I read an interesting story recently about Cuba and the value of their used cars. The story was written before President Trump announced plans to reverse parts of the Obama decision to loosen economic ties with the US – so what I describe below may well change as Cubans change their lifestyle again, or more likely, do deals with Europe or China.
Unsurprisingly, cars are very expensive in Cuba. With decades of blockades, Cuba became famous for all the “hybrid” 1950s American steel and I use the word hybrid because parts were so difficult (or impossible) to get that the locals made their own or modified the cars to suit parts sourced from other vehicles.
In recent years, the Government has relaxed many of the original orders put in place by Fidel Castro and have allowed Korean and Chinese cars to be imported in very limited numbers (2,000 a year). Consumers can buy and sell used cars at will with no Government approval, however new cars still have to be sold through Government sanctioned dealers.
With the economic changes that the Government brought in – and the enthusiasm of having a new trading partner over the water – the used car market started to heat up. People were able to bring in cash from families overseas (namely the US) and this meant that they now had money to buy a car. However, because supply is still limited, the market started to behave like other high value product markets do – the value of each car started to rise and others realising that their used car was increasing in value stoked the market by defining ever higher prices – and getting the money they demanded!
Subsequently, used cars are selling for premium pricing just like in other countries such as Singapore – both are islands, although Singapore is at the other end of the economic spectrum to Cuba!
With the news that the US plans to reverse parts of the agreement signed by Obama, the Cubans might have to tighten their belts – President Trump wants to limit the dollars that goes to the Government and allow more freedom of choice in the private sector, however his suggested reversals are likely to push money back to the Castro Government!
It is possible that the changes will depress car pricing as the market falters and buyers slow down their activity thus putting price pressure on the products. This could then ensure that the Cuban used car market becomes similar to other markets where the products are priced sensibly.
The whole market is a classic example of how Governments (both locally and globally) can affect the pricing of a product in a market that in theory should be managing itself.