Wilson Initiative – Two plus Two Equals One Thousand

Catenaria

The Trade Effects of Independence

1 Catalonia is a very open economy. Both Catalan exports to and imports from abroad (including the rest of Spain) are greater than 60% of the Catalan GDP. Such a degree of openness is, overall, in line with the size of the Catalan economy.

2 Catalan trade shows a worrying dependence on the Spanish market: about 50% of Catalan exports go to the rest of Spain. European countries that are similar in size to Catalonia show greater diversification in terms of trading partners.

A key factor explaining the disproportionate weight of the Spanish market in Catalan trade is the inertia created by the fact that the Spanish economy was closed to the outside world for much of the twentieth century. A second important factor that explains that dependence is the infrastructure policy followed by the Spanish government, which has, on repeated occasions, refused to finance key infrastructure projects that would have facilitated trade between Catalonia and the rest of Europe – such as the reinforcement of the Mediterranean Corridor. A centralizing infrastructure policy naturally leads to centralized trade flows.

The current situation does not need to be permanent. Over time, the inertia of the past will gradually wane, Catalonia will achieve a degree of diversification similar to that of other countries and Catalan transactions with Spain will represent a small percentage of total Catalan sales abroad. Although this process of diversification could be considerably slow, it is in fact already noticeable in the aggregate data of Catalan trade: the share of Catalan exports to the rest of Spain has fallen from 57% in 2000 to 47% in 2011.

A process of independence could reduce trade between Catalonia and the rest of Spain, and thus accelerate a natural process of market diversification. Still, what would happen if Catalonia suddenly stopped selling to Spain before finding other buyers? Which would be its impact on Catalonia’s economy? Seizing upon this very legitimate concern, some political parties and their analysts have tried to intimidate Catalans with calculations that predict catastrophic falls of 9, 16, or even 19 percent of the Catalan GDP in the event of independence. Are these predictions credible? Our answer is a clear and resounding NO.

6 The starting point of the most catastrophic of these calculations consists in pointing that Catalan exports to the rest of Spain constitute more than 30% of the Catalan GDP. Accordingly, these studies argue that, if independence entails a significant drop (because of boycotts or animadversions) in purchases of Catalan products, the cost in terms of the Catalan GDP would be indeed very high.

It is often forgotten, however, that exports are a measure of production or total sales and that, therefore, their value includes not only the value added by the exporters but also the value of the intermediate goods used in their production. Some of these intermediate goods are produced in Catalonia, but others are imported from abroad—it is important to remember that two thirds of Catalan imports are intermediate goods. As a result, the effective percentage of value added or Catalan GDP included in Catalan exports to the rest of Spain is significantly lower—it has been estimated to be 22.5% of the GDP.

It is also often forgotten that the goods that cannot be sold to the rest of Spain will not be thrown away. Catalan businesses will not sit back idly: they will try to sell their products in other markets. They may sell at reduced prices—but certainly at positive prices. Consequently, the loss of value added associated with a fall of sales to the Spanish market will depend on how much prices would have to be reduced in order to sell those products to the rest of the world.

In order to generate 9% falls in GDP as a consequence of independence, one must assume that Catalan exports to the rest of Spain will fall by 80% and that Catalan producers will have to sell these goods to other countries at half-price. Under these assumptions, the boycott would affect 0.8 x 22.5 = 18% of the value added or Catalan GDP and Catalonia would lose, due to a price reduction, 0.5 x 18 = 9% of its total GDP. Fortunately, these hypotheses are simply absurd, and, therefore, the numbers they generate are absurd too.

10 It is very unlikely that Catalan exports to the rest of Spain will fall by as much as 80%:

a/ First, a boycott of this size would have severe consequences for the Spanish economy. This simply means that the threats of boycotts suffer by the same problem the threats to leave Catalonia out of Europe do: they are not credible. That is, Spain may have an incentive to announce them now but, when push comes to shovel, it will find it hard to carry them out given how they will affect it too.

b/ Second, it is hard believe that consumers and Spanish companies would boycott multinational companies located in Catalonia – such as Nestlé, BASF, Volkswagen, Nissan, and Repsol – because it would be difficult to distinguish whether the products of these companies came from Catalonia or elsewhere and because the Spanish people would not want to harm their European partners’ companies (such as Volkswagen) and, even less, their own companies (such as Repsol). In 2006 all multinational companies based outside of Spain represented 40% of all Catalan industrial production and a probably even larger share in Catalan exports. This means that a boycott of Catalan products would be unlikely to affect more than 60% of Catalan sales to Spain.

c/ Third, there is likely to be a greater propensity to boycott consumer goods than intermediate and capital goods. Catalan export data for 2011 shows that only one third (1/3) of Catalan exports are associated with consumer goods. Therefore, in the extreme case in which the boycott affected 50% of consumer goods and 20% of capital and intermediate goods produced by companies with mostly Catalan capital, the fall of exports to the Spanish market would be only 0.6 x (1/3 x 50% + 2/3 x 20%) = 18%. Since we believe that Spanish consumers and companies are rational, there should be no boycott. However, we may be wrong. In any case, it is very unlikely that a boycott would affect about 18% of Catalan exports to the rest of Spain.

