#Andorra: An Association Agreement with EU

| May 15, 2017 | 0 Comments

Andorra wishes to intensify its trade links with the EU, bypassing its current business interests derived from the sale of alcoholic beverages and tobacco, with the help of a few privileged commercial duty-free allowances.

What has been a renowned commercial and tourist centre of the Pyrenees, the goverment wants to start a new cycle of prosperity and economic opening to the world. It is now addressing the main economic activity of the country to develop sectors such as welfare and health, and tourism over and above the already worn-out commercial attractions based on alcohol and tobacco. The incentive for alcohol and tobacco came from a tax differential and a permissive business duty-free allowance, which today seem difficult to fit with the status of a country immersed fully in a harmonized EU regime.

This apparent sacrifice, still pending the final negotiation, aims to allow the country to become an interesting economic and financial centre which is fully approved by the international community. Andorra offers also specialized tourist attractions providing added value related to the services of good living and health. Nevertheless, it will necessarily require a period of transition and adaptation to convert the existing industry based on the trade of alcohol and tobacco, which until today, along with the financial sector, has been the mainstay  of the country’s economy. Without such a smooth transition, the alcohol and tobacco industries will suffer commercially, with a corresponding deleterious effect on the Andorran economy.

Furthermore, the banking sector has been impacted adversely in terms of financial performance since Andorra implemented a number of reforms related to transparency of  financial transactions to meet the standards required by OECD. Significant investments have been carried out by the banks on infrastructures related to the tourism sector, and many of these are now in a state of negative equity. The banks’ existing financial exposure justifies their support for a closer union with the EU in order to attract fresh foreign capital.

So while for the financial sector it is appealing to open new horizons of expansion, for trade in alcoholic beverages there will begin an era of uncertainty until the outcome of the negotiation and the consequences of entering fully into the European harmonized system, are known. Then it must decide on the compatibility or otherwise of the current regime of  duty-free allowances and low VAT, with the commercial interests of the other countries of the union, as well as other community charges such as the non-existence of excise duty. There are indeed precedents for retaining such systems even after joining the EEA – for example Norway was able to retain its border control and its strict travellers’ allowances for alcohol import after joining EEA. Andorra would have to achieve similar success in negotiating any entry to the EEA or risk losing the benefits of its duty-free attraction to visitors.

On the other hand, for the tobacco industry, which is difficult to replace and essential for the economy of the country and the agricultural sector, the EU looks like it will need to be patient and make an effort to find an ad hoc solution, albeit on a temporary basis. This would enable the tobacco sector to commence a decisive conversion about this traditional economy – an economy with a significant weight within the national budget, and which has been a major commercial attraction for centuries.

Alcohol and tobacco are among the most regulated consumer products in Europe, with some fearing the trend is towards over-regulation. So for Andorra, the long-standing importance of the alcohol and tobacco sectors to its national economy means that it is vital to ensure that any changes do not impact negatively on the country’s ability to support its public service expenditure and the welfare of its inhabitants. Should this issue result in a financial deficit, the Andorran government could be obliged, without a viable solution, to make some cuts on transport, social and health care services. This would have a damaging impact on a hard working population.

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Category: A Frontpage, EU