Why the whole West should come together in a large free trade area

Establish a large free trade area (LFTA) between Western countries, on the model of the European EFTA. The proposal by Giuseppe Capuano, professor of International Economics at the University of Salerno

If they had to identify a date from which the beginning of the end of globalization and turbo-liberalism were to be marked, economic historians would probably identify it in 2020, the year of the Covid-19 pandemic.

Year in which all the problems and critical issues of a geopolitical and economic model came to light which on the one hand had favored the relocation over the years of a large part of American and European industry to Asia in search of low labor costs and transformed the United States and the EU essentially into a market for the assembly of finished products, financial and consumer services and on the other, had allowed China to enter the WTO in 2001 without any guarantee of reciprocity and without preventing its dumping practices adopted.

Among the consequences of ungoverned hyperglobalisation, not all of which are negative (see for example the growth of many developing countries with the reduction of poverty), was first and foremost the formation of a gigantic trade surplus for China, which became the driving force behind its rise to economic and political power and, secondly , the parallel weakening of the Western economy as a whole, with the United States of America increasingly grappling with the growth of twin debts (public debt – around 30 trillion dollars – and commercial debt – around 1000 billion dollars) and the EU is often a victim of its own institutional and bureaucratic architecture which has made it increasingly less competitive on international markets (see the "Draghi Report" presented in September 2024).

After the pandemic, the USA and EU attempted to recover the deficit in competitiveness and innovation and pieces of industrial apparatus by accelerating the processes called reshoring and friendshoring with the shortening of value chains (from long to short supply chains). The change in production strategy by private individuals supported by individual states has proven over the years to be insufficient and too expensive due to the long implementation times and hampered by the enormous structural and return delocalization problems (see for example the scarcity of rare earths, of technologies connected to them or the enormous localization costs and/or the difficulty of finding specialized personnel at low cost).

Returning to economic current affairs, with the new US Presidency however, we are trying to find new ways to solve this economic disaster with the tariff "war", with the cure proving to be worse than the disease. In practice, protectionism and trade policy are being used as a substitute for other economic and industrial policy tools to address a structural criticality of our economic system. Choices that probably call into question one of the few certainties that modern economic theory (from Smith to Ricardo to Keynes to Friedman) has shared over the last three centuries, namely the principle according to which "the development of international trade favors economic growth and the well-being of peoples".

Contrary to the protectionist practices proposed in recent months and following the teaching of the great economists of the past, this article proposes a method that is somewhat provocative and diametrically opposed to that currently pursued by the USA in order to encourage the growth of Western economies and their new competitive positioning in a rapidly evolving geopolitical scenario: creating a large free trade area called "Large Free Trade Association (LFTA)" between Western countries on the EFTA model with the participation of the USA, EU, Canada, Japan, South Korea, Australia, etc. Gradually and with methods possibly differentiated for the participating countries but at decreasing rates over time and tending towards zero according to a shared path.

The LFTA could give rise to a large economic market with "zero" customs tariffs made up of more than one billion inhabitants and which would represent more than 50% (around 50 thousand billion dollars) of the world GDP which, in 2019, was equal to around 94 thousand billion dollars (source: IMF).

Detailing our proposal in greater detail, we state that EFTA (European Free Trade Association) is an intergovernmental organization established in 1960 by the EFTA Convention, which promotes free trade and economic integration among its members, in Europe and globally. The seven founding countries were: Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom and others were part of it. Many of these countries then joined the European Union. It currently includes Iceland, Liechtenstein, Norway and Switzerland.

Technically, a free trade area is made up of several states, in which the free movement of goods and services is foreseen and the consequent suppression of all constraints imposed on trade (tariff and non-tariff) within the area. The States associated with the free trade area are instead free to act individually towards third States; this last element differentiates the free trade area from the customs union .

The spirit of the proposal, therefore, would be to follow what was taught by the great economists of the past which goes in the opposite direction to what is preached by the current American Presidency, in the interests of all Western countries, starting from the USA itself.

If implemented in a graduated manner over time according to a shared path, the Large Free Trade Association (LFTA) would favor an increase in trade, GDP growth without inflationary pressures and, from a geopolitical point of view, the birth of an important global interlocutor. It would be desirable for this proposal to be the subject of broader technical reflection and attention on the part of policy makers and those with government responsibilities.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/occidente-grande-zona-libero-scambio/ on Sat, 19 Apr 2025 05:22:18 +0000.