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Emerging World Trade Blocs: The North American

Free Trade Area and the European Union


Compared
By

Olga M. Lazin, UCLA

STATISTICAL ANALYSIS

Let us compare for the early 1990s:

(a) the 15 countries comprised in the European Union (data for which here
include three countries that are to join in January 1995),

(b) the six Eastern European countries likely to join the European Union in
the long term under the Europe Agreement,(1)

(c) the EU constituencies; 27 countries to date

(d) EU and NAFTA countries compared,

(d) major world trading blocs, especially Mercosur which is being courted
by both NAFTA and EU, and

(f) the NAFTA schedule for managing the opening of duty-free trade by
item for each of the three countries.

Data on the major trade blocs are included in order to show the context in
which NAFTA and EU discuss expansion. The Europe Agreement to unite
the continent east and west was signed on October 5, 1992, at Luxembourg;
and the EU's negotiations to develop a special relationship with Mercosur
have acquired importance by mid-1994 as Mercosur debates how closely to
try to relate to NAFTA.

Comparison is presented in five tables. Tables 1, 2, and 3 cover population,


GNP, GNP/C, and export share in GNP for the EU, Eastern Europe, and
NAFTA. Table 4 covers the same data for major trade blocs. Table 5 shows

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the relative importance of the major trade blocs, using the USA as reference
point. Table 6 presents the current situation of economic blocs as through
statistics for six countries, Japan standing as its own economic bloc.

Table 1 allows us to examine the ranges in country size for population.


Reunited Germany has the largest population, 81 million. Italy and the U.K.
follow as the second and third largest countries, virtually tied at 58 million
persons. Germany's population is 207 times larger than the smallest
country--Luxembourg has only 389,000 persons. In terms of GNP, Germany
is 134 higher than that of Luxembourg

Given such disparities in size, is it "fair" that the EU member countries have
disproportionate voting rights which are weighted in favor of small
countries? (For shares of voting rights, see Appendix A.) One good
argument for such weighting is that Luxembourg has the highest GNP/C of
EU's (US$ 35,260) and the highest export share in GNP (94%). Spain has a
larger population (39 million) but has EU's lowest export share in GNP
(17%). Such complexities explain why weighted voting rights are not as
arbitrary as first glance might have us believe. In any case big countries have
enough votes that it takes the votes of many small countries to reach the
present blocking minority of 23 votes, a total which once the EU reaches 15
countries will be 26 votes. (2)

Table 2 shows ranges in size for the six countries of Eastern Europe seeking
to join the EU. Poland has the highest GNP (US$ 75 billion), much higher
than that of EU member Ireland (US$ 42 billion). Unfortunately Poland is
weak in exports, which amount to 19% of its GNP. Hungary's advantage is
due to its earlier leadership among the former communist countries in
carrying out economic reform, its GNP/C being 54% higher than that of
Poland.

The relationship of Poland to "smaller" countries is interesting. Although


Poland has 4 times the population of Bulgaria's 9 million, Poland has the
lowest export share of GNP. Bulgaria has the second largest export share in
GNP (45), after the Czech Republic, which leads both in export share in
GNP (58) and also in GNP/C (US$ 2,440) as compared to the rest of the
Eastern European countries.

With regard to the two poorest countries seeking to join the EU, the poor

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economic performance of Romania is noteworthy. The Romanian GNP is
hardly double that of the Slovak Republic (US$ 10 billion), yet the two
countries are equal in GNP export share (28%). Romania's trade with
Eastern Europe collapsed in 1991 along with the COMECON trading
organization. Subsequent growth in trade with the West has been slow, and
current-account deficits of more than US$ billion have been recorded in each
of the last four years. In terms of population, Romania is 4 times larger than
that of the Slovak Republic (5.3 million). The legacy of a high-inflation
environment and modest growth accounts for the Romanian currency's very
small purchasing power. Despite all theses shortcomings Romania became a
full member of EU in ten years, that is December 1st, 2007.

The Slovak Republic with its small population and economy calls our
attention. How can it hope to compete in an expended EU? Although its
population is only 5 million and its GNP is only US$ 10 billion, Slovakia
has a relatively high level of export in GNP, 60% higher than the larger
Romania.

