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How Distorted is Cuba’s Trade: Evidence and Prediction from a Gravity Model

Cuban trade has been historically distorted for two reasons: its membership in the socialist trade pact (CMEA) and the US embargo. Using a gravity model, this article explores the degree of distortion of the current Cuban trade structure and predicts its evolution, in the event the economy is liberalized. The econometric approach uses information on trade flows between 101 developing and developed countries in the 1980-91 period. The main results predict that 80 per cent of Cuban exports and imports will switch away from current partners (in particular, Canada and Japan) towards the USA, to reduce transportation and transaction costs. The results appear robust to specification, time period and trade determinants. The degree of distortion of Cuban trade has declined in the 1990-91 period but, unless the US embargo is lifted, it will not converge to what world trade patterns predict.