Spain and Portugal still have to achieve a significant measure of bilateral trade liberalization: trade between them was almost non-existent as recently as 1979, and liberalization is consequently expected to have a large impact on their industrial structures, particularly in Portugal, since it is the smaller economy. Portuguese export industries have responded well to liberalization and restructuring over the last four years, but the 1985 EC treaty allowed for a slower pace of liberalization for oil refining, and import-substituting industries are now lobbying for similar treatment.
In Discussion Paper No. 428, Research Fellow Cristina Corado uses a formal model of imperfect competition to determine the effects of EC enlargement and the single market programme on six industries with economies of scale and oligopolistic market structures, which have traditionally been protected and oriented towards the domestic market, and on two labour-intensive export industries (cotton and metal products) for both Spain and Portugal. These represent 29% of production and 21% of manufacturing employment in Portugal, and 16% and 9% respectively in Spain. In Corado's model, differences in marginal costs reflect differences in the level of production (determined endogenously) which captures both direct and indirect barriers to trade. Levels of protection and of industrial concentration are shown to be higher than in other EC countries.
Corado simulates two trade policy changes, corresponding to the liberalization resulting from the single market programme and enlargement, and the liberalization due only to the entry of the two Iberian countries and their unilateral reduction of trade barriers vis-à-vis the rest of the Community (and each other). The difference between the two approximates the `costs of non-Europe' for Spain and Portugal.
Corado's results indicate, not surprisingly, that net exporters favour `1992' over `enlargement', because their access to a larger market implies increases in both production and consumer welfare. Most of the industries studied were net importers or operated at lower scales of production than their competitors elsewhere in the Community. Hence their production is likely to be reduced, and their concentration correspondingly increased, in the medium term. `1992' will therefore lead to pressure for a reallocation of firms towards larger markets, although this pressure would be greater and consumer gains correspondingly smaller than for a unilateral liberalization by the Peninsular countries. Hence, both Spain and Portugal should support the single market programme for both types of industry.

Portuguese Industry and the Effects of EC Membership
Cristina Corado

Discussion Paper No. 428, July 1990 (IM)