Cuba Begins Expropriating Foreign Property Summary

  • Last updated on November 10, 2022

Cuba’s expropriation of foreign investments and facilities generated a diplomatic and legal furor that led businesses to demand increased investment guarantees when they operated in developing nations.

Summary of Event

Cuba’s nationalization of foreign investments reflected a popular trend among developing countries in the 1960’s. Nationalization involved the expropriation, or takeover, of private foreign investments for the public good. It involved a search for a balance between the efforts of developing nations Developing nations to control the core sectors of their domestic economies and the liberty of foreigner investors to accumulate wealth under the free enterprise system. Nationalization of land and industries;Cuba Cuban Revolution (1956-1959) Economic systems;communism Communism;Cuba Cold War;Cuba [kw]Cuba Begins Expropriating Foreign Property (Mar. 4, 1959) [kw]Foreign Property, Cuba Begins Expropriating (Mar. 4, 1959) [kw]Property, Cuba Begins Expropriating Foreign (Mar. 4, 1959) Nationalization of land and industries;Cuba Cuban Revolution (1956-1959) Economic systems;communism Communism;Cuba Cold War;Cuba [g]Caribbean;Mar. 4, 1959: Cuba Begins Expropriating Foreign Property[06070] [g]West Indies;Mar. 4, 1959: Cuba Begins Expropriating Foreign Property[06070] [g]Cuba;Mar. 4, 1959: Cuba Begins Expropriating Foreign Property[06070] [c]Government and politics;Mar. 4, 1959: Cuba Begins Expropriating Foreign Property[06070] [c]Business and labor;Mar. 4, 1959: Cuba Begins Expropriating Foreign Property[06070] [c]Diplomacy and international relations;Mar. 4, 1959: Cuba Begins Expropriating Foreign Property[06070] Castro, Fidel Eisenhower, Dwight D. [p]Eisenhower, Dwight D.;and Cuba[Cuba] Kennedy, John F. [p]Kennedy, John F.;and Cuba[Cuba] Hickenlooper, Bourke B.

The emergence of Fidel Castro as the leader of Cuba in January, 1959, marked the beginning of an ideological change that altered the political economy, particularly in relation to the rights and responsibilities of foreign firms and investors in Cuba. Castro came to power determined to put into practice his revolutionary idealism. Castro, by nationalizing targeted foreign factories and businesses, hoped to return to Cubans the control of the core and cardinal sectors of the national economy.

Castro’s actions were not devoid of ideological motives. The Cuban leader, after a brief career as a lawyer, entered visibility in national politics when, on July 26, 1953, he led a mob of more than one hundred activists in an attack on barracks and other facilities in Santiago de Cuba. After one and one-half years of a fifteen-year prison term, he was granted amnesty by Fulgencio Batista y Zaldívar’s government. On January 1, 1959, Castro and his revolutionary brigade forced Batista into exile. The reins of power passed to a fiercely ideological group.

Within weeks of assuming power, Castro announced that his government intended to dispossess those he described as the unlawful beneficiaries of the national wealth. The criminals, as he termed them, included the ousted Batista, his officials, and foreign concessionaires suspected of unlawful enrichment in collaboration with the defunct administration. Cuba’s Fundamental Law Fundamental Law, Cuban (1959) of February 7, 1959, set the stage for the revolutionary policies that followed. The statute, justified by natural law and the expediency of public policy, sanctioned the retrieval of public property acquired by Cubans and foreigners at the expense of the masses. On March 4, 1959, Castro’s government took over the foreign-owned Cuban Telephone Company Cuban Telephone Company . Soon after, the government expanded the nationalization program. In May, revolutionary leaders turned their attention to the pattern of land use and tenure in industries.

