European Community enlarges with accession of Spain and Portugal

American exporters should be ready for both opportunities and challenges from an enlarged European Community (EC), with the accession of Portugal and Spain, which took effect on Jan. 1. The treaty, which contains many provisions, particularly for the six-year transition period to 1992, was ratified by all of the EC's other ten members. The enlarged EC now comprises the following twelve member states: Belgium, Denmark, the Federal Republic of Germany, France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom.

The treaty calls for the progressive dismantling of internal Portuguese and Spanish tariffs by 1992, with half of the cuts coming within three years. Exceptions to this tariff cutting have been made for the new entrans so that their economies can adjust to the increased competition, notably by allowing quotas on autos, steel and textiles. Free movement of capital, freedom to perform services, and the movement of workers will also take place within seven years for most countries, but will not be completed until 1996 in the case of free movement of persons. Spain and Portugal will contribute to the EC budget, but will be net beneficiaries at least in the transition period.

Duties to Fall

For U.S. business, Spanish and Portuguese tariffs, now at around 15-17 percent ad valorem (a.v.) for industrial goods, will be reduced in six years to about 5-7 percent a.v. as Portugal and Spain implement the EC's Common Customs Tariff (CCT). One-tenth of this reduction will take place on March 1, 1986, with the next cut scheduled for Jan. 1, 1987. Portuguese and Spanish duties on imports from other EC members will fall to zero by 1992. Some of the trade displacement has probably already occurred as a result of the Spain-EC Free Trade Agreement, and the preferences Portugal granted members of the European Free Trade Association (EFTA). The United States stands to lose heavily in agriculture, however, as several key exports to Spain, notably corn, will be subject to the EC's variable levy system.

Combined GNP of $2,600 Billion

Based on 1984 data, the enlarged EC of twelve will have a population of over 321 million, 95 million more than that of the United States. The combined GNP of the EC-12 based on 1984 data would have been about 71 percent of U.S. GNP, with per capita GNP around $9,900, compared to $15,500 for the United States. EC-12 exports for 1984 would have accounted for nearly one-third of world exports and 30 percent of world imports (based on GATT estimates of 1984 world trade). Total trade of the EC-12 in 1984, including intra-EC trade, would have been 1.9 times that of the United States.

Preferences Not New

The EC, Spain and Portugal have had long-term preferential relations since at least 1970, so this is another stage of integration in a 25-year procedure. Since 1977, agreements granting trade preferences and financial matters continued in force for Spain. On the industrial side, the EC granted tariff concessions of 40 or 60 percent to nearly all imports originating in Spain, while about half of agricultural imports were granted a tariff preference of between 25 and 60 percent. Portugal also benefitted from internal preferences of EFTA, and those granted on industrial products by the EC to all EFTA industrial products.

The impact on EC agriculture will be notable, as total utilized agricultural area will be increased in the EC by 35 percent, and the working population engaged in agriculture by nearly 38 percent. One Spanish worker out of six still works on the farm; in Portugal, it is one in four. EC competition and trade in olive oil, wine, fruits and vegetables are most likely to be affected.

Spanish industry will need to become more competitive in some sectors, notably steel, shipbuilding, and textiles, and the introduction of the EC's Value Added Tax (VAT) in Spain will create difficulties (see following article for more details).

Treaty Provisions Are Numerous

External Industrial Trade. On March 1, 1986, the first staged reduction in Portuguese and Spanish external tariffs will be effected. Over the six-year period, these tariffs will be gradually aligned with the EC's CCT, and the immediate impact on U.S. exporters will be a one-tenth duty reduction from current levels, computed by the difference between existing Portuguese/Spanish tariffs and the EC's current CCT. In the rare instances where Portuguese or Spanish tariffs are not more than 15 percent higher or lower than the current CCT, then the CCT rate will be applied on March 1, 1986 in the case of Spain, and on Jan. 1, 1987 in the case of Portugal. When the new trade-weighted CCT for the EC-12 is introduced, probably on Jan. 1, 1988, most EC import duties on industrial goods could increase about 0.6 percent in absolute terms.

International Organizations. Spain and Portugal are both memebers of the IMF, the GATT, and the OECD. Spain participated fully in the Tokyo Round of trade negotiations, while Portugal did not. Spain has accepted the Tariff Protocol and Supplement, the Standards, Subsidies, Customs Valuation and Anti-Dumping Codes. Portugal has only accepted the Subsidies Code with reservations.

