Provisions of the Final Act

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Providing it is ratified, the implementation of the Agreement on Agriculture should start in 1995, and developed countries' commitments to reduce support and export subsidies as well as to expand market access should be completed within six years, i.e. by the year 2000. Developing countries commitments, on the other hand, should be completed within ten years, by the year 2004. The least-developed countries (LDCs) are not required to make any reductions. The commodity coverage of the Agreement on Agriculture includes most of the products normally considered as pan of agriculture (i.e. it excludes fishery and forest products) with the exception of rubber, jute, sisal, abaca and coir which are covered by industrial product negotiations. However, domestic support measures for these commodities are completely excluded from reduction commitments, as there are no such commitments for industrial products. Initially, negotiations on tropical products were conducted separately from those on agriculture but in the end they were grouped together.

There are three elements to the commitment on market access: tariffication, tariff reduction and access opportunities. First, members must convert their non-tariff barriers (NTBs) into tariffs. This means that specific NTBs (quotas, variable levies, minimum import prices, discretionary licensing, state trading measures, voluntary restraint agreements and similar border measures) need to be abolished and converted into an equivalent tariff (ad valorem or specific). The basic approach is to set a tariff equal to the difference in 1986-88 between the internal price (typically the domestic wholesale price) and the external price (typically the import unit value c.i.f. converted into national currency). Adjustments may be made for quality or variety; however, most developing countries have opted to use a special clause which allows them to set bound ceiling tariffs instead of full tariffication.

Ordinary tariffs, including those resulting from tariffication, should be reduced by 36 percent (as an average over all commodities) in the six years starting in 1995, with a minimum rate of reduction of 15 percent for each tariff item (for developing countries the figures are 24 and 10 percent). The tariff reduction will be undertaken in equal annual instalments and all customs duties will be bound.

As existing NTBs have sometimes resulted in zero or negligible imports, there are special provisions concerning minimum access opportunities. Where there are no significant imports, a minimum access equal to 3 percent of domestic consumption in 1986-88 will be established for 1995, rising to 5 percent of base year consumption at the end of the implementation period. Minimum access opportunities will be implemented on the basis of a tariff quota at low rates provided on a most favoured nation (MFN) basis. in cases where current access opportunities are more than the minimum, they will be maintained and increased during the implementation process.

The Agreement on Agriculture contains important special safeguard provisions, which allow additional duties when there are either import surges or particularly low prices (both compared with 1986-88 levels). In the case of import surges (defined by specified trigger levels above average imports in the previous three year; and the most recent change in consumption), additional duties shall not exceed one-third of the ordinary customs duties in effect. In the case of low import prices (in national currency terms), an additional duty can be charged which progressively increases as the price level drops further below the 198688 level. Thus, there is a strong stabilizing influence on domestic prices in the case of very large import price falls. However, this effect would aggravate the fall in prices on world markets because the additional duties would curb the increase in import demand which would be necessary to help shore up international prices.

The introduction of reduction commitments on domestic support marks perhaps the greatest single innovation of the Agreement on Agriculture. The general approach adopted has been to divide policies into two groups: i) policies that have a minimal or no effect on production or trade distortion (the Green Box category); and ii) policies subject to reduction commitments. The total support given to agriculture in 1986-88 by the latter policies, measured by the Total Aggregate Measurement of Support (Total AMS), is subject to reduction commitments of 20 percent in developed countries over the period 1995-2000 and 13.3 percent in developing countries in the period 1995-2004. Reduction commitments refer to total levels of support and not to individual commodities.

Green Box policies, which are exempt from reduction commitments, are those that do not entail price support to producers and for which support is provided by the government and not by consumers. The list of exempt policies is very long and includes such policies as general services (research, training, extension, inspection, marketing and promotion, infrastructure) food security stocks, domestic food aid and certain direct payments to producers (decoupled income insurance and safety net programmes; disaster relief; producer or resource retirement schemes; investment aids; environmental programmes; and regional assistance).

In addition to the Green Box category, other policies excluded from the AMS include investment subsidies that are generally available to agriculture in developing country members and agricultural input subsidies, generally available to poor farmers of developing country members. Policies that amount to a small percentage transfer value to producers (less than 5 percent of the value of production for developed countries and less than 10 percent for developing countries) are also excluded under the de minimis rule. Finally, direct payments to production-limiting programmes have been excluded from the Current Total AMS, provided certain conditions are met (namely that they are decoupled or that payments are made on 85 percent or less of base production).

