Portugal Trade Policy Brief
Michelle Wenzlawsh
Jeffrey Wilson
Marques Reasonover
Principles of International Economics
Dr. Ghosh
The University of Akron
2
Michelle Wenzlawsh
Jeffrey Wilson
Marques Reasonover
Principles of International Economics
The University of Akron ~ Dr. Ghosh
Portugal Trade Policy Brief
Introduction
Portugal was once at the forefront of international trade during the 15th and 16th
Centuries. The nation was the tip of the spear regarding global trade via their colonies in Brazil,
Africa, India and China and their early advancements in naval technology. Portugal joined the
European Union in 1986 and adopted the Euro as its national currency in 2002. This paper seeks
to analyze the current trade policies of Portugal and make the necessary recommendations that
would increase the benefits the nation could derive from foreign trade. It will provide a history
of the trade patterns and trade policies that Portugal has engaged in during the recent past. The
amount of goods being imported and exported in Portugal will be analyzed and the gravity model
will be employed to see if these trade flows are heading to the countries that offer Portugal the
highest gains. At the end of the paper, conclusions will be made regarding the efficiency of
Portugal’s current economic policies and what changes could be enacted to improve upon them.
Economic History
This trade policy on Portugal will examine Portugal back to the 1970’s. This thirty some
year reference will give a good picture of how Portugal’s economy and trade policies have
changed in recent history. In 1974 the army overthrew the governmental powers and took
3
control of the nation.1 Prior to the revolt, Portugal had been led by Dr. Salazar who gained
absolute power after being elected Finance Minister in 1926. Dr. Salazar was succeeded by Dr.
Marcelo Caetano in 1968 who ruled the country until the military revolt of ‘74. Since 1974 there
have been many changes in Portugal to make the nation more democratic. Before joining the
European Union Portugal’s national currency was the escudo, which held a value of about 56.74
escudo to one U.S. dollar.
The economy of Portugal during the 70’s and early 1980’s is one that could be viewed as
semi-developed due to the effects of the revolution and the oil price increases. Portugal faced an
unfavorable balance of trade, severe unemployment, a large number of incoming refugees from
former Portuguese colonies in Africa and inflation which was around 15%.
Although many
factors contributed to Portugal’s rising unemployment rate in the 70’s, the increased immigration
rates from the African nations were a direct cause a plethora of negative, short run labor market
effects.2
Portugal’s agriculture industry produced the lowest yields in Western Europe in the late
70’s. Most of this stemmed from the social and structural problems that were part of Portugal’s
economic history. The same situation goes for the mineral deposits; there was significant
mineral wealth in Portugal but the cost of extraction was significant considering other
investments that were planned for Portugal. Investments were therefore focused on railroads and
the Douro River, which planned to be made more navigable for transportation and infrastructure
purposes.3
1
“Portugal.” The World Fact Book. Central Intelligence Agency. 4 October 2005.
<http://www.cia.gov/cia/publications/factbook/geos/po.html#Econ>
2
Doing Business in Portugal. Price Waterhouse, June 1981
Doing Business in Portugal. Price Waterhouse, June 1981
3
4
The Transportation systems in Portugal were on their way to improvement also.
Motorways were being expanded and focus remained on connecting the capital city of Lisbon to
Algrave. The airlines were in good working order and connected Lisbon to most parts of the
world, although all systems of transportation and communication did suffer from the cutbacks
resulting from the military coup.
The major Portuguese industries of the mid 1970’s and early 1980’s were the textile and
clothing industries, which were followed by food processing, shipbuilding, electronic parts and
tourism.
Due to Portugal’s trade deficit the government put emphasis on encouraging exports and
reducing imports. To do this there would be development in the food, timber, and tourism
industries, which were all labor intensive. At the time unemployment was at 13% but skilled
labor was available and was the factor of production needed most to improve their trade deficit.
