September 27, 2017 NAFTA: What we know and what no one can say
The U.S. objectives for the renegotiation of NAFTA are clear. The overall aim is to improve the U.S. trade balance, focusing among other on rules of origin, non-tariff barriers and better access to the agri-food market. Canada’s objectives are also clear: preserving the gains achieved and modernizing the agreement, including e-commerce and environmental issues. What is more nebulous is the backdrop against which the negotiations are being conducted.  President Trump’s statement that he could unilaterally end this free-trade agreement that he qualified as “horrible” for his country has, in particular, created controversy. Our point here will be to arrive at a more nuanced picture; as sometimes not being wrong does not necessarily mean being right.

NAFTA is a complex agreement, but the procedure to terminate it is simple. A six-month notice must be sent to the other parties, namely Canada and Mexico. However, the result would not be that the U.S. would automatically drop out of NAFTA. Contrary to Brexit, the NAFTA notice allows a party to withdraw from the agreement, but does not obligate it to do so. President Trump, or his possible successor if the process is drawn out, could then always decide to remain a party to the agreement after the expiration of the notice period. In any case, even if the Americans do withdraw from NAFTA, this agreement will still remain in force between Canada and Mexico. As for customs tariffs with the U.S., they would be those of a free-trade agreement already entered into with the U.S. in 1988 or, or failing any common resolve in this regard, those of the World Trade Organization. In all cases, about 40% of Canadian exports to the U.S. would still be exempt from custom duties, while most of the remaining balance would be subject to a tariff between 2% and 3%.

The issue on which the most credible experts compete in legal wisdom is whether President Trump could unilaterally terminate NAFTA or if he would need Congress’s approval to do so.  Indeed, the American constitution is silent on the matter. Apart from the fact that it only deals with treaties, while NAFTA is an agreement in U.S. law, the constitution provides for terms and conditions for their adoption, but not for their termination. The main argument against President Trump acting alone is that the U.S. Congress had to approve the adoption