with skepticism, acknowledging these low numbers as mere attempts to mask a truly desperate situation. The nationalized economy has not worked well for Cuba in the past decade, as the nation’s average GDP growth rate has slowed to nearly one percent and continues to drop.

Since the collapse of the Soviet Union and implementation of the U.S. trade embargo, Cuba has maintained a heavy reliance on remittances from Cuban émigrés and oil subsidies from Venezuela, resulting in incredible market volatility. According to the 2016 Index of Economic Freedom, inefficient public sector spending is still high at over 60 percent of total domestic output, with average monthly wages for a Cuban citizen falling to a mere 584 Cuban Pesos per month, equal to about $22.24. The nation remains fractured under a dual currency, utilizing both the Cuban Peso (CUP) and the Convertible Peso (CUC), the latter being pegged to the American dollar. This is problematic because Cuban workers employed by the state are paid in the Cuban Peso, a distortion that makes for immense transactional inefficiencies for the average Cuban worker.

During his time in office, Raúl Castro has committed himself to a series of economic and institutional reforms with varying levels of success. In terms of increasing fiscal freedom for his constituents, Castro has established microcredit institutions, bank accounts, wholesale markets for the non-state sector, inheritance rights and a housing market. According to Granma, the official newspaper of the Central Committee of the Cuban Communist Party, President Castro also aims to “distance [Cuba] from those conceptions that condemned self-employment almost to extinction and stigmatized those who decided to join it, legally, in the 1990’s.” Over the past eight years, Castro has expanded the number of private sector employment categories, making it easier to obtain licenses validating private business ventures. Cuba’s restructuring efforts, however, still have a long way to go. According to the Brookings Institution, the nation still lacks much needed price reform, a unified currency, a realistic exchange rate and bank system reform. Recognizing this, President Castro remains determined to take advantage of the many changes in U.S. regulations that would assist Cuba in increasing exports, raising salaries and productivity, reducing state payrolls and increasing exports.

Cuba’s economic success in the coming years will primarily depend upon foreign direct investment, the greatest proportion of which will come from cooperation with U.S. businesses. Most American companies, however, regard the Cuban business climate with hesitance. In addition to the reasons outlined earlier, the Cuban population’s low earnings hold limited real purchasing power and demonstrate lackluster demand. More importantly, the atmosphere surrounding what is still a command economy does not lend itself well to typical U.S. business practices; the government owns all means of production and they ascribe to neither the rule nor the due process of law. American companies interested in investing in Cuba are hesitant for understandable reasons—their assets could be vulnerable to a high degree of risk.

Over the past year, however, some firms have enjoyed great success by opening shop in Cuba. AirBnB, for example, established a network in Cuba on April 1, 2015. Only one year later, according to Time, they have hosted more than 13,000 U.S. visitors and Cuba has become their fastest-growing market. Cubans who host tourists have benefited a great deal from the rise of AirBnB, earning an average of $250 per booking. Other American companies such as Carnival Cruises and Starwood Hotels have enjoyed similar success, forging relations with Cuba and capitalizing on the recent tourism boom. Yet, it is difficult to believe that such a limited market will create lasting economic gains for either nation. A robust tourism sector will promote neither industrialization nor high-tech industry, the hallmarks of a truly developed economy.

Carlos M. Gutierrez, chairman of the Albright Stonebridge Group and the U.S.-Cuba Business Council, echoed this sentiment, commenting to the New York Times, “We have to get rid of the embargo for this [success] to actually take hold.” So, in the meantime, Cuba must focus on creating a more ‘business friendly’ environment. Primarily, the Castro administration must commit to enforcing legislation, offer greater protection of property rights and unify the nation’s currency. Only then will Cuba, upon official Congressional dismissal of the embargo, be primed to advance into the next step of development and take part in a greater economic prosperity.

Obama and the Castro regime in Cuba have recently begun talks about ending the trade embargo between the two countries, arguing that it is archaic and that both sides could benefit from a new trade agreement. Although Cuba is a communist state, something that Castro is not willing to change, Cuba still presents opportunity from an economic standpoint. Cuba is a country stuck in the 1960s (the embargo was put in place in 1961) that desperately needs new infrastructure. Because sanctions are Congress’s most powerful tool, it has proven to be hard for Obama to simply remove the embargo completely. Instead, the Obama administration has had to propose ideas to Congress and remove sanctions regarding Cuba one at a time.