At this time in history, Portugal was a member of the GATT and European Free Trade
Association (EFTA). Portugal had also begun negotiations and reforms to allow the admittance
into the European Community (ECC). Most nonagricultural imports from EFTA and ECC
countries were either duty free or were at very minimal duty rates, elimination of all duties were
to be imposed by all member nations by 1984.
Portugal’s unfavorable forging trade balance in the 70’s had been increasing much due to
the independence of Portuguese colonies.
Without the inflow of resources from their old
colonies, Portugal became very dependent on imports and foreign aid.
Although many goals were met through IMF negotiations, the public sector credit still
demanded attention as well as the structure of the economy as a whole. The reelection of most
government officials in October 1980 established a four-year term in office, which gave the
5
government time to implement and follow through with their four-year development plan. This
plan focused on reducing the deficit trade balance, increasing productivity, lowering
unemployment, and accelerating the structural changes to the economy. This development plan
attempted to integrate Portugal with the EEC.
Increasing investment in Portugal was also taken very seriously within the Portuguese
government and in 1980 there was a radical revision of investments and tax incentives which
included industrial classification, regional improvement balance of payments, and financing for
local businesses. In the minds of government officials foreign investment was an essential part
of economic success. Government embraced FDI but maintained restrictions to certain sectors
and
strengthened
its
process
of
screening
new
applicants.
Between 1975 and 1977 there were a multitude of restrictions on imports to Portugal,
such as advance cash deposits and restricted credit facilities. These methods were attempted for
short periods of time and ultimately abandoned.
In March 1978 quota restrictions were
introduced for items such as food, domestic goods, minerals, and small electronics. These quotas
were to end on March 31, 1981 but were extended and revised annually. Import duties were
established on a basis of weight or unit depending on the nature of the product. The duties also
followed a maximum and minimum schedule. Maximum rates could range from 1% to 50% on
top of an import surcharge of 10% to 60%. In addition taxes were assessed according to the
price plus all duties plus a 40% markup for presumed sale price. Minimum rate fall between ½
to1/3 the maximum rates depending on the country or origin, which includes other members of
GATT. In addition to all this the Ministry of Finance could establish special tariff rates for
imports that are under state regulation. Member nations and prospect member nation were to
have all duties removed by 1984.
6
In 1986 Portugal joined the EEC. Since then the Portuguese government has made
progress in privatizing the Financial and Telecommunication industries of the economy. In 1998
Portugal qualified for the European Monetary Unit and began circulating the Euro on January 1,
2002. Economic growth was above the average for the European communities for most of the
90’s but has recently fallen between 2000 and 2004. The education system in Portugal is one
factor that is holding them back from greater economic progress as well as high production costs
that hinder FDI. Portugal still struggles for improvement even though it is faced with restraints
from the EU to keep GDP stable.
Trade Statistics
Portugal is one of the smallest nations in Western Europe both geographically and
economically.4 The western portion of Portugal is bordered by the Atlantic Ocean while the
county of Spain creates the eastern border. Portugal has seen a lot of change over the past
twenty years and these changes have been both positive and negative. A major transformation
occurred in 1986, when Portugal joined the ECC (now the EU). This had profound effects on the
entire Portugal economy.
To look at Portugal’s major trading partners one does not have to go very far. Portugal
conducts heavy trade of products with EU members Spain, Germany, France and Italy.
Regardless if the product is imported or exported, Portugal tends to rely on similar countries to
fulfill both tasks.
The CIA World Fact Book states that Portugal’s main exports total 37.68 billion dollars
annually.
Their main trading partners consist of the following: Spain captures the largest
percentage at 24.8%, France 14%, Germany 13.5%, UK 9.6%, US 6%, Italy 4.3% and Belgium
4
“Portugal.” The World Fact Book. Central Intelligence Agency. 4 October 2005.
