The road to divorce

NAFTA has separation procedures for dissatisfied parties, but how far will the president go and will he involve Congress?

By: Eric Kulisch
Photo: Abscent/Shutterstock
   The North American Free Trade Agreement has had modest, but positive, effects on the U.S. economy since its inception 23 years ago. But to hear President Donald Trump tell it, the trade accord has been ruinous, resulting in the outsourcing of manufacturing production and millions of jobs to Mexico.
   It was one of the main themes that propelled him to victory in the 2016 election, and now in office he says he’s prepared to withdraw from the pact unless Canada and Mexico are willing to renegotiate on terms more favorable to the United States. The trilateral relationship is on the rocks and the dominant partner is telling both spouses they must go to counseling – with a therapist picked by the United States – or else get divorced.
   The Canadian and Mexican governments have signaled willingness to renegotiate NAFTA because they also have grievances they want resolved. Meanwhile, businesses involved in cross-border trade generally agree the trade deal needs modernizing to better address new conditions, such as the digital economy, and to streamline border bureaucracy.
   Trump and close advisers have made clear their disdain for multilateral agreements, so pulling out and negotiating bilateral deals with Canada and Mexico remains a possibility.
   The president has wide-ranging authority over trade policy under the U.S. Constitution and law, but if the White House unilaterally tries to reset NAFTA it could set up a conflict with Congress because of legal gray areas that exist with regard to the separation of powers, international lawyers say. And the recent executive order placing a temporary immigration ban on people from certain countries, as well as all refugees, suggests the Trump administration is willing to act on its own.

   What’s at Stake. NAFTA opened up markets by eliminating most tariffs on products sold among the three countries, with a heavy focus on the automotive, agriculture and textile industries. It also introduced intellectual property rights protections, established mechanisms for resolving disputes and implemented labor and environmental safeguards.
   U.S. companies sold nearly $500 billion worth of goods in Mexico and Canada last year, continuing their run as the top two export markets for American products. The two neighbors represent 30 percent of the total amount of trade the U.S. conducts around the world, with imports and exports totaling almost $1.1 trillion.
   The United States has a $60 billion trade deficit in goods with Mexico, but a surplus in services puts the overall deficit at $50 billion. Trump has railed against the trade deficit, saying during the campaign he would slap 20 percent tariffs on countries that hold a trade surplus with the United States and impose tariffs of as much as 35 percent on U.S. firms that relocate to Mexico and then sell their products to U.S. customers.
   But the manufacturing trade deficit is not as bad as it appears because a portion of it comes from petroleum imports, and most Mexican manufactured goods contain at least 40 percent U.S.-made parts and materials, as encouraged by the agreement. That means a portion of Mexican imports are actually American products being reimported.
   The same goes for Canadian products, with 25 percent of U.S. imports from Canada of U.S. origin, according to a 2010 report by experts at the U.S. International Trade Commission.
   Trying to quantify NAFTA’s direct benefit to the U.S. economy has proven elusive for economists. It is difficult to isolate how trade would have evolved in the absence of the deal because U.S. trade with Mexico and Canada was already growing prior to NAFTA, accurate data on trade flows at the industry level is limited, and trade with Mexico and Canada (less than 5 percent of GDP) is small relative to the size of the U.S. economy, not to mention technological advances and domestic developments in each nation.
   Some estimates conclude that the benefit to U.S. GDP from NAFTA is a few billion dollars a year, or a few hundredths of a percent.
   NAFTA’s real value, according to experts, is that it led to the establishment of a tri-national manufacturing platform based on specialization and economies of scale, with companies performing work wherever it was most efficient and thereby making North American products more competitive in the global market. Less successful was the geo-political goal of reducing incentives for people to illegally migrate to the United States by boosting the economy of a developing nation (Mexico), in the process creating higher wages and jobs at home.

