General History of Icelandic Foreign Trade
An outstanding feature of the Icelandic economy is the overwhelming share of fish and fish products in its export of merchandise, which on average was close to 78% in the period 1990-1994 and as high as 90% before 1970. This is both an advantage (by implying a high degree of specialization) and a disadvantage (due to the vulnerability of such an undiversified economy). High on the political agenda during all the postwar period has been diversification of the economy, in particular the export industries. While this is important, an economy of the size of Iceland's is by necessity specialized and comparisons with communities of similar size would no doubt confirm this inference.
Fish and fish products command an overwhelming share in Icelandic exports: in the 1960s it was over 90%, falling to 75-80% when export of aluminium started in 1969 and with the advent of ferrosilicon exports in 1972. In 2006 marine products constituted 51.2% of all exports, a 5.5% decrease from the previous year and a 9% decrease from 2004. The variations from one year to another in the share of fish in total merchandise export can more often than not be traced to the supply of fish rather than to export drives for other commodities.
Whereas exports are fairly concentrated into a few broad groups of commodities, imports are very diversified. Iceland is totally dependent on imports for its demand of oil and oil products, for its consumption of wheat it is totally dependent on foreign suppliers, and the timber used annually must come from foreign sources. For investment goods, too, the Icelandic economy depends to a considerable extent on imports as most of the machinery used is of foreign origin. As a rule of a thumb, the import content of investment is around 40%.
Direction of Trade
The distribution of Iceland's foreign trade reflects very well the country's geographical position, midway between Europe and America.
There have been considerable fluctuations in the geographical distribution of exports since the founding of the Republic. This reflects in part the fact that certain important fish exports are closely tied to certain markets or even countries. Thus export of salted cod is largely confined to Spain and Portugal and stockfish exports are likely to be destined for Africa or Italy. The market for fresh fish on ice is in Europe, where the UK and Germany are the main outlets. Politics, domestic or international, is another factor shaping the geographical distribution of trade. One case in point was the increase in trade with the Soviet Union in the wake of the Cod War with the UK in the early 1950s, and another, on a smaller scale, the closing down of exports of stockfish to Africa with the outbreak of the Biafran war.
Lastly, product prices and exchange rates have become an increasingly important determinant of the geographical distribution of Iceland's export outlets. Iceland's exports followed the strong dollar in the early 1980s, then they shunned the US market as the dollar weakened in the latter half of the decade.
Extensive trade is conducted with the European Union, which is by far the most important market area. In 1998 no less than 65% of Iceland's export markets were in the EU.
Iceland's trade policy in the period 1930 to 1960 precluded it from taking part in the liberalization of trade and formation of the European trading blocs, the EEC and EFTA. Hesitant moves to liberalize trade in the early 1950s came to an end in 1952 as a result of changes in external conditions. Imports were subject to extensive rationing. Iceland's trade came to be conducted to a considerable degree by bilateral trade arrangements, and in the 1950s no less than one-third was on that basis.
Eastern Europe has been of great importance in terms of exports as well as imports. Trade with the Soviet Union got off to a flying start in the wake of the ban on landing of fresh Icelandic fish in the UK in the early 1950s. This trade bloomed in the period 1956-1960, when no less than 31% of Iceland's exports were marketed in the COMECON countries, with the share of imports at around 29%. Trade with Eastern Europe decreased as Iceland's trade policy became more liberal from the early 1960s onwards. Trade with communist countries was almost solely barter. Iceland bartered fish (mostly salted herring) and various manufactured goods (notably woollens), for petrol and oil, cars and various machinery. It is quite remarkable that Russia was the sole supplier of the strategic commodity oil to the NATO member Iceland for most of the Cold War. Trade with the former Soviet Union and Eastern Europe more or less collapsed with the fall of communism and less than 1% of Iceland's exports in 1994 went to these countries.
The change in trade policy in the wake of the 1960 "Reconstruction government" programme changed Iceland's trade options radically. One possibility became applying for membership of the EC, which was seriously contemplated in the early 1960s when the UK was on the verge of joining and taking with it Denmark and even Norway. Nothing came of this possibility, however, and it was not until 1970 that Iceland became a member of EFTA.
Trade with Asian countries has been increasing sharply in recent years. Iceland is one of very few Western countries that have run up a surplus on trade with Japan for some years. In 1994 Iceland's exports to Japan totalled ISK 16 billion (USD 229 million), having doubled from the year before, and imports from Japan came to ISK 4.1 billion (USD 59 million). Of course, high transport costs from Iceland to Japan preclude exports of all goods but those fetching a high value per kilo. Exports from Iceland to Japan include frozen redfish, flatfish, shrimp and capelin, along with considerable quantities of ferrosilicon, due to partial Japanese ownership of a plant in Iceland.
The import side is much more stable than the export side in terms of geographical distribution. Germany, The United Kingdom, and The United States are the three major economies that Iceland trades with. In 2005 these three countries accounted for 42% of all exports (Fob), and 29% of all imports (Cif). In 2006 these countries accounted for 40.6% of all exports (Fob), and 30.4% of all exports (Cif). In recent years Norway has become the main supplier of oil instead of Russia, and with it one of the main importer to Iceland.
Trade in Services
Around one-third of Iceland's export revenues come from exports of services; a similar proportion of its foreign expenditure is on import of services. Exports of fish and fish products accounted for 56,7% of merchandise exports in 2005.
Adapted from "Iceland - The Republic", Handbook published by the Central Bank of Iceland, ed. by Mr. Jóhannes Nordal and Mr. Valdimar Kristinsson, Reykjavik 1996. The Mission is responsible for the adapted texts.
- Iceland - OECD Economic Surveys, OECD, Paris (annual publication).
- Trade Policy Review, Iceland, Vol I & II, GATT, Geneva 1994.
- Ministry for Foreign Affairs