The Agreement on Agriculture lists the export subsidies that are to be reduced: direct subsidies, sales from stocks by governments at prices lower than the domestic market price, export payments financed by obligatory levies, subsidized export marketing costs and special domestic transport charges. The volume of exports benefiting from such subsidies must be reduced by 21 percent and the expenditure on export subsidies by 36 percent over the 1995-2000 period. Unlike the reduction commitments in domestic support, reductions in export subsidies will be product-specific. Also, calculations of the commodity-specific final level of subsidized exports are based on average 1986-90 levels. However, in certain cases exporters have been allowed to maintain a higher level of subsidized exports permissible in the years up to 1999, by availing themselves of a special option (the higher of the subsidized levels of 1991-92 and 198690) to make reductions to the same final level by the year 2000.

The final Act also provides some provisions for the prevention of circumvention of export subsidy commitments. First, export subsides not included in the reduction commitment must not be used to circumvent the commitments. Second, members have undertaken to work towards internationally agreed disciplines on the used of export credit and credit guarantees. Third, the onus of proof in contentious cases rests on the exporter to show that there has been no violation of export subsidies. Finally, there are some important provisions on food aid, namely that it should not be tied directly or indirectly to commercial exports; that food aid transactions should be carried out in accordance with FAO Principles of Surplus Disposal; and that such aid should be provided to the extent possible in full grant form or on terms no less concessional than those provided for in Article IV of the 1986 Food Aid Convention.

A late addition to the Final Act was Article 12, Disciplines on Export Prohibitions and Restrictions, which concerns limitations on exports of foodstuffs taken under paragraph 2(a) of Article XI of the GATT. This allows such restrictions to be "temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party". This possibility is now to be tightened up. In future, exporters must consider the effects on importing members' food security and must consult with importing members who have a substantial interest at stake, at their request.

Special and differential treatment for developing countries is an integral part of the Agreement on Agriculture, although it may not be adequate. Special and differential treatment has three basic elements. First, developing countries are given more time to adjust and are expected to make smaller reductions in support. Thus, the period of implementation is ten years, not six, and reduction commitments in the areas of market access, domestic support and export competition amount to two-thirds of those expected of developed countries. Also, developing countries are allowed a higher de minimis level of domestic support (10 percent instead of 5 percent for developed countries). LDCs are exempt from the reduction commitments.

The second area where special and differential treatment applies concerns the various types of policies that are "acceptable" to GATT. As regards export subsidies, developing countries are allowed to provide subsidies to reduce the marketing costs of agricultural products and differential internal transport costs, which developed countries must curtail. Regarding domestic support, the Green Box category has a special provision for developing countries in regard to public stockholding for food security and domestic food aid. Moreover, developing countries may exclude the following policies from the calculation of the Total AMS: i) investment subsidies that are generally available to agriculture; ii) domestic support to producers to encourage diversification from illicit narcotic crops; and iii) agricultural input subsidies provided to low-income or resource-poor producers that are available to all producers, providing they meet certain criteria.

Third, there are special provisions for developing countries contained in the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-importing Developing Countries. The idea behind the Decision is that agricultural trade liberalization is likely to lead to higher world prices for food, while reduced export subsidies will also raise the effective price paid by importers. There is also some concern that the volume of food aid, which historically has been closely linked to the level of surplus stocks, could decline as the surplus stocks are run down. The Decision promises action to improve food aid by i) reviewing the level of food aid; and ii) providing an increasing share of aid on grant terms. It also promises to consider requests for technical and financial assistance to improve agricultural productivity and infrastructure and, furthermore, that any agreement on export credits would make "appropriate provision' for differential treatment in favour of these countries. Finally, it provides for short-term assistance in financing normal commercial imports from international financial institutions under "existing facilities, or such facilities as may be established, in the context of adjustment programmes".

