HIGHLIGHTS:

  • If implemented, positions held by new U.S. President-Elect Donald Trump during the presidential campaign could have consequences on trade and investment regulations applicable to Mexican and U.S. traders and investors.
  • From a legal point of view, denouncing the North American Free Trade Agreement (NAFTA) is feasible, making the World Trade Organization (WTO) agreements the fallback legal instrument for Mexican-U.S. trade relations.
  • However, adopting protectionist measures for specific sectors of the U.S. economy would be possible without the need to withdraw from NAFTA or the WTO agreements.

This week's electoral results in the United States require a serious analysis of the consequences due to some of the statements made by new President-Elect Donald Trump during the campaign, which could impact trade and investment regulations applicable to Mexican and U.S. traders and investors if those positions are implemented.

From a legal point of view, denouncing the North American Free Trade Agreement (NAFTA) is feasible. Article 2205 of NAFTA states the following:

A party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.1

The fallback legal instrument for Mexican-U.S. trade relations would be the World Trade Organization (WTO) agreements. As for U.S.-Canada trade relations, those countries would still have a chance to reinstate their previous bilateral Free Trade Agreement (FTA), which has been suspended since NAFTA took effect.2

Withdrawal Effects

Some immediate effects of NAFTA withdrawal would be the possibility to exclude U.S. goods and suppliers from Mexico's FTA government procurement processes. NAFTA Chapter X obligations would not affect Mexican companies as much since they rarely participate in U.S. proceedings due to, among other things, Buy American Act restrictions that were permitted under NAFTA. U.S. suppliers would have to carefully identify Mexican procurement processes to assure that they can participate in international processes not restricted to nationals and other FTA partners.

Another immediate consequence would be the elimination of the investor state dispute settlement provisions contained in NAFTA Chapter XI, excluding any chance for investors to bring expropriation claims (among others) before a neutral arbitration tribunal against the Mexican or U.S. authorities. This is a scenario that investors should consider right away before losing the right (the consent of governments to arbitration contained in NAFTA) for raising a dispute.

Elimination of the Chapter XIX antidumping dispute settlement mechanism would be another big loss for both sides, bringing back local administrative proceedings as the sole opportunity to challenge such measures aside from the WTO mechanisms, which hold a different standard of review than that of NAFTA.

Since Mexico is not a party to the WTO Government Procurement Agreement and there are no dispute settlement mechanisms such as NAFTA Chapters XI and XIX under the WTO, there would be no alternatives other than those mentioned above.

A bilateral trade and investment relation ruled solely by the WTO would imply, among other things, the elimination of free trade and the reinstatement of tariffs. The simple average applied Most Favored Nation (MFN) tariff rate of the U.S. under WTO is 3.51 versus 7.52 from Mexico, and the simple average bound tariff is 3.47 for the U.S. and 36.12 for Mexico. In other words, NAFTA withdrawal would increase tariffs to U.S. imports immediately by a 7.52 rate, allowing Mexico to raise those tariffs up to 36.12, which would also have to be applied to every other WTO member. Meanwhile, Mexican exports to the U.S. would be subject to an increase from a free trade zero tariff to a 3.47 tariff automatically and up to a 3.51 MFN tariff (average) without violating WTO commitments. This scenario would require an immediate analysis on trade preferences from third-party countries to assure the best prices on supplies that comply with other existing regulations and maintain their businesses.

Withdrawing from WTO is another scenario that has been suggested by Trump, one that is also legally possible.3 This would have far more complex consequences and seems much more unlikely than a NAFTA withdrawal. A WTO withdrawal would require a look back in time to the world economy before 1947, when the General Agreement on Tariffs and Trade (GATT) took effect.

Other Options

NAFTA withdrawal might not be the only alternative to keep U.S. companies from moving production offshore – assuming that is one of the main goals for such a withdrawal. Adopting protectionist measures for specific sectors of the U.S. economy would be possible without the need to withdraw from NAFTA or WTO. Such measures would require a more detailed and specific analysis, as has previously occurred when NAFTA has been breached with disputes involving cross-border trucking, tuna, broom corn broom and poultry, as well as other bilateral disputes involving tomato or softwood lumber.

The only legal obstacle for this type of unilateral measures for breaches of international obligations are dispute settlement mechanisms that could be triggered to seek an authorization to retaliate and "compensate" against them. Unfortunately, unlike WTO's dispute settlement mechanism, NAFTA's Chapter XX mechanism is broken since there is no agreement on the roster of individuals who could participate in a dispute settlement panel. Therefore, closely examining such measures would be necessary to identify WTO violations and refer all disputes to that forum.

This might not be the case for Chapter XI investor-state or Chapter XIX antidumping mechanisms that would continue to operate but could increase in use, particularly Chapter XI since some trade protective measures might be challenged by investors if they encompass an economic harm to their investments in the other country. That happened to Mexico when a tax on sodas using high fructose corn syrup (fructose) was adopted to protect the Mexican sugar industry, whose sugar production was being displaced by fructose. In that instance, three U.S. investors brought claims against Mexico resulting in three arbitration awards that said Mexico should pay millions of dollars to compensate U.S. investors.

Attorneys in Holland & Knight's International Trade Group have the experience to help your business prepare for and navigate any upcoming changes in NAFTA or the WTO. We follow international trade developments closely, including in regards to the Trans-Pacific Partnership, which in spite of the election results might still be placed before the U.S. Congress for approval.