The NAFTA debate is no longer about the agreement itself, or about Mexico, but about competing domestic political agendas and irreconcilable world views. Appeals are made not to economic interest but to nationalistic fears. On one side, there are scare-mongering claims about Mexican instability; on the other, crude appeals to the most xenophobic strains of American populism. Critics exaggerate the risks of more rapid economic integration while minimizing its rewards; advocates, no more responsibly, do just the opposite. On both sides, the agreement's true purpose-and its likely effects-have been distorted and obscured.

What the North American Free Trade Agreement actually does, in a dense thicket of lawyerly prose, ridden with caveats and codicils, is to set the ground rules by which cross-border trade would be liberalized. Within ten years nearly all restrictions on manufacturing trade and most cross-border investment constraints would be removed. After 15 years the last tariffs and quotas on agricultural goods would disappear.

In concept, then, NAFTA is both simple and-from an American standpoint-seemingly unobjectionable. Mexico agrees to do almost everything of an economic nature that the United States ever wanted it to do-lift import barriers, stabilize its currency, scale back state industry, deregulate private business and allow more extensive foreign investment. In return it gets reciprocal access to the American market, plus the steady influx of outside capital that the imprimatur of a trade treaty with Washington would virtually guarantee.

One of the first myths about NAFTA is that the money that the treaty would "add" to Mexico would be "subtracted" from the American economy. Actually, that would rarely be the case, for the simple reason that little of this money would otherwise be invested in the United States. Yet much of the political opposition to NAFTA stems from just this sort of distorted, fixed-pie picture of how the economy works. If jobs are being created by American employers in Mexico, the logic goes, then they must be jobs that have been taken from Americans in Detroit, Cleveland or Minneapolis. If Mexico raises its standard of living, then it must be because the United States has grown poorer.

Little orthodoxies of this sort litter the NAFTA debate. And in the hands of political barn-burners like Ross Perot, they have made it extremely difficult for ordinary Americans to sort through the conflicting claims and counterclaims and make up their own minds about what NAFTA might mean for America's future. Through the efforts of NAFTA opponents, millions of Americans have been persuaded that a prosperous Mexico would be a direct threat to their jobs and incomes.

This is simply wrong: NAFTA would make Mexican manufacturing an integral part of North American industry, not a rapacious competitor. It is a blueprint for the more efficient reordering of industrial production on a continental scale. Granted, that task requires some initial pain and disruption-mostly in Mexico, but also in vulnerable regions and industries north of the border. But most of this dislocation is inevitable in response to global economic competition and change.

In truth, the United States has little to fear and much to gain from Mexico industrializing in an intelligent fashion. NAFTA would speed that process. This does not mean that NAFTA's advocates are right and its opponents wrong. Quite the contrary, many of the claims made on NAFTA's behalf are plainly wrong, and many of the criticisms made by NAFTA opponents are both fair and deserving of some public response. But to see why, it's necessary to strip away the myths and half-truths that now clutter the NAFTA debate.


Separating the facts about NAFTA from the fables of its enemies and friends is a first step toward a rational discussion of the NAFTA plan. Herewith, a brief tour through some of the most common NAFTA myths and misconceptions.

- NAFTA would create the world's biggest and richest market-a $6 trillion market of 360 million consumers.

Journalists, NAFTA advocates and even presidents have uncritically recited this U.S. Trade Representative mantra. But NAFTA wouldn't create a $6 trillion market. That already happened in 1990: the United States ($5.4 trillion in gross domestic product) plus Canada ($600 billion). More careful NAFTA boosters tout a $6.2 trillion market, but avoid noting that Mexico is the "point two." (Mexico's gdp has since grown past $300 billion, making it equal to an Ohio, or half a Canada.) NAFTA, then, would make the North American giant taller overnight, but by just a few inches.

Negotiated and championed by a Republican White House, NAFTA reflects a clear ideological preference for market forces over industrial policy, for free trade over managed trade. This puts NAFTA at philosophical odds with the more interventionist, fair-trade-oriented Clinton administration.

This common formulation has it exactly backwards: if you like industrial policy, you should love NAFTA.

