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Country Commercial Guides for FY 2000: Portugal Report prepared by U.S. Embassy Lisbon, released July 1999 Note*

I. EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at Portugal's commercial environment using economic, political and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordination Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. Embassies through the combined efforts of several U.S. government agencies.

Portugal offers an emerging market within the framework of the European Union. Portugal's emerging market status means new opportunities and high growth rates. European Union membership and participation in the first tier of the monetary union mean stability and continued growth due to EU infrastructure funds. Together they offer U.S. exporters an opportunity to do business with a country that Business Week called a "European Tiger" and to export to an expanding corner of Europe--our largest bilateral trade partner.

Since Portugal joined the EU in 1986 its economy has gradually come alive. Portugal has made tremendous strides in the last dozen years. A recent article in USA Today, profiling Lisbon, stated that 500 years ago, leading up to Vasco da Gama's discovery of the trade route to India, Portugal was at the center of world discovery and innovation. And then it took a well-deserved rest--for 500 years! Well, this may be a little exaggerated, but ever since Portugal's wake up call the country has been on the move.

Portugal is a great story these days. From a politically and economically isolated nation a decade ago, it has managed to transform itself into a leader at the center of the European and world stage. Just in the past two years it has hosted high-level international meetings (OSCE and NATO), won a non-permanent seat on the UN Security Council, and opened a world exposition. The Portuguese economy is thriving, with record highs in its stock market, low unemployment, and a founding membership in the European Monetary Union of which its leaders are justifiably proud. After years at the periphery of the Iberian Peninsula, Portugal is finally fulfilling its geo-strategic and economic potential as the gateway to a unified Europe - especially Southern Europe and Africa.

Since Portugal's entry into the European Community in 1986, the country has undergone a tremendous transformation. Portugal has successfully parlayed a dozen years of well-managed EU infrastructure funds into strong economic growth, low inflation and substantial new foreign investment in productive capacity. Portugal has increased its standard of living closer to that of its EU partners. GDP per capita on a purchasing power parity basis rose to over 70% of the EU average in 1997 from just over half of the EU average in 1986.

Imports and exports have expanded rapidly and growth during 1997 is expected to be in the 7-8% range for both. Exports have mushroomed over the past decade as Portugal has benefited from the EU open market and the takeoff in imports underscores strong Portuguese demand for foreign goods. The increasing influence of both imports and exports show the rapid integration of Portugal into the global economy.

In agriculture, soybeans are the number one export to Portugal in value terms (USD 83 million in 1997) followed by corn (USD 69 million). Grain exports to Portugal (and the EU) are subject to high tariffs, but the U.S. has access to a special Portuguese 500,000 MT corn quota for non-EU suppliers. Policy problems related to the clearance process for new bio-engineered corn varieties seeded in the U.S. have led to a temporary suspension of corn imports during 1998. Other products that continue to have high market potential in Portugal are cotton, hides and skins (including finished leather).

Larger than it seems

For U.S. firms, Portugal's emergence as a full partner in Europe has meant a stable location open to foreign investment and an increasingly attractive market for exports. Portugal today should be viewed for what it is -- an independent European market of 10 million which is somewhat under-served by

U.S. suppliers since many of these firms have yet to discover the country. As only the 33/34th largest market for the direct export of U.S. goods and services, Portugal does not frequently rank on top of the lists of new markets to explore. But, Portugal does have a number of things going for it that argue for U.S. firms to pay closer attention to the market: significant indirect U.S. imports; strong trade links as the pre-eminent supplier to Lusophone Africa; and the prospect for continued growth stemming in part from ongoing EU investment.

Statistics would have one believe that the U.S. is primarily involved in selling heavy equipment, machinery and agricultural commodities to Portugal. But this is only part of the story. The U.S. offers a strong market presence in high technology including computers, software and telecommunications. The U.S. accounts for more than 50% of the computer equipment in Portugal and probably close to 70% of software. In addition to these items, best prospects for non-agricultural exports include; telecommunications equipment, medical equipment, scientific and laboratory instruments, pollution control equipment, and franchising. Due to transportation, distribution and taxes, many of these goods are shipped to Portugal indirectly from the U.S. arriving from distribution centers or suppliers located in other EU countries. Actual U.S. exports and market share are probably double the official figures of USD 1 billion and 4%, respectively.