11 Empirical evidence suggests that the average price reduction required to sell Catalan products potentially boycotted by Spain to the rest of the world is in the range of 10% to 40% (25% being the value used by most economists). In order to calculate the effect of such reduced prices on the Catalan GDP, one should also consider the costs of services associated with transporting these goods and services to foreign markets that are not paid to Catalan firms. We estimate that these costs paid to foreigners, which are equivalent to a reduction in the net selling price, would be at most 10% of the export value.

12 These observations lead us to conclude that in the worst-case scenario, sales would drop 18%, and a price drop of 40 + 10 = 50% would be necessary to reallocate the sales. Under such as pessimistic scenario, the fall in Catalan GDP would be 0.18 x 0.5 x 22.5 = 2.0%. For the more plausible price reduction of 25 + 10 = 35%, the fall in Catalan GDP would be 0.18 * 0.35 * 22.5 = 1.4% of the GDP. And these calculations still assume that a boycott against Catalan consumer goods would be almost 10 times (60% vs. 6.5%) higher than the 2005 boycott against Catalan cava. In short, any reasonable scenario indicates that the commercial effects of independence would have a relatively small impact on the Catalan GDP, especially when compared to the 8% fiscal dividend of independence.

13 Some analysts have drawn an even more catastrophic scenario, in which an independent Catalonia would be outside the EU, presumably because Spain would veto its entry. As we explained in detail in the document “Europe, Oh Europe” (http://www.wilson.cat/en/comunicats-conjunts/item/197-europa-europa.html), in order to stay in European market and maintain free circulation of goods (i.e., trade without tariffs) Catalonia need not be a part of the EU. It would only have to sign bilateral agreements, such as those Switzerland has signed with the EU. EU treaties establish that such bilateral agreements do not require unanimity, but only a qualified majority. In addition to this, European legislation would allow Catalonia to negotiate those agreements even before it became a sovereign state (see, for example, the communication of the European Commission COM (2012) 602 final, 10 October 2012).

14 It is often mentioned that independence may affect the localization of firms. To consider this point, we need to address a previous question first: why would companies want to leave Catalonia? Certainly, it is conceivable that some companies would want to leave if they were faced with a catastrophic scenario where widespread boycotts lowered sales to the rest of Spain by 80% and lowered the Catalan GDP by 9%. Remember, however, that relocating is a process that involves very high fixed costs and that it only pays off when boycotts are of long duration. Moreover, as explained above, a scenario where sales in the rest of Spain fall by 80% is simply absurd. If a boycott ended up resulting in a small decline in GDP, the effect on la business delocalization would also be small.

15 Could it be the case that multinationals would not want to stay in Catalonia because its market would be too small? Some countries that have attracted large flows of direct investment in recent years, such as Ireland and Belgium, have economies that are similar in size to the Catalan economy. In fact, multinational companies only care about the size of an economy when the economy is closed to the outside. Yet, if, as we argued earlier, the decline in Catalan trade were small and if it also had a negligible effect on companies with foreign brands (such as multinational firms), bringing in the argument about Catalonia’s small size is not convincing.

16 This does not mean, however, that in an independent Catalonia there would be no relocations, that company headquarters would not be moved away to Madrid or that business would be never closed. It is evident that all these could happen—in the same way that there have been and there will continue to be if Catalonia continues as part of the Spanish state. The key question, in our opinion, is the effect that Catalan independence would have on the incentives of Catalans to create new companies. Here, we should point out two facts. First, independence would give the Catalan government more discretion and resources to carry out investments in infrastructure or to carry out fiscal policies that would increase the incentives of foreign companies to locate their production centers in Catalonia. Second, regarding the creation of new companies, it is difficult to imagine that a future Catalan state should establish worse regulations than those that currently exist in Spain. Without going any further, the report “Doing Business”, published annually by the World Bank, puts Spain at position 136 in a ranking of 185 countries in terms of ease of creating new businesses. In terms of entrepreneurship, one can only say that “Spain is not Uganda [ranked 144 in “Doing Business”]” in a tongue-in-cheek manner.

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