Given the above disparities, interests within the EU have been divided into
five "constituencies." (3) (See Chart 1.) The "Core" constituency is France
and Germany (which founded in 1951 the European Coal and Steel
Community to rebuild war-torn Western Europe). To this core are appended
Belgium, Holland, and Luxembourg, too close geographically and too small
economically to avoid being drawn into the orbit of power.

The second EU constituency is made of the "free traders" Britain and


Denmark (both of which joined the EU in the early 1970s). Britain leads the
way to open a common market of goods, services, capital, and people while
at the same time trying to prevent the rise in Europe of any singly powerful
country.

The EU third constituency involves the poorer, newly democratic members


admitted in 1980s (Greece, 1981; Portugal and Spain, 1986), each seeking to
modernize their economies in order to guarantee against a resurgence of any
authoritarian rule. This expansion widened the gap between richer and
poorer countries, the latter including Ireland and to some extent Italy.

The fourth constituency involves Eastern Europe, which freed itself from
Russian rule after 1989. It sees admission to the EU, proposed for the year

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2000 by Germany, as guarantee against the resurgence of Russian authority
in the region.

The fifth EU constituency involves the European Free Trade Association


(Austria, Finland, Norway, Sweden), which has realized, except for Norway,
that it must not be left out of the EU as it expands to include even Eastern
Europe. Indeed Austria may move directly into the Core.

Given the divergent interests of these five constituencies, two models offer
future direction to solve the problem of disunity within unity. The British
model, which seeks to give more or less equal weight to, the concentric
circles depicted in Chart 1, thus encourage cooperative diversity; and the
German-French model, which seeks to move forward with monetary union
and unified foreign policy focused on the center circle in Chart 1. The idea
that Britain may resist France and Germany by refusing to join the EU
monetary union has prompted The Economist to write:

If Britain stays out, only to change its mind later {as it did about the EU], it
leaders may seem as silly as Churchill now seems, for this comment on the
founding of the European Coal and Steel Community 43 years ago: 'I love
France and Belgium but we must not allow ourselves to be pulled down to
that level." (4)

Turning now to a comparison of the EU and NAFTA, several factors


emerge. The population of the two trade blocks is about the same (363.3
million for NAFTA, 345.0 million for the 12 EU countries, and 368.8 for the
15 countries in 1992). With regard to economic differences, Germany
emerges as having the biggest sheer economic power, followed by France
and Italy within the EU.

Noticeable is that the USA has the highest GNP among all countries (US$
5.9 trillion) and the highest GNP/C within NAFTA (US$ 23,120).

Comparing the countries with lowest export share of GNP in each unit,
NAFTA's Mexico with only 14% has much less than the EU's Greece, which
stands at 23%. Romania and the Slovak Republic have twice Mexico's
export share in GNP.

With regard to the power of population and GNP, the index in Table 5 is

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based on the fact that the most important country is the USA, which equals
100. while Mexico has one-third of the U.S. population, but only 5% of
GNP.

Table 5 shows why Japan is often seen as the economic "enemy" of both
NAFTA and the EU, its power being concentrated in one county which has
established a web of trade dependency worldwide. Its GNP/C is 21% higher
than that of the USA.

Japan's accumulation of world trade capital is one of the reasons why so


many other countries are trying to compete globally by implicitly forming
trade blocks. NAFTA gives the USA, Canada and Mexico the possibility of
expanding international and international trade at Japan's expense.

The USA dwarfs most of the Western hemisphere in terms of GNP, except
for Canada, which reaches 84.3% of the U.S. total. (See Table 5.) Although
the European Union is 48% larger in population than the USA, its GNP/C is
only 89% of the U.S. amount.

In establishing itself as FTA linchpin in the Americas, (5) Mexico has done
so in spite of the fact that it has only one-third of the U.S. population, 5% of
the U.S. GNP, and 15.3% of the U.S. GNP/C at the same time, however the
NAFTA framework enhances Mexico's tremendously as U.S. business
investment has arrived with new impetus beginning in 1994, especially after
the national "defeat" of the Chiapas rebels in August at ballot boxes almost
everywhere in Mexico.

