Economic Analytical Unit - Department of Foreign Affairs and Trade

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Doing business in Spain
An introductory guide to the market

Section 2 - Getting Down to Business

A developing relationship

Modest Beginnings

The absence of strong historical links, the large geographic distance between Australia and Spain, and the presence of cultural and linguistic differences has meant that the two countries have generally looked elsewhere for trade opportunities. Historically, Australia concentrated its European trade relations with the United Kingdom and, to a lesser extent, with other traditional European partners, such as Germany, Italy and France. Conversely, Spain's most important economic links have been with Europe. Moreover, Spain's strong historical association, shared language and cultural similarity with the Latin American region has produced strong commercial relations with those countries. More recently, both Australia and Spain have looked to expand their opportunities within their respective geographic regions. Spain has successfully integrated its economy within the European Union, and Australia has developed strong and constructive relationships within its Asia Pacific region.

Australia and Spain enjoy a healthy and growing, albeit modest, trade relationship with enormous potential for further expansion of commercial dealings.

Room for Improvement

Spain is rated as the most dynamic economy in the European Union and is forecast to have one of the highest growth rates in the euro zone for 2003. Total Spanish imports for 2001 were valued at US$ 182.6 billion, outstripping exports by US$ 7.0 billion. With a population twice the size of Australia's , solid appetite for imports, and unrestricted trade access to other euro zone countries, Spain's dynamic economy holds great potential for increasing Australian trade.

The opportunity to expand Australia's trade with Spain becomes evident when the bilateral trade figures with Spain are compared with those of the European Union as a whole. In 2002, the European Union maintained its position as Australia's largest trading partner, accounting for 18 per cent of Australia's total merchandise trade. Australia's exports to the European Union were worth A$ 14.9 billion, with a total two-way trade value of A$ 44.2 billion. However, the value of Australia's total trade with Spain accounted for only 0.7 per cent of Spain's total trade in 2001, despite Spain's recent out-performance of its European rivals.

This under-development is further highlighted when Australia's merchandise trade with Spain is compared as a share of Australia's bilateral trade with the five biggest economies of Europe: Germany, France, Italy, the United Kingdom and Spain. In 2002, Australia's trade with these five countries totalled A$ 32.5 billion ( see Table 1) . However, Australia's trade with Spain, worth A$ 1.6 billion, represented only five per cent of this total trade.

Table 1: Australia's total merchandise trade with the five largest European economies, 2002
Country Value of Trade with Australia (A$ b)
United Kingdom $ 11.4
Germany $ 9.0
Italy $ 5.8
France $ 4.7
Spain $ 1.6
Total $ 32.5

Source: STARS Database, Department of Foreign Affairs and Trade, February 2003

Merchandise Trade

Australia and Spain's current commercial relationship provides a good basis for exploring new bilateral trade and investment opportunities, as well as for collaborating on opportunities within the Asia Pacific and Latin American regions. Bilateral trade is increasing at a healthy rate, though the overall total trade figures remain comparatively modest, having started from low base. Bilateral trade between Australia and Spain in 2002 stood at A$ 1.6 billion, one third more than the value of trade in only five years.

Over the past 10 years, trade between Australia and Spain increased at an average rate of 13.7 per cent a year. This is nearly twice the rate of increase of Australia's trade with the European Union which, as a whole, grew at an average annual rate of 8.2 per cent, and was slightly slower than the average annual growth rate of 8.3 per cent in Australia's total global merchandise trade.

However, Australia and Spain are still some way from achieving the status of significant trading partners. Spain was Australia's 28th overall ranked trading partner in 2002, accounting for just 0.7 per cent of Australia's total trade ( see Table 2) , and Australia accounted for less than 1 per cent of Spain's total trade.

