U.S. sales decline; national prepares for EC entry; Spain - Europena Community - World Trade Outlook

U.S. shipments to Spain totaled just $1.2 billion through the first six months of this year, a drop of 13 percent over the same period of 1984. The present decline follows a 7 percent loss for fullyear 1984. While imports from Spain surged 56 percent in 1984, the fell at an 8 percent rate in the January-May 1985 period. However, imports from Spain increased 22 percent during June 1985 to $1.2 billion, limiting the Spanish reduction to 4 percent for the half-year. This year will probably end with a 10 percent decline in U.S. exports, and (for the second year in succession) a commercial trade balance in favor of Spain.

The Spanish economy weakened significantly in early 1985. Exports had failed to match last year's gains, and neither domestic consumption nor investment had responded to existing government efforts. Consequently, the government announced in April a reduction in personal income tax, loosened somewhat regulations concerning foreign investment authorizations, increased tax credits for new jobs, accelerated depreciation for capital machinery, and reduced employer contributions to the social fund for newly hired workers under age 25. The economy appears to be responding to these new measures. Domestic investment has picked up and may produce 3 percent growth versus last year's loss of 2.5 percent. Private consumption appears to be increasing and could advance 1 percent for the year, compared to last year's 0.6 percent decline. Construction activity may be growing at a 1 percent annual rate, a useful improvement over last year's 5 percent decline. However, inflation, as measured by the CPI, has also advanced to a 10 percent annual rate, up from 8 percent. Unemployment has jumped two points to 22 percent. The country's balance on its international current account remains healthy, showing a surplus of $211 million through May. The government now hopes that GDP growth will touch 1.9 percent, nearly equal to last year's 2 percent advance. Spain's entry into the European Community on Jan. 1, 1986, will have an adverse effect on total U.S. exports. The EC has indicated its desire to include Spanish imports of U.S. corn and soybean ($660 million in 1984) under its variable levy program. This would raise tariff rates into Spain, currently 1 percent on corn and zero on soybean, to a range of 20-90 percent, depending upon EC harvests.

Duties on most U.S. manufactured products will decline at the beginning of 1986, falling from a range of 15-20 percent to an average of 5-10 percent. Community firms (exporting from one of the other countries belonging to the EC) already benefit from 25 percent lower tariffs on most industrial products. Although they will not enjoy zero duty rates for an additional seven years, European perceptions of Spain's more open borders could lead Community firms to step up efforts to penetrate the market.

Spain will also switch to the value-added tax system on Jan. 1, charging a rate of 12 percent on most products. Observers feel that this could add from 2-5 percentage points to Spain's CPI inflation rate. This, plus increased competition from EC firms, may stifle near-term advances in Spain's GDP. Thus it is possible that in the first years following accession, the United States will lose both import market share and absolute dollar volume as the Spanish economy adjusts to the costs of EC entry.

Best opportunities for American firms are in those fields that will contribute to improving Spanish product quality and labor productivity. Analytical and scientific instruments should do particularly well, as should computers and software, food processing and packaging equipment, and water resources technology.

Particular note should be taken of Spain's electronics industry development plan, which offers not only outstanding investment incentives for the local production of computers, consumer electronics, telecommunications, and medical electronics, but which may also result in imports of electronic components at an annual rate of $800 million by 1987. Opportunites also exist for U.S. firms offering insurance, leasing, marketing and management consulting, and personnel training services. Commerce will sponsor a trade mission on computer software in January 1986 to Madrid and Barcelona, followed in February by a water resources seminar mission, also to both cities. For more information on Spain, contact the dest officer at (202) 377-4509.

COPYRIGHT 1985 U.S. Government Printing Office
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