In relation to the USA, Mexico's GNP/C exceeds by 3.5% that of Mercosur's


12.8% share of the USA's GNP/C, while Germany, with about the same
population as Mexico, has 96% of U.S. GNP/C, raising the average for the
EU to 80% of the same figure.

To further this comparison, let us note the fact that since 1994 the New York
Times (NYT) is carrying a regular comparison of the NAFTA-EU-Japan
economic situation for competition (See Table 6.) To represent the EU, the
NYT gives Britain and Germany; to represent NAFTA, it gives all three
partners; to represent global competition, it gives Japan.

The bottom line for global competition is shown in the 1993 manufacturing

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wage gap given in Table 7. With five leading countries of Western Europe
trying to compete under a burden of hourly scale averaging nearly US$ 21,
Japan and the United States nearly tied in the US$ 16 hourly range, and the
Asian "tigers" (Taiwan, Singapore, South Korea, and Hong Kong) averaging
about US$ 5 hourly, two facts are clear. Mexico with its US$ 2.41 hourly
manufacturing average is the attractive partner wherein factories can be
established in the Western Hemisphere. Eastern Europe with its US$ .90 is
the equivalent area of the future for the European Union.

Although Germany is moving important manufacturing funds into Romania,


for example, the EU has yet to formally bring Eastern Europe into a formal
relationship like that enjoyed by Mexico with NAFTA. Eastern Europe as a
whole (except for the Czech Republic) awaits the opening of it economies,
which remain largely non-market as is shown in Appendix B.

The NAFTA model for opening its three countries over 15 years provides a
much easier process than that faced by Eastern Europe of having to integrate
into the EU on a complete basis and mostly all at once. The effect of
NAFTA integration on Mexico, the USA and Canada is shown in Table 8,
which divides the process into the following time frames for elimination of
tariffs: immediately as of January 1, 1994, and within 5, 10 years, and 15
years.

With regard to immediate action by Mexico, it eliminated duties on all U.S.


and Canadian products not made in Mexico, that is on 43 percent of its
purchases in those two countries. Although most of Mexico’s purchases
seemingly come from the USA (63.4 percent in 1992) and little from Canada
(1.0 percent), the reality is that much of the Canada-Mexico trade is lost
statistically when it passes through the USA where it becomes incorporated
into U.S. trade data.

The USA took immediate action to eliminate duties on nearly 50 percent of


Mexican imports and Canada 19 percent of Mexican imports. Canada’s
actions involved a complete opening to Mexican textiles (including thread,
cloth, and clothing), which in 1992 reached about 17 million dollars in
value. (Mexican textile exports to the USA were 56 times greater.)

CONCLUSION and Positive Outcomes, as well as updates on

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NAFTA

NAFTA and the EU differ greatly in three major ways. The EU goes beyond
NAFTA's trading plan to include free movement of citizens as workers and
students; and EU seeks eventual unification of such potentially controversial
areas as currency, foreign policy, and military coordination.

The second difference is that NAFTA has the trading edge to expand beyond
Mexico into Latin America. Not only do the USA and Mexico have large
trade experience with the region that dwarfs that of the EU, but Mexico has
made the many agreements that at once make expanded trade possible as
well as require it to make multilateral sense of its many bilateral agreements.
Canada has far to go in developing trade beyond the USA, and both
countries face stiff competition from Japan. Under Mexico's leadership in
bringing about the integration of the Americas, however, NAFTA seems
well positioned to compete with the EU as it takes its first serious steps to
develop relations with Mercosur.

The third major difference is that the "core" for NAFTA is the USA, for EU
it is two countries. With Mitterrand’s term coming to an end in France and
Jacque Delors not only retiring as the unifying head of the European
Commission but declining to be the front-runner to replace Mitterrand as
president of France, the question is whether or not Germany can count on
either a dynamic concept of the EU or France as traditional ally as it seeks
ever greater EU unity on all fronts.