<http://www.cia.gov/cia/publications/factbook/geos/po.html#Econ>
7
at 4.5%.5 Major exports that Portugal offers are clothing, footwear, machinery, cork as well
paper products, petroleum and textiles.6 It should be noted that the overwhelming majority of
the exporting partners belong to the EU and represent 81.4% of Portugal’s total trading partners.
Outside countries, like the United States and Lusophone Colonies7 make up another 9%.
According to the U.S. State Department, the 1.9% of U.S. imports that come from Portugal
represents $1.856 B worth of transistors, semiconductors, aircraft equipment, oil seeds, fruit,
animal feed, telecommunications equipment and related parts, automatic data processing
machines and coal.
Along with exporting, the CIA World Fact Book also cites Portugal’s import trade
partners, which accounts for $52.1 B dollars in annual imports. Again, Spain is the largest
trading partner making up 29.3% of annual imports, Germany 14.4%, France 9.7%, Italy 6.1%,
the Netherlands 4.6%, and the UK 4.5%.8
The main Portuguese imports are machinery,
petroleum, textiles, agricultural products and chemicals. Nations of the European Union make
up 76.6% of total imports coming into Portugal. Non-European Union countries (Africa, the
United States, and Japan) make up the remaining amount of Portuguese imports at 14.6%. The
5.8% of U.S. export goods sent to Portugal equate $902 M dollars worth of textiles valves tubes,
transistors, semiconductors, cork, petroleum oils, footwear, alcoholic beverages, pottery, men’s
apparel and non electric machinery parts.
5
“Portugal.” The World Fact Book. Central Intelligence Agency. 4 October 2005.
<http://www.cia.gov/cia/publications/factbook/geos/po.html#Econ>
6
“Portugal.” The World Fact Book. Central Intelligence Agency. 4 October 2005.
<http://www.cia.gov/cia/publications/factbook/geos/po.html#Econ>
7
Angola, Mozambique. Lusophone refers to the old Portuguese colonies in Africa.
8
“Portugal.” The World Fact Book. Central Intelligence Agency. 4 October 2005.
<http://www.cia.gov/cia/publications/factbook/geos/po.html#Econ>
8
The European Union and other RTAs
The most important economic organization that Portugal belongs to is the European
Union (EU). The EU allows for the free movement of goods, capital and labor between Portugal
and her fellow members. Within the EU there are bilateral agreements such as the Agreement on
Textiles and Clothing which further the catalyzation of trade. These bilateral agreements are all
underneath the WTO and apply to all EU members. Exemptions and reductions in tariffs are
only allowed for members of the European Union. All tariff rates are based on the cost of the
good, the insurance costs and the cost in freight (CIF). There is also a value added tax or VAT
placed on non-EU goods coming into Portugal. This is the CIF plus an additional duty. The
value added tax on the majority of goods is 19% (Trade Information Center). Some goods are
eligible for a reduced rate of 5%-12% however this is only for basic necessities and food.
Portugal is involved in many Regional Trading Agreements (RTA's) with the EU being
the largest and most prominent of these. Portugal joined the European Community in 1986
which later became the European Union. In April of 1992, Portugal joined the exchange rate
mechanism of the European Monetary System which led to the circulation of the Euro in 2002.
To assure this transition would run smoothly, Portugal reduced its interest rates to facilitate the
assimilation in the EU and increase domestic demand.
Portugal also belongs to the WTO as well as the Organization for Economic Co-operation
and Development (OECD). The OECD involves 30 countries working cooperatively in an effort
to develop economic policies on a domestic as well as international level.
The volume of trade in Portugal has increased due to a reduction in trade barriers, and
free trade with other European Union members. The reduction of trade barriers with the other
European Union members had increased trade for Portugal. Although this increase began before
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Portugal was a member of the European Union, due to the requirement of lowering trade barriers
prior to entry into the EU. The amount of trade has not had an overall positive effect on the
Portuguese economy, due to the high amount of imports. Portugal has become dependent on
importing low high value added, skilled labor intensive goods, such as information technology
and communication products. This dependency has left Portugal with the problem of shifting
their work population into skilled labor in order to shift the demand of these goods into a
domestic demand, which would reduce their need for imports.