Portugal is also the pre-eminent supplier of goods and services to the Lusophone African countries of Angola, Mozambique and Cape Verde. For example, Portugal accounts for more than 50% of Angola's imports. Many of Portugal's key distributors and firms have offices in Africa or travel there on a regular basis. It is not uncommon for 10% of the total market for products in Portugal to actually be accounted for by the re-export of goods to Africa.

EU, Infrastructure and Investment

Scratch the surface of almost any major project in Portugal and you turn up the presence of EU funds. Much of Portugal's strong growth and investment can be attributed to Portugal's membership in the European Union. EU co-funding has been used for a variety of infrastructure, development and training projects. While the funds offer a key boost to continued growth, they also mean that U.S. firms need to deal through their U.S. subsidiaries in Europe or through EU partners to bid on the many EU-funded projects. Although these projects are not officially tied to any one country, in practice, contracts are awarded only to EU firms and their subcontractors.

Over the period 1997 - 2000, the government will invest some USD 20 billion in regional development projects in virtually every sector of the economy. Portugal will fund two-thirds of the investment, the EU one-third. EU-backed investment will have an impact on a number of major infrastructure projects, including; expressway and railway construction and expansion, the Porto metro, the renovation of the existing bridge over the Tagus River in Lisbon and construction of a second bridge, construction of a nationwide natural gas pipeline, construction of the Alqueva Dam and related irrigation works, and complete renovation and development of a new section of Lisbon as the site for EXPO 98, Lisbon's World Exposition.

EU funds remain instrumental in attracting private direct investment to Portugal. In 1993, Portugal and the EU agreed on a USD 7 billion package of subsidies and grants to encourage foreign investment in industrial development during the period 1994 - 1999. EU-backed incentives, often totaling 25-40% or more of total project costs, have been used effectively as a decisive factor in plant location decisions. These funds were key in attracting the huge Ford/Volkswagen minivan manufacturing plant and in retaining and expanding such high tech facilities as the Texas Instruments/Samsung CPU plant. In addition to the financial incentives, international comparisons show that Portuguese labor costs in manufacturing are among the lowest of all industrialized countries.

Strong and Stable

The political leadership, regardless of whether it is the center right or left, supports broadly similar policies on most issues. The government has been able to guide Portugal with a steady hand due in part to its successful campaign to be in the first tier of countries entering the European Economic and Monetary Union (EMU).

On May 2, 1998, European Union (EU) leaders approved Portugal's membership in the group of eleven EU member states that adopted a single currency, the Euro, on January 1, 1999. Declining inflation and long-term interest rates and rising confidence in Portugal resulted in investment- and private consumption-led real economic growth of 4% in 1998. That growth has slightly decreased to the 3 - 3.5% range in 1999. Portugal's external accounts remained broadly in balance and financial markets were buoyant in 1997 and 1998. Bond yields fell sharply to match their German equivalents and the stock market expanded rapidly. Unemployment declined to 4.8% in the first quarter of 1999. Labor regime rigidities such as high severance and social costs continue to hamper even greater employment growth. Government bureaucracy remains burdensome and commercial legal channels are still very slow.

Country Commercial Guides are available for U.S. exporters from the National Trade Data Ban's CD-ROM or via the Internet. Please contact Stat-USA at 1-800-Stat-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at http://www.stat-usa.gov; http://1997-2001.state.gov/; and http://mac.doc.gov. they can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country-specific commercial information should contact the U.S. Department of Commerce, Trade Information Center by phone at 1-800-USA-TRADE.

For more information on Portugal and on other European markets, visit the Showcase Europe home page at www.sce.doc.gov.