The Final Act also includes the important Agreement on Sanitary and Phytosanitary Measures. It recognizes that governments have the right to take sanitary and phytosanitary measures but that they should be applied only to the extent necessary to protect human, animal or plant life and should not arbitrarily or unjustifiably discriminate between members where identical or similar conditions prevail. Members are encouraged to base their sanitary and phytosanitary measures on international standards, guidelines and recommendations where they exist, including the Codex Alimentarius and the international Plant Protection Convention (IPPC). However, members may maintain or introduce higher standards if there is scientific justification or an acknowledged risk. The Agreement spells out procedures and criteria for risk assessment and the determination of adequate levels of protection. It is expected that members will accept the sanitary and phytosanitary measures of others as equivalent if the exporting member demonstrates to the importing member that its measures achieve the importing member's appropriate level of protection. The Agreement provides for control, inspection and approval procedures. It also contains requirements on transparency, including the publication of regulations, the establishment of national inquiry points and notification procedures. It establishes a Committee to provide a forum for consultations, maintain contact with other organizations and monitor the process of international harmonization.

The Final Act also contains texts that refer to technical aspects of trade. These include harmonizing rules of origin (other than those relating to the granting of preferences) and ensuring that such rules do not create unnecessary obstacles to trade. There is also a text on pre-shipment inspection which sets out the obligations of importing and exporting countries. The Agreement on Implementing Article VI (anti-dumping and countervailing duties) strengthens the requirement for an importing country to establish a clear causal relationship between dumped imports and injury to the domestic industry. There are procedures for handling anti-dumping cases. The Agreement on Subsidies and Countervailing Measures builds on the existing Subsidies Code and establishes three categories of subsidy: prohibited, actionable and non-actionable. There is special treatment for developing countries. The Final Act also contains a text that extends and clarifies the Agreement on Technical Barriers to Trade to ensure that technical regulations and standards do not create unnecessary barriers to trade. A Code of Good Practice for the Preparation, Adoption and Application of Standards is included. The new agreement strengthens the disciplines regarding the users of import licensing systems, which are much less widely used than in the past. There are also new texts on Customs Valuation and new accession procedures to the existing Agreement on Government Procurement to facilitate the membership of developing countries. Finally, the Uruguay Round agreements would also tighten up the application of safeguard action taken under Article XIX against unforeseen increases in imports that could cause damage to the industry.

There are also several important agreements in addition to the reduction of tariffs. The Agreement on Trade-Related investment Measures (TRIMs) prohibits any TRIM that is inconsistent with GATT articles on national treatment (requiring imported goods to be treated in a non-discriminatory way vis-à-vis domestic goods) and on quantitative restrictions. Regarding textiles and clothing, the object is to secure the eventual integration of this sector into GATT on the basis of strengthened rules and disciplines. This would lead not only to the phasing out of Multifibre Arrangement (MFA) restrictions but also of non-MFA restrictions. The General Agreement on Trade in Services extends to this sector a basic MFN approach, with exemptions, and other provisions such as transparency and recognition requirements. It establishes the basis for progressive liberalization in services and the institutional arrangements, including dispute settlement and a Council on Services. The Agreement on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods (TRIPs), covers such matters as copyright, trademarks and service marks, industrial designs, patents and trade secrets. In addition to the above, there are texts designed to reform the system of dispute settlement, confirm the Trade Policy Review Mechanism and encourage greater transparency in the GATT system.

Finally, there was a decision to set up a World Trade Organization (WTO). Decisions by the WTO will be based on consensus and, if votes are needed, each member will have one vote. The WTO will provide a common institutional framework for conducting trade relations among members in matters related to the Final Act. The WTO will absorb the existing GATT and is expected to cooperate with the relevant UN agencies and the Bretton Woods organizations (the World Bank and the IMF), in order to achieve "greater coherence in global economic policy-making".

The Uruguay Round also established a Committee on Agriculture, which will meet annually to discuss the implementation of the Agreement. Members can discuss the question of market shares, the linked issue of export subsidies and the problem of inflation affecting the level of domestic support. The Committee will discuss follow-up to the Decision relating to the concerns of the least-developed and net food-importing developing countries. It will also be involved in the notification requirements for the use of the safeguard provisions and for export prohibitions and restrictions.

Effects on agricultural markets

Although the Agreement on Agriculture is comprehensive, it represents only a partial liberalization agreement. Overall, a large degree of distortion in the world market of agricultural commodities will still remain even after the complete implementation of the reduction commitments in these three areas.