Overall Portugal has not seen much benefit from their current trade policy in terms of
efficiency. Portugal’s imports exceed their exports, which puts them at a current account balance
deficit to begin with. In addition to this, is that many of the new entrants into the European
Union can produce the same goods that Portugal produces domestically, at lower costs because
of wage differences. These goods include textiles and clothing, which are low value added, low
skilled labor intensive goods. Because of the competition from new EU entrants, Portugal has
not seen significant decrease in demand for these domestic goods, both home and abroad, joined
with a recent increasing demand for skilled labor, which decreases the unskilled labor wages,
Portugal’s efficiency has not had significant benefits from the new trade policy. In addition to
this, protection of industries to help them sustain competition has also hindered efficiency in
Portugal’s markets. This low efficiency level compared to the rest of the EU will reduce the
demand for Portuguese products and the unskilled labor that creates them. Portugal has realized
it will eventually need to shift to higher skilled labor markets, if they are unable to compete in
unskilled labor markets.
10
Trend Productivity growth
Output per hour worked in the business sector (1)
Percentage changes
9
Although Portugal has seen tremendous benefits and positive impacts due to the trade
policy of the EU it faces competition from new EU members in low-skill labor-intensive sectors.
In evaluating the current trade policy on the distribution of income, according to the HechsherOlin model and its assumptions, Portugal’s abundant factors will benefit and scarce factors will
be harmed. Portugal joining the EU, and participating in free trade between its nations would
9
“Structural Survey” Economic Survey: Portugal OECD. 7 December 2005.
<http://www.oecd.org/document/5/0,2340,en_33873108_33873764_33701381_1_1_1_1,
00.html>
11
according to theory help an industry such as low-skilled labor, in which Portugal is well
endowed, and harm an industry such as high-skilled labor, in which Portugal is scarcely
endowed. Because Portugal had a strong low skill base at their entrance into the EU, they
focused on that as their factor endowment, this increased the demand for unskilled labor and
decreased the demand for skilled labor. This greater demand for unskilled labor over time
increased the supply of unskilled labor compared to skilled labor.10
Within Portugal’s’ economy many products are made that require low skill labor such as
mining, textiles, and agriculture, and clothing. Within Portugal you find very little supply or
demand for Information Technology or Communications sectors. Because of this Portugal is
competing with more efficient, lower wage producers of low skill labor goods.
Without
increasing efficiency the demand for low skilled labor will ultimately decrease, causing workers
to squire skills for new, greater skill, competitive jobs, which Portugal has recently seen as new,
less developed nations join the European Union. In addition to competition, Portugal faces a
below average student performance level. Portugal is not getting value for the money spent in
the education sector due to below average student performance and average spending per
student. Portugal would benefit from focus on their education sector, to promote learning and
more skilled labor. Along with promoting education, Portugal would benefit from focus on
industrial policy, with a strategy to improve and develop an industry such as IT or
communications.11
10
“Structural Survey” Economic Survey: Portugal OECD. 7 December 2005.
<http://www.oecd.org/document/5/0,2340,en_33873108_33873764_33701381_1_1_1_1,
00.html>
11
“Structural Survey” Economic Survey: Portugal OECD. 7 December 2005.