Table 2: Australian merchandise trade with Spain in 2002
  (A$ m) Share Rank
Exports to Spain 694 0.6% 25th
Imports from Spain 917 0.7% 27th
Total trade ( exports + imports) 1,611 0.7% 28th

Source: Composition of Trade: Australia 2002, Department of Foreign Affairs and Trade, February 2003

In the early nineties, Australia ran a trade deficit with Spain. Between 1999 and 2001, this position had gradually changed and, in 2001, Australia ran a trade surplus with Spain of A$ 96 million. This turnaround was primarily due to the strong growth in Australian exports, which had grown at an average annual rate of 24.6 per cent over the five year period, from A$ 277 million in 1996 to A$ 845 million in 2001. Significant increases in the value of Australia's imports from Spain in 2002, in particular the import of passenger motor vehicles and telecommunications equipment, and a drop in Australian exports to Spain, particularly of crustaceans, animal feed and ores, led to a trade deficit in 2002. The value of Australia's exports to Spain is comparable with Australia's exports to countries such as Iran, Egypt and Belgium.

In contrast to the steady overall increase in export growth, the rate of growth in Spanish imports from Australia has slowed. Ten years ago the annual average import growth rate was 14.9 per cent, dropping to a still healthy 8.3 per cent over the five year period from 1996, with the total value of Spanish imports from Australia increasing from A$ 276.8 million in 1996 to A$ 845.3 million in 2001. Export value in 2002 dropped to A$ 693.8 million.

Figure 3: Australia's merchandise trade with Spain, 1992-2002

Australia's merchandise trade with Spain 1992-2002

Source: ABS data on DFAT Stars Database

Composition of Merchandise Trade
Exports

Just ten years ago, nearly 80 per cent of Australia's exports to Spain were primary products. In 2002, that figure had decreased to just over half ( 52.3 per cent) . While the composition of trade reflects the continued importance of primary products, the long-term trends indicate that manufactures, in particular elaborately transformed manufactures (ETMs) , have dramatically increased over the past six years, with growth of nearly 200 per cent ( see Figure 4) .

Figure 4: Australia's broad exports to Spain

Australia's broad exports to Spain

Source: ABS data on DFAT Stars Database

Reflecting an established pattern of trade, coal continues to be Australia's principal export to Spain, with an annual average increase of 17.1 per cent over the past ten years. The total value of coal exports in 2002 was A$ 263.0 million. Fast ferries have also been a major Australian export to Spain, competing with coal as the major export in some years. Confidential items ranked as Australia's second largest export, at A$ 220.6 million. ( Note that due to the way major shipping and distribution lines work, and the way Australian export data is collected, goods destined for Spain that are first shipped to London or Rotterdam, for example, are not recorded as exports to Spain on official trade statistics. )

Table 3: Top 10 Australian exports to Spain, 2002
Export Item A$ mil Average p. a. growth
over 5 years (%)
Average p. a. growth
over 10 years %
Coal 263.0 32.5 17.1
Wool 38.9 -2.0 4.8
Medicaments ( incl. veterinary) 20.8 327.6 135.8
Crustaceans 9.3 17.7 8.9
Other ores 8.2 - -
Animal feed 7.9 152.9 1.5
Integrated circuits 7.7 27.3 38.4
Crude minerals, nes 7.2 36.8 49.7
Iron ore 6.6 24.4 -10.5
Motor vehicle parts 6.2 79.5 34.9
Total merchandise exports 694 13.7 13.6

Source: ABS data on DFAT Stars Database

Imports

Simple ( STMs) and elaborately transformed manufactures ( ETMs) have accounted for the majority of Australia's imports from Spain over the past ten years ( see Figure 5) . From around 69 per cent ( A$ 147 million) in 1992, this figure had increased to almost 86 per cent by 2002, with the value of total manufactured imports reaching A$ 784.3 million. Primary product imports, which were worth A$ 123.4 million, represented 14 per cent of total Australian imports from Spain.

Figure 5: Australia's broad imports from Spain

Figure 5: Australia's broad imports from Spain

Source: ABS data on DFAT Stars Database

Passenger motor vehicles were the highest ranked import item in 2002, worth over A$ 160.7 million. Olive oil, imports of vegetable fats and oils collectively were the second ranked item, at A$ 63.7 million ( see Table 4) .

Table 4: Top 5 imports from Spain, 2002
Import Item (A$ m)
Passenger motor vehicles 160.7
Soft fixed vegetable fats and oils 63.7
Clay construction materials 54.4
Telecommunications equipment 49.3
Medicaments ( inc. veterinary) 45.6

Source: Composition of Trade: Australia 2002, Department of Foreign Affairs and Trade, February 2003

Trade in Services

According to OECD data, Spain exported services to Australia worth US$ 76 million in 2000. This represented a 9 per cent increase on 1999 and, in 2000, accounted for 0.14 per cent of Spain's total services exports. In 2000, Spanish imports of services from Australia totalled US$ 76 million. This represented a 35 per cent increase on 1999 and, in 2000, accounted for 0.25 per cent of Spain's total services imports.