NAFTA unabashedly picks winners and losers-but on a generally rational basis, with more competitive, high-wage industries favored over businesses dependent on subsidies or cheap labor. U.S. negotiators agreed to phase out protection for the labor-intensive apparel business, for example, but insisted on rules forcing Mexican garment-makers to buy their fabric from the capital-intensive American textile industry. NAFTA would let Mexico dominate much of the low-end glassware market in North America, but technologically advanced glass products throughout the continent would be supplied largely by the United States.

Even within highly specific import categories, such as steel pipe or cut flowers, some products would be immediately subjected to the full competitive force of duty-free trade, while others would be weaned from protection more gradually, with phase-in periods of five or ten years. True, all of NAFTA's provisions are ultimately transitional: after 15 years for sensitive farm products and ten years for almost everything else, trade and investment would be largely barrier-free. But the terms of the transition could determine which industries would survive when North America's last trade barriers come down.

NAFTA's big impact would be in manufacturing, the marrow and bone of the North American economy; after that, its effects would be felt most strongly in the farm belt.

That's the erroneous impression one gets from the NAFTA debate. But the real action after NAFTA would take place in the service sector, which is more important to all three economies than manufacturing and agriculture combined. In Mexico, services account for 60 percent of gdp, and include the industries most closed to American trade and investment. By contrast, in the 23 percent of the Mexican economy that is in manufacturing, American companies are not only present but dominant. And for farmers, the United States is already overwhelmingly Mexico's biggest market, and Mexico is typically the second or third biggest buyer of American agricultural exports.

Disdain for the service sector as semiskilled burger-flipping ignores its crucial role as a high-tech, high-wage American export earner. Mexican service industries which NAFTA would open to American companies include banking, communications, transportation, insurance, publishing, beachfront tourism, film distribution, retailing, educational training, civil engineering, software design, natural gas and electric power distribution, and scores of other highly competitive and lucrative businesses. This opening comes variously from NAFTA's removal of equity limits, patent and copyright rules, government procurement reforms and investment guarantees.

The impact would be immediate. One service business that would benefit dramatically from NAFTA is construction. Mexico's infrastructure-ports, railroads, phone lines, power plants-lags behind not only American norms but such developing nations as Chile, Malaysia and Turkey. Getting it in shape would be a bonanza for the Bechtels and the Brown & Roots of this world: estimates of public works projects planned for the next five years exceed $100 billion. In the world market, American companies have a tough time competing for giant turnkey engineering contracts. But NAFTA would give American firms an inside track in Mexico, from bidding rights to financing to the barrier-free importation of material and personnel.

- Free trade would spur a massive relocation of American factory jobs to Mexico.

This is the "big sucking sound from the south" that so unnerves Ross Perot. But what Perot hears isn't jobs moving south: it's Mexico vacuuming up all the American products it can buy. Exports to Mexico quadrupled over four years to $40 billion in 1992, giving the United States a $7 billion surplus. NAFTA would open Mexico's import doors even wider. Manufacturers want NAFTA not to secure production relocation opportunities, which they already had, but to open a long-closed market to their American factories.

Claims of massive job migration are based on gross exaggerations of the role of labor and environmental regulations in production costs-and gross underestimates of the costs of building new factories in a foreign country. Union-sponsored research has been able to document just 96,000 jobs that have been moved to Mexico over the past 15 years. That may sound like a lot, but it's less than the average monthly fluctuation in the size of the American work force. More to the point, if they hadn't been shifted to Mexico, most of these jobs would have been lost anyway to increases in productivity and competition, or would have migrated to even cheaper labor zones like China.

- NAFTA won't lure any American employers across the border. If they are going to move south, they'll move with or without a free trade agreement.

The standard rebuttal of the Perot thesis also has it wrong. NAFTA is meant to make Mexico more appealing to American investors-giving them permanent rights to full control of Mexican subsidiaries and protecting them against any future reversal of Mexican investment rules. NAFTA's dispute resolution panels would in effect extend U.S. legal protections to American businesses on Mexican soil.

Under NAFTA, Mexico would be a better place to do business-with lower financial costs, an improved infrastructure, a larger pool of trained bilingual personnel. For outside investors, there would also be an intangible comfort factor in knowing that Mexico was somehow legally linked to the United States. In short, NAFTA removes many of the obstacles, perceived or real, that have kept hundreds of companies from ever considering expansion into Mexico. That's exactly what Mexico wants NAFTA to do.

