Last March, Spain's trade balance achieved its first surplus since at least 1971, when the current series of historic data began. Since the onset of the global economic crisis, exports have grown at a strong pace, which has softened the impact of the recession in which Spain has been immersed since the middle of 2011. With this data now available, many questions have arisen about the condition of Spain's external trade. In an effort to respond, four professors of applied economics at the Complutense University of Madrid — Elisa Álvarez, Carlos M. Fernández, Diego Rodríguez and Josefa Vega — have completed a study published as a book titled, Competitive Strengths and Key Sectors in Spanish Exports.
Rafael Myro Sánchez, professor of economic and business sciences at the same university, managed the study and talked with Universia Knowledge at Wharton about its conclusions. Myro discussed current conditions for Spanish exporters, their strengths and weaknesses, and whether the growth in recent years is temporary or can be maintained in the future.
An edited version of the transcript appears below.
Universia Knowledge at Wharton: How have Spanish exports evolved in recent years?
Rafael Myro:Spain's foreign trade sector has been functioning well for quite some time. If we consider the contribution of exports to the growth of Spain's gross domestic product (GDP) — without taking into account imports because the trade balance is still negative — we see that from 2000 to 2007, they have grown by more than 1% of GDP. And during the past few years, from 2010 to 2012, this figure has increased by more than two points. That is to say, exports are a permanent source of thrust for the GDP.
UKnowledge at Wharton: What has changed in Spain during the crisis that has enabled its exports to grow in this way? What have been the key factors?
Myro:Exports have been growing at a very high rate. The impact of the crisis has been added onto the previous expansionary stage. Three factors have been the keys to expanding Spanish exports during the recessionary phase of the economy. The first factor has been the growth of the international market. Demand in emerging markets grew at a strong pace because the impact of the crisis in those countries has not been as noticeable as in the more developed countries.
The second factor is that Spanish companies have paid more attention to foreign markets as a result of the decline in domestic demand. The third — and final — factor is the increase in Spanish competitiveness, which has enabled the country to have a very solid pattern of exports.
UKnowledge at Wharton: With respect to that last point, do you believe that Spanish products are competitive in international markets?
Myro:Competitiveness is a concept that can be measured by taking two aspects into account: The price of a product, and its quality and unique characteristics. The European Commission notes in its latest research that more than 50% of trade between European countries can be explained by reasons of uniqueness and quality, not by reasons of price.
During its latest expansionary period, from 2000 to 2009, Spain has done a great deal to improve the quality of its products. This has enabled the nation to compensate a bit for the deterioration in its competitiveness from the point of view of price, for the increase in production costs during this phase. During the crisis, especially over the last three years, not only has the quality of Spain's products continued to increase, but production costs have dropped, especially because of the reduction in its labor costs. In part, this is what has reestablished Spain's competitiveness from the viewpoint of prices. This has also enabled Spanish companies to have higher margins so they can deal with the higher demands [necessary] for competitiveness at the international level.
UKnowledge at Wharton: Which Spanish sectors have the highest level of exports, and why?
Myro: Exports have been behaving exceptionally well in almost every sector. Few sectors are not doing well.
However, all manufacturers are doing poorly in information and communications technology (ITC); and in leather goods, footwear and furniture. On the other hand, things are going very well in the medium to high technology sectors: automobiles, where Spanish companies are very strong and well positioned; pharmaceuticals, where they have gained an impressive share of the global market, and chemicals, where they have made very good gains globally. And we should not overlook the market for agricultural machinery. Of course, you also have to add the strength in sales of traditional products — most of all, from the food sector.
I believe that it is also important to stress the strong growth in exports by Spain's pharmaceutical sector. Its share of the country's overall export sales has increased from 0.8% in 2000 to more than 4.2% in 2012.
UKnowledge at Wharton: What you've just said clashes a bit with the popular image of Spain as a country that does not export value-added products.
Myro:Such a view exists, you'll pardon me for saying this, because people are not used to looking at the data. And in Spain, we have a habit of severely criticizing ourselves. I am completely opposed to the image of Spain as a country whose only export is tourism, as a country that does not have strong industries. But these are the sorts of things that people usually say.
UKnowledge at Wharton: Are Spain's exports carried out by foreign multinationals operating in Spain as well as by locally owned firms?
Myro:In our book, we say something that has not been said for many years. We estimate the share of Spanish exports that come from foreign-owned firms that are operating in the country. We reach the conclusion that foreign companies account for about 28% of Spain's total exports, including services. And manufactured goods account for 33% of all sales from Spain to foreign markets.
There is no doubt that in some sectors, such as in automobiles, the foreign-owned firms have a very large share. But in other sectors, such as medications, where we have grown the fastest in recent years, locally-owned companies have a very large share.
UKnowledge at Wharton: What are Spain's competitive strengths relative to other countries?
Myro:First of all, Spain has a diversified pattern of exports that are well adapted to global demand. Another strength is that Spanish products have a medium to high degree of sophistication. In addition, the country also offers products that … are relatively unique compared with those of our rivals.
