There is a fairly active trade in consumer goods, including imported manufactured items, which, because they are taxed at lower rates, are less expensive in Andorra than in neighboring countries. Andorraís tax-free status has also had a significant effect on its relationship with the European Union. Its negotiations with the Union began in 1987. An agreement that went into effect in July 1991 sets duty-free quotas and places limits on certain items--mainly milk products, tobacco, and alcoholic beverages. Andorra is permitted to maintain price differences from other EU countries, and visitors enjoy limited duty-free allowances. In June 2004 Andorra signed a series of accords with the EU in the fields of economic, social, and cultural cooperation. Tax legislation was also approved that taxes interest from monetary products and fixed-interest investments belonging to non-residents while maintaining bank secrecy.

The results of Andorraís elections thus far indicate that many support the governmentís reform initiatives and believe Andorra must, to some degree, integrate into the European Union in order to continue to enjoy its prosperity. Although less than 2% of the land is arable, agriculture was the mainstay of the Andorran economy until the upsurge in tourism. Sheep rising has been the principal agricultural activity, but tobacco growing is lucrative. Most of Andorraís food is imported.

In addition to handicrafts, manufacturing includes cigars, cigarettes, and furniture for domestic and export markets. A hydroelectric plant at Les Escaldes, with a capacity of 26.5 megawatts, provides 40% of Andorraís electricity; Spain provides the rest.