Recently Obama proposed a few rule changes to Congress, which capture his eagerness to take advantage of the economic opportunities Cuba has to offer. He proposed that the United States be allowed to export building materials, agricultural equipment, and telecommunication equipment. In addition to those requests, he also asked Congress to allow the United States to import Cuban cigars and rum.

This is definitely a step in the right direction. However, the U.S. government has to remember that although Cuba is anxious to renew ties with the United States, there may also be some skepticism associated with a new trade agreement, as the United States’ ultimate goal is obviously to transform the Cuban government into a democracy. When Castro made a speech outlining his demands of the United States at the Community of Latin American and Caribbean States summit, he stated that before a new agreement was reached, the United States must: return Guantanamo Bay and pay reparations for all of the economic distress caused by the embargo.  Some of this may be fair, but the United States does not have too much to gain economically from Cuba, which has a GDP about the size of West Virginia. Thus, Cuba will probably end up conceding to any requests made by the United States.

Although the economic benefits for U.S. corporations in Cuba are relatively small compared to size of the U.S. economy, there is still some upside for certain sectors and regions. For example, at the port of Baton Rouge, there is expected to be a major economic impact benefitting the state of Louisiana due to the amount of wheat Cuba will potentially import. Since Cuba usually has to get its wheat from a distant source, the close proximity of Baton Rouge promises lower prices and efficient trading for Cubans. Also, with the increase in ships coming in and out of the port, Louisiana Commissioner of Agriculture and Forestry, Mike Strain, says, “docking fees and the purchase of groceries and supplies while the ships are docked in Baton Rouge will have an economic impact of $1 million annually.”

Some commentators say that although Cuba seems like it is a goldmine for corporations considering it has been shut off from the biggest superpower in the world since 1961, the only thing U.S. corporations will find there is fool’s gold. The excitement about taking advantage of the new Cuban market is simply a front behind which the U.S. government will begin to chip away at the Communist regime in Cuba. The last attempt to dethrone the Castro regime was when the United States slapped the trade embargo on Cuba, which obviously didn’t work. Now it is up to the “economic promise” Cuba provides, for the United States to start instilling the wonders of democracy in the minds of the Cubans.

Two point seven million; 70 percent; 400 billion. These numbers aren’t just members of a string of trivial figures. According to the Economic Policy Institute, the first is how many US jobs were displaced between 2001 and 2011; the second represents the proportion of the American adult workforce that saw a $1000+ drop in yearly income; and the third gives the dollar amount that the US has lost in export opportunities. What could have possibly caused such huge losses? In a word, China—or rather, its practice of currency manipulation.

Currency manipulation is a country’s practice of artificially devaluing or inflating its own currency, so that the exchange rate between that currency and others around the world is different than what it ought to be in a free market. This imparts a cost advantage to the exports of the currency manipulator, because their goods suddenly become cheaper on the global market relative to other countries’ exports. In an open economy, exchange rates should adjust to trade balances, so that as capital accumulates, demand for local currency would drive up its value. In other words, China’s surpluses should lead to an appreciation of the yuan, eliminating their pricing advantage.

But China doesn’t play by such normal rules. According to prominent national economist Paul Krugman, China uses its trade surpluses to constantly print more of its own money, flooding the market with Chinese yuan and creating demand for American dollars. At the same time, it uses its newly-printed currency to aggressively purchase US dollars and government debt; as of December 2012, China held over $1.2 trillion dollars in US-specific debt and had acquired a massive imbalance of over $3.4 trillion in foreign currency reserves.

Until June 2010, China actually dictated the value of the yuan against the value of the dollar, in essence “pegging” the worth of the yuan relative to the dollar at a ratio of 6.8 to 1. Although China has abandoned this hard peg, the Peterson Institute for International Economics still estimates that China undervalues its currency by up to 40%.

So what does this mean for the United States?

First, it means the distortion of competition. Because currency manipulation makes Chinese goods cheaper relative to those of the US, it also makes American products proportionally more expensive for Chinese citizens to import. Every business day, American consumers buy $1 billion more in Chinese goods than American manufacturers sell to China, which fuels the same kind of trade imbalance that fuels China’s currency manipulation in the first place. Indeed, the Economic Policy Institute estimates that were China’s currency to experience a full revaluation, the U.S. trade balance would improve by up to $191 billion, thereby increasing U.S. GDP by as much as $286 billion, adding up to 2.3 million U.S. jobs, and reducing the federal budget deficit by nearly $1 trillion over 10 years.

