Emerging World Trade Blocs: The North American Free Trade Area and the
European Union Compared
By
Dr. Olga M. Lazin, UCLA
ANALYSIS
The North American
Free Trade Area, is together with the European Union, one of the largest
manageable trade areas in the world. For all of its successes, the European
Union is more than a customs union, it is a free mobility space for all
European nationalities, which makes it the template, a model for progress. BRITexit
has now complicated the configuration. Britain exite referendum on June 30th,
2016 will actually make Germany a stronger, more powerful actor in the European
Union.
As we are looking
back, putting the formation of the EU into perspective, let us compare for the
early 1990s:
(a) the 15
countries comprised in the European Union (data for which here include three
countries that were 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 (2011),
(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 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 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 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 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. After the earthquake
and the tsunami, Japan no longer poses a great threat to NAFTA. Many computer
chip parts and Toyota car parts will be delayed in reaching the U.S.
unfortunately after the disasters that hit Japan in March 2011.
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 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 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 |
||
TLC |
UE |
|
Un mercado de comercio de bienes |
||
Pais |
Poblacion (miles) |
Producto interno bruto(millones de dolares) |
Produtcto interno bruto per capita (dolares) |
Proporcion del producto interno bruto dedicadoa la |
Alemania2 |
||||
19,6583 |
||||
20,1034 |
||||
de Europa Oriental |
||||
Pais |
Poblacion (miles) |
Producto interno bruto(millones de dolares) |
Produtcto interno bruto per capita (dolares) |
Proporcion del producto interno bruto dedicadoa la |
305 |
||||
Pais |
Poblacion (miles) |
Producto interno bruto(millones de dolares) |
Produtcto interno bruto per capita (dolares) |
Proporcion del producto interno bruto dedicadoa la exportacion |
126 |
||||
Bloque Comercial |
Miembros |
Poblacion (millones) |
Producto interno bruto(millones de dolares) |
Produtcto interno bruto per capita (dolares) |
Union Europea8 |
||||
MERCOSUR9 |
||||
As of 2010 we have now 27 countries which are members of the EU.
Statistics from
source: Olga M. Lazin, “Mexico as
Linchpin for Free Trade in the Americas,” in Statistical Abstract of
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. After the earthquake
and the tsunami, Japan no longer poses a great threat to NAFTA. Many computer
chip parts and Toyota car parts will be delayed in reaching the U.S.
unfortunately after the disasters that hit Japan in March 2011.
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 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.)
Area |
Population/Poblation |
GNP |
GNP/C |
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.)
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.
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.
B. Continuing Problem:
NAFTA Red Flags
NAFTA Red Flags
1. Labor rights and
double taxation and social security issues for
double taxation and social security issues for
workers are not included and far from
inclusion.
inclusion.
2. Public safety issues
for executives and employees are of great concern to foreign companies.
Olga Lazin Ó 2011for executives and employees are of great concern to foreign companies.
----- Footnotes
Desmond Dinan, Ever Closer Union? An Introduction to
the European Community (Boulder, Colorado: Lynne Rienner Publishers, 1994), p.
479.
the European Community (Boulder, Colorado: Lynne Rienner Publishers, 1994), p.
479.
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.
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.
"The European Union: Back to the Drawing
Board," The Economist, September 10, 1994, pp. 21-23.
Board," The Economist, September 10, 1994, pp. 21-23.
Ibid, p. 23.
See James W. Wilkie and Olga Lazin, "Mexico as
Linchpin for Free Trade in the Americas," Background Study prepared for
PROFMEX-ANUIES Conference on "Mexico and the Americas," Puerto
Vallarta, Mexico, November 13-16, 1994,
Linchpin for Free 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
March 16, 2011
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