NAFTA in Play
President-elect Trump's statements on the North American Free Trade Agreement (NAFTA) and other trade agreements have called into question the legal framework businesses and investors have relied on in developing their supply chains and businesses more generally. This client alert describes (1) President-elect Trump's statements on NAFTA, (2) the President's authority to withdraw from NAFTA and re-impose tariffs, and (3) the President's authority to change other NAFTA-required measures. The client alert concludes with a discussion of the process that is likely to be followed as part of the negotiations among the NAFTA parties.
President-elect Trump's NAFTA declarations
President-elect Trump's official campaign platform includes a plan to "immediately renegotiate" the terms of NAFTA and "submit notice that the US intends to withdraw from the deal" if Canada and Mexico do not agree to renegotiate. He complained about cheaper labor in Mexico and Mexico's value added tax system, which he charged results in export subsidies for Mexican producers. He has not been more specific about his plans, how he would implement them, and precisely what he would seek in negotiations with Canada and Mexico.
The President's Unilateral Authority to Withdraw from NAFTA
The President very likely has the authority to withdraw the United States from NAFTA. NAFTA provides that "a Party may withdraw from this Agreement six months after it provides notice to the other Parties." The North American Free Trade Agreement Implementation Act approved the Agreement and authorized the President to exchange notes with Canada and Mexico, providing for the entry into force of the Agreement after the President had made certain determinations. As the Agreement was negotiated by a President pursuant to authority granted by Congress, there is an argument that it is within a President's discretion to issue a notice of withdrawal. On the other hand, the extensive conforming amendments to US domestic law that were made by the NAFTA Implementation Act would remain in place absent action by Congress. These include amendments to agriculture laws, the Tariff Act of 1930, user fee laws, intellectual property laws, temporary entry laws, sanitary standards, government procurement laws, and dispute settlement rules.
The President's Unilateral Authority to Increase Tariffs
The President would have broad authority to change tariffs after the US's withdrawal from NAFTA. Pursuant to the Trade Act of 1974, the duties in effect at the termination of a trade agreement continue for one year after termination, unless the President "by proclamation provides that such rates should be restored to the level at which they would have been but for the agreement." Within sixty days after the date of such termination, the President is required to transmit to Congress his recommendation as to the appropriate duty rates for all articles that were affected by the termination or would have been so affected had the proclamation not been issued.
Thus, upon the US's withdrawal from NAFTA, the President would have authority to increase duties, at least with regard to Mexico. The President could terminate Presidential Proclamation 6641 (Dec. 15, 1993), which modified the US tariff schedule by specifying NAFTA eligible products, setting out the relevant rules of origin, etc. However, the President would have to transmit that information to Congress, which very likely has the authority to override the proclaimed rates. Upon the US's withdrawal from NAFTA, the US/Mexico trading relationship would become governed by the World Trade Organization commitments. The United States would be obliged under WTO rules to extend the same tariff treatment to Mexican products it extends to other countries' products (i.e., articles imported from Mexico would be afforded Normal Trade Relations rates).
The US's withdrawal from NAFTA would most likely have a different effect with respect to Canada. The NAFTA Implementation Act did not repeal the previously enacted US-Canada Free Trade Agreement (USCFTA). Many USCFTA provisions were "suspended" during such time as NAFTA is in effect, so the US-Canada trading relationship would, upon a withdrawal from NAFTA by the US, instead be governed by the USCFTA. Many of the tariff reductions in NAFTA picked up where the USCFTA left off. Thus, the requirement that duties be "restored to the level at which they would have been but for the agreement" would restore the import duties to the rates that would have been in effect under the USCFTA (i.e., goods originating under the USCFTA rules of origin would still be able to be traded between the two countries at preferential rates). In addition, the Automotive Products Trade Act would govern the importation of automotive products from Canada.
Other NAFTA-Related Measures
As indicated above, while the President has authority to withdraw the United States from NAFTA and modify tariffs, repeal of the NAFTA Implementation Act or parts thereof would require an act of Congress. If that Act is not repealed, the statutes Congress amended by Pub. L. 103-182 would remain in place. That said, because the NAFTA Implementation Act is replete with references to NAFTA, many of those statutes would be rendered moot or nonsensical, while others would remain fully valid and in effect. Unless they were amended, provisions of the Tariff Act of 1930 relating to drawback, antidumping and penalties would remain in effect, although the references to NAFTA would apply only to activities carried out during the time that NAFTA was in effect. The same applies to any ongoing bi-lateral panel activities initiated before withdrawal. Certain agriculture, phytosanitary and sanitary measures and standards would remain in place. The intellectual property rights amendments are another example of laws that would remain in place unless modified.
President-elect Trump emphasized throughout the campaign that he could get a "better deal" for America, and he will presumably seek to use withdrawal threats as leverage with Canadian and Mexican officials. Those negotiations could take place through a procedure created by NAFTA, or simply through discussions between senior trade officials of the three countries. As for the NAFTA procedure, the Agreement creates a Free Trade Commission consisting of cabinet level representatives or their designees. The responsibilities of the Commission include, among others, supervising the Agreement's implementation and overseeing its further elaboration and considering any other matter that may affect the operation of this Agreement. Annex 2001.2 creates numerous committees and working groups who could begin negotiations to modify or amend the provisions the incoming administration wishes to have re-negotiated. Article 2202 of NAFTA permits the Parties to agree on modifications of, or additions to, NAFTA.
It is not clear what precisely President-elect Trump will want to secure in any such negotiations. Both the Canadian and Mexican governments have expressed a willingness to talk. The Mexican government has indicated that any renegotiation should result in greater productivity and competitiveness for the entire region, and that the Trans Pacific Partnership was in fact a refresher of NAFTA. The Agreement is a couple of decades old and the economies of all three countries have evolved. There is a strong argument for updating the Agreement to encompass new aspects of the economy (e.g., digital economy, energy, service sectors) as well as revisiting existing elements that have not been fully enforced (e.g., intellectual property).
Given President-elect Trump's stated intention to revisit NAFTA in some form, companies should be considering now how best to engage in this process. At a minimum, any company that utilizes NAFTA should examine their supply chains and begin to consider possible adjustment (e.g., if the US withdraws from NAFTA, what will that do to the landed cost of goods produced at the company's facilities in Mexico? How will the landed cost of goods produced in Mexico compare to the landed cost of goods produced at other facilities – in China or another FTA partner?). In addition, companies should consider options to engage the Administration to either try to preserve the benefits that NAFTA has brought, or to influence the negotiations to achieve additional benefits. Such determinations should begin as soon as possible.
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Baker McKenzie's International Commercial Practice Group advises multinational companies on legal issues impacting global business strategy. As trusted advisors on international trade, foreign investments, data privacy, information governance, sourcing and business transformations, we provide practical and comprehensive legal solutions aligned with clients’ strategy and risk profile. We have formed a multi-disciplinary and multi-jurisdictional team to assist clients with such issues.