Sumario de provisiones delTratado de Libre Comercio de America del Norte


(TLC) y la UniónEuropea (UE)
TLC UE
Criterios transnacionalespara
Un mercado de comercio crear, paso a paso, una unión
Metas
de bienes política, económicay de
población.
Actividad Cada miembro El Consejo de Ministros(el
establecesu propia principal órgano de toma de
politico externa sujeta a decisiones con representaciónde
negociaciones. todos los paises) toma

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decisiones aplicable.s a todos
los miembros.
Los miembros han establecido
una unidad monetaria común (el
ECU) pero coda paísmantiene
Cada miembro tienesu aún su propia moneda. Bajo el
Moneda
propia moneda. Tratado de MaastricL,
seprogramó que el ECU se
volvlera la única unidad
moneuriapara 1999
Los miembros se unieron en un
sólo mercado a partir del 1 de
enero de 1993. Capital,bienes y
Cada paLçconserve sus servicios circulan entre los
Aranceles propias regulaciones paises de la UE. Existe el
arancelaria. compromiso para abolir los
controles de migración interna,
pero algunospaises han
pospuesto su cumplimiento.
Autoriza a camionesy
Se establecióuna política común
cargueros comunes para
para un bloque sin fronteras y la
circular entre paises. (El
apertureto total de las rutas de
Transporte tráfico camioneroen
transporte, excepto el tráfico
cruzará la frontera
camionero,que está prohibido
mexicana libremente para
Los Alpes suizos y austríacos.
1999.)
Los trabajadorespueden
Los trabajadoresno están
Empleo moverse libremente entre los
incluidos.
paises miembros.
MigraciónyCiU Sólo Los ciudadanos delos paises de
adanía profesionistas,persona de la UE tienen garantizada la
negocios e inversionistas libertad de movimiento y
aenen el derecho de residencia.Los ciudadanos votan
trabajar en losestados par el Parlamento Europeo en su
miembros. lugar de residenciasin importer
su ciudadanía. Están siendo

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introducidos pasaportesde color
tinto en to da la UE.
Acuerdos de
Los acuerdos de comercio son
comerciocon otros
No cubiertos. firmados par la Unión, no por
países no
países individuales.
mlembros
Los miembros
estáncomprometidos con una
Políticaexterna No cubierta. política externa común, pero
pocuspaises buscan en realidad
su cabal cumplimiento.
Inflacióny
Los pulses miembrosdeben
administrac ión No incluidas.
adherirse a los límites máximos.
macroeconómica
Los miembros
acordaronestablecer estrategias
Competencia y comunes para hacer a todos Los
No cubiertas.
calldad países igualmentecompetitivos.
Las normac de calidad.son
mínimac.
Los miembros seadhieren a
Protecciónal
No cubierta. regulaciones estándar que están
consumidor
siendo establecidas.
Se aplican criteriosestándar a
Politica social No cobierta. todos los paises (por ejemplo, la
seguridad social).
Establece una pauta estándar
para todos los miembros. Se
otorgan privilegios
especialespara ayudar en las
Legislacion de Cubre sóloel Tratado de
area económicamente
impuestos Doble Impuesto.
necesitadas tale. como Españay
Portugal. Finlandia y Austria se
beneficiarán al volverse
miembros.
Medio ambiente Los participantesestán Los miembros hanestablecido

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estableciendo estándares
una política externa de
comunes en Los tratados
estándares y medidas.
Iaterales
Los miembroshan establecido
Salud No cubierta.
un programa común
Establece programasde
Aunque el TLC esuna intercambio para estudiante de
unión economica, ha educación superior y
surgido un acuerdo profesoresunlversitarios. El
Educación
lateral, pero no al programa ERASMUS apoya a
mismonivel que para el los estudiantes que
programa ERASMUS. estudienhaste un afio en otro
pais de la UE.
Los miembros buscandesarrollar
una política común de
seguridad. Se ha establecidoun
Defensa No cobierta.
sistema militar común, pero
coda pais conserve su propia
milicia.