   Exit Levers. The Trump administration is preparing to enter into negotiations with Canada and Mexico about trade (and immigration in the case of Mexico). Mexican President Enrique Peña Nieto canceled a January visit to Washington after President Trump publicly embarrassed him over the subject of paying for a border wall to stop illegal entry of migrants, but talks are expected in the coming weeks once Trump’s cabinet is in place.
   There is no specific procedure within NAFTA implementing legislation passed by Congress regarding renegotiation. 
   It remains to be seen to what extent the administration will brief members of Congress on negotiations as they happen, or obtain their input. But the most likely scenario, according to a trade expert speaking on background, is that the administration will send letters to Mexico and Canada that it intends to renegotiate the free trade agreement.
   President Trump entered office with a stronger hand to renegotiate NAFTA after Congress passed Trade Promotion Authority in 2015 to give then-President Obama fast-track trade negotiating authority for the Trans-Pacific Partnership Agreement, which the United States has since abandoned under Trump’s order before the agreement could enter into effect. TPA requires the President to notify Congress of any intentions to enter into trade negotiations, and legislative aides on the Hill take that to mean deals that are renegotiated, as well as original deals, the trade expert said. The White House can submit a new NAFTA deal to Congress for an up-or-down vote – without any amendments.
   Under NAFTA rules, any nation that wishes to withdraw from the accord must provide six months’ notice to the other parties, and Congress. But the break may not be as clean when it comes to domestic law because Congress passed legislation to implement U.S. obligations under the agreement.
   “Withdrawal from NAFTA on an international level wouldn’t automatically terminate all provisions of the statute,” Catherine Amirfar, a partner at Debevoise & Plimpton in New York, said during a recent webinar produced by the American Society of International Law. “There are some provisions in effect only because we’re a NAFTA party, so if that goes away they would automatically suspend. But there are other provisions that changed U.S. law in accordance with NAFTA that wouldn’t. And that just means there’s a legislative component” that would live on unless Congress took action to repeal those provisions of U.S. law.
  If the United States withdraws from NAFTA, the main requirement is that the administration can't raise tariffs to pre-NAFTA levels because Mexico is a member of the World Trade Organization and subject to tariffs under that regime. And the existing tariffs must remain in place for one year from the date of actual termination before being raised to allow industry to transition, the trade expert said on condition of anonymity because his group doesn't want to be on the record until Trump administration positions become more clear.
   The ability of a president to unilaterally withdraw from a congressional-executive agreement such as NAFTA has never been tested, said Amirfar, a former counselor on international law at the State Department during the Obama administration.
   Trade agreements must first be approved by the Senate. Technically they are not considered treaties, which require a two-thirds majority vote. Congressional-executive agreements only require simple majorities in the Senate and House to pass.
   And there have only been two instances of presidents unilaterally pulling out of treaties, according to Amirfar. President Jimmy Carter ended a defense treaty with Taiwan and in 2002 President George W. Bush took executive action to remove the United States from the Anti-Ballistic Missile Treaty. In both cases, the courts said they didn’t have a role because the issues were of a political nature.
   The dynamics might change, Amirfar speculated, if Congress were to voice its opposition to withdrawal from NAFTA, or any congressional-executive agreement, by passing legislation or a sense of Congress that puts conditions on the withdrawal. That could trigger a court case that ends up at the Supreme Court.
   “It would behoove this administration to work with Congress, to work with other stakeholders, and not just because of the potential legal challenge,” Amirfar said. “The idea of ripping up a trade agreement that has so much impact on U.S. companies, the opening of markets, it could trigger trade wars, reciprocal duties, reciprocal tariffs that would shut down trade. It would not benefit us; it would not benefit U.S. workers. So without an alternate regime in place, to just strip away NAFTA unilaterally, or with Congress, just doesn’t make sense.”
   The Uruguay Round Agreements Act of 1994, which implemented the United States’ commitment to transform the General Agreement on Tariffs and Trade into the World Trade Organization, also includes a provision that specifically states Congress must give approval to withdraw from multilateral trade deals negotiated through the WTO.
   Whether that statute is enough to block unilateral executive action regarding WTO compliance has not been tested in the courts either, Amirfar said.
   John Bellinger, a partner at Arnold & Porter Kaye Scholer and a former legal advisor in the State Department and National Security Administration under President George W. Bush, expressed concern about potential presidential overreach with regard to multilateral agreements after a draft executive order was leaked to the media suggesting the Trump administration wanted to review all multilateral treaties to determine whether the United States should withdraw from those it believes aren’t in the U.S. interest.
   The White House has since said no such executive order is being planned.

   Normal review. It is normal for new administrations to review treaties that are under review by the Senate to prioritize which ones it wants to push for quick action, Bellinger said. But President Trump’s apparent skepticism about international law and treaties is worrisome because treaties benefit every aspect of American life, from taxation and international calls carried by satellite, to protection of intellectual property rights, both international law experts agreed.
   “The United States has had a long history of using treaties to extend our voice, to extend our values to great effect in the world,” Amirfar said. “Americans understand that the security and stability of the world is promoted through shared legal rules, shared values and we can’t expect other countries to live up to these norms that are so important to us unless we do so ourselves.”
   There are currently 44 treaties pending before the Senate that have been completed and transmitted by previous presidents, including 21 negotiated during the Obama administration. During the Bush administration, the Senate approved 163 treaties. Achieving passage typically requires legwork from the executive branch to convince lawmakers to ratify the treaties, Bellinger said.
   The Trump administration clearly had a misstep rushing out with the recent executive order temporarily banning immigration from seven designated countries and halting the intake of all refugees, Bellinger said. The hope is that future decisions, include those regarding treaties, will be fully cleared through the inter-agency process as Secretary of State Rex Tillerson and other Cabinet members assume office, he added.
   The Bush administration was a bit quick to oppose certain international agreements, “but calmed down in the second term, realized some of its mistakes, and went a more multilateral route,” Bellinger said. “So I hope the Trump administration reads its history.”
   The Bush administration, for example, initially opposed the Law of the Sea Treaty because the accepted wisdom of officials was that Ronald Reagan didn’t like it, but through a process of education from the military, State Department and other agencies it became clear to the White House that the treaty had been renegotiated and was very much in the U.S. interest, Bellinger said.
   “My hope is what will happen is that before we have to go to congressional challenges is that we will have a process of education of the president and his advisers in the White House on the importance of international law and the treaties to which we are a party,” he said.