With NAFTA, as critics rightly contend, many growing companies would routinely consider Mexican sites for new investments-investments which might have otherwise stayed in the United States. But these are not the giant manufacturing conglomerates like ge and the Big Three automakers, which have been there for decades, which could defend their interests even without a free trade pact, and which are in any event contracting, not expanding, their North American operations. The real impact, both economic and psychological, would be on smaller, labor-intensive manufacturers with little international experience.

Despite the claims of Perot and other NAFTA-bashers, these companies seldom offer the kind of high-skill, high-wage jobs that the United States needs to prosper and compete in the 21st century. And because their competition primarily comes from low-wage foreign producers, American wage scales will be increasingly hard to sustain. Even without NAFTA, many of these firms will be drawn south by the need to reduce labor costs and the prospect of sales within Mexico.

- Under NAFTA, North American car production would shift to Mexico, which would become an Asian-style exporter.

Wrong again. NAFTA's immediate effect on the auto industry would be a flood of imports-from the United States into Mexico. Current rules allow car makers to import only half as much in dollar terms as they export. After NAFTA, they would immediately be able to import 20 percent more than they export: that's equivalent to about 400,000 vehicles yearly. The import ceiling would rise gradually to 55 percent above exports over ten years, and then would be removed entirely.

What does this mean? Direct yearly exports of at least 100,000 American-made cars almost immediately, compared with zero a few years ago. Mexico is by far the fastest-growing auto market in North America: sales tripled in just five years to 750,000 vehicles in 1992 and could pass the million mark by 1995. NAFTA would give American car makers and their underused American plants an inside track: for years to come, the growth of the Mexican market would outpace the expansion of the Big Three's Mexican operations. That means job gains, not job losses, for American auto workers.

- NAFTA is going to turn Mexico into one big maquiladora, with dollar-an-hour assembly plants from Chihuahua to Chiapas ravaging the environment and destroying American manufacturing jobs.

Critics can hardly be blamed for seeing NAFTA as an expansion of the maquiladora concept into the rest of Mexico. Many NAFTA advocates have defended maquiladoras on the same basic grounds as NAFTA: American industry needs labor-intensive production options, and better to have the jobs go to Mexicans than to distant Asians controlled by Tokyo. Few NAFTA supporters have been critical of the classic maquiladora's failure to pay taxes, train workers, or raise wages above the legal minimum.

Yet NAFTA would number the days of the maquiladoras-both legally (in-bond assembly plants have no place in a free trade zone) and economically (wage rates would rise and factories would become more capital-intensive). With NAFTA, plants that depend solely on minimum-wage labor would be forced to move to cheaper areas in southern Mexico (and even further south, to Central America and Hispaniola). Without NAFTA, Mexico would continue to be forced to attract industry with low wages and lax pollution controls. If you want to strike a blow against the maquiladoras, NAFTA is your club.

- Still, with or without maquiladoras, dollar-an-hour Mexicans would be taking jobs from American workers. No manufacturer can resist that 10-to-1 or 20-to-1 wage differential.

Some would. Granted, wages are still about a dollar an hour in many border assembly plants and in the poorer districts of the rural south, such as the state of Yucatan (whose relentless advertising of its dollar-an-hour work force has been a public relations windfall for NAFTA's American opponents).

But such wage scales are atypical. Mexico's median manufacturing wage, including mandatory benefits, is now approaching three dollars an hour, twice what it was five years ago. For the developed Mexican industrial states hoping to lure foreign manufacturing investors, the most direct competitors are the states of the nonunionized American South, where median wage rates in equivalent jobs average about $12 an hour. A 4-to-1 gap is still a lot, but it isn't 10-to-1. And the gap is steadily shrinking: at current rates it will soon close to the point where American productivity advantages would offset most savings from lower Mexican wages.

- The balance of cross-border trade over the next 10 to 20 years would ultimately determine whether NAFTA was good for the United States.

Pro-NAFTA economists point to the swelling bilateral surplus as proof that free trade with Mexico is good news. Opponents say it's a transitional aberration: Mexico is importing equipment to produce exports, they say, and once its new factories are in place, cheap Asian-style products will flood the American market, driving the trade balance back into deficit.

