The 1994 free trade agreement among Canada, the United States and Mexico (NAFTA) was groundbreaking. Innovative to say the least, NAFTA has served as a model for many free trade agreements executed throughout the world over the last 24 years.
As with any trade agreement of consequence, NAFTA has economically benefitted certain sectors more than others.
Given the rhetoric of the Trump presidential campaign, it seemed inevitable that the US would pressure Canada and Mexico to accept some fundamental changes to the agreement. The early US threats to withdraw and establish tariffs have been replaced by targeted discussions on particular provisions of the agreement such as those related to automotive rules of origin, the arbitral mechanism for challenging anti-dumping and countervailing duty decisions, and the arbitral mechanism for challenging host government regulations and enforcement actions affecting foreign investors.
Electoral politics are now in play in Mexico and the United States, and could frustrate the finalization of NAFTA 2.0.
In the event the NAFTA renegotiation does not reach a successful conclusion, Canada, Mexico and other US trading partners can take some comfort in the safety net provided by the WTO, bearing in mind the Trump administration has occasionally indicated willingness to ignore WTO rules and rulings.
Our dedicated team of international trade and commerce experts throughout the region has broad and deep experience in business operations and transactions among the NAFTA countries, before and after the commencement of NAFTA, during its negotiation in the early 1990s, and now during its renegotiation. If you would like to discuss the business implications of the NAFTA renegotiation, please get in touch with your usual Baker McKenzie contact or, alternatively, contact a member of our “NAFTA in Play” team: Paul Burns, Raymundo Enriquez, Rod Hunter, Janet Kim, Amy de la Lama, Peter MacKay, Ted Murphy or Miguel Noyola.
NAFTA in Play: Supply Chain Questions
We live in a globalized world. Multinational companies, over decades, have come to be links in a massive global value chain in which they collaborate with NAFTA partners and other allies around the world to create, manufacture, distribute and sell products of every kind.
The President's (as well as his transition team’s) rhetoric about international trade agreements, and in particular NAFTA, has understandably generated anxiety within the US multinational business community.
A renegotiation of at least some NAFTA provisions is likely. The President has focused extensively on this issue, and the Canadian and Mexican governments have expressed a willingness to negotiate.
Accordingly, US manufacturers whose operations rely on NAFTA should be considering now how best to engage in this process. At a minimum, any company that utilizes NAFTA should examine its supply chains and begin to consider possible adjustment. The questions they should ask include the following:
- If material changes to NAFTA are implemented, what will that do to the landed cost of goods produced at the company’s facilities in Mexico? (For example: Estimate the additional cost a company would incur if it is required to pay MFN rate duties on imports from Mexico. Estimate the additional cost company would incur due to the non-deductibility of payments for imported products, which is a key feature of the Border Adjustment Tax under discussion. Then factor in the lower corporate income tax rate - 20% - that would likely be instituted together with the Border Tax Adjustment.)
- How would the landed cost of goods produced in Mexico compare to the landed cost of goods produced in other countries such as China or another FTA partner?
- Who is the importer of record for customs purposes? (That party, technically, would be obligated to pay any import duties that may be imposed.)
- Has the company contractually passed to third parties the obligation to pay duties that may be imposed on imports from Mexico?
- Is the company minimizing the value of the goods to the extent allowed?
- Might duties be avoided through the use of foreign trade zones, customs bonded warehouses, maquiladora, Temporary Importation Under Bond, the American Goods Returned program, or duty drawback?
- Would it make sense for the company to begin constructing trade remedy petitions? (The President has indicated a partiality for such remedies.)
- Does the company have any significant potential claims against Mexico (or Canada) for government actions that adversely affected the company's Mexican (or Canadian) investments? (It is prudent to have this information to be able to promptly file arbitration notices if and when the US issues a NAFTA withdrawal notice.)