Ultimately, our competitiveness is derived from the fact that we have numerous large companies that are very strong. [Spanish] companies that have more than 500 employees enjoy higher levels of productivity; equal to or higher than companies of the same size in other countries such as France, Germany and the United States. These companies do a better job of controlling their labor costs than the small and mid-size firms so that the increases in labor costs they experienced from 2000 to 2007 have had only a very limited impact. Since a large portion of Spain's exports are derived from those firms, despite the fact that there is some loss of competitiveness because of [higher] pricing, this [loss of competitiveness] happens less often than people say.
One significant piece of data that explains these firms' influence is that those Spanish companies that have more than 500 workers constitute only about 2% of the total number of companies in the country, yet they export 50% of its total output of products and services.
UKnowledge at Wharton: What are Spain's weaknesses?
Myro: Spainhas a lot of small companies — more than in other countries — that have very little experience at exporting. In cases where these firms do export, they do so with very little intensity. In addition, small Spanish firms have a lower propensity to go abroad than their counterparts in other countries. You have to push them more because they lack any significant policy for [export] promotion.
Second of all, Spanish firms are [selling to] foreign countries that … are not among the world's faster-growing economies. We are not well positioned in those regions that are economically very important today. We have to redirect our exports toward those countries that are going to dominate global growth, such as … countries of Brazil, Russia, India, China and South Africa.
A third handicap is that Spanish firms that do export tend not to be very persistent in their exporting. That is to say, except for that small nucleus of big companies that sustain everything, the small firms are not usually maintaining a consistent pattern of foreign sales and increasing their sales at a particular moment. Many companies export, and then stop exporting. It is not easy to get these companies to make exporting into a regular practice.
UKnowledge at Wharton: You've spoken about redirecting exports to those countries that have a greater potential for growth. Does that mean that one of the keys to the future of Spain as an exporting country will be to distance itself from its traditional trading partners in the European Union?
Myro:Without a doubt. A very large share of our exports is sold to Germany, Italy, France, Great Britain and Portugal, and we have to start from that point. The fact that we are well positioned in those markets says a great deal because those countries are demanding markets and our products are very unique and very good. But we have to move on from that point. We have to conquer all of North and South America, for example.
UKnowledge at Wharton: The European Union and the United States have begun to negotiate a free trade agreement. What can this mean for Spanish exports?
Myro:It would be very important for us if they reached an agreement. In the United States, most of our products have yet to be introduced, from foods to machinery. There, we are almost more advanced in the services sector, selling renewable energy, high-speed infrastructure, and the management of airports and highways. Nevertheless, we have a lot more trouble placing our products there.
UKnowledge at Wharton: What will be the other keys to keeping Spain's foreign trade sector growing?
Myro:It will be critical to [retain] big companies that sell lots of products in lots of countries; that is to say, those firms that are capable of targeting many products to many countries. On the other hand, we have to convince the small firms to export more.
UKnowledge at Wharton: If Spanish exports continue to grow at the current rate, what share of the country's GDP do you think they can ultimately capture in the future?
Myro:At the moment, Spain's exports account for 30% of the country's GDP. Over the next decade, we should quietly reach 35%. Even so, we are still far from the levels of Germany, where that percentage is at 50%.
During the crisis years, we have managed to get our exports to capture a larger share of our economy GDP than is the case for local exporters located in France, Italy and Great Britain. Fundamentally, this has been done during the last four years, partially because of the temporary factors associated with the crisis, which we mentioned earlier. The challenge for Spain is for this percentage to continue to grow after the crisis ends.
Our growth model for exports as a share of GDP is quite similar to that of Germany. For example, we have a remarkable stability in our international market share, and we cope with Chinese competition like no one else in Europe except the Germans. Germany should be our model, without doubt.
UKnowledge at Wharton: And if we separate these figures between services and goods, what is the result? What should be your goals in such a case?
Myro:In 2007, exports of goods amounted to 18.7% of Spain's GDP. In 2011, that figure rose to 21.1%. That figure is expected to rise by an additional four percentage points to 25% by the end of this decade. It is a difficult goal to achieve, but it would be a tremendous success if we reached it.
As for the importance of exports of services as a share of [Spain's] GDP, that is 9.8% at the moment, compared with 7.1% in Germany. In this respect, we are well above the average of the five big countries of the eurozone, which are at about 7%. Despite that, Spain can also get that percentage to grow in coming years because [our] non-touristic services are growing very rapidly. The more the European economy recovers, the more we can achieve those goals.
UKnowledge at Wharton: Can Spain serve as an example for other countries in the eurozone that are struggling economically, such as Portugal, Greece and Ireland? Can those economies also use exports as a life raft they can latch on to?
Myro: Yes, Spain can serve as a good example for these countries. But their exports are not doing poorly. Since they are very small economies, their companies have no other remedy but to direct themselves toward foreign markets. Although these countries have a high propensity to export, they also have a problem. In order to make a noticeable increase in their exports, they have to increase their productive base. But these countries have problems with their productive structures and their overall competitiveness. Their industrial base isn't large enough to manufacture more goods. The exports of these countries are very unusual products, and very traditional ones in the case of Portugal.