In general, according to most studies and compared with the situation without the effect of the Uruguay Round Agreement, moderate increases can be expected in the prices of temperate zone products (5 to 10 percent on average) but smaller increases or even slight declines in the prices of the principal tropical products (Table 3). Developing countries are concerned about the price changes of both temperate and tropical products. Moreover, the expansion in world trade in these commodities, which is projected to be slower than during the 1970s and 1980s, will only be stimulated to a limited extent by the Uruguay Round agreements. Major changes in the global volumes of trade are not expected, although there will be changes in the patterns of trade and scope for the more competitive exporters.

Beyond agriculture per se, important changes are expected from trade expansion under the liberalized MFA. A large rise in textile exports to the developed countries is expected, while the upward pressure on price could curtail demand somewhat in the developing countries where the bulk of textile consumption takes place.

On balance, demand for textile fibres could be stimulated, which could be of considerable interest to a number of fibre-exporting developing countries. At the same time, a beneficial effect on the expansion of world agricultural markets could come from the boost to world income through the Uruguay Round. This boost to income, mainly in the developed countries, would presumably increase the demand for higher-valued products as well as for niche market products such as exotic fruit and vegetables, cut flowers and horticultural products.

The price increases that are likely for the main temperate zone food products together with reduced export subsidies could significantly increase import prices paid by the net food-importing developing countries, which are the large majority of developing countries. In this context, the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-developed and Net Food-Importing Developing Countries could, in principle, help these countries in the event of higher world food prices and import bills.

While it is likely that world agricultural prices may be affected as a result of the Uruguay Round Agreement, there is a question mark over food stocks. The general move towards liberalization and a reduced role of governments in price support activities could lead to a fall in government stockholding of agricultural commodities. The reduction may not be large but there is a question as to whether the private sector would step in to fill the gap. If not, as seems likely, then global food stocks are likely to be reduced. Fortunately, however, support to food security stocks that is undertaken in a prescribed fashion has been excluded from reduction targets in the Final Act. As called for by FAO's Intergovernmental Group on Grains, at its 25th session in 1993, it is to be hoped that countries would take advantage of this exemption and build up adequate food security reserves, but developing countries may not be able to make major efforts on this score because holding stocks is an expensive undertaking. The costs and benefits of building and utilizing food reserves or relying on the world market for food supplies need to be carefully weighed.

TABLE 3: Simulated effects of Uruguay Round trade liberalization on world prices

Commodity Sources
UNCTAD/WIDER (1990) Page, Davenport & Hewit (1991) FAPRI (1993) Brandao & Martin (1993) Goldin, Knudsen & van der Mansbrugghe (1993)

(percentage change)

TEMPERATE ZONE PRODUCTS
Wheat 7.5 5.0 6.3 6.3 5.9
Coarse grains 3.41 1.8 2.4 4.4 3.6
Rice 18.3 1.2 4.4 4.2 -1.9
Meat 13.0 5.3 0.5 6.16 4.78
Sugar 10.6 5.0 ... 10.2 10.2
Soybeans 0.0 ... 0.0 4.527 ...
Soybean oil 0.1 ... 3.8 ... 4.19
Dairy products ... 9.3 6.95 10.1 7.2
TROPICAL PRODUCTS
Coffee 0.42 0.8 ... 0.41 -6.1
Cocoa 0.03 1.0 ... 0.14 -4.0
Tea 0.5 ... ... 2.34 3.0
Tobacco 0.34 ... ... ... ...
Cotton 0.9 ... ... 2.23 3.7
Groundnuts 1.5 ... ... 4.527 ...
Groundnut oil 0.6 ... ... ... 4.19
Plants and Flowers ... 1.0 ... ... ...
Spices ... 0.2 ... ... ...