<http://www.oecd.org/document/5/0,2340,en_33873108_33873764_33701381_1_1_1_1,
00.html>
12
The Gravity Model
The gravity model is a basic and popular means by which to measure the bilateral trade,
migration, commuting and tourism flows between two separate nations.12 The model estimates
trade levels between two countries as a function of the distance separating trade partners, and the
Gross Domestic Production levels of the trade partners. Although the model is inhibited by its
strong reliance on theory it does have a high explanatory power regarding trade levels.13 The
gravity model formula employed in this trade policy brief is the following:
Tij=YiYj
Dij
Capital City
Berlin
Paris
Rome
Figure 1.1
Distance from Lisbon (Miles)
1845.18
1454.02
1862.70
12
Bergstrand, Jeffrey H. “The Gravity Equation in International Trade: Some Microeconomic
Foundations and Empirical Evidence.” The Review of Economic & Statistics 67(August
1985): 474-481
13
Bergstrand, Jeffrey H. “The Gravity Equation in International Trade: Some Microeconomic
Foundations and Empirical Evidence.” The Review of Economic & Statistics 67(August
1985): 474-481
13
Tij is the total volume of trade between
Amsterdam
Spain
1864.07
503.53
the two nations in billions of dollars, Yi and Yj are the respective income levels of the trading
nations given as GDP in billions of dollars and Dij is the distance between the two countries.
Under regression, the ratio of income vs. distance is multiplied by a constant, A. For the analysis
here, a regression is not necessary with the trade flows being compared over two years only;
2003  2004. Therefore the constant may be dropped from the model.
The gravity model predicts that nations with larger GDPs will engage in more trade. The
same prediction holds true for countries that are close together relative to other nations. While it
was originally thought that distance would play little role in trade flows, studies have shown that
distance in fact has dramatic effects upon trade.14
Distance is a proxy for transport costs with goods from distant places being more
expensive than goods being exchanged to neighboring countries. Certain goods such as organic
materials and other perishables may not last during long transport times thereby making distance
an even larger factor in trade flows.15 Other reasons citing distance as an important factor in
trade is synchronization costs. Firms combining multiple inputs in order to create their final
product may require those inputs to all arrive with the same time period. Travel distances can
impede this process, resulting in inputs arriving too late or too early and thereby disrupting the
firm’s operations. The remaining factors that show distance to be of great importance are
communication costs over long distances, transaction costs and “cultural” distances (Head 2003).
14
Head, Keith. 2003. “Gravity for Beginners.” Keith Head. 18 November 2005. <
http://pacific.commerce.ubc.ca/keith/gravity.pdf>
15
Head, Keith. 2003. “Gravity for Beginners.” Keith Head. 18 November 2005. <
http://pacific.commerce.ubc.ca/keith/gravity.pdf>
14
The results of the gravity model estimations for Portugal and her five leading EU trade
partners are shown in Figure 1.2. Portugal’s actual trade flows are greatest with Spain, followed
in order by Germany, France, Italy and Netherlands. The estimations of the model show that
Trading Partner
Germany
France
Spain
Italy
Netherlands
Figure 1.2
Tij (2003)
Tij (2004)
194.44
247.55
179.66
247.77
248.16
331.34
117.61
151.08
41.01
52.11
% change in Tij
27.3%
37.9%
33.5%
28.5%
27.1%
Portugal’s current trade flows are in compliance with the findings of the gravity model. Spain
was the country with highest bilateral
trade estimate (331.34) for 2004 and
is in fact Portugal’s main trading
partner. Although the GDP of Spain
is not as large as that of Germany or
Figure 1.3
Country
Portugal
Germany
France
Spain
Italy
Netherlands
GDP 2003 (Billions of Dollars)
149.45
2400.66
1747.97
836.10
1465.90
511.56
GDP
2004
168.28
2714.42
2140.90
991.44
1672.30
577.26
France (See Figure 1.3)16, the shorter geographic distance between Portugal and Spain results in
higher levels of trade according to the model. The top five trading partners of Portugal are all
members of the European Union and it makes sense for Portugal to trade with nations that form
the regional trading agreement of the EU. There are no trade barriers between nations in the EU
and therefore Portugal and her trade partners need not worry about tariffs, quotas and other
restrictions that would impede such transactions. In conclusion, according to the gravity model
employed in this paper, Portugal’s choice of trading partners and the amount of trade that is
taking place between the nations appear to be efficient.
“List of Countries by GDP (Nominal)” 2005. The World Bank. 23 November 2005.
