Last week the European Union, through its Commissioner Peter Mandelson, reached agreement with China on the control of the latter's exports of textile products to EU member states. The issue essentially was that Chinese exports of these products had reached proportions that had started to represent a very serious threat to the survival of the textiles industry in Europe. The issue had been very much circumscribed to textiles; however, in my opinion, this would be reducing it to the absurd if we were to think that the only threat that the manufacturing sector of EU member states is facing is in the textiles industry and that the threat is only coming from China.

The threat is certainly not circumscribed to China. Products manufactured in Malaysia, Thailand, the Philippines, Indonesia and other states in the Far East have penetrated the EU market to an extent that equals the level of penetration achieved by Chinese products. This explains the title of this week's contribution. Neither is the threat circumscribed to textile products. Gone are the days when the products made in the Far East were those products found in open-air markets, selling at very low prices. States in the Far East also manufacture designer products, high technology products and lifestyle products.

Another important consideration is that the Far East phenomenon means different things to the different members of the European Union. For those members that have a relatively small manufacturing sector, the threat is not so great. China and the other states in the Far East are producers of manufactured goods rather than of services and therefore today they do not represent a significant competitive threat to such EU member states. If anything the development of the manufacturing capability in the Far East today represents for these EU member states an opportunity for lower priced products.

For those member states that have a relatively strong manufacturing sector but a small home market, like Malta, this phenomenon represents both a threat and an opportunity. It represents an opportunity in that we can benefit from lower priced products; while it represents a threat because Far Eastern countries, thanks to lower production costs and even a home market that is very large, are attracting foreign direct investment that could have otherwise been attracted to Malta. For countries that have a strong manufacturing sector as well as a strong home market, like Italy and Germany, the threat is twofold. There is the threat of imports and there is the threat of loss of jobs resulting from investment being moved away towards the Far East.

The issue becomes even more complex when one considers that in a couple of years, states will no longer be able to resort to protective barriers to keep away lower priced imports. At that stage another issue comes into play - the regulatory framework within which industry is operating in the EU. Today industry in the EU incurs costs related to health and safety at work, the protection of the environment, employment protection, social security, etc. These costs are inexistent in the Far East; a situation that may be judged as creating unfair competition against EU based manufacturing firms.

What challenge does the Far East phenomenon represent for Malta's government? It needs to be stated without ambiguity that there is nothing that can be done to stem the tide of imports from the Far East. Free trade is here to stay because it is to the benefit of all countries. At best one would need to make sure companies are operating on a level playing field. The EU is very vigilant to ensure that companies operate on a level playing field within its boundaries; but does very little on this score outside its borders.

Thus the issue that the government would need to address Malta's position as an investment location. When a German or an Italian firm invests in the Far East, it would have already taken the decision to invest outside its home market. Previously we were able to attract a part of that foreign investment. Now, more often than not, we are losing that investment to the Far East. Admittedly the same thing is happening to countries like Poland, the Czech Republic and other EU member states that joined in 2004.

This means that the government needs to act not so much on the demand side of the economy but on the supply side. It is useless stimulating aggregate demand in our economy if this is just going to mean more imports or higher property prices. We need to stimulate our supply capabilities, such that firms operating in Malta strengthen their competitiveness. In effect we need to transfer resources from the demand side of the economy to the supply side. Eventually the improvement in our supply capabilities would mean more jobs and in turn a higher aggregate demand. The Far East phenomenon is just one more factor that should force us to think seriously about the competitiveness of firms operating in Malta.