Spain is primarily a service nation, relying heavily on tourism and related services to counteract large trade deficits. The historical attractions based on a long history of interaction with the Greek and Arab worlds, the relative absence of industrial pollution and a dry warm sunny climate of the Mediterranean south and east have provided a solid base for the tourism sector. Around 50 million tourists visit Spain annually. The 11 September 2001 terrorist attacks in the United States had a negligible impact on total tourist numbers visiting Spain, although income from tourism fell by around 4.3 per cent in 2002. Nevertheless, the tourism sector continues to have excellent prospects for further growth.

Though Australia has world famous agricultural and mining sectors, consecutive governments have recognised the need to transform and modernise the economy, resulting in sophisticated manufacturing and services base. Indeed, services and manufactures now account for almost half of total Australian exports. In line with Australia's increasing skill base, experience and capacity, services are now accounting for a rising share of Australia's export trade. In 1982 services accounted for just 17 per cent of Australia's total exports. By 2002 that figure had increased to 21 per cent.

Investment

Investment between Australia and Spain has traditionally been limited. As highlighted in Section One, although Spain ranked as the world's sixth largest exporter of capital, only 3 per cent of this investment reaches the Asia Pacific region, and even less to Australia. Despite the fact that Spain is also a major recipient of inwards FDI, Australian companies have not generally featured in Spain's market restructuring and expansion. As a result, levels of direct bilateral investment are small, although there is evidence that this is beginning to change.

At present, small number of Australian companies are active, or maintain representative offices, in Spain. Lend Lease is involved in a number of large construction projects. Amcor has set up flexible packaging manufacture plants. The support services group, Brambles, maintains a number of interests in Spain, including equipment pooling and rental, and information management. Cash Converters opened its first franchise in Spain in 1995, and now has more than 35 stores. Burns Philp runs yeast operations, and Billabong clothing and Fosters also have a strong presence.

Spanish investment in Australia has occurred across a number of sectors, including in agribusiness, manufacturing and services, such as hospitality, and real estate. Although the Spanish investment presence in the Australian market has been relatively minor, the Spanish Government is now actively encouraging businesses to pay greater attention to the Asia-Pacific region. This is one of several factors that have contributed to the recent increase in Spanish interest in investing in Australia. In 2001, Spanish wine producer, Freixenet, acquired a major share in the Wingara Wine Group, and EDV has set up a manufacturing plant for barrier packaging in Victoria. Ferrovial Aeropuertas has also invested several hundred million dollars in the Southern Cross Airports Consortium, alongside the major investor Macquarie Airports Group, which won the tender for the privatisation of Sydney Airport. Banco Santander maintains a representative office in Australia. Looking to the future, major Spanish alternative energy companies are exploring investments and projects in Australia.

A Promising Future

Fulfilling the Potential

Despite the lack of familiarity between the respective countries and their economies, prospects for increasing Australian Spanish trade are promising. While it is easy to identify the differences between Australia and Spain, what is often overlooked is the similarity in the trajectories of both countries over the past two decades. Both countries have experienced period of rapid economic transformation. The traditional reliance on primary production has been supplemented by massive growth in the manufacturing sectors. Trade has increased dramatically, as economic reforms, such as deregulation and privatisation, have made industries more efficient and their economies more internationally competitive. Successive governments have also undertaken fiscal consolidation, as well as introducing taxation and labour market reforms. The result has been strong economic growth and increased foreign trade, making both Spain and Australia more affluent, with increasingly urban and cosmopolitan societies. It is this parallel development that Australian business should seek to explore as an opportunity to increase trade.