Spain's African enclaves of Ceuta and Melilla, although part of the enlarged EC, will be excluded from the customs union. Portugal will retain import quotas imposed on 13 GATT and 11 communist countries for seven years after accession.

Spain will gradually abolish its network of non-tariff barriers (NTBs), which include import licensing, mixing regulations, state trading, consumption quotas, Spanish flag preferences, export aids, and variable levies; the latter will ultimately be continued under the EC's system. Portugal will eliminate its food import monopolies.

Internal Industrial Trade. Internal tariffs between Portugal, Spain, and the EC will be phased out over six years, with the first reduction scheduled on March 1, 1986. Having enjoyed many years of tariff protection, and helped by low wages, Spain's industry has largely been insulated from European competition, and some sectors, such as footwear, became highly competitive. Portuguese and Spanish industries will have to adjust quickly to the increased competition from the rest of the EC.

Quantitative restrictions between Spain and Portugal were abolished upon accession, except for a limited number of products considered particularly sensitive to Spain. The Spanish national monopolies for tobacco and petroleum products will be gradually eliminated with the opening of quotas over the transition.

Services. Both countries will abolish restrictions on investment, particularly in banking and insurance, which will gradually be eliminated over six years. EC investments into Portugal of over 1.5 million ECUs ($1.2 million) will be subject to prior approval; this threshold will be raised 20 percent per annum. Portugal is allowed to continue regulating the tourism and movie sectors for five and three years, respectively.

Finance. Restrictions on current payments and invisibles transactions will be eliminated within seven years. For Spain, real estate investments in the EC will be deregulated within five years. Portugal will be required to deregulate real estate investments in five years, while Portuguese investments in the EC will be regulated for another seven years. The spanish peseta will be included in the European Currency Unit (ECU), but Spain will not participate in the exchange rate system until a later date. Portugal has established a foreign exchange market.

Spain abolished its cumbersome system of taxes--some 23 different taxes were in effect--and replaced it with three different VATs, with a standard rate of 12 percent to be levied in all of Spain, except the Canary Islands, Ceuta and Melilla. Portugal also introduced three VAT rates, with a standard tax of 16 percent.

Freedom of Movement of Capital. Spain will undergo a five-year transition for investments in the EC. However, its securities transactions must meet EC standards within three years. Portugal will undergo a seven-year transition for direct investment, and a five-year transition from remaining transactions.

Freedom of Movement of Workers. The EC-10 will be able to continue existing restrictions on labor immigration for a period of seven years, except in Luxembourg where the transition will be 10 years. Special provisions will be adopted as regards freedom of movement for workers already in the Community and on the granting of social security benefits.

Long-Term Changes Seen

For U.S. Business

The enlargement will change the existing pattern of trade flows. The most obvious will result from: the overal lowering of Portuguese/Spanish industrial tariffs for third countries from 15-17 percent to a lower CCT rate around 5-6 percent; the progressive and complete elimination of Portuguese/Spanish duties on EC trade by 1992; and, the income effects resulting from economic growth, investment and specialization, and alteration of price systems.

As a result of previous preferential arrangements, there has already been some impact on industrial trade. Over the long-term, U.S. commercial interests will be adversely affected, principally agricultural commodities. U.S. exports to Spain and Portugal are concentrated in food and live animals, crude materials, and machinery/transport equipment. This last category may be adversely affected as the new entrants' internal tariffs are progressively lowered to zero.

If the EC's Common Agricultural Policy (CAP) reduces trade in agricultural and raw materials, any small short-term gain in trade elsewhere could be eliminated. There are also significiant possibilities for diversion of demand from U.S. suppliers to the rest of the world.

The face of Europe has changed again. U.S. firms will once more have to adapt their marketing strategies to these changing conditions. For more information on the commercial implications for the Treaty of Accession, readers may contact: Office of European Community Affairs, IEP/EUR, Room 3036, U.S. Department of Commerce, Washington, D.C. 20230, telephone: (202) 377-2905/5276.

Requests for information on marketing in Portugal may be addressed to: Portugal Desk, IEP/OWE, Room 3043, U.S. Department of Commerce, Washington, D.C. 20230; telephone (202) 377-3945. Information on marketing in Spain is available from Spain Desk, IEP/OWE, Room 3043, U.S. Department of Commerce, Washington, D.C. 20230; telephone: (202) 377-4509.

COPYRIGHT 1986 U.S. Government Printing Office
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