The opening of Cuba to United States (US) tourism would represent a seismic shift in the Caribbean’s tourism industry. Liberalised Cuba-US bilateral tourism would increase overall arrivals to the Caribbean.
This surge will likely drive tourism in Cuba to full capacity, although much is unknown about short-run supply constraints.
As US visitors overwhelm capacity, Organisation for Economic Cooperation and Development (OECD) visitors currently vacationing in Cuba would have to be redirected towards neighbouring countries.
Hence, while short-run constraints bind in Cuba, the region would enjoy a period of sustained demand.
In the wake of this change, some countries potentially stand to lose US tourists but gain non-US tourists, as trade redistributes in line with fundamentals.
The results suggest that total Caribbean arrivals would increase by approximately four per cent.
On the issue of the supply shock from an opening of US tourist flows to Cuba, concerns have arisen over the need to brace for such competitive pressures. For example, the very high costs of visiting Cuba, compared with the perfect trade integration of the US Virgin Islands, suggests that the current restriction provides substantial trade protection to the latter.
The rest of the Caribbean lies somewhere in between these two extremes, with US tourist arrivals driven at least in part by preferential trade positions relative to Cuba.
Under a scenario in which US tourist flows to Cuba are unrestricted, the market will need to find a new equilibrium, as the largest consumer of tourism services in the region meets for the first time in nearly fifty years the region’s largest potential producer. As this dead weight loss is lifted from US consumers, Caribbean vacations will be re-priced, based on fundamental costs, and new tourism consumption patterns will emerge across all destinations and visitor countries.
For Caribbean competitors, opening Cuba to US tourists implies hedging toward alternative tourist sources, as US visitor losses will occur on impact.
The results suggest that binding capacity constraints in Cuba would likely displace current tourists as new US arrivals with immensely lower travel costs compete for limited hotel rooms.
Capturing this short-term dislocation is important for offsetting potential US tourist losses.
The results also suggest that permanent declines in travel costs for US tourists alongside their importance in this market could increase their longterm presence in the region.
As US tourists are able to spend less on getting to their destination, they are able to outbid other visitors for greater tourism quality and quantities.
While future industry uncertainty is unavoidable, a longterm strategy to deal with the elimination of the implicit trade protection afforded by restricted tourism is needed, which suggests a number of directions for competing in an unrestricted Caribbean tourism industry.
First, there is scope for breaking up the value chain, specialising, and delivering customised services to clients that base demand on differing cultures and nationalities.
Secondly, where there is no evidence that having a domestic airline significantly helps tourism, access to OECD airlines is important, so that increasing overall access to airlines, including charters, helps.
Dr Rafael Romeu is also a member of the Washington-based Association For The Study Of Cuban Economy and a former International Monetary Fund fiscal economist.