By: David Gallagher
“[T]he worst trade deal in history.”
-Donald Trump, speaking about NAFTA[i]
WHAT IS NAFTA & WHY DOES TRUMP DISLIKE IT?
The North American Free Trade Agreement, commonly referred to as NAFTA, is a trade agreement between the United States, Mexico, and Canada.[ii] After being signed into law by President Bill Clinton in 1994, it functioned to essentially eliminate all tariffs among and between the three countries.[iii]
Donald Trump is not a fan of the trade agreement, viewing it as being a “far greater benefit” to Mexico than it has been to the U.S., citing concerns over jobs fleeing the country since it was enacted.[iv]
The President-Elect has vowed to “immediately renegotiate the terms of that agreement to get a better deal for our workers” as part of his ‘First 100 Days Agenda.’[v] Mr. Trump went on to say: “If [Canada and Mexico] do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that America intends to withdraw from the deal.”[vi]
CAN TRUMP ‘KILL’ IT? (OR AT LEAST UNILATERALLY WITHDRAW?
Can Trump, once President, withdraw from NAFTA as easily as he claims? Article 2205 of the trade agreement states:
A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.[vii]
However, scholars are split on whether this language gives the President the unilateral power to withdraw his country from the agreement. Barry Appleton, a Canadian lawyer who specializes in international law, argues:
It’s the simplest deal to kill… [t]he NAFTA can be abrogated after six months notice. Period… [Trump] can rip up the deal… The written notice doesn’t have to be an act of Congress… My understanding is that [Article 2205] is a standard clause which allows their president to withdraw their country from the obligations that they were previously committed to.[viii]
Other experts do not view the issue as so simple, contending that Congress would have to sign off on the withdrawal as well, because “it’s not in the purview of the executive branch.”[ix] Those in this camp base their belief on the fact that NAFTA is technically a CEA, or congressional-executive agreement.[x] The defining characteristic of a CEA is that it is created by statute, not treaty:[xi]
A CEA requires the approval of a simple majority in both Houses of Congress. The passage of NAFTA involved a 169-page piece of legislation, H.R. 3450. The first purpose of H.R. 3450 was to authorize President Bill Clinton to enter into an agreement with Mexico and Canada on Jan. 1, 1994.[xii]
John Yoo (current Emanuel S. Heller Professor of Law at the University of California Berkeley and former Deputy Assistant U.S. Attorney General in the Office of Legal Counsel[xiii]) notes that this distinction is critical when considering withdrawing from NAFTA, concluding “Trump cannot terminate [NAFTA] – or even negotiate it – without the approval of Congress.”[xiv] Fleshing that out more fully, both Yoo and Julian Ku (law professor at Hofstra University Law School) explain:
[U]nder the Constitution’s Commerce Clause, only Congress may alter our tariff, tax and customs laws. Congress first authorizes the president to reach a trade agreement with certain countries within limited parameters. Once the deal is struck, the president sends it to Congress for enactment into U.S. domestic law. No trade agreement goes into force until Congress passes the statutes that carry out the trade deal’s obligations.[xv]
Ultimately, there are merits on both sides of the argument. It’s possible that Article 2205 does indeed grant Trump the unilateral power to withdraw the United States from NAFTA, but there are no solid legal precedents to either support or refute this theory. Jon Lieber, U.S. director at the geopolitical risk consultancy company Eurasia Group, sums it up best when he states: “We don’t know if withdrawing from trade bills have to be ratified by Congress… We do know that [Trump] can’t unilaterally repeal the implementing bills that came along with that.”[xvi]
RAMIFICATIONS OF WITHDRWING FROM NAFTA
Economic experts agree that withdrawing from NAFTA, whether it be a unilateral executive action or one with Congressional support, will not achieve the President-elect’s goal of bringing back ‘middle-class’ jobs:
But at the end of the day, reversing trade policy won’t bring jobs to America if there are other places in the world where goods can be made with cheaper labor. And unless politicians want to ask Americans to work for a few dollars a day, which is the going rate in many developing countries, those aren’t jobs that would create middle-class wages anyway.[xvii]
