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Can Trump really dump NAFTA? 'The answer is yes'

Donald Trump
[Trump to NAFTA: ‘Bye.’/Photo by Olivier Douliery/ABACAPRESS.COM]

By Aaron Broverman

During the 2016 U.S. Presidential Election Campaign Donald Trump called NAFTA “a disaster.”

“We’re being defrauded by all these countries,” he told anchor Scott Pelley during an interview on 60 Minutes.”We need fair trade. Not free trade. We need fair trade. It’s got to be fair.”

Now with Trump the president-elect, one of the first things speculated to be on his agenda is a renegotiation of NAFTA. But, how would that actually work and what are the possible consequences of a new NAFTA deal or no deal at all? Could the U.S. just walk away from the treaty if they didn’t like the terms of a possible renegotiation?

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Can the U.S. Walk Away?

“The answer is yes,” says Simon Potter, a partner at McCarthy Tetrault’s offices in Montreal specializing in international trade and investment law. “The treaty provides for any of the three countries to give notice and just walk out of the treaty and the treaty would then end.”

The actual terms of a potential exit come from Article 2205 of the treaty, which states, “a party may withdraw from this agreement six months after it provides written notice of withdrawal to the other parties.” Once the U.S. drops out, the agreement would remain in force among the other two parties.

Notice it says, “parties,” not “Presidents.” The U.S. president shares authority with congress to renegotiate treaties, which is done mostly through the U.S, Trade Representative. Treaties that come from these negotiations must be then ratified by congress and signed into law.

“He as the president, head of the U.S. executive branch, can ask for any trade agreement to be renegotiated — I don’t think he needs congressional approval — and the question then becomes whether Mexico and Canada are willing to sit down and renegotiate. I’m assuming if the president says he wants to open up some of the provisions, it’d be hard for Mexico and Canada to refuse to talk,” says Lawrence Herman, principal counsel of Herman & Associates, a Toronto-based law firm specializing in International Trade, Investment and Public Policy.

Both Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto said they are happy to reopen talks with Trump about NAFTA, but Nieto says he’s willing to modernize, but not renegotiate, the deal. But even if the three countries reach an impasse and the U.S. drops out as Trump has threatened, it won’t be the end of the the world for trade agreements.

It Won’t Be that Easy

“There are two treaties,” says Potter. “There is NAFTA, the three country agreement, but before that there was the free-trade agreement between Canada and the U.S. and that’s still a deal. It’s a conceivable result that NAFTA could end if these negotiations don’t work, but we’re still left with the FTA.” It is conceivable that Trump could ask that both agreements be renegotiated, but whether that will happen and whether it will happen at the same time remains to be seen.

In addition to harmonizing standards and making the border as thin as possible on a commercial level between the countries involved, NAFTA and the FTA also have the built-in ability to appeal trade rulings and an arbitration system that allows a company from one country be compensated in the event that their investments are mistreated by the other country. For example, if you’re a country that follows all the rules — collects what you need to collect on taxes, makes sure your products follow environmental standards — then suddenly, one country changes those rules, but just for the companies in your country or just for your specific company, that would be a mistreatment of your investment.

Trump cannot unilaterally decide to “rip up NAFTA” and change the scope of the treaty. Any changes he makes have to be within the scope of the treaty. He also cannot unilaterally revoke normalized trade relation duties in lieu of the excessive column two duties of the U.S. Harmonized Tariff Schedule. Trump does have the power of Presidential Proclamation, but they must be under the law and are subject to judicial oversight.

But if Trump (and the dominant republican congress) decide to leave NAFTA, or if it’s drastically changed, what would the potential consequences be for the rest of us?

What does it mean for Canadians?

“The market access provisions for exports, particularly exports of goods from Mexico, but including exports from Canada, into the U.S. market will face additional hurdles,” says Herman.

If the duty-free exchange of goods was changed between the three countries, goods would become more expensive to ship across borders and the average consumer would either be paying more for them as a result, or things that once were available from those countries would either no longer be available or be available in very limited quantities.

“I think the effect of a protectionist policy, which Mr. Trump is unquestionably pursuing, would be to reduce the open market, limit imports, cause the price of goods generally, across the economy, to go up,” says Herman. If the U.S. increases tariffs and duties on their goods, Canada could do the same for Canadian goods, which would directly impact American consumers, especially those in the northern tier.

Renegotiating NAFTA would also have an impact on the way companies arrange their businesses. “The thicker you make the border and the more duty you impose every time something goes across the border, the arrangements made for how to make your car, or just about anything else, are suddenly out the window. In the extreme, it could be very, very serious,” says Potter.

Trump is also not a fan of other trade pacts such as Free-Trade agreements with Europe and the Trans-Pacific Partnership [TPP] — without U.S. participation, that agreement is effectively dead. But should these agreements also dissolve, it may present a great opportunity for Canada.

“If Canada has preferential access to the European market, but the United States does not, that’s an opportunity for Canada and if Canada can arrange with the TPP partners to gain preferential access to Asian markets like Japan, Malaysia and Indonesia while the U.S. doesn’t — that’s a real advantage to Canada,” says Potter.

“The simple fact is these trade agreements have benefited the Canadian economy and the American economy. It’s true that some companies who thrived under the old system, haven’t thrived under the new system. But as a global matter, the economies of both countries have been improved dramatically by these agreements, so the idea of getting rid of these agreements out of a desire to do good is going to backfire.”