<http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)>
“Global Economy: GDP for 2000 and 2003 (Current US$).” Geohive. 23 November 2005. <
http://www.geohive.com/global/geo.php?xml=ec_gdp1&xsl=ec_gdp1>
16
15
Conclusions
Changes need to be made in order for Portugal to reach their current, full economic
potential. Portugal has been plagued by a low skilled labor force which inhibits the nation’s
ability to innovate in IT and other high skilled industries. A better educational system would go
a long ways towards increasing the long run human capital of the Portuguese labor force. A
labor force with higher skills will allow the nation to expand their production to include
technological advanced good and services. This creation of a new market would allow Portugal
to trade with new nations and boost their domestic economy in turn.
Portugal needs to cease the protection of their inefficient industries such as textiles.
Other nations are able to make textiles cheaper than Portugal and therefore Portugal should focus
their resources on industries in which they are more efficient. By insisting on producing textiles,
Portugal is wasting valuable workers, capital and other inputs on a production cycle for which
they do not possess a comparative advantage.
Portugal would also benefit from lowering employment protection legislation.17 This
would require industries to be innovative in order to compete, which will increase productivity
and cash flow to Portugal.
Technology and management methods will also improve if it
industries are not protected, because of necessity to survive.
Portugal would also improve from promoting competition.18 This would in turn create
better, more efficient industries. The creation of innovative environments, where businesses are
willing to invest in innovation to see profits would also benefit Portugal’s economy.
17
Economic Survey of Portugal, 2004. OECD Policy Breif.
http://www.oecd.org/dataoecd/34/56/33714513.pdf
18
Economic Survey of Portugal, 2004. OECD Policy Brief.
http://www.oecd.org/dataoecd/34/56/33714513.pdf
16
17
References
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Bergstrand, Jeffrey H. “The Gravity Equation in International Trade: Some Microeconomic
Foundations and Empirical Evidence.” The Review of Economic & Statistics 67(August
1985): 474-481
Carrington, William J. and Pedro J.F. de Lima. “The Impact of 1970’s Repatriates from Africa
on the Portuguese Labor.” Industrial and Labor Relations Review 49 (January 1996):
330-347
Clark, Charles. Economic Transition in Historical Perspective. Burlington, VT, Ashgate, 2001.
Cohen, Daniel. The Economics of Rising Inequalities. New York, Oxford Press, 2002.
Developmental Co-operation Review Series Portugal, No. 22. Organization for Economic Cooperation and Development, 1997.
Doing Business in Portugal. Price Waterhouse, June 1981.
Economic Survey of Portugal, 2004. OECD Policy Breif.
http://www.oecd.org/dataoecd/34/56/33714513.pdf
Esser, Charles. “Portugal Country Analysis Brief.” Energy Information Administration. 12 July
2004 <http://www.eia.doe.gov/>
“Global Economy: GDP for 2000 and 2003 (Current US$).” Geohive. 23 November 2005. <
http://www.geohive.com/global/geo.php?xml=ec_gdp1&xsl=ec_gdp1>
Head, Keith. 2003. “Gravity for Beginners.” Keith Head. 18 November 2005. <
http://pacific.commerce.ubc.ca/keith/gravity.pdf>
“List of Countries by GDP (Nominal)” 2005. The World Bank. 23 November 2005.
<http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)>
“Portugal.” The World Fact Book. Central Intelligence Agency. 4 October 2005.
<http://www.cia.gov/cia/publications/factbook/geos/po.html#Econ>
Stone, Glyn. The Oldest Ally, Britain and the Portuguese Connection 1936-1941.Rochester, NY,
The Boydell Press, 1994.
“Structural Survey” Economic Survey: Portugal OECD. 7 December 2005.
<http://www.oecd.org/document/5/0,2340,en_33873108_33873764_33701381_1_1_1_1,
00.html>
18
Syrett, Stephen. Local Development. Brookfield, VT, Avebury, 1995.