Essentially, American firms currently utilizing NAFTA to produce goods cheaply in Mexico would, if the United States withdrew from the trade agreement, simply shift their production to the next least costly country—even if the U.S. does not have a bilateral trade agreement with them.[xviii]
Economists also worry about the possible emergence of a protectionist trade battle if the United States withdrew from NAFTA. If Trump’s administration decided to raise tariffs on goods coming in from Mexico in an attempt to increase costs on firms that produce there, Mexico could just as easily retaliate by placing higher tariffs on goods flowing south from America. This scenario would almost certainly have negative effects on both nations, as the U.S. imported $259 Billion in manufactured products from Mexico last year, while exporting $214 Billion of the same to its southern neighbors.[xix] Reducing the amount of goods we export to Mexico would also have a significant negative impact on domestic jobs, six million of which depend on exports to Mexico, according to Gary Hufbauer of the Peterson Institute.[xx]
In all, U.S. consumers would suffer as a result of leaving NAFTA:
Withdrawal wouldn’t be a smooth process. It would require loads of American businesses bringing existing components of their supply chains and outsourced services back onshore to avoid tariffs or other penalties — a process that takes time and money. It would also potentially increase costs for those businesses going forward. If that’s enough, the move could set off a trade war by prompting Mexico to raise tariffs on American goods in response. That could cause a downturn in the US economy and a spike in the unemployment rate that would undermine the very reason Trump is considering withdrawing from NAFTA; while some jobs would be created, more jobs would be lost as American exports grow more expensive for foreigners. And domestic demand would drop as cheap foreign goods hit with tariffs becoming more expensive, meaning Americans would probably buy fewer of the Mexican-made goods that stock the shelves of Walmart and other major American retailers.[xxi]
WHAT WILL HAPPEN?
Many experts see a full American withdrawal from NAFTA as unlikely, with a re-negotiation of terms being much more likely.[xxii] Canadian Prime Minister Justin Trudeau, known to be pro-trade, appears to be open to a renegotiation, acknowledging the fact that “over time trade deals must be given another look to be sure they’ve advanced with the times.”[xxiii] Ildefonso Guajardo, the Mexican Economy Minister, also stated that he would be open to meeting with President-elect Trump to discuss NAFTA, but did not expressly state that he would be willing to re-write the agreement until more information concerning possible changes is known.[xxiv] Along the same lines, Mexican President Enrique Pena Nieto recently stated that Mexico would be open to “moderniz[ing]” the treaty, but not to renegotiating existing provisions.[xxv]
Despite the strong talk coming from the Mexican administration, a renegotiation of NAFTA does seem to be the most likely resolution in this issue. The trade agreement has been beneficial to all three signatories, especially Mexico, which has seen significant economic gains and an associated increase in the standard of living.[xxvi] When you further consider the aforementioned negative economic impact of a complete withdrawal from the trade agreement would have on the American economy, and the logistical nightmares associated with such an act, a renegotiation makes the most sense for all parties involved.
[i] Vicki Needham, Trump Says He Will Renegotiate or Withdraw from NAFTA, The Hill (June 28, 2016, 2:53 PM EDT), http://thehill.com/policy/finance/285189-trump-says-he-will-renegotiate-or-withdraw-from-nafta-without-changes [https://perma.cc/Y7FB-QAQX].
[ii] Patrick Gillespie, NAFTA: What it is, and Why Trump Hates it, CNN Money (Nov. 15, 2016, 5:17 PM ET), http://money.cnn.com/2016/11/15/news/economy/trump-what-is-nafta/ [https://perma.cc/V389-W7F8].
[iv] Paula Dwyer, Trump’s Wrong. NAFTA was Good for the U.S. and Mexico, Bloomberg (Sept. 1, 2016, 3:30 PM EDT), https://www.bloomberg.com/view/articles/2016-09-01/sorry-mr-trump-nafta-helped-the-u-s-too [https://perma.cc/559Z-3C2P].
[v] Needham, supra note 1; Marilyn Geewax, 3 Ways President-Elect Trump May Shake Up Trade Policy, NPR (Nov. 9, 2016, 3:47 PM ET), http://www.npr.org/sections/thetwo-way/2016/11/09/501464785/three-ways-president-elect-trump-may-shake-up-trade-policy [https://perma.cc/J7PL-PVEA].
[vi] Needham, supra note 1.
