Trade between the U.S., Canada and Mexico will be significantly affected if President-elect Donald Trump carries out his campaign pledge to renegotiate or completely withdraw from NAFTA. Indeed, Article 2202 of NAFTA provides that “the Parties may agree on any modification of or addition to this Agreement.” This implies that the three signatory countries to NAFTA would have to agree on such amendments or additions. Withdrawal is also a possibility; Article 2205 permits a country to withdraw from NAFTA six months after providing written notice to the other two countries.
In the event of U.S. withdrawal from NAFTA, U.S. and Canada trade relations will presumably be governed by the Canada-United States Free Trade Agreement, which was suspended following NAFTA’s entry into force. Trade relations between the U.S. and Mexico will be governed by their commitments as members of the World Trade Organization (WTO), including most favored nation (MFN) treatment, meaning that they must grant the same tariff treatment to each other’s goods as that extended to other WTO member countries – assuming the U.S. remains a member of the WTO. Trade disputes between the two countries would be subject to resolution through WTO dispute resolution mechanisms. For example, the President-elect’s proposed 35 percent tariff increase on imports to the U.S. from Mexico could be the subject of such disputes.
In addition to the loss of preferential tariff treatment for qualifying goods between the U.S. and Mexico, there are other potential consequences for U.S. investors and exporters from withdrawal from NAFTA. Without another agreement in place, U.S. private investors will lose NAFTA’s Chapter 11 protections, which grant them the right to challenge (through arbitration) the Mexican government’s actions with respect to their investments in the country. The resolution of such investment disputes would become subject to domestic legislation and judicial review. Also, U.S. companies may no longer receive non-discriminatory national treatment in Mexican government procurement processes, as is currently available under Chapter 10 of NAFTA.
All that said, a more likely scenario is that the Trump Administration will put forth substantial modifications to NAFTA that it considers beneficial to U.S. workers, using the threat of withdrawal as leverage to renegotiate with Canada and Mexico. Short of a renegotiation of or withdrawal from NAFTA, a number of other federal statutes would allow the U.S. president to undertake actions affecting U.S. international trade without congressional approval. Future Gardere client alerts will explore, among other topics, the threshold requirements and limitations on the president’s authority, if any, that such statutes impose.
What to do?
While it is difficult to predict the Trump administration’s next steps on trade, companies should immediately take proactive measures to reduce the risk to their businesses, including the following:
- Identify the impact to their supply chains and other business interests that may be adversely affected by a possible renegotiation or withdrawal from NAFTA by the U.S. For example, in the event of withdrawal, what alternative duty-free provisions remain available in the U.S. and Mexico? Can free trade agreements with other countries bring similar benefits? Committees or task forces responsible for reviewing these issues within organizations should include members representing multiple functional areas: trade compliance, logistics, supply chain, legal, accounting and tax.
- Engage with industry trade groups and policy makers. This will give companies an opportunity to provide input regarding the NAFTA benefits they currently enjoy. In the event NAFTA is renegotiated, companies will be in a better position to participate in the rule-making process and advocate for revisions that will minimize the impact to their businesses.
Gardere’s international trade group will continue to monitor developments in this area. The team has the experience to assist companies with navigating potential changes and managing the associated risks.