Cuba, the centrally planned cigar, and its rivals

• Published date: 01 October 2019
• Author: Kent Jones
• DOI: http://doi.org/10.1111/twec.12841
• Date: 01 October 2019

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wileyonlinelibrary.com/journal/twec World Econ. 2019;42:2900–2923.

© 2019 John Wiley & Sons Ltd

Received: 18 July 2018

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Revised: 3 March 2019

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Accepted: 13 June 2019

DOI: 10.1111/twec.12841

ORIGINAL ARTICLE

Cuba, the centrally planned cigar, and its rivals

KentJones

Babson College, Babson Park, Massachusetts, USA

KEYWORDS

Cuba, planned economy, trade

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INTRODUCTION

Cuba, a small island economy subject to central planning, constantly runs trade deficits, and depends

on a small number of export goods, in addition to tourism, to support its import needs. Among its

few traditional export goods are premium cigars. Despite its long history and reputation for making

high‐quality cigars, Cuba still struggles to achieve output levels based on its tobacco‐growing capac-

ity, due to both natural causes and production inefficiencies. Shortfalls in supply are likely to become

a more serious constraint on Cuba's ability to export if global demand for premium cigars grows,

and it faces increasing competition from other cigar‐producing Caribbean countries. This paper sets

out to show that, despite its reputational advantages, Cuba's main problem in further developing its

cigar exports lies in its lack of financial resources and market‐based incentives, organisation and

flexibility. Trade restrictions and rigidities in state‐run production also limit its ability to adapt effec-

tively to market trends in differentiated cigar blends and leaf combinations. Restrictions on foreign

direct investment (FDI) prevent Cuba from modernising its tobacco cultivation and cigar production.

In general, the global market for premium cigars is likely to face demographic and health policy

changes in the future, requiring flexibility on the part of Cuba and its rivals in order to adapt to new

competitive conditions.

The paper begins with a discussion of Cuba's factor‐based comparative advantage in hand‐rolled

cigars, and its reputational advantage in selling this luxury product. The next section provides a de-

scription of the hand‐rolled cigar production process and the difficulties of achieving efficient output

under a centrally planned economy, trade regime and dual exchange rate system. There follows an

examination of the global premium cigar market and its bifurcation between the US, separated by the

embargo against Cuban trade, and the non‐US global market, dominated by Cuba. The penultimate

section examines the adjustment problems that Cuba and its rivals will face in international markets,

including Cuba's production capacity constraints, branding issues in US and non‐US markets, anti‐

smoking regulations, shifts in demand towards emerging markets and changes in consumer tastes. The

paper concludes with an assessment of reforms that will be necessary to improve Cuba's performance

in cigar exports, and the outlook for global premium cigar competition.

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CUBA, CIGARS AND INTERNATIONAL TRADE

From a commercial perspective, cigars fall broadly into two categories: a small premium segment

comprising large, hand‐made varieties, made from select tobacco leaves, and sold at the highest price

points; and the mass‐market segment of machine‐made, cheaper and smaller cigars, cheroots and

cigarillos.1

Cuba, the Dominican Republic, Nicaragua and Honduras dominate the global market for

premium cigars. Reputation‐based branding and exclusive distribution distinguish premium cigar va-

rieties, with carefully cultivated “pedigrees” of their constituent tobacco leaves, labour‐intensive pro-

duction processes, historical features and appellations of origin. Premium cigar manufacturers promote

their brands through chains of exclusive cigar bars and annual fairs, conventions and other promo-

tional events. Specialised cigar publications and industry organisations conduct premium cigar tast-

ings and ratings in the same way that vintage wines are rated and ranked for quality. Premium cigars

are lifestyle luxury goods, designed to be enjoyed as a special experience, with a smoking duration of

from 30min to 3hrs. The mass‐market, machine‐made segment, in contrast, spans a wide range of

differentiated varieties, designed and priced for more frequent consumption, branded and promoted

for mass appeal and typically sold through wider commercial distribution beyond specialised cigar

shops. These cigars are usually smaller in circumference and length, may have filters and flavour infu-

sions and have smoking durations of 10–30min.

Cuba's comparative advantage in premium cigars is based on the particularly favourable

microclimate and soil in the Vuelta Abajo and Semi Vuelta regions in the Pinar del Rio prov-

ince of western Cuba.2

This area supports the cultivation and seasoning of the slow‐burning

and aromatic wrapper, filler and binder tobacco leaves used in making the iconic Cuban puro

premium cigar, with all tobacco components sourced exclusively in Cuba. Seed type, soil, cli-

mate and growing conditions significantly affect the quality of cigars and in fact determine the

distinctive taste of cigar varieties (Freccia, Jacobsen, & Kilby, 2003). Cuba became a major

source of commercial tobacco production in the early days of Spanish colonisation and origi-

nated the development of hand‐rolled “cigarros” (Wikle, 2015). Based on this legacy, Cuba

continues to cultivate its traditional growing methods and delicate skill‐intensive techniques of

rolling the cigars by hand, which also determine the quality of the finished product. Factor‐

based sources of comparative advantage, combined with traditional skills and a long history of

cigar production, have created a premium for Cuban cigars that is comparable to the reputa-

tional advantages of regional appellations for fine wines from France.3

Freccia etal. (2003)

note in their hedonic study that this “non‐functional” utility element appears to have a strong

influence on Cuban cigar prices, as the attribute “Cuban” is associated with an additional $7.50

1 “Premium cigar” is a generic term that generally refers to hand‐rolled (as opposed to machine‐made) cigars, usually made

with “long” (i.e. whole leaf, rather than“short” chopped or shredded tobacco) filler. The size of premium cigar is often

benchmarked at a minimum weight of three pounds per thousand. US legislation regarding cigar health‐related legislation sets

the minimum at six pounds per thousand. Further gradations of “premium” generally refer to quality differences and derive

from the type and provenance of tobacco leaves used, which determine the cigar's flavour. The quality of the “draw” in

smoking the cigar depends on the wrapper's skill in achieving the proper construction and tightness of the rolling. Official

trade statistics do not provide consistent and internationally comparable data on “premium”cigar trade, which are available

only through individual country and industry estimates (see, for example, Tables3a and b) and consultant reports.

2 Other tobacco‐growing regions serving the premium cigar industry include the Partido area of La Havana province and the

Vuelta Arriba and Remedios areas of eastern and central Cuba, respectively. See Cuba Cigar website.

3 Freccia etal. (2003) present a hedonic model of premium cigar pricing and ratings, in which the strongest effect on a cigar's

price and rating in their sample is the attribute of Cuban origin.