North American Free Trade Agreement and the European Union Compared

Keeping an Eye on NAFTA and the EU

Emerging World Trade Blocs: The North American Free Trade Area and the European Union Compared

By

Dr. Olga M. Lazin-Andrei, UCLA

STATISTICAL 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.

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.

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.

See following posting.

Author Dr Olga Lazin

Dr Olga M Lazin

Copyright Olga Lazin, 2011

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About DrOlgaLAZIN

Published writer and university lecturer. 25 years in Education. My website: http://www.olgalazin.net My books are here: http://www.olgalazin.net/books.html Also on Amazon.com check out my books in English, and Spanish.
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