1. Indicadores de poblacion, produccion y exportacionesde Union


Europea 1
Pais Poblacion Producto interno Produtcto Proporcion del
( bruto(m int product
m illones ern o
i de o interno
l dolares) bru bruto
e to dedicad
s per oa la
) cap exporta
ita cion
(do
lar

10
es)
Alemania2 80,553 1,846,064 23,030 24
Austria 7,906 174,767 22,110 41
Belgica 10,039 209,594 20,880 73
Dinamarca 5,166 133,941 25,930 37
Espana 39,077 547,947 14,020 17
Finlandia 5,062 116,309 22,980 22
Francia 57,338 1,278,652 22,300 23
Grecia 10,454 75,106 7,180 23
Irlanda 3,536 42,798 12,100 62
Italia 57,844 1,186,568 20,510 20
Luxembourgo 389 13,716 35,260 94
Paises Bajos 15,167 312,340 20,590 54
Portugal 9,843 73,336 7,450 35
Reino Unido 57,701 1,024,769 17,760 24
Suecia 8,707 233,209 26,780 28
15 paises 368,782 7,269,116 19,6583 27c
12 paises 347,107 6,978,040 20,1034 25c

1. Indicadores de poblacion, produccion y exportacionesde Europa


Oriental
Pais Poblacion Producto interno Produtcto Proporcion del
( bruto(mi inte producto
m llones rno interno
i de brut bruto
l dolares) o dedicado
e per a la
s capi exportaci
) ta on
(dol
ares

11
)
Bulgaria 8,952 11,906 1,330 45
Hungria 10,202 30,671 3,010 33
Polonia 38,365 75,268 1,960 19
Republica
10,383 25,313 2,440 58
Checa
Republica
5,346 10,249 1,920 28
Slovaca
Rumania 22,865 24,865 1,090 28
Total 96,113 178,272 1,854a 305

1. Indicadores de poblacion, produccion y exportacionesde America del


Norte
Produtcto
Proporcion del
Poblacion inter
producto
( no
Producto interno interno
m brut
bruto(mi bruto
Pais il o per
llones de dedicadoa
e capit
dolares) la
s a
exportacio
) (dol
n
ares)
Canada 27,844 565,787 20,320 25
Estados
255,414 5,904,822 23,120 11
Unidos
Mexico 84,967 294,831 13,470 14
Total 368,225 6,765,440 18,374a 126

1. Principales bloques de comercio mundial7


Bloque Miembros Poblacion Producto interno Produtcto
Come ( bruto(mill intern

12
o
m
bruto
ill
ones de per
rcial o
dolares) capita
ne
(dolar
s)
es)

TLC 3 363.3 6,404.2 17,622


SICA 6 29.5 36.0 1,222
ACS 25 198.7 474.0 2,386
G3 3 137.8 377.7 2,740
Pacto Andino 5 93.8 160.1 1,707
MERCOSUR 4 191.6 544.1 2,840
Union
15 368.8 7,269.1 19,658
Europea8
Union Europea 12 345.0 6,144.0 17,809
APEC 13 1,961.0 11,135.1 5,678

TLC
Mexico 83.3 282.5 3,391
Estados Unidos 252.7 5,610.8 22,203
Canada a 27.3 510.8 18,711

SICA
Costa Rica 3.1 5.6 1,796

ACS
Cuba 10.7 26.9 2,500

G3

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Colombia 33.6 41.7 1,241

Pacto Andino
Venezuela 20.2 53.4 2,644

MERCOSUR9
Brazil 151.4 414.1 2,735
Chile6 13.4 31.3 2,336

Union Europea
Alemania 79.6 1,692.0 21,256

APEC
Japon 124.0 3,337.0 26,911

As of 2010 we have now 27 countries contained within the EU.

Statistics from source: Olga M. Lazin, “Mexico as

Linchpin for Free Trade in the Americas,” in Statistical Abstract of

Latin America, vol. 31, 2001.