Who's right? It doesn't really matter: trade surpluses aren't inherently virtuous, and deficits aren't always a problem. In the case of the United States and Mexico, manufacturing trade has always favored the United States and should continue to do so as long as Mexico remains a developing nation. If the overall bilateral balance goes a few billion dollars into deficit, so what? Countries can't maintain surpluses with every trading partner at once. Nearly half of our imports from Mexico are goods like oil and coffee that we would otherwise buy somewhere else. If Mexico enjoys a surplus in the future because it is also exporting manufactured goods to America that we used to buy in East Asia, that's a positive development for the American economy: money paid for Mexican products would be recycled back as spending on American products, which wouldn't be the case with trade dollars sent to Asia.

For example, between 1987 and 1990 exports from the United States to Mexico more than doubled. Exports from Mexico to the United States grew even faster, giving Mexico a $2 billion surplus in this $60 billion exchange. In 1991 American exports grew more quickly than Mexico's, giving the United States a $2 billion surplus in this now $65 billion two-way trade. Does this mean that in 1990, trade with Mexico was destroying American jobs, while in 1991 it suddenly began creating American jobs? Foolish on its face, that is exactly the logic employed by those who warn against a bilateral trade deficit 10 or 20 years from now, as well as by the NAFTA proponents who erroneously equate our current surplus with net job creation.

- NAFTA would open the gate to the Trojan horse from Tokyo: Japan would soon be busily building plants in Mexico, their new duty-free "back door" into the American market.

To begin with, Japan doesn't have much trouble getting into the American market through the front door. Second, Japanese investment in Mexico would be a net gain for the United States. Yet Japanese companies have never been that interested in Mexico: despite President Carlos Salinas de Gortari's zealous courtship, Japan contributes less than five percent of Mexico's foreign investment. NAFTA wouldn't necessarily make Japan more interested. To comply with NAFTA's North American content rules, the Japanese would need to do exactly what Washington used to urge (futilely): invest their trade-surplus dollars in a poor country which also happens to be a loyal American customer. Washington is signaling Tokyo that it considers Mexico its own economic turf and wouldn't welcome an aggressive Japanese presence. NAFTA may in the long run lure Japanese investment to North America-not to Mexico but to the United States, where transplant shops give Japanese invaluable local political clout. For all these reasons, it's quite unlikely that NAFTA would lure the keiretsu south of the Rio Grande.

- Environmentalists oppose NAFTA because they fear that American companies would cross the border to avoid U.S. antipollution rules, fouling the Mexican environment while weakening the consensus for environmental enforcement at home.

In fact, most environmentalists don't oppose NAFTA. After they forced negotiators to put environmental concerns on the NAFTA agenda, they began to see that NAFTA would focus resources on border and internal Mexican environmental problems in an unexpectedly effective way. NAFTA would bring Mexico into the broader North American consumer economy, where environmentalists have enormous influence. NAFTA-driven economic integration has already given Mexico's fledgling environmental movement real political leverage for the first time.

Most mainstream conservation groups backed NAFTA formally, though with caveats. The more militant organizations-Greenpeace, Friends of the Earth, even the Sierra Club-remain unsatisfied. But their opposition has proved constructive: because of pressure from critics, NAFTA is the first international trade agreement that addresses the environmental consequences of trade between developed and newly industrializing economies.

- NAFTA is good for the United States because it would stop Mexican immigration: as President Salinas says, it would let Mexico "export jobs, not people."

This assumes that Mexican immigration is an economic problem for the United States, which it is not, and that immigration flows come more from the push factor of Mexican unemployment than from the pull of American demand, which is also untrue.

Serious students of Mexican demography don't expect NAFTA to have any noticeable effect on Mexican immigration over the next five to ten years. The cross-border networks that connect jobs and workers are so numerous and embedded in the fabric of both economies that the marginal effects of NAFTA would be impossible to discern. Far more important would be the overall economic performance of the United States and, to a lesser extent, the results of any change in U.S. immigration laws.

But in the long run Salinas is right. To the extent that NAFTA promotes industrialization and urbanization, it would accelerate the decline of Mexico's birth rate. It would also further narrow the gap between U.S. and Mexican wage rates, reducing the incentive to immigrate. Higher Mexican wages could also force increased mechanization in California agriculture, which remains the biggest single importer of cheap Mexican labor.

