This week’s G8 summit in Ireland, that is the meeting of eight largest economies in the world, was characterised by a number of issues such as Syria and fighting tax evasion.
There was one item that was not on the agenda of the G8 meeting as it concerned only the EU and the US. At the start of the meeting it was announced that the EU and the US will open negotiations next month on a long-sought deal to create free trade between the world’s two mightiest economic regions. It is being described as an effort that will create millions of jobs, which, however, may take years to materialise.
It has been claimed that the trade of goods and services between the EU and the US is of around $1 trillion. Capital flows are even greater at around $4 trillion. The political thinking is that these numbers could be much greater if both sides agree to remove both the tariff barriers on imports (which in certain cases are quite high) and the non-tariff barriers which take the form of bureaucratic hurdles that inhibit the export of many products.
The expectation is that trade could increase by around 25 per cent, generating an additional two million jobs. Thanks to the free trade agreements that exist between the EU and other states and the US and other states, the EU-US free trade agreement could boost the economies of other countries as well. This argumentation is based on the premise that free trade leads to a more efficient allocation of resources and, consequently, to economic growth. Even so countries will still be tempted to maintain trade barriers to protect industries that have become uncompetitive.
For example, France has already started insisting that the TV and film industries be excluded from the negotiations, fearing that the increased transatlantic trade and investment partnership will pose a serious threat to the survival of its own companies in this sector.
The answer to that is that free trade would bring about a level playing ground, which is in everyone’s self-interest.
Moreover, companies would be saved the effort of seeking to overcome trade barriers and be free to invest in innovation. One benefit that politicians will not admit to is that such an agreement between the EU and the US could serve to stem China’s economic power.
Malta should view such a free trade agreement more as an opportunity than as a threat. We have grown our economy after achieving Independence in 1964 on the strength of an Association Agreement signed with the EU (then called the EEC).
We attracted foreign investors because exports manufactured in Malta could enter the EU without paying duties. There were times when the EU imposed quotas on Malta and, as a result, our economy suffered. Thus history shows that free trade has brought net benefits to our country.
I make reference to net benefits, as, even in Malta, free trade did have its costs, such as the closure of companies that could not compete with imports.
On the other hand, we should not forget that because of the inefficiencies of such companies, as consumers we were paying a price that was higher than what was available in foreign markets.
Our membership of the EU strengthened our trade relations with the rest of the world and – subsequently – our exports of goods continued to rise and many Maltese businesses ventured into the export of services. One fundamental economic axiom for Malta is that our growth must be export-led growth.
Malta should play a leading role in the forging of this trade agreement between the EU and the US. I would expect it to give a much-needed boost to our manufacturing sector and should also serve as a platform to attract new investment.