Spain has had a long legacy of tariff protectionism and economic isolationism, and until the 1960s it remained outside the West European and international economic mainstreams. Spain's effort in the late 1980s to accelerate its integration into the EC customs and economic structures resulted in a drastic accommodation to international and West European trading standards.

When Spain embarked on a period of economic modernization in the 1960s, its foreign trade, as a percentage of overall economic activity, was below the average for other major West European countries. Exports and imports amounted to about 16.5 percent of the Spanish GDP in 1960. During the 1960s, Spain's foreign trade increased at an annual rate of about 15 percent; in the 1970s, it grew at an even higher rate. After the oil price increases of the 1970s slowed the world economy, Spanish trade expanded less rapidly. By 1984, after a period of sluggish growth, foreign trade made up about 25 percent of the country's GDP. According to the Economist, in 1987 Spanish imports and exports, respectively, accounted for 16.8 and 11.7 percent of the nation's GDP. These figures indicated an increasing linkage with the world economy, but even in the 1980s foreign trade played a smaller role in Spain's economy than it did in most other European countries.

Spain has not had a positive trade balance since 1960, when exports of US$725 million exceeded imports by US$4 million. In 1961 imports were about one-third larger than exports--a quantitative relationship that, for the most part, has held steady ever since then, despite enormous increases in Spanish exports. In the mid-1980s, Spain's trade deficits ranged from just over US$4 billion in 1984 and in 1985 to US$13 billion in 1987, when merchandise imports amounted to US$49.1 billion, and exports, to US$34.2 billion. A booming economy with strong domestic demand was responsible for a surge of imports in 1987-- an increase of 25 percent, compared to 1986.

Spain's chronic trade deficits were often offset by large earnings from the tourist industry and by remittances from Spaniards working abroad. The revenue from these two sources often allowed invisible receipts to exceed the trade deficit, the result being a surplus in the nation's current account balance. In 1983 Spain's current account balance registered a deficit of US$2.7 billion, but this was followed by surpluses during the next four years. In 1985 the surplus amounted to US$2.8 billion, and in 1986 it was US$4.2 billion. The surplus for 1987 was only US$184 million but, as capital goods made up much of that year's imports, economists were not alarmed.

Although famous for its production of citrus fruits, olives, and wine, about three-quarters of Spain's exports consisted of manufactured products in the mid-1980s. In 1986 and in 1987, manufactured goods made up 74.4 and 72.4 percent of the country's exports, respectively, while foodstuffs accounted for 16.1 and 17.6 percent, respectively. In these two years, raw materials made up about 4 percent of Spain's exports, and fuel products, about 6 percent. Merchandise imports generally exceeded merchandise exports by about one-third. In the 1980s, manufactured goods constituted about two-thirds of all imports, fuels as much as one-fifth, and other raw materials and foods about one-tenth each.

Trading Partners

Ever since steps were taken in the 1960s to liberalize Spain's economy, its trade with West European countries had steadily expanded. In 1973 EC countries accounted for 47.8 percent of Spain's exports, and they provided 37 percent of its imports. In the early 1980s, this ratio had not changed significantly; in 1982 the respective figures were 48.6 and 31.8 percent. After Spain's accession to the EC, however, the balance shifted radically; in 1987, some 63.8 percent of Spain's exports went to the EC, while the EC supplied Spain with 54.6 percent of its imports. In 1987 France was Spain's most important trading customer, taking 18.9 percent of its merchandise exports; West Germany was the largest source of imports, supplying 16.1 percent of the total. The United States, which was Spain's single most important trading partner in the 1970s, accounted for just over 8 percent of both imports and exports in 1987. Increased trade with the EC caused Spain's economic interaction with most of the rest of the world to decline on a relative basis. This decline was most marked with regard to the Organization of Petroleum Exporting Countries (OPEC), which supplied Spain with 26.8 percent of its imports and received 5.3 percent of its exports in 1982, compared with 9.5 and 6.5 percent in 1987.