Still, many people think that in the short run NAFTA would actually increase Mexican immigration. They point to the agricultural reforms that are expected to push one million or more Mexicans off the land in the next five or ten years. NAFTA does strip away price supports and other subsidies for traditional corn-and-beans farmers, but Mexico would be taking these steps even without NAFTA. And NAFTA would soften the blow in two critical ways. First, by trading American access to the Mexican grain market for Mexican access to the American horticultural market, NAFTA would make it easier to substitute viable export crops for inefficient subtropical cornfields. Second, by expediting the flow of foreign capital into provincial Mexico, in both agricultural investment (once forbidden) and light industry (now rapidly expanding), NAFTA would create alternative local employment opportunities that would not have otherwise existed.

- NAFTA would strike a blow for democracy: the Salinas gang of Harvard-trained reformers represent the forces of openness battling against an ossified authoritarianism. Once they consolidate economic reform, democratization is sure to accelerate.

President Salinas is opening up Mexico's system only where it is unavoidable or in the best interests of the ruling Institutional Revolutionary Party (pri). He has fired every arrow in his authoritarian quiver: controlling the press; pork-barreling election spending; co-opting the independent right and harassing opponents on the left; supervising vote counts; and intending to name his own successor. That doesn't mean that NAFTA wouldn't ultimately be a democratizing force. But democratic progress in Mexico will depend less on external economics than on insistent forces within Mexico itself.

In the short term, America's preference for multiparty pluralism in Mexico inevitably conflicts with the need for economic growth. NAFTA's ratification would virtually guarantee the pri presidential candidate's election in 1994. Conversely, if NAFTA were rejected and the economy went into a tailspin, the opposition might again pull within striking distance, as it did in 1988. While depriving Mexico of needed investment might induce a democratic revolt, it would also probably push the pri back to old-line authoritarianism. That, in turn, would decrease American exports and increase Mexican emigration. A collapsing Mexican economy is in no one's best interest.

- NAFTA may be a fine idea, but it would punch a $40 billion hole in the federal budget. We simply can't afford it.

That $40 billion price tag is not the cost of NAFTA, but an expansive estimate of the cost of buying the votes needed to secure its ratification. Nearly half of it would go for public works improvements in border zones from San Diego to East Texas: bridges, roadways, sewage systems, new customs crossings and the like. Partly this is a standard public works wish list. But much of it is long overdue because of the growth of trade and border industry over the past ten years, along with the continuing population shift to the Sunbelt. It is quite true that the increased trade generated by NAFTA would put added strain on local infrastructure. But that's true of increased economic activity anywhere: it's perverse to oppose growth simply because it has associated infrastructure costs.

Another big-ticket item-about $10 billion-is the overdue cleanup of toxic waste dumps and waterways along the border. This is needed, but again not because of NAFTA. In fact, NAFTA would help prevent such abuses by improving regulatory oversight and discouraging further industrial concentration in the border zone. Money for worker retraining, which the Clinton administration wants to triple to $1.6 billion in 1994, is another expenditure. But these funds would give aid to nearly one million workers left unemployed by defense conversion and foreign competition, mainly from Asia. Only a fraction of it can fairly be considered a cost of NAFTA.

That leaves the $600 million or so a year that Washington would no longer collect in tariffs under a free-trade regime. This would be NAFTA's only major direct budget cost. Yet tariffs are not intended as a revenue source (at least not in the twentieth century), but as an import penalty. Tax revenues from new business and rising incomes would more than offset losses from canceled tariff collections. Mexico understands this, even though it would give up three times as much tariff revenue as the United States in absolute terms, and more than 30 times as much in terms of budget impact.

- Still, we should be careful. As Perot says, "Measure twice, cut once." Let's follow his advice and implement free trade only partially and provisionally, before it's too late to turn back.

Either we have a free trade agreement or we don't. NAFTA's comprehensive nature-encompassing a broad range of industries in three large economies-is what makes it work. It can't be introduced piecemeal, sectorially or geographically.

Yet nothing is forever. If the warnings of NAFTA critics ever came to pass-falling wages and massive manufacturing unemployment north of the border, brutal environmental degradation and labor repression south of the border-the United States could (and would) withdraw. All that's required is six months' notice. Mexico and Canada are so dependent on American capital and markets that an abrupt withdrawal would be unthinkably painful. In the United States it would barely be noticed. Congress' ability to quit NAFTA at any point puts industry on notice that the promises of NAFTA supporters must be fulfilled.