Second and more importantly, Chinese currency manipulation translates into the potential for real economic disaster. US dependency on foreign savings exposes our economy to certain risks, but China’s distasteful currency practices only make this truth harder to swallow. According to the New York Times, China’s amassment of trade surpluses is “the most distortionary exchange rate policy any nation has ever followed. Most of the world’s largest economies—the US included—are stuck in a liquidity trap as a result—deeply depressed, but unable to generate recovery by cutting interest rates because the relevant rates are already near zero.” In effect, China’s unwarranted surplus policies have imposed an anti-stimulus that the world’s economies can’t offset. Their artificially under-valued currency is more attractive to businesses and investors than the capital that US banks are reluctant to lend, which siphons demand away from domestic consumption.

While this may just sound like a lot of theory, the unfortunate reality is anything but. Many scholars, including Wayne Morrison of the Congressional Research Service, believe that China’s purchasing of US securities—the predominant mechanism by which China manipulates its currency—was a major contributing factor to the 2008 sub-prime mortgage crisis and subsequent global economic slowdown. “Such purchases kept real US interest rates very low and increased global imbalances,” Morrison argues. As China continues to buy up US debt to fuel its enormous expansion, the American-Chinese deficit only becomes more pronounced, and the scales are further tipped toward the prospect of future asset bubbles and distortions.

Yet the United States isn’t the only nation that languishes beneath China’s currency devaluation. Surprisingly, China’s economic policies have created distortions within the Chinese market itself. On the surface, China appears to be thriving, a competitive economic player in the global exchange—so competitive, in fact, that the Council on Foreign Relations predicts that China’s GDP will eclipse that of the United States in five to ten years. But sustained growth of such enormous magnitude and duration comes at a price, particularly given Beijing’s centralized economic governance structure.

China reserves large parts of its markets for state-owned enterprises, demanding that its government firms dominate industries such as coal and railway infrastructure—these industries can’t go bankrupt. Indeed, the Heritage Foundation observes that state-owned banks control as much as 90% of China’s assets. With such a tight rein on the economy, the Chinese government has unintentionally created a structural distortion in China’s central monetary practices, one that is only magnified by currency manipulation.

Analysis from a study published by New York University’s Stern School of Business notes two distinct mechanisms by which China’s banking practices and central domination destabilize the Chinese economy.

First, it creates an insurance effect on banks. Knowing they can’t become insolvent, bankers become more sensitive to loan volume than to the risks of those loans, which encourages risky lending practices. As loans are given out below the efficient rate, increased demand in the housing sector causes an aggregate increase in borrowing, which increases prices in the real sector above their fundamental value and creates a bubble.

Second, as banks allocate fractions of deposits from savers into the housing sector, they may face interim deposit withdrawals or draw-downs on corporate lines of credit. In this case, unable to meet their liquidity shortfalls, banks are forced to sell assets at short notice or raise equity in the markets, incurring a liquidation cost. And since private Chinese investment and consumption is inversely proportional to the demand for American dollars created by currency manipulation, banks are forced right back to the risky loans incentives that produce the aforementioned economic bubble.

The end result of this economic mess? Massively escalating debt. By China’s own estimates, total local government debt amounts to $2.2 trillion, or around one third of total GDP. Kenneth Rogoff of Harvard University furthers that waves of municipal defaults could present even greater problems for the central government, which is sitting on another $2 trillion debt of its own. On top of that, total corporate, public, and household debt in China totals to about 206% of current GDP. This debt spurs a vicious cycle, whereby China manipulates its currency—and thereby attracts foreign trade and investment—to cover its own economic inefficiency, but this short-term growth produces unsustainable long-term damage.

This sort of economic situation has happened before—China isn’t the first Asian nation to employ currency manipulation in order to rapidly create a booming industrial economy while at the same time producing artificially high growth rates. Japan tried the same thing decades earlier, but crashed in 1990; South Korea, which copied Japan’s developmental practices, experienced its own meltdown in 1997. Indeed, the phenomenon is so common among rapidly expanding East Asian countries that Time Magazine has referred to the situation as the “Asian Developmental Model.”