Foreign Investment

Since the late 1950s, foreign investment has played an increasingly crucial role in Spain's economic modernization. One of the first and most significant steps included in the Stabilization Plan of 1959 was granting foreigners permission to buy Spanish securities. In 1963 this measure was supplemented by allowing foreigners the right to secure majority interest in Spanish companies, except those engaged in fields deemed to have strategic importance. As a result of these actions, there was a large influx of foreign capital into Spain.

Spain was attractive to foreign investors not merely because it offered opportunities for participating in a rapidly expanding domestic market, but also because it served as a base for further export and trade with EC countries. This was a leading factor in Ford Motor Company's 1974 decision to build an assembly plant near Valencia, and in General Motors' entry into the Spanish market. Japanese companies also intensified their investments and presence in Spain with similar goals in mind. Low-cost labor was another attraction for foreign investors, though not to the same extent as in the 1960s and the 1970s.

In compliance with the EC accession agreement, rules governing foreign investment in Spain were adapted to EC standards in 1986. The new measures streamlined administrative procedures and reduced the number of sectors in which foreign ownership was restricted. The requirement for prior authorization of investments was replaced by one calling merely for prior notification. Notification had to be given when the investment was for more than 50 percent of a Spanish enterprise, when it constituted a re-investment by foreigners, or when its goal was the establishment of branches of foreign companies on Spanish soil.

The influx of foreign investment was extremely large during the 1980s, almost tripling between 1982 and 1987. Some of it took the form of speculative investment, attracted by high Spanish interest rates. More than half of all new foreign investments in Spain represented an expansion of previously existing investments; nearly one-third were in the chemical industry and in the nonfuel mineral processing sector. EC countries became the most important source of investment. The United States, nonetheless, still accounted for about 20 percent of the cumulative foreign investment total. It was expected that, if negotiations being conducted in 1988 for a United States-Spain treaty to avoid double taxation were successful, United States investment might increase.

Spanish direct investment abroad, for which regulatory restrictions were liberalized in 1986, doubled to 101 billion pesetas in 1987. EC countries accounted for 64 percent of the total, with the Netherlands, West Germany, and Portugal being the largest recipients. Investments in the United States fell to 8 percent of the total. Spanish investments in Latin America, especially in Mexico and in Argentina, declined sharply because of heavy debt burdens in that region. By the late 1980s, analysts estimated that Latin America accounted for only 4 percent of Spain's foreign investments.

Spain and the European Community

The year 1992 promised to be one of the most momentous for Spain in the twentieth century. The Summer Games of the XXVth Olympiad were to be held in Barcelona; the five hundredth anniversary of the discovery of the New World was to be celebrated in Seville, with an ambitious international exposition known as Expo 92; and Madrid had been designated as Europe's cultural capital for that year. Moreover, 1992 would mark the culmination of a forced march to modernize the country's economic, social, and financial institutions, because Spain would be fully exposed to the bracing winds of unfettered economic competition from the members of the EC. By the end of 1992, the EC's plan to eliminate barriers to trade, employment, and the flow of capital across the twelve member states' borders was to take effect.

Spain's long adherence to protectionism had been a major factor in its technological and economic backwardness. The Socialist government's commitment to economic modernization and to Spain's integration into the European economic mainstream thus represented a historic landmark. The end of authoritarian rule in 1975 led Spain to embrace a system of political democracy, but changes in the economic sphere proved more difficult. In the 1980s, true economic modernization was only beginning, as the Gonzalez government cast Spain's national goals in terms of increasing its competitiveness, both within Europe and around the world.

The Spanish economy had long functioned on a two-tiered basis. One part--including most notably the automobile manufacturing and chemical industries--was technologically advanced. An even larger part was accustomed to operating inefficiently, protected from outside competition and highly fragmented into a host of small and medium-sized enterprises that accounted for as much as 90 percent of Spain's commerce and industry. It was in this second economic area that the brunt of accelerated change was being felt in the second half of the 1980s, as many small, inefficient concerns faced the effects of free market competition.

Spain had been trying to join, or to align itself with, the EC since 1962. The barriers to Spanish membership were primarily political, and they reflected varying degrees of European hostility to the Franco government rather than fear of economic competition. Among the members of the EC, only Italy and France, with similar agricultural export commodities, had substantial economic motives for opposing Spain's entry into the EC.