- Mexico doesn't need NAFTA. If the agreement is defeated or postponed, Mexico would continue to enact economic reforms unilaterally. Since NAFTA's importance is more psychological than economic, it would be better to avoid the risks of rejection and let Mexico liberalize on its own.

This is the most pernicious NAFTA myth of all. Curiously, it's been promoted by both Mexico's government, which is now nervously seeking to downplay its dependence on the agreement's success, and by NAFTA's American opponents, who argue that Mexican officials would continue to liberalize the Mexican economy even if denied preferential access to the American market. On both sides, these arguments are disingenuous.

There are clear limits to what Mexico can accomplish unilaterally. Otherwise, Salinas would never have risked negotiating a trade pact with Washington. By itself, Mexico could never allay fears that its present policies might be reversed by some future government. Nor could Mexico alone attract the steady stream of investment that would be lured by a trade treaty with the United States-even with enactment of its planned new foreign investment law, which is designed to replace its restrictive 1973 statute and to extend much of NAFTA's liberal investment regime to investors from outside North America

NAFTA would do more than lock in Salinas' economic reforms. It would guarantee that Mexico gets the capital and market access it needs to survive painful economic adjustments and develop skill-intensive industrial jobs. Without NAFTA this restructuring process would be much harder, and growth would be much slower. Imports from the north would be stifled not by tariffs but by contracting demand. The Mexico that American workers fear and deplore-the Mexico of $5-a-day assembly lines, of lax environmental and labor standards, of rigged bidding for state contracts-would reappear with a vengeance if capital inflows fell short of expectations and there were no NAFTA safeguards against such abuses. Mexico would lose. But in some ways, the United States would lose even more.


NAFTA implies change, and real change is always unnerving. It is true that NAFTA would cause some lost jobs. It is also fair to view the costs and benefits of economic growth with some skepticism. But in NAFTA's case, the benefits would dramatically outweigh the costs. If anything, the pact is skewed in America's favor. Official estimates that NAFTA could lead to as many as 500,000 lost jobs sound scary-until one realizes that these jobs would be lost not at once but over the course of a decade, and that most of them will disappear anyway because of productivity enhancements or import competition from other low-wage countries. Meanwhile, some 20 million new American jobs will be created over the next ten years-at least one million of which would support the expanding market in Mexico that NAFTA would help create.

The real problem with NAFTA is that it doesn't offer instant gratification. Over the next few years, the pain of change would be more visible than the compensating gains. The factory shutdowns and other dislocations that NAFTA might accelerate would have almost no measurable effect on the economy as a whole. But in affected communities the impact would be traumatic. Nonetheless, most of these jobs would eventually be lost with or without NAFTA. America's need to help its people make the transition to a new, higher-skill economy is every bit as great as the need of business to gain access to foreign markets. The NAFTA debate has usefully focused attention on this fact.

The benefits accruing to the United States would be largely a by-product of Mexican prosperity and would not be felt strongly for 20 to 30 years. In the meantime, there are all those problems in Mexico that NAFTA's critics rightly point out-unchecked pollution, lax environmental enforcement, poor labor conditions and undemocratic political processes. Nevertheless, in virtually every particular, Mexico's problems would get worse if NAFTA were defeated and would be easier to mend if NAFTA is passed. Over time, in almost every instance, what's good for Mexico would also be good for the United States.

Yet NAFTA's most prominent opponents continue to put forth their view of a world where naive Washington negotiators are perpetually outwitted by wily foreign opponents, where core American industries like steel and cars can survive only through subsidy and protective tariffs, where the United States can brake its slide to inevitable economic decline only by shutting its borders to goods and immigrants and by disengaging from foreign economic alliances. This is a crabbed, distorted picture of a nation that is still, despite its problems, the biggest, most varied and most creatively dynamic economy in the world. It is a view that overlooks the reality of American automakers regaining market share with better and cheaper cars, of high-tech American steel mills exporting to eager customers in Mexico and beyond, of the continuing American entrepreneurial domination of the computer science, biotechnology and communications industries that will shape the global economy of the 21st century. There is a reason why a country like Mexico wants to forge an economic union with the United States. For America to turn Mexico down would be to acknowledge that it had lost faith in its own future.

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