[vii] Jacob L. Shapiro, The American President’s Power over NAFTA, Geopolitical Futures (Sept. 9, 2016), https://geopoliticalfutures.com/the-american-presidents-power-over-nafta/ [https://perma.cc/2LMN-LC8E].
[viii] Mark Gollom, What Would it Take for Donald Trump to Rip Up NAFTA?, CBC News (June 30, 2016), http://www.cbc.ca/news/world/donald-trump-nafta-trade-1.3657673 [https://perma.cc/ZWY3-N4J7].
[x] Shapiro, supra note 7; Julian Ku & John Yoo, Trump Might be Stuck with NAFTA, Los Angeles Times (Nov. 29, 2016, 4:00 AM), http://www.latimes.com/opinion/op-ed/la-oe-yoo-ku-trump-nafta-20161129-story.html [https://perma.cc/E8CL-WWPB].
[xi] Ku & Yoo, supra note 10.
[xii] Shapiro, supra, note 7.
[xiii] See Memorandum from John C. Yoo, Deputy Assistant Attorney Gen., U.S. Dep’t of Justice,
to the Deputy Counsel to the President, “The President’s Constitutional Authority to
Conduct Military Operations Against Terrorists and Nations Supporting Them”, Lawfare (Sept. 25, 2001), https://lawfare.s3-us-west-2.amazonaws.com/staging/s3fs-public/uploads/2013/10/Memorandum-from-John-C-Yoo-Sept-25-2001.pdf ; see also John Yoo Faculty Page, University of California Berkeley School of Law, https://www.law.berkeley.edu/our-faculty/faculty-profiles/john-yoo/ .
[xiv] Ku & Yoo, supra note 10.
[xvi] Paul Blake, Trump and Trade: How the President-Elect Could Tear Up TPP and Nix NAFTA, ABC News (Nov. 11, 2016, 4:36 PM ET), http://abcnews.go.com/Business/trump-trade-president-elect-tear-tpp-nix-nafta/story?id=43467294 [https://perma.cc/S97E-E4MZ].
[xvii] Alana Semuels, Could the U.S. Really Gut its Trade Deals?, The Atlantic (June 30, 2016), http://www.theatlantic.com/business/archive/2016/06/could-the-us-really-gut-its-trade-deals/489476/ [https://perma.cc/LK7C-5CRT].
[xviii] Id. (“This has little to do with tariffs or with NAFTA—the U.S. doesn’t have a bilateral trade agreement with Vietnam, but companies still make things there and sell them here”).
[xix] Tami Luhby, Yes, ‘President Trump’ Really Could Kill NAFTA – But It Wouldn’t be Pretty, CNN Money (July 6, 2016, 8:42 AM ET), http://money.cnn.com/2016/07/06/news/economy/trump-nafta/ [perma.cc/LP86-S2C9].
[xx] Dwyer, supra note 4 (“Economist Gary Hufbauer of the pro-free-trade Peterson Institute says workers in export-related jobs are paid 10 percent to 15 percent more than workers in non-export jobs requiring the same skills.”).
[xxi] Zeeshan Aleem, Here’s What Will Actually Happen if Trump Withdraws from NAFTA. It’s Not Pretty, Vox (Nov. 16, 2016, 8:30 AM EST), http://www.vox.com/policy-and-politics/2016/11/16/13641944/trump-nafta-mexico-canada-recession-trade-warren-sanders-tpp [https://perma.cc/27JR-G7YE].
[xxii] George Manessis, Trump Talks Tough on Trade has at Least One NAFTA Member Willing to Play Ball, CNBC (Nov. 12, 2016, 11:22 AM ET), http://www.cnbc.com/2016/11/12/trump-talks-tough-on-trade-has-at-least-one-nafta-member-willing-to-play-ball.html [https://perma.cc/C9W3-PBSW].
[xxv] Trump’s NAFTA Revamp Would Require Concessions, May Borrow from TPP, CNBC (Nov. 22, 2016, 2:07 AM ET), http://www.cnbc.com/2016/11/22/trumps-nafta-revamp-would-require-concessions-may-borrow-from-tpp.html [https://perma.cc/D5K3-8CBA]
[xxvi] Dwyer, supra note 4.