On April 27, 2017, US President Donald Trump announced that he would not withdraw from the North American Free Trade Agreement (NAFTA) “at this time,” after securing agreement from Canada and Mexico to renegotiate elements of the agreement. The administration is expected to submit the formal notification of its intent to enter into negotiations in the very near future. It remains to be seen how patient the administration will be if Mexico and Canada drag out the negotiations without making a serious effort to renegotiate. The option to withdraw from NAFTA, while on the back burner for now, could re-emerge at some point in the future. It is worth understanding what the administration’s options really are with regard to withdrawing from NAFTA.
NAFTA was enacted domestically by statute when Congress passed the implementing legislation making the required changes to US law. However, Chapter 22 of the NAFTA agreement provides a mechanism for parties to the agreement to withdraw—specifically, Article 2205 Withdrawal, which states: “A Party may withdraw from this Agreement six months after it provides written notice of the withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.” It is generally assumed, although untested in trade agreements that are in force, that the president, exercising his constitutional power over foreign policy, is authorized to give notice on behalf of the United States to terminate a treaty, including NAFTA. In fact, President Trump used this authority earlier this year to withdraw from the Trans-Pacific Partnership agreement (although this was not in force).
Once the United States has announced its intention to withdraw from NAFTA, there still must be, in most cases, additional steps taken to return the United States’ trade regime to a pre-NAFTA state. The preferential tariff rates for goods from Mexico and Canada established by NAFTA were authorized through the grant of proclamation authority to the president by Congress under Sec. 201(a)(1) of the NAFTA implementing legislation. Specifically, the statute states: “[T]he President may proclaim (A) such modifications or continuation of any duty, (B) such continuation of duty-free or excise treatment, or (C) such additional duties.” The NAFTA preferential tariff rates were proclaimed by former President Bill Clinton on December 15, 1993. Some have questioned whether President Trump could unilaterally eliminate these preferential tariffs without approval from Congress. It would appear that there are several sources of proclamation authority that could be used by President Trump to return tariffs on goods from Mexico and Canada to the prevailing “most-favored nation” (MFN) rates that apply to most other WTO members that are not part of a free trade agreement with the United States.
Section 125(b) of the Trade Act of 1974 authorized the president to terminate at any time, in whole or in part, any proclamation made under this Act. Because the NAFTA preferential tariff rates were proclaimed pursuant to Section 604 of the Trade Act of 1974, President Trump has the authority to withdraw President Clinton’s proclamation setting the NAFTA tariff rates.
Even if this authority is not sufficient, the administration could rely on section 111 of the Uruguay Round Agreements Act, which states: “[T]he President shall have the authority to proclaim - (1) such other modification of any duty, (2) such other staged rate reduction, or (3) such additional duties, as the President determines to be necessary or appropriate to carry out Schedule XX.” Schedule XX refers to the United States' MFN tariff rates that apply broadly to all WTO Members unless more liberal access is provided through a free trade agreement. Should the United States withdraw from NAFTA, it may be able to rely on this authority to increase duties on imports from Canada and Mexico to the bound MFN rates.
While certain provisions of NAFTA will expire upon withdrawal, additional action will be needed in other instances to change existing US law and regulations. Section 109(b) of the NAFTA implementing legislation states that if “a country ceases to be a NAFTA country, sections 101 through 106 shall cease to have effect with respect to such country.” Section 101 of the implementing legislation provides congressional approval for the agreement and Statement of Administrative Action that was submitted to Congress. Section 102 governs how the agreement relates to state law. Section 103 governs provisions that require consultation and layover of provisions by Congress. Section 104 provides the authority for the president to take executive action to implement regulations necessary to implement the agreement. Section 105 establishes the NAFTA Secretariat. Section 106 governs the appointment of individuals to NAFTA dispute settlement panels. Aside from the expiration of these specific provisions, where NAFTA obligations were incorporated into US law through statutory amendments, further legislative action may be necessary to remove those provisions from US law. For example, NAFTA obligated the Parties to impose restrictions on the availability of duty drawback. The NAFTA Implementation Act amended the US duty drawback statute to reflect those restrictions. The duty drawback statute would have to be amended after withdrawal from NAFTA, or else those restrictions would remain part of US law. Similarly, any regulations that were issued to implement NAFTA obligations will remain in effect until they are officially withdrawn or revised.
It appears clear that President Trump could withdraw from NAFTA based on the language in Article 2205. Based on that language and section 125(b) of the Trade Act of 1974, there is an argument that Congress has granted this authority to the president without requiring further consultation with Congress. It is not clear, however, that this action would automatically reverse the duty reductions implemented under NAFTA. However, there are statutory authorities the administration could cite as justification for raising duties.