The government’s perception of the role and place of foreign investors in Cuba was heavily conditioned by a socialist bias. On June 3, 1959, Cuba launched the Agrarian Reform Law, Agrarian Reform Law, Cuban (1959) designed to transfer much of the lands held by foreign firms and speculators to the Cuban peasantry. Under the law, landholding by a corporate or natural person was limited to thirty caballerias. (One caballeria is approximately thirty-three acres). Any holdings beyond that limit became subject to state appropriation and redistribution to landless citizens.

Cuba’s revolution also took aim at land tenure in the mining industry. A creeping expropriation indirectly forced investors to relinquish proprietary interests as soon as it became unprofitable to continue in business. On October 26, 1959, the government introduced changes in the tax scale for nickel and other mining concessions, which were largely held by foreign firms. Mining Law No. 617 Mining Law No. 617 (1959)[Mining Law Number 617] of 1959 was enacted to increase the national revenue from land resources.

The government sought to enhance its revenue and economic control in other ways. On May 17, 1960, the governors of the central bank, Banco Nacional de Cuba Banco Nacional de Cuba , advised foreign firms in the petroleum industry to purchase several thousand tons of crude petroleum from Soviet sources. The threatened sanctions against noncooperating firms included nationalization of their operations and assets. The directive appeared to be in bad faith in view of the extensive presence of U.S. firms in the oil industry and the sensitivities of the Cold War. The U.S. Department of State protested the policy and the politicization of business in Cuba.

The test of good faith in the nationalization policy rested on the payment of compensation to the dispossessed investors. Although the Cuban government agreed to compensate foreign investors, the amount of compensation, which seemed sufficient by Cuban measures, was not adequate according to the owners’ valuation of present and anticipated returns on capital. The standard of compensation established by Cuba, based on unstable rates of foreign exchange, meant the loss of substantial revenue to firms. The basis of good faith appeared to be absent, given the ideological thrust of Castro’s regime. The government appeared to desire a transfer of wealth rather than a businesslike takeover of control.

The U.S. Congress moved to protect the interests of American investors. On July 6, 1960, the legislature amended the Sugar Act Sugar Act (1948) Sugar Act Amendment (1960) of 1948 to empower the president to regulate sugar imports and the preferential basis of the trade, which had worked in Cuba’s favor. President Dwight D. Eisenhower, enabled by the authorization, moved to curtail U.S. sugar imports from Cuba. Cuba promptly retaliated by enacting Law No. 851, Law No. 851, Cuban (1960)[Law Number 851, Cuban] which empowered the government to apply necessary measures for the protection of its economic sovereignty.

American investors were caught in the middle of the confrontation. Castro’s government, by an executive resolution of August 6, 1960, nationalized more than two dozen firms in which Americans had controlling stock or substantial equity. Cuba contended that U.S. regulation of the sugar trade encroached on its sovereign rights and followed up with a string of legislative and executive instruments, including a stipulation that compensation to U.S. investors would be paid from revenue realized from U.S. sugar imports. Cuba, unhindered by the numerous protests, continued to nationalize banks and other U.S. firms.

Significance

Cuba’s economic nationalism Nationalism;Cuba Economic policy;Cuba held American capital ransom and created heated diplomatic and legal tussles. Cuba’s actions led to litigation and demands by capital-exporting nations for a regulatory regimen to stem the tide of expropriations and disputes concerning foreign investment. The expropriation disputes further disrupted Cuban-American relations. The Bay of Pigs incident in 1961 and the missile crisis in 1962 were milestones in a complex tangle of events. American private investments were held captive in Cuba, particularly after January 3, 1961, when the United States cut diplomatic ties with the Castro regime. Given Castro’s relentless nationalism, the U.S. government eventually froze Cuba’s assets in the United States.

Cuba’s actions were not the first of their kind in international business. Since World War II, nationalizations have occurred in Africa, Asia, Europe, Latin America, and the Middle East. In 1977, the U.S. Comptroller General reported to Congress that between 1961 and 1975, 260 major expropriation disputes involving U.S. private investments had occurred in different parts of the world: 30 in Asia, 37 in the Middle East, 75 in Africa, and 118 in Latin America.