After long negotiations, which began in 1962, Spain and the EC signed a preferential trade agreement in June 1970. The agreement called for mutual tariff reductions, ranging from 25 to 60 percent, to be applied gradually over a six-year period. Quantitative restrictions for a number of items were eased under a special quota system.

At the end of the Franco era, little attention was given to Spain's urgent economic problems. Spaniards and their postFrancoist governments tended to regard membership in the EC as a symbolic political act that obtained recognition for Spain's return to democracy, rather than as a portentous economic policy decision irretrievably linking Spain's economic future with that of Europe. The result was that, although Spain had applied for membership nearly a quarter of a century earlier, little national debate took place prior to the signing of the 1985 accession agreement, which was concluded only after arduous negotiations.

The accession agreement called for gradual integration to be carried out over a seven-year period, beginning on January 1, 1986. This adjustment transition involved a number of significant features. Customs duties were to be phased out as of March 1, 1988, and industrial tariffs on EC goods were to be phased out on a reciprocal basis until January 1, 1993. Additional import levies, most notably Spain's tax rebate on exports, were to disappear upon its entry into the EC. With some exceptions, import quotas were to be removed immediately. Quotas on color television sets and tractors were to be eliminated by the end of 1988, and those for chemicals and textiles, by the close of 1989.

In principle, EC-based companies were free to invest in Spain. National assistance programs for industrial projects were subject to strict EC regulations, but special allowances were made for the steel industry, and Spain was allowed to keep its 60 percent local content rule for automobile manufacturing until the end of 1989. Spain became subject to EC antitrust rules immediately, however.

Spain was obliged to adhere to EC product and consumer protection standards at once. Like other EC members, Spain was required to levy a value-added tax (VAT), which was the EC's principal source of revenue. Spanish workers were to be able to circulate freely and seek employment in the EC by 1993.

Phased alignment with the EC's Common Agricultural Policy (CAP) was to be completed only in 1996. The Spanish widely regarded this as a discriminatory action taken by EC countries to prevent imports of Spanish tomatoes, olive oil, and wines until as late a date as possible. Spain's fishing industry, the largest in Western Europe, received the right to fish in most EC waters, but its catch was sharply restricted until 1995.

Despite a favorable attitude toward the establishment of an eventual EC-wide monetary union in the late 1980s, the government was reluctant to commit the peseta to stabilization within the European Monetary System (EMS) because of its over-valued exchange rate. In mid-1988 the Bank of Spain took what was regarded as a symbolic step toward full membership in the EMS by formally accepting the 1979 Basel agreement. By the terms of the agreement, EC central banks made 20 percent of their gold and foreign currency reserves available to the European Monetary Cooperation Fund, against the equivalent in European Currency Units (ECUs). The subject of the peseta's inclusion in the ECUs, in all likelihood a prerequisite of Spain's full participation in the EMS's exchange-rate system, was to be taken up in September 1989, when the composition of the next ECU would be determined.

The Spanish government sought special treatment for the peseta, the exchange rate of which was considered inflated. Such an arrangement would permit relatively wide margins of fluctuation similar to those enjoyed by the Italian lira. The International Monetary Fund (IMF) urged Spain's early membership in the EMS, and the pressure to reach a decision on this EMS question was bound to increase when Spain assumed the EC presidency during the first half of 1989.

In the late 1980s, some of the more painful aspects of Spain's integration into the EC were cushioned by the country's expansionary economic boom, the continuing fall in oil prices, a sharp reduction in the exchange value of the United States dollar, and the massive inflow of foreign investment, as numerous foreign multinational companies endeavored to participate in Spain's expanding consumer market. Observers expected that Spain's industrial enterprises, especially the more inefficient and backward ones, would be absorbed by more modern domestic and foreign entrepreneurs or would cease operations. Over the long term, however, the Spanish economy was expected to resemble that of its more advanced EC counterparts much more closely by the year 2000 than it had in the past.

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Source: U.S. Library of Congress