1 Simple average of maize and sorghum.
2 Refers to beans: for roasted, 0 percent; for coffee extracts, 1.4 percent.
3 Refers to beans: for butter, 0.5 percent; for powder, 0.8 percent; for chocolate, 1.8 percent.
4 Refers to leaves: for cigarettes, 0.1 percent; for cigars, 0.8 percent.
5 Refers to butter.
6 Refers to beef, veal and sheep meat; for other meats, 3.1 percent.
7 Refers to all oilseeds.
8 Refers to beef, veal and sheep meat.
9 Refers to all vegetable oils.
Sources: UNCTAD/WIDER. 1990. Agricultural trade liberalization in the Uruguay Round: implications for developing countries. New York, UN; S. Page, M. Davenport and A. Hewit. 1991. The GATT Uruguay Round: effects on developing countries. London, ODI; FAPRI. 1993. World Agricultural Outlook, Staff Report No. 2-93. Iowa State University and University of Missouri-Columbia; A.S.P. Brando and W.J. Martin. 1993. Implications of agricultural trade liberalization for the developing countries. Agricultural Economics, 8: 313-343; E. Goldin, O. Knudsen and D. van der Mensbrugghe. 1993. Trade liberalisation: global economic implications, Paris, OECD/World Bank.

The impacts on individual developing countries will depend mainly on the pattern of their agricultural commodity trade and their responses to the new trading opportunities.

As regards Africa, most countries tend to be food importers, particularly of wheat, rice and dairy products, while exporting tropical products such as cocoa, coffee, fruit and some agricultural raw materials. Most are LDCs (28 out of more than 50) and have some preferential access for a part of their exports under the Generalized System of Preferences (GSP) or the Lomé Convention, the value of which may be eroded by overall trade liberalization. The increase in world market prices foreseen for the temperate zone food commodities, combined with a substantial reduction in export subsidies on these commodities, points to a considerable increase in the prices paid by the importing countries. Thus, Africa is likely to face increased foreign exchange expenditures on imports of cereals, meat and sugar and small gains in tropical products, possibly coffee and cotton. The situation varies from subregion to subregion.

As regards Latin America and the Caribbean, only one country is among the least-developed group. The region as a whole is a net importer of cereals, even though several countries in the region are exporters of one or more cereals, particularly Argentina and Uruguay. Hence, on balance, the rise in the price of cereals could lead to a rise in the import bills of most of these countries. For most other agricultural commodities, the region is a net exporter and, if the increase in international prices is passed back to the domestic economy, this net export situation should be improved further.

The Near East region is predominantly a net importing region, relying extensively on food imports and producing a variety of horticultural and cotton exports. Only two countries are in the least-developed group. The rise in the prices of basic foodstuffs should give the countries in this region the chance of passing on the higher prices to their farmers and hence giving a fillip to output, but they are likely to remain large net importers. For horticulture, the challenge will be to take advantage of growing markets in the region itself and especially in Europe.

South Asia, where four countries are least-developed, is largely self-sufficient in basic cereals although it is a net exporter of rice and a net importer of wheat. It is also a net importer of oilseeds and dairy products but a major exporter of agricultural commodities such as tea, spices, cotton, jute, tobacco and fruit.

On balance, the region may be a small loser in net trade in the basic foodstuffs except for possible gains in the rice sector, although the concentration of gains in rice would favour the japonica rice exporters more than the indica rice exporters of this subregion. Bigger gains may be expected from textiles with the liberalization of the MFA, which could give a boost to the domestic production of fibres.

Southeast and East Asia, where two countries are least-developed, share a similar pattern to South Asia and could lose from higher world prices of wheat and coarse grains, which would more than offset possible export gains from higher rice prices. With some significant exceptions, most countries in the region will stay relatively close to food self-sufficiency, and the main result of the Uruguay Round price changes would be to reinforce this tendency. The subregion enjoys a wide and diversified range of exports, including rice, oilseeds, fibres, tropical beverages, fruit, sugar, cassava and hides and skins.

Few gains can be expected in the tropical beverages area, while the market for cassava may shrink and rice opportunities will depend partly on the varietal considerations noted above. Fibres may be boosted somewhat by increased demand from the textile sector; oilseeds, fruit and hides and skins could benefit from market expansion.

The Pacific Islands include four LDCs and are generally net importers of food and net exporters of sugar (Fiji) and palm and coconut products. Land shortages in most of the countries will presumably limit the possibilities of a major increase in domestic food production so that a careful focus on high-value products and exploitation of the possibilities for diversification where feasible will still be important options.