Cuba’s economic nationalism turned the attention of policy makers to foreign expropriations. By the Johnson-Bridges Amendment Johnson-Bridges Amendment (1959)[Johnson Bridges Amendment] to the Mutual Security Act Mutual Security Act (1957) of 1957 (an amendment introduced in Congress by Olin Johnson and Styles Bridges in 1959), an expropriating nation, to remain eligible for U.S. foreign assistance, must ensure satisfactory compensation to the dispossessed within six months of the action.

Congress acknowledged the right of a developing nation, in exercise of its sovereign privilege, to appropriate property within its territory but stipulated that such privilege carried a responsibility for the fair treatment of aliens. Foreign expropriation became a substantive issue when Leonel Brizola Brizola, Leonel , a Brazilian governor, nationalized the assets of the International Telephone and Telegraph International Telephone and Telegraph Corporation in 1962. This was followed in 1963 by President Arturo Illia’s Illia, Arturo revocation of petroleum concessions to seven U.S. subsidiaries in Argentina.

In a bid to counter the excessive application of sovereign privilege to business transactions, Congress amended the Foreign Assistance Act of 1961 to afford protection to U.S. investors abroad. Under the amendment sponsored by Senator Bourke B. Hickenlooper, the willful abrogation or impairment by a foreign government of its contractual obligation to a U.S. firm was sanctionable by the suspension of economic aid until a satisfactory settlement was reached. In the case of Cuba, Congress in 1962 amended the Foreign Aid Appropriation Act Foreign Aid Appropriation Act amendment (1962) to prohibit third-party assistance to Cuba. Foreign assistance thus became a viable vehicle for the defense of the free enterprise system.

The Cuban expropriations led to reexamination of the international and domestic law principles governing the acts of sovereigns. The matter arose from the implementation of Cuba’s Law No. 851, under which Castro nationalized the Compania Azucarera Vertientes-Camaguey de Cuba Compania Azucarera Vertientes-Camaguey de Cuba[Compania Azucarera Vertientes Camaguey de Cuba] (CAV), a sugar trader. Before the nationalization of CAV, Farr, Whitlock, and Company Farr, Whitlock, and Company , a New York brokerage firm, had acquired title to sugar consignments from CAV. After the nationalization of CAV, the brokerage firm took delivery but made payment to Peter Sabbatino Sabbatino, Peter , a court-appointed receiver, instead of the Cuban bank, Banco Nacional de Cuba. The Cuban bank initiated an action in the District Court of New York. In Banco Nacional de Cuba v. Sabbatino, Banco Nacional de Cuba v. Sabbatino (1964) the bank contended that the nationalization of CAV was an act of the Cuban state and therefore outside the jurisdiction of a U.S. tribunal. The court, however, held that the Cuban nationalization violated U.S. public law as well as international law. The court of appeals upheld the decision. On further appeal to the U.S. Supreme Court, Supreme Court, U.S.;act of state doctrine the Court held that the Cuban measure was covered by the act of state doctrine.

Congress, dissatisfied with the decision of the Supreme Court, responded with an amendment to the Foreign Assistance Act Foreign Assistance Act amendment (1964) Sabbatino amendment (1964) of 1964. The amendment, introduced by Senator Hickenlooper, was made retroactive to events occurring after January 1, 1959, when Castro assumed power in Cuba. The “Sabbatino amendment” presumed the power of domestic courts to examine the validity of acts of state, except when the president, by a notice to the court, upheld the act of state doctrine based on the imperatives of foreign policy. International law, however, generally recognized the acts of sovereigns within their national boundaries.

