Written by Matthew Kronby and Milos Barutciski
As Inauguration Day approaches we are receiving many questions about Donald Trump’s promise to renegotiate or “tear up” the NAFTA, most of them turning on what he can do and what would it mean for Canada-United States trade. Here are some answers.
1. Could President Trump terminate or “tear up” the NAFTA?
Not exactly. However, under Article 2205 of the NAFTA, the U.S. could withdraw from the agreement on six months’ notice. The NAFTA would remain in force between Canada and Mexico.
2. Could the President make the decision to withdraw the U.S. from the NAFTA or renegotiate it on his own, or would Congress need to approve the decision?
The President likely has the legal authority to withdraw the U.S. from the NAFTA on his own, and that authority may well extend to overriding some statutory provisions giving effect to the United States’ NAFTA obligations. Even if Congress challenged the President's authority on these matters, a challenge likely would take far longer than the six-month NAFTA notification period to work its way through the courts, and the courts might refuse to take sides. Therefore it is prudent to assume that a Trump Administration has considerable latitude to pull the U.S. from the NAFTA with or without Congressional support.
3. Is a Trump Administration likely to withdraw the U.S. from the NAFTA?
No. The U.S. has too much to lose from unilateral withdrawal, given the deep economic ties the NAFTA has produced among the U.S., Canada and Mexico. It is far more likely that the U.S. will use the threat of withdrawal to renegotiate aspects of the NAFTA.
4. What will be on the table if the NAFTA is renegotiated?
Canada’s asks are likely to include greater access to U.S. procurement—including constraints on “Buy America” policies—as well as modernization of rules of origin, deeper regulatory cooperation, improvements to the state-to-state dispute settlement mechanism and possibly reforms to the investor-state dispute process.
However, the U.S. will hold the stronger hand in any negotiations. Despite the Government of Canada's professed willingness to re-open the NAFTA, a Trump Administration will be looking not to improve trade flows, but for Canada and Mexico to "pay" for access to the U.S. market.
The U.S. asks may well include concessions by Canada in sensitive areas such as supply-managed agriculture, the lifting of foreign investment restrictions in the telecommunications sector, limits on Canadian softwood lumber exports and changes to intellectual property rights to more closely mirror the U.S. system. The U.S. can also be expected to seek the elimination of the binational dispute settlement mechanism that allows Canadian governments and businesses to challenge U.S. anti-dumping and anti-subsidy determinations before bilateral panels rather than in U.S. courts.
While the President-elect’s NAFTA-related opprobrium has been directed at Mexico, Canadian negotiators—as well as Canadian businesses and their U.S. allies—will need to be nimble in order to preserve, let alone improve on, the status quo for Canada-U.S. trade. The good news is that the U.S. has much at stake as well. Concluding the negotiations is likely to depend more on finding win-win solutions than on brinksmanship.
5. What happens to Canada-U.S. trade if the U.S. does withdraw from the NAFTA?
The Canada-U.S. Free Trade Agreement (CUSFTA) was never terminated; it was merely suspended for so long as the NAFTA is in force as between Canada and the U.S. Therefore if the U.S. were to withdraw from the NAFTA, the CUSFTA probably would come back into force.
6. Why “probably”?
When the NAFTA was concluded, the intention was that the CUSFTA would kick back in automatically if the NAFTA ceased to apply to Canada-U.S. trade, but it is not entirely clear if some sort of affirmative action is required. And the U.S. potentially could terminate the CUSFTA too, also on six months' notice, leaving Canada-U.S. trade to be governed by WTO rules, including the WTO’s “most-favoured nation” duty rates.
However, that scenario seems highly unlikely. The principal focus of Trump's opposition to North American free trade has been Mexico. By contrast, the CUSFTA was one of the legacy achievements of the Reagan Administration. It is difficult to imagine Trump wanting to undo that legacy, or that his new U.S. Trade Representative, who helped to negotiate the CUSFTA, would want to do so either. Nevertheless, the mercantilist orientation of the Trump Administration means that it may want to get something in exchange for continuing the CUSFTA.
7. What would it mean for bilateral trade if the CUSFTA did come back into force?
Under the CUSFTA, bilateral trade in nearly all goods would remain duty free. However, the CUSFTA rules of origin to determine which goods qualify for duty-free treatment are less precise than those in the NAFTA.
Reversion to the CUSFTA would also mean the loss of NAFTA protections for Canadian exporters from U.S. safeguard actions against injurious imports, which can be expected to become more commonplace under a Trump Administration. It would also mean the end of the NAFTA’s binational dispute settlement mechanism for dumping and subsidy disputes. The equivalent mechanism under the CUSFTA was time-limited and has expired. Preserving the binational dispute settlement process was a key objective for Canada when the NAFTA was negotiated, although its value has eroded over time.
The CUSFTA also offers less comprehensive protections for services and investment trade than the NAFTA does. For example, CUSFTA protections do not extend to certain important services like rail transportation or provide for investor-state dispute settlement like that in NAFTA’s Chapter 11.
Reasons for Canadian Business to be Wary After January 20
These are only some of the concerns a Trump presidency raises for Canada-U.S. trade. Others include expanded “Buy America” policies, U.S. engagement with the WTO, and the shape of U.S. tax reform efforts, which will involve Congress and could include border tax adjustments or other measures that have major implications for trade.
Trump’s nominees for key trade positions, including for Commerce Secretary and the head of the new National Trade Council, as well as his post-election threats to companies in the auto sector, demonstrate his intent to follow through on campaign promises to change the way the U.S. has conducted trade relations for past 25 years. While the principal targets of these changes will be China and Mexico, the clear message from the Trump transition team has been that the Trump Administration "will put American workers first". That makes Canada vulnerable to both direct and collateral damage.
If your company wants to know more about how it will be affected by these developments and how it can prepare for them, please contact us:Matthew Kronby
Partner, International Trade and Investment Law
Partner and Co-Head, International Trade and Investment Law