A focal point of the recent presidential campaign was international trade and free trade agreements, in particular. President-elect Trump took a position on trade that is opposite of what is espoused traditionally by the Republican Party. He has recently announced his intent to withdraw the United States from participation in the Trans-Pacific Partnership (TPP), the Pacific Rim free trade agreement that has not yet gone into effect.
The North American Free Trade Agreement (NAFTA), effective January 1, 1994, received significant attention this election season. Throughout his campaign, President-elect Trump repeatedly vowed to either renegotiate or withdraw the U.S. from NAFTA. These campaign promises beg the question on the minds of many at U.S., Canadian, and Mexican companies (and their foreign parents in many instances) that have integrated North American supply chains that rely on NAFTA: Can President Trump renegotiate or effectively have the U.S. withdraw from NAFTA?
Mr. Trump’s promise to renegotiate NAFTA’s terms appears plausible, but perhaps contentious. Clearly, both Canada and Mexico must be willing to negotiate all or parts of NAFTA to effectuate a “NAFTA 2.0.” Interestingly, in a November 10, 2016 news conference, Canada’s Liberal Prime Minister, Justin Trudeau, expressed a willingness to potentially renegotiate NAFTA, stating he believes it is important for Canada to be open to talking about the trade agreement. Mexico’s Secretary of Economy, Ildefonso Guajardo, indicated that Mexico would be less willing to discuss renegotiating NAFTA; instead, Mexico would attempt to explain the strategic importance of NAFTA. Similar statements have been made by other Mexican officials.
There is no legal prohibition against any efforts to renegotiate NAFTA, in its entirety or parts of it. What does this mean for trade? As far as importers and exporters are concerned, this means that a close watch must be kept on developments in this arena, but no rash decisions should be made—patience will be key. No date has been set for formal talks between the NAFTA countries, and there is too little information at this time for companies to make significant decisions regarding existing supply chains or investment strategies. If the parties attempt to renegotiate NAFTA, it likely will be a long, arduous process, especially considering the divergent positions on renegotiation.
The question is not whether Trump can terminate the agreement—NAFTA would continue to exist between Canada and Mexico—but whether he has the authority to “withdraw” the U.S. from the trade agreement. NAFTA is not a treaty. Rather, it is a congressional-executive agreement implemented by domestic legislation, which like a treaty, becomes the law of the land. Unlike treaties, which, under the Article 2, Section 2 of the Constitution require a two-thirds majority in the Senate to pass, congressional-executive agreements are not covered by the Constitution and require only a simple majority in both Houses of Congress.
Under H.R. 3450, the North American Free Trade Agreement Implementation Act, Pub. L. No. 103-182 (the “Implementation Act”), the President is not required to obtain Congressional authorization to withdraw the U.S. from NAFTA. As the President-elect has pointed out, NAFTA contains a “withdrawal” provision under Article 2205. It simply states that a party may withdraw from NAFTA six (6) months after it provides written notice of the withdrawal to the other parties. With the Constitution and the Implementation Act silent on the issue, the legal authority to withdrawal after giving six (6) months’ written notice is straight-forward. Actually effectuating withdrawal from NAFTA, however, will undoubtedly lead to economic, political, policy and legal disputes that could make the process impractical, at best. Since no party has raised the prospect of withdrawing from NAFTA, the wide-range of issues to be addressed will be novel and without legal precedent.
For practical reasons, companies relying on NAFTA currently should not look to alter their supply chain and business practices immediately. There is no guarantee of any changes to NAFTA or that the U.S. will actually withdraw from this key free trade agreement. Acting early based on the current rhetoric would be unwise and could prove to be costly. Nonetheless, in 2017, companies may want to start contingency planning, including exploring alternate sourcing, tariff-engineering, and other duty-saving strategies. The developing nature of this matter will be followed closely and further updates will be provided, as warranted.