Close, But Few Cigars

The mention of Cuba evokes popular tropes — old cars, rum, baseball, and of course, cigars. For decades, these famous hand-rolled cigars have become emblematic of the island. Cuba’s fertile soil and local climate are conducive to high quality, handmade tobacco products, celebrated and coveted by cigar connoisseurs and everyday US consumers alike. And thanks to the Obama administration’s recent loosening of travel and commerce restrictions, cross-border merchandise exchange between Cuba and the US has been on the rise. In January 2015, the trade embargo between the US and Cuba relaxed to allow US visitors to import legally up to $100 worth of alcohol and tobacco per person. Most recently, this past March, the US government also legalized American purchase and consumption of Cuban origin merchandise, such as cigars, while abroad. Although the trade embargo is still in place, these trends of increasing normalization shed light on the possibility of an opening of the Cuban tobacco market to the US.

Spearheaded by President John F. Kennedy in 1960, the historic US-Cuba trade embargo culminated the economic response to Castro’s communist regime. But when it came to the cigars, even JFK couldn’t help himself; right before signing the embargo, the President personally ordered 1,000 Cuban cigars to arrive by the next day. The embargo nevertheless banned US residents from legal purchase and commercial import of Cuban tobacco products. Consequently, Cuba lost a major consumer while American manufacturers began to use tobacco harvested from elsewhere. Following domestic private property expropriation, Cubans manufacturers also relocated to nearby countries, such as the Dominican Republic, which remains the current largest US supplier that continues to craft traditional Cuban-style cigars under their original company names.  In the US, Miami also hosts many Cuban, family-run cigar shops. The tobacco and cigar industry remains state owned in Cuba, but since 2000, Altadis, a French-Spanish corporation, owns 50 percent of Habanos, the Cuban cigar monopoly.

Today, the US remains the top consumer of cigars globally with an annual intake of 300 million cigars. Although other countries’ suppliers and new tools, such as online Internet ordering, help feed this demand, an easing of the Cuban embargo would certainly be advantageous for the American industry. Naturally, the Cubans are eager to expand. In February, Cuban trade minister Rodrigo Diaz spoke to the US Chamber of Commerce to request the allowance of commercial exports, especially cigars. Habanos optimistically predicted that it could initially acquire 25 percent to 30 percent of the US market and grow to 70 percent if the embargo were lifted.

A closer look at US demand reveals the significance. A 2012 report demonstrated that certain sized cigars are taxed less than cigarettes, leading smokers to transfer to pipe and cigar products instead. While cigar smoking has the reputation of being an old man’s pastime, the 1990s witnessed a rise in adolescent use. In fact, between 2000 and 2014, while cigarette use decreased 40 percent, cigar use increased by an impressive 122 percent. Brown’s home state of Rhode Island has the second-highest rate of cigar usage in the Northeast, and former Providence mayor Buddy Cianci often hosted “Cigar Evening” political campaign events.

Cuban cigar producers like Habanos may be a bit rash to presume a future monopolization of the American market.

On a global scale, the perception of cigars as symbols of luxury and wealth has already driven demand in developing consumer markets, especially in the Middle East, China, Russia, and Brazil. Generally speaking, cigar’s current trendiness will no doubt engender greater immediate interest in this culturally significant item. Basic economics, however, would predict that an increase in the supply of cigars may lead to decreased appeal and lowered price. It is also important to consider that the preference for products vary among consumers; as Brooklyn’s Cigar Lounge owner, David Diamante, explained, “French wine is thought to be the gold standard, but people still buy wine from Chile, Napa Valley and other regions.” Similarly, the case of Russian vodka cautions against another possible turnout of changing consumer tastes. After the USSR ended, the US experienced an immediate increase in vodka consumption. However, in following years, competitors gained traction, and imported Russian vodka fell 70 percent between 2012 and 2013.

The country could also still face obstacles to effective supply. The Food & Drug Administration is currently considering more stringent regulation of handmade cigars, which would require stricter production standards and a longer time period before the products are approved. Ambassadors from major manufacture countries, like Honduras, the Dominican Republic, and Nicaragua, have already publicly spoken out against these regulatory changes. The Honduran representative even argued that these cigar regulations would endanger the nation’s stability by threatening jobs. As cigarette manufacture supports about 300,000 jobs in these countries, potential regulatory changes could influence supply and alter the economic landscape.

Even technically speaking, the physical cultivation of tobacco isn’t completely foolproof. If demand were to skyrocket suddenly, growers and manufacturers still need to allow the cigars adequate time to cure and to age properly — a detail that might hinder supply efficiency. Of course, as with any agricultural product, the impending threats of global environmental trends also tamper with production. This past year, due to El Nino patterns, Cuba experienced a heavy drought followed by rainfall during its typically dry winter season, which significantly affected sales. Finally, the possible expansion of Cuban products will inevitably lead to legal and trademark production issues. Already, to prepare for a possible embargo lift, Cuba has vigorously pursued bans against Cuban themed tobacco products in other countries and against cigar companies with historically Cuban brand names. As legal expert Michael Krinsky astutely remarks, “Thousands of U.S. companies have registered…intellectual property in Cuba in anticipation of the day when they will be able to sell their products there. Cuban companies are doing exactly the same thing.”

Given these considerations, Cuban cigar producers like Habanos may be a bit rash to presume a future monopolization of the American market. In a world of diverse, prevalent cigar demand, Cuban cigars’ trendy appeal will definitely motivate renewed interest. Sudden success might lead to short term growth, but deeper issues, like supply roadblocks and the unpredictable nature of consumer tastes, might lead to unforeseen industry setbacks. As enticing as it seems, the loosening of Cuba’s current embargo and subsequent potential for a future opening would most likely create some cigar market disturbance at best — but no revolution.

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