Under these circumstances, firms rely on heavy-handed direction and subsidization by the state in order to create massive industrial growth. Credit is made cheaply accessible to these firms, which funnel money—both private and public—into government-controlled operations, all while the state continues to reproduce conditions that make local goods attractive (in China’s case, currency manipulation). The problem is that prices can’t stay wrong forever. State-owned companies don’t have to show the same kind of capital returns that private companies do, leading to bad investments and heavy borrowing. Under this pressure, banking sectors buckle and investment bubbles explode. If China continues on its current path, there is a very real possibility that it will become another data point in this economic model.

Is China’s economic collapse looming on the horizon? No one can say for sure. But China’s subsidization and investment through currency manipulation amounts to around 50% of its GDP, unprecedentedly high even for the Asian Developmental Model. As China continues to explore its role in the global marketplace and the global community, it would do well to remember the limits of economic centralization, painfully exposed with the fall of communism in the 1980s. The economy of tomorrow is dependent upon the cooperation of all its players; in the game of globalization, China’s conduct may earn it three strikes and an out.

Food shortages, economic volatility, and human rights violations are only three of the many ailments that have plagued the floundering Cuba in the past decade. These problems originate in Cuba’s strangling government, which has been challenged by international sanctions since its origin in 1959. For the past half-century, the US has remained entrenched in its unsuccessful embargo of Cuban goods with the intent to undermine the Castro regime. Yet both the U.S. and Cuba stand to benefit from trade between the two nations.

The embargo was first imposed in 1962 following Cuba’s alignment with the Soviet Union. Since then, the Helms-Burton Act of 1996 codified the embargo into law and strengthened its reach by restricting trade of Cuban-made goods with foreign companies. The US has remained steadfast in its demand for Cuban democracy and dismantling of the current government, but few European and Latin American allies support its economic embargo. The source of current support for the embargo lies in the Cuban-American lobby, which sways the vote of Cuban- Americans in Florida. Currently, U.S. law has ceased trade apart from basic necessities—agricultural imports from the U.S. totaling $1 billion—with its southern neighbor, and has reduced trade between Cuba and other nations.

The large economic impact the lifting of the Cuban embargo would have on Cuba is closely tied to its dependence on trade. Historically, the socialist system of trade has left Cuba’s prosperity in the hands of the Soviet Union and, recently, Venezuela. In the period following the dissolution of the Soviet Union, Cuba’s GDP dropped 35% as Soviet subsidies were lost and 85% of Cuba’s trading partners ceased trade with the island. Shortages of basic goods and medicine, a plummeting standard of living, and rising debts all revealed Cuba’s dependence on international trade and subsidies from socialist allies. And while Cuba has recovered from this period, much of it was due to relaxed state control of the economy and increased humanitarian trade from the US.

Since 2004, Cuba has replaced its Soviet sponsorship with Venezuelan subsidies and trade. Amidst Cuban economic growth, open trade with the United States could relieve Cuban dependence on foreign support. As Cuba’s main trading partners are currently Venezuela, Canada, and the EU, Cuba could competitively export agricultural and fuel products to its close neighbor, the U.S. With the surplus earned from exports, the government could make balance debts and offer a greater variety of goods to its citizens.

The United States would also benefit greatly from lifting the embargo. In terms of U.S. exports, the U.S. International Trade Commission estimated that the annual U.S. export losses from the embargo are approximately $1 billion dollars. Additionally, the United States could also normalize relations with nations frustrated by their stubbornness over excluding Cuba. When choosing whether to continue or close the embargo, the U.S. must weigh its effectiveness against these forgone benefits.

The embargo has now been in place for 50 years and has been utterly unsuccessful. Broadly, the embargo was intended to push Cuba toward democracy and oust Fidel Castro as its leader, but instead Cuba has adapted to the loss of U.S. support and has distanced itself from its powerful neighbor. Independent of the embargo, Raul Castro—Fidel’s 80-year- old younger brother—has loosened government economic control. Cubans are now able to sell some private property and apply for 181 approved self-employment occupations. Although the work is predominantly menial labor, the 371,000 licenses granted for self-employment is nonetheless a step toward capitalism. As Cuba takes these small steps on its own, U.S. trade will expose the benefits of capitalism to the Cuban government.

The losses from trade that the United States incurs by imposing the Cuban embargo further exposes its absurdity. The U.S. government promises to lift the ineffective embargo on the condition that Cuba transitions to democracy, yet communist China remains America’s second largest trading partner. After 50 years, the embargo resembles more an outdated manifestation of the Cold War than an effort to improve the lives of Cuban citizens.nearly impossible for entrepreneurs to create successful businesses.