Withdrawing from or renegotiating NAFTA was a key element of President-elect Donald Trump´s presidential campaign. NAFTA was approved and implemented by the US, Mexico and Canada in late 1993, and now twenty-three years later, political and business leaders are trying to understand how Mr. Trump’s presidency could impact this trilateral trade and investment pact.
As a law firm focused on assisting clients with legal matters in the NAFTA region, Cacheaux, Cavazos & Newton (CCN) is closely following developments that could affect our clients. In an attempt to interpret such developments, this is the first in a series of special reports CCN will prepare to provide periodic updates affecting businesses engaged in North American trade and investment. Below is a brief analysis of the main legal aspects of a proposed withdrawal from or renegotiation of NAFTA, followed by FAQ’s and links to articles on this important topic.
The question of whether the US may withdraw from or renegotiate the terms of NAFTA must be considered in light of existing domestic and international laws in force in Mexico, Canada and the US. One must also take into account the provisions of the World Trade Organization (WTO) and its related agreements on specific sectors, such as foreign investment, trade in services, intellectual property, and other areas.
While Chapter 22 of NAFTA enables signatories to withdraw from the Agreement after giving the other parties six months’ notice, such action alone would not alter the reduced or eliminated tariffs that currently apply under NAFTA. Any such change would likely require an amendment or outright repeal by the US Congress of the law that approved and implemented NAFTA.
Since both Mexico and the US are members of the WTO, even in the absence of NAFTA’s preferential tariff rates, WTO Most Favored Nation (MFN) tariff rates would apply to goods traded between Mexico and the US. All parties now carrying out Mexico-US trade should review current WTO rates, which are relatively low in terms of the pre-NAFTA and pre-WTO tariff rates that applied in the past, to determine how current WTO rates could impact their businesses.
In addition to the NAFTA and WTO international legal frameworks, US domestic law allows the President and the United States Trade Representative (USTR) to raise tariffs in a number of scenarios. Such domestic statutes include Section 301 of the Trade Act of 1974, which enables the USTR to determine whether a US trading partner has engaged in unfair trade practices with the US. If certain requirements are met, the President may order the USTR to increase tariffs on goods coming from countries that have engaged in unfair practices. Other US statutes provide more specific and limited instances in which the President may order higher tariffs on goods imported into the US in cases where US national security or trade deficit issues come into play.
One should keep in mind that if the US gives notice of its intention to withdraw from NAFTA, the US would revert to its previous status with Canada under the US-Canada Free Trade Agreement, which was signed by the two countries in 1989. Also, policymakers in all three countries would have to grapple with untangling deeply integrated supply and value chains that have been created across NAFTA’s borders since its implementation more than twenty years ago. Mexican and Canadian leaders have recently expressed their willingness to renegotiate NAFTA, so companies currently doing business in the NAFTA region will need to stay abreast of developments on this topic.
May a party withdraw from NAFTA?
Yes. Article 2205 of NAFTA provides that any party may withdraw from NAFTA six months after providing written notice of withdrawal to the other parties. It is important to note that the legal status of NAFTA is different in the US than in Mexico. In the US, NAFTA is an executive agreement and not a treaty. Therefore, the US President has the authority to withdraw from NAFTA without obtaining authorization from the US Congress. For Mexico, the situation is different because NAFTA is considered a treaty. Thus, if Mexico’s President seeks to withdraw from NAFTA, such action will require the approval of Mexico’s Senate.
What will happen if the US decides to withdraw from NAFTA?
Once the notice of withdrawal becomes effective, NAFTA will remain in force for Mexico and Canada. With respect to the trade relationship between Mexico and the US, as noted above, such will be governed by the WTO.
What is the WTO?
The WTO is an international organization tasked with regulating international trade and investment matters. As such, it provides a framework for governments to negotiate trade agreements by establishing principles and rules for international commerce. The WTO contains binding commitments requiring member states to keep their trade policies within agreed limits. Currently, 164 countries are members of the WTO, including Mexico, the US and Canada.
The WTO succeeded the General Agreement on Tariffs and Trade (GATT), which was created in 1947. Since 1995, the WTO and its numerous side agreements have provided the essential elements that underpin the world’s multilateral trading system, including the seminal concepts of transparency, reduced tariff rates, non-discrimination and elimination of non-tariff barriers.
May the US and/or Mexico unilaterally impose higher tariff rates?
In principle, under domestic US law, the US President has the authority to unilaterally impose higher import rates on any country. However, such increased rates could not take effect until the U.S. has withdrawn from NAFTA, which would be at least six months from providing notice of its intention to withdraw from the trade agreement. In Mexico, the Mexican Constitution also grants to the Mexican President the authority to impose higher import duties, as well as to restrict and prohibit the importation of certain goods, to achieve a purpose that benefits Mexico.
Does the WTO allow member states to unilaterally impose higher tariff rates?
As noted, the WTO’s free trade principles are binding on all WTO member states. Therefore, if a WTO country were to unilaterally impose higher tariff rates in violation of WTO’s requirements, such higher rates would violate the MFN principle requiring member states to offer all WTO countries the preferential MFN tariff rate. In other words, the WTO requires its members to offer the same reduced MFN tariff rate to all WTO members.
What remedies would Mexico have if the US were to unilaterally impose higher tariff rates?
Mexico could file a request for consultations before the WTO to formally initiate a dispute. If the dispute is not resolved in the consultations phase, Mexico could then file a written request for a WTO panel to hear and resolve the dispute. If the WTO panel were to conclude that the US violated the principles of the WTO, it would issue recommendations to be followed by the US.
If the US did not follow the recommendations within a reasonable period of time, Mexico would be entitled to establish temporary measures, such as compensation that would benefit Mexico. If the US refuses to offer reciprocal compensation measures to address the dispute, Mexico could request that the matter be resolved by the WTO’s Dispute Settlement Body in order to establish retaliatory measures to rebalance the trade “playing field” and remedy the damage caused.
May the US withdraw from the WTO?
Yes. Any WTO member state has the right to withdraw from the WTO by providing a notice to the Director-General of WTO. However, if the US were to withdraw from the WTO, other countries would be free to impose higher tariff rates on imports of goods from the US.
What could be the immediate effects following a country’s decision to renegotiate or withdraw from NAFTA?
In addition to other effects, it is likely that the remaining NAFTA countries would take steps to enhance enforcement efforts to ensure strict compliance with applicable NAFTA rules.
What should companies currently doing business in the NAFTA region do?
Companies engaged in trade and investment in the NAFTA region should closely follow what are sure to be frequent and possibly fast-moving developments throughout the rest of 2017. Such companies should: (i) rely on trustworthy sources of information; (ii) review potential alternatives that may exist in their respective sectors and markets; (iii) work closely with their external advisers, industry chambers and government representatives; (iv) model how potential changes could affect their supply chains; and (v) conduct self-assessments to review compliance with current NAFTA rules.