The Uruguay Round has established a new international trade environment for agriculture. However, the liberalization of trade achieved is only partial; therefore, the question of further reducing the barriers to trade in agriculture may be expected to be high on the agenda of international action in the years ahead. Also rising in the agenda are other trade policy issues that may well complicate rather than ease the path of reform. These include the integration of environmental and trade concerns and the growing attraction of regional economic groupings, free trade areas and preferential schemes.

Policy implications

The main implications for the developing countries are the changed set of policy options that they face in the post-Uruguay Round world. These apply to all developing countries, least-developed or not. The main differences between the two groups is that the LDCs are not expected to reduce support levels but they are expected to embrace the new policy disciplines. Other developing countries have to reduce support but, under the special and differential treatment clause, they may cut support by less than the developed countries and spread their reductions over more years. For most developing countries, policy initiatives will take place within the framework of structural adjustment programmes (SAPs). In agricultural and food policy, there is currently a general trend towards more accurate targeting, which is partly due to increasing concern about the administrative difficulties and excessive costs of many current policies and broadly reflects the requirements of SAPs. Therefore, there are two sets of agricultural policies - those that are circumscribed and hence are of restricted use and those that are broadly acceptable but which of course may not always be feasible to employ.

The main implication of the Agreement on Agriculture is that policies that, according to given criteria, "distort" agricultural production or trade are likely to be increasingly untenable. This includes many of the policies employed in the developing countries, such as minimum guaranteed prices, procurement prices and price stabilization schemes, even though some exemptions are made for food security purposes. In cases where administered prices are above world prices, countries may keep administered prices but the total amount spent on these and similar policies must not exceed the 1986-88 level for the LDCs and must be reduced by other developing countries. As the commitment on domestic support is expressed in an AMS, there is flexibility for countries to decide where to make cuts. This flexibility in price policy should be of considerable use to developing countries in deciding on which commodities are given priority in the provision of support. Input subsidies, providing they are widely available to farmers in developing countries, are acceptable as far as the Uruguay Round of MTNs is concerned but are often less acceptable under structural adjustment policies. At the same time, in many developing countries the main thrust of policies has been to tax agricultural producers, particularly those producing export crops. The extent to which agricultural producers and exporters are taxed is not addressed by the Agreement on Agriculture, even though it is likely to form part of domestic reform policies.

The exempt, or Green Box, policies can be defined as those interventions which imply no, or minimal, "distortions" for domestic production or international trade. To be eligible for inclusion in this category, policies must be government-funded and entail neither i) transfers from consumers to producers through, for example, management of the price structure; nor ii) direct price support. The list of such policies is given in Annex 2 to the Agreement on Agriculture but, while the list of exemptions is long, many of these involve government expenditures that the developing countries cannot afford. The challenge will be to develop low-cost, decoupled methods of support for use in the developing countries that nonetheless give the necessary boost to agricultural productivity and production.

The dual influences of changes in the international trading environment and SAPs generally require governments in developing countries to shift the focus of their interventions away from attempts to influence the price mechanism and towards programmes of investment in the infrastructure of the agricultural economy, in particular programmes to develop the marketing services and appropriate storage facilities accessible to the rural population. In addition, a shift in resources away from direct input subsidies to enhanced credit provision is recommended. Trade policy initiatives witness a shift from the use of quotas to tariffs and a general reduction in the latter.

In conclusion, the implications for the developing countries are significant mainly for future formulation of agricultural policies. Whether the pressure for change comes from the new disciplines Of the Final Act or from those deriving from structural adjustment Policies, both point in a similar direction - one where influencing prices is no longer the main instrument of agricultural policy. Determining whether agriculture in the developing countries can progress under these circumstances, when the main developed country exports of agricultural products may retain reduced price-distorting policies, will require case-by-case examination.

North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) was ratified by the United States, Canada and Mexico, creating a free trade zone with a population of almost 370 million people - the world's biggest trading bloc, with a GDP of $6.5 trillion compared with the EC's $5.5 trillion. The world community saw the NAFTA outcome as a big push for the Uruguay Round of MTNs, which was still in the final stage of negotiation at the time but which was concluded in mid-December 1993. The Latin American and Caribbean countries perceived NAFTA's ratification as a strong endorsement Of greater economic integration in the hemisphere.


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