Free trade between the US and the EU

Mr L. Zammit's article appears weekly on the Times of Malta

This week’s meeting in Ireland of the G8, that is the 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 European Union and the United States. At the start of the meeting it was announced that the EU and the USA 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 USA is of around one trillion dollars. Capital flows are even greater at around 4 trillion dollars. 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%, generating an additional two million jobs. Thanks to the free trade agreements that exist between the EU and other states and the USA and other states, the EU – USA 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 movie 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 USA could serve to stem China’s economic power

 

Malta should view such a free trade agreement more as an opportunity than as threat. We have grown our economy after achieving Independence in 1964 on the strength of an Association Agreement signed with the European Union (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 as a result 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 USA. 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.

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