The rapid development of both economies, combined with an increasingly affluent society, has increased the demand for value added goods and services. In Spain, recent growth areas of particular importance for Australian suppliers include the provision of education services, environmental services, information and communication technologies products and services, marine equipment, processed food and wine ( see Section Three) . Recent Australian export successes have included items as diverse as live crayfish, outback clothing, air-conditioning units, English language training, outdoor furniture and sophisticated Internet-based technologies. Over the last five years, with a total value of A$ 589 million, with a total value of A$ 589 million, ships, boats and floating structures ( in particular high speed aluminium ferries) have been exported to Spain, and are now servicing major tourist areas in the Mediterranean and elsewhere.

There may also be possibilities for commercial cooperation or joint ventures between like-minded Australian and Spanish companies in the Asia Pacific region ( see Box 2) .

Box 2: Spain's Asia Pacific Plan

In 2000, in line with Spain's growing global influence, the Spanish Government released its Asia Pacific Plan , which recognised the need to increase Spain's relatively few links with this region. The Plan affirms the Spanish Government's commitment to broadening and achieving more balanced relations with the Asia Pacific region. A series of concrete initiatives have been proposed to strengthen trade, investment, political, cultural and educational links with the region. The Plan's focus is primarily on nations such as China, Japan, South Korea and, given Spain's historical links with the country, the Philippines. However, Australia is expected to benefit from the Plan as a whole, and the Australian Government is working to ensure Australia capitalises on Spain's new policy, engaging Spanish officials to highlight Australia's relevance and importance to the region. To provide a focus and further its objectives, Spain has appointed an Ambassador for the Asia Pacific Plan.

Given its own wide-ranging engagement within the Asia Pacific region, Australia is well-placed to become a springboard for the new Spanish interest in the region. Spanish firms could benefit by locating their regional headquarters and operating centres in Australia. As Spanish companies seek access, expertise, and partners in their future expansion into these markets, Australian companies should be able to capitalise on their own connections.

Many Australian firms are making inroads into the Latin American market, with numerous examples of innovative Australian companies securing new markets and taking Australia's export and investment base in new directions. Establishing partnerships with Spanish companies already active and experienced in the Latin American market will increase the opportunities for Australian trade and investment growth in the coming decades.

Working Together

Opportunities for further bilateral trade and investment can be assisted greatly by increasing the levels of knowledge and information exchange between Australia and Spain. High profile visits are important in raising Australia's visibility, in Spanish Government and other circles, and in expanding the range and depth of bilateral dialogue. High level Australian visitors to Spain since 2000 have included the Minister for Foreign Affairs, Mr Alexander Downer ( twice) ; the Minister for Immigration, Multicultural and Indigenous Affairs, Mr Philip Ruddock; the Minister for Ageing, Mr Kevin Andrews; the former Minister for Defence, Mr John Moore, the former Minister for Financial Services, Mr Joe Hockey and the former President of the Senate, Senator Margaret Reid.

Trade missions also play a valuable role in exposing the business community to commercial opportunities and capabilities. A number of Exporters Associations and Chambers of Commerce in Spain send delegations to Australia every year. The former Spanish Industry and Energy Minister, Josep Piqué, led a business delegation to Australia in June 1998. Australian delegations have also visited Spain to explore business opportunities and raise awareness of Australian capability. These missions and market visits were broad-ranging and included the engineering, education and agribusiness sectors.

The Australian Embassy in Madrid is active in promoting Australia as a commercial partner for Spain. Austrade maintains an office in Madrid, headed by the Trade Commissioner, which provides export assistance to Australian companies. Similarly, the Spanish Government runs trade promotion office in Sydney. As well, regional trade promotion centre representing Catalonia's regional government and an active Spanish Chamber of Commerce are also located in Sydney. The Australia Spain Business Association, with branches in Madrid and Barcelona, is also working to promote improved business linkages.

Together, Australia and Spain are working at all levels to improve the bilateral relationship for the future.

Box 3: Selected Bilateral Treaties and other Instruments between Australia and Spain

Agreement on Social Security (1991, updated 2002)

Entry and Short-term Visits Facilitation Arrangement (1998)

Agreement on Cultural, Educational and Scientific Cooperation ( 1994) Double Taxation Agreement (1992)

Treaty on Mutual Assistance in Criminal Matters (1991)

Treaty on Extradition (1988)

Information and Communications Technologies Memorandum of Understanding ( Under negotiation)

Working Holiday Makers Arrangement ( Under negotiation)

Science and Technology Cooperation Agreement ( Under negotiation)

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