“NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.”
President-elect Donald Trump, September 26, 2016.
President-elect Donald Trump has consistently stated that he will renegotiate or terminate American participation in NAFTA—the North American Free Trade Agreement. For businesses that rely on NAFTA, there are two recurring questions: (1) Can he do it? (2) What happens if he does?
Before turning to these questions, it is important to remember that NAFTA is the tip of an extremely complex regulatory “iceberg” that addresses bilateral, multilateral and other issues. NAFTA regulations address general and specific rules of origin (i.e., rules to determine eligibility of a good as originating in a NAFTA country), certification of eligibility by exporters of goods between NAFTA countries, commodity-specific rules, country-of-origin marking rules, special rules for drawbacks (i.e., claims for total or partial duty refunds for products imported and then exported in the same form or after additional manufacturing to another NAFTA country); rules regarding repair or alteration of products in NAFTA countries, record-keeping, and civil penalties. The application of NAFTA-eligibility rules can be especially complicated when dealing with goods that contain components from multiple NAFTA and non-NAFTA countries and are subjected to manufacturing processes in multiple countries before their end-use destination in a NAFTA country.
Can President Trump do it?
Probably yes, but not without a fight.
The story is somewhat convoluted. Article 2205 of NAFTA states only that “[a] Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties.” It does not say who within the “Party” must provide that authority. To answer that question, we must look to the Constitution and federal law.
NAFTA is not a treaty. It is a Free Trade Agreement, passed pursuant to the Trade Act of 1974, 19 U.S.C. §§ 2191-2194, under the “fast track authority” allowing the President to negotiate trade agreements that Congress can approve or deny but cannot filibuster. As originally promulgated, this fast track authority expired in 1994. Congress reauthorized the authority from 2002-07 in the Trade Act of 2002, and again in the Trade Act of 2015. The current fast track authority applies to agreements competed before July 1, 2018, with a possible extension to agreements completed before July 1, 2021.
Does the President have the constitutional authority to withdraw from NAFTA without consulting Congress? That question is open. Business and trade groups sought judicial rulings that the President did not have the constitutional authority to enter into NAFTA on his own, but the Eleventh Circuit held in Made in the USA Found. v. United States, 243 F.3d 1300 (11th Cir. 2001), that this issue was a “political question” beyond the authority of the federal courts to adjudicate. Older judicial authority is at best murky on the point but leans somewhat toward the idea that this power is a political question that federal courts cannot resolve. See Goldwater v. Carter, 444 U.S. 690 (1979). If a court were to find that withdrawal from NAFTA is a political question, the decision of the other branches would remain in effect.
Hidden issue: Would a court grant temporary relief to consider a challenge? Complete resolution of matters in the federal court system almost always takes longer than six months. See, e.g., United States v. State of Texas, 136 S. Ct. 2271 (U.S., June 23, 2016), the case involving legality of the Deferred Action for Parents of Americans immigration program, which took 16 months from initial ruling to Supreme Court decision. Parties opposing executive action often seek temporary injunctive relief to determine whether presidential power has been properly exercised. It is an open question as to whether a court would issue preliminary relief to stop the six-month withdrawal clock. It is virtually certain that someone will seek preliminary relief, thereby adding another layer of complexity to the process.
The bottom line: We can reliably assume that there will be litigation by someone if President Trump tries to withdraw the United States from NAFTA. The incoming administration would be in the strongest position to make withdrawal “stick” if it obtained express authorization from Congress to do so. See Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579, 634 (1952)(Jackson, J., concurring).
What happens after termination?
In the absence of new congressional authority, the President’s power to terminate a trade agreement enacted under authority of the Trade Act of 1974 appears to be limited by section 125 of the Trade Act, which sets out the provisions governing a president’s authority to alter duty rates and other import restrictions in the event of withdrawal from a trade agreement. Subsection (e) provides that following any such withdrawal, duty rates should remain unaffected for a period of one year after the date of termination or withdrawal, unless the President by proclamation provides that such rates should be restored to the level that would apply but for the agreement. Section 125, however, also provides authority for the President to impose additional duties “to the extent, at such times, and for such purposes as he deems necessary or appropriate.” The maximum allowable level of such duty rate increases is 50 percent above the general duty rate in effect on January 1, 1975, or 20 percent above the rate in effect for that country as of January 1, 1975, whichever is higher. If the President tried to act beyond the authority of section 125 without relying on another statute, it almost certainly would prompt litigation.
An alteration of duty rates would be felt primarily by the importers of record in any NAFTA-eligible transactions since importers are responsible for duty payments on imports into their responsive NAFTA country. Thus, in the event of a U.S. withdrawal from NAFTA and presidential restoration of non-NAFTA rates or imposition of other duty rates, U.S. importers of products from Mexico and Canada could face higher import duties. Canadian and Mexican importers of previously NAFTA-eligible products from the U.S. could also be affected, although the nature and extent of that effect could depend on how those countries adjust their tariffs, something the President-elect cannot control.
Withdrawal from NAFTA would also affect the special rules applicable to drawbacks, the complex commercial program administered by Customs that allows for refunds of duties, taxes, and certain fees when products imported into the U.S. are then exported to another country or destroyed. Special drawback rules apply under NAFTA.
It must be remembered that section 125 of the Trade Act only applies to the United States. Other NAFTA nations may not be or feel themselves to be restrained by limitations like those in section 125. Such actions could prompt Congress to give the administration greater authority, with unpredictable results.
So what will happen?
Predictability thus far has not been a hallmark of the incoming administration. It is possible to make some predictions, however, based on two statements the President-elect Trump made frequently on the stump: (1) the incoming administration wants to bring jobs back to America; and (2) the incoming administration wishes to negotiate “better” bilateral deals. It is not too much to guess that “better” means keeping jobs in America and returning jobs to America from outside its borders.
Strategically, to the extent that the incoming administration believes that counterparties will try to salvage something to avoid the complete loss of the NAFTA relationship, the new administration may proceed by using a threat to withdraw from NAFTA immediately as a lever to negotiate new bilateral trade deals. Watching the President-elect so far suggests that the new administration will withdraw first and then try to negotiate replacements during the withdrawal period.
The President-elect has threatened to impose a 35 percent tax on imports from Mexico and up to a 45 percent tariff on goods imported from China. The former would require repeal of NAFTA; the latter would not. But because the Constitution lodges the power to raise taxes and tariffs with Congress, increases by the President would require statutory authority. Section 122 of the Trade Act allows the President to impose a 15 percent surcharge on tariffs for 150 days. Other statutes, including the Trading with the Enemy Act of 1917, the Trade Expansion Act of 1962 and the International Emergency Economic Powers Act of 1977, may be the “big sticks” the President wants. Actions under these statutes may generate litigation, but presidents desiring to impose tariffs in support of their policy objectives have used all of them in the past.
Because of the complexities of NAFTA and the wide array of products that come within its reach, there is no single “right answer” as to what may happen. If you import goods currently regulated by NAFTA into the United States, perhaps the best recommendation is to look at how they were treated in the period immediately prior to NAFTA. If NAFTA is repealed and nothing replaces it, section 125 of the Trade Act mandates a setting back of the clock in the absence of express congressional authority to do otherwise. But watch for invocation of another statute in conjunction with repeal as a lever to obtain the concessions the President-elect has stated that he wants.