1. Population and economic power index from devepoed countries (Indice


de poblacion y poder economico de las principales unidades de
comercio mundial) in 2010
Area Population/Poblation GNP GNP/C

Mexico 33.0 5.0 15.3


Canada 10.8 9.1 84.3

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MERCOSUR 75.8 9.7 12.8
Alemania 31.5 30.2 95.7
EU 147.6 131.5 89.1
Japon 49.0 59.5 121.2

To conclude on a general note, NAFTA is more equitably positioned in


terms of internal wage gap between countries than is the EU. For NAFTA,
the U.S. manufacturing wage rate is 6.8 time larger than Mexico. For the
EU, the existing gap between the highest wage-paying Western Germany
and the lowest paying Portugal is 5.4, but the potential gap once EU expands
into Eastern Europe is 36.6 times--the difference between West Germany
and Bulgaria.

Equity is not the only issue, however, and indeed inequity in this case may
help Eastern Europe attract capital in the competition for ever cheaper
manufacturing sites in an era of globalization.

Crossing back over the Atlantic, Mexico has taken up a leading role in
requiring better Labor laws and environmental standards which are to be
perfected within NAFTA, otherwise the second bigger free trade alliance
will remain only a mere customs union.

RECENT POSITIVE DEVELOPMENTS:


1. Obama agrees to reinstate Bush pilot program for Mexico trucks and
drivers to enter USA, thus potentially ending WTO authorization of tariffs
to punish U.S. for having violated NAFTA.

2. Mexico is now benefiting from the electrical and hybrid car boom in the
USA, U.S. auto companies have made Mexico their
assembly/manufacturing base also because of Maquiladora legal
advantages.

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3. Auto and other manufacturing companies in EU countries (or other
countries which do not have an FTA (Free Trade Area) with NAFTA or the
USA are taking advantage of the fact that Mexico is the only country that
has an FTA with NAFTA, thus EU countries, e.g., use Mexico as their
manufacturing/assembly base to send their exports from Mexico to the
USA as Mexican exports.

4. Mexico is still the only country to have an FTA with both NAFTA and
the EU.
Canada is far from an accord with EU because each of the 27 EU countries
will have to approve of that FTA.

5. European and Asian countries are using Mexico as the base to export to
Central and South Americas as well as the Caribbean.

6. Many companies who left for China have returned to Mexico which has
more secure legal system, does not demand co-ownership, and has much,
much lower transport costs. Further, U.S. Executive can fly from many
U.S.
cities and still be in the same time zone and not suffer from long-flight
jetlag to Asia.

7. The Asian fresh vegetable market for export to USA is based on


Mexico's West Coast. (The Dominican Republic failed for Asian exporters,
owing to infrastructure and transport issues into the USA as well as time
delay to reach the American West Coast where the Asian population has
grown exponentially.)

7. Many U.S. Companies requiring high-tech industrial skills have moved


back to Mexico from the Caribbean (where they moved when the USA
signed FTAs with that area.) Caribbean countries tend to lack high-tech
advantages. Plus hurricanes are very disruptive.

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B. Continuing Problem: NAFTA Red Flags

1. Labor rights and double taxation and social security issues for
workers are not included and far from inclusion.

2. Public safety issues for executives and employees are of great concern to
foreign companies.

Olga Lazin 2011

-----

Footnotes

(1)
Desmond Dinan, Ever Closer Union? An Introduction to the European
Community (Boulder, Colorado: Lynne Rienner Publishers, 1994), p.
479.
(2)
Currently 54 votes out of 76 total are needed to obtain a "qualified"
(decisive) majority; once the number of countries reaches 15, the
decisive majority will be 62 votes out of 87 total. the U.K.'s concern is
that even if it were to be joined by Germany and Holland to form a
"liberal group," they could not form a blocking minority even though
they have 40% of the vote between them. See Appendix A and "The
European Union Survey," The Economist, October 22, 1994, p. 20.
(3)
"The European Union: Back to the Drawing Board," The Economist,
September 10, 1994, pp. 21-23.
(4)
Ibid, p. 23.
(5)
See James W. Wilkie and Olga Lazin, "Mexico as Linchpin for Free

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Trade in the Americas," Background Study prepared for PROFMEX-
ANUIES Conference on "Mexico and the Americas," Puerto Vallarta,
Mexico, November 13-16, 1994,

(6) http://www.allvoices.com/contributed-news/8467402-what-is-new-
with-nafta, March 16, 2011

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