Foreign expropriations also led to institutional arrangements for the management of investment disputes. In 1969, Congress established the Overseas Private Investment Corporation Overseas Private Investment Corporation (OPIC) to operate an investment guarantee program that protected and underwrote U.S. private investments in developing nations. In the 1970’s, OPIC supported numerous ventures, for example, those of Firestone Tire and Rubber Company and Trans-World Airlines in Ghana, the Bank of America in Malawi, and a flour mill in Zaire. It also settled a number of investment disputes.

The disputes made for greater business-government cooperation. President Richard M. Nixon’s economic assistance and investment security policy of January 19, 1970, Foreign aid, U.S. attempted to reduce the frequency of government involvement in private investment disputes by expanding the role of multilateral institutions in the management of investment disputes. Nixon’s initiative was strengthened by Henry Gonzalez’s bill in the House of Representatives, which authorized U.S. directors in the Asian Development Bank, the Inter-American Development Bank, and the International Development Association to withhold support for loans to nations that expropriated U.S. investments without adequate compensation.

Business response to expropriation varied. It included contract revision, litigation, appeal to diplomatic quarters, and relocation of investment. In 1976, the European Organization for Economic Cooperation and Development Organization for Economic Cooperation and Development (OECD) resolved to cooperate on a voluntary basis against economic nationalism in developing nations. As international lenders continued to relate creditworthiness to expropriation records, developing countries expanded their search for means to obtain economic equity. Since the intense globalization of the international economy and the decline of communist and socialist governments, the climate for foreign investment has generally improved, and countries taking the step of expropriating foreign properties without just compensation run the risk of marginalizing themselves and scaring away future foreign investment activity. Nationalization of land and industries;Cuba Cuban Revolution (1956-1959) Economic systems;communism Communism;Cuba Cold War;Cuba

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Akinsanya, Adeoye A. The Expropriation of Multinational Property in the Third World. New York: Praeger, 1980. Makes a forceful argument for the position taken by some of the developing nations in their efforts to gain or regain control of their national economies.
  • citation-type="booksimple"

    xlink:type="simple">Blanchard, Daniel S. “The Threat of U.S. Private Investment in Latin America.” Journal of International Law and Economics 5 (1971): 221-237. Illustrates developing nations’ perception of foreign capital and presence as a neocolonial threat.
  • citation-type="booksimple"

    xlink:type="simple">Figueras, Miguel Alejandro. “Globalization, the Multilateral Agreement on Investment and Nationalization in Cuba.” In Globalization and Third World Socialism: Cuba and Vietnam, edited by Claes Brundenius and John Weeks. New York: Palgrave, 2001. Study of the expropriation of foreign property in Cuba in the context of the globalization of industry and the development of the international economy. Bibliographic references and index.
  • citation-type="booksimple"

    xlink:type="simple">Kaufman, Burton I. Trade and Aid: Eisenhower’s Foreign Economic Policy, 1953-1961. Baltimore: Johns Hopkins University Press, 1962. A forceful analysis of the politics of trade and aid in the period preceding the reform of foreign assistance in 1961.
  • citation-type="booksimple"

    xlink:type="simple">Lipson, Charles H. “Corporate Preferences and Public Policies: Foreign Aid Sanctions and Investment Protection.” World Politics 28 (1976): 396-421. Illuminates the convergence and departure of purposes between the private and public sectors.
  • citation-type="booksimple"

    xlink:type="simple">Todaro, Michael. Economic Development in the Third World. 4th ed. New York: Longman, 1989. Examines the problems of dependence and economic development in developing areas, particularly in terms of patterns of and approaches to industrial reform.
  • citation-type="booksimple"

    xlink:type="simple">Vernon, Raymond. Exploring the Global Economy: Emerging Issues in Trade and Investment. Lanham, Md.: University Press of America, 1985. Perspectives on the configuration of the global economy and what appear to be conflicting expectations of the developing and the developed countries.
  • citation-type="booksimple"

    xlink:type="simple">Waldman, Raymond J. Regulating International Business Through Codes of Conduct. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1980. Interesting discussion of attempts to make firms more responsive and responsible in the international environment.

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