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. Given the substantial sums at stake (over USD $1 trillion annually), any proposal to withdraw or overhaul the agreement will attract substantial lobbying efforts from many angles. Disputes should be expected in connection not only with the tariffs to be applied, but also with the numerous non-tariff barriers that NAFTA eliminated (e.g., import license and local content requirements) and over the various other trade and investment-favorable mechanisms that NAFTA established (e.g., procurement rules, dispute resolution mechanisms).
NAFTA in Play: Immigration Questions
If NAFTA is renegotiated or the US government decides to withdraw from this important trade agreement, companies may face hurdles related to the movement of professional talent. Specifically, the TN visa classification (special nonimmigrant category provided to certain professional occupations) that is currently used by many companies to move professionals across the borders for temporary assignments may be impacted.
Global companies with cross-border populations moving between the United States, Canada and Mexico need to closely monitor the incoming administration's messages regarding NAFTA to assess the potential impact on the TN work authorization category and business visitor admissibility requirements.
At this time we recommend review of your expatriate populations in the United States, Canada and Mexico to identify those workers holding NAFTA visa classifications, as well as the evaluation of alternative non-immigrant solutions and long-term immigration solutions that are not reliant on NAFTA.
NAFTA in Play: Privacy Issues
The impact of a shift in US trade policy on data privacy and protection and related issues is not altogether clear. Nevertheless, the overhaul of (or US withdrawal from) NAFTA or the abandonment of TPP could conceivably lead countries to implement rules under the guise or justification of data protection or privacy but with an underlying intent and/or practical effect to restrict trade with the United States.
For example, data localization rules, restrictions on cross-border transfers of personal data or rules with regard to mandatory disclosures of source code or other intellectual property could in practice significantly impact commerce that relies on the free or nearly free flow of data. Similarly, this shift could impact countries' willingness to cooperate with the United States on important issues such as cybersecurity and related cyber threats, something that was expressly called for under the TPP and something that is critically important to combatting a problem that is essentially global in nature.
Therefore, as the new US administration takes shape, US companies will need to watch for these types of changes and build flexibility into their privacy programs to account for the potential for greater regulation and restrictions and less consistency across different countries.
NAFTA in Play: Energy Industry Considerations
Energy companies would likely be impacted by a material revision of NAFTA. Below are energy-related considerations that may be relevant to such companies as the NAFTA debates unfold.
- NAFTA petroleum markets are highly integrated. In 2015, 48% of US petroleum imports came from Canada and Mexico, and 35% of US petroleum exports went to Canada and Mexico.
- The energy sector is one area in which a NAFTA renegotiation could actually expand enhance opportunities for US and Canadian investors in Mexico. The NAFTA chapter on energy and basic petrochemical products in essence reserves to the Mexican government a long list of energy-related activities such as crude oil and natural gas exploration, exploitation and refining. This reservation conflicts with the energy sector reforms that have taken place in Mexico in recent years, including the ending of the longstanding monopoly of the state-owned oil and gas company (Pemex), and allowing foreign companies to invest in the exploitation of offshore oil fields and shale gas. A NAFTA overhaul that brings the energy-related provisions in line with the Mexican reforms would provide legal comfort to US companies hoping to become involved in (or already involved in) such activities. On the other hand, in the context of a contentious NAFTA renegotiation Mexico might use the existing NAFTA energy-related restrictions to improve its bargaining position.
- In recent years US companies have invested substantial sums in pipelines to transport gas to Mexico. Those companies should closely monitor possible shifts in US (and Mexican) trade policies that could affect the utilization of such pipelines and related infrastructure.
- In an effort to demonstrate the attainment of a "better deal," the new administration could impose a tax on Mexican imports of US gasoline, diesel and liquid petroleum gas, which, depending on the tax amount, could drive Mexico to approach alternative sources in Asia, Europe and the Mediterranean.
- A material renegotiation of NAFTA could encourage foreign competition in the Mexican energy sector. The Chinese are already on the playing field, having recently been awarded two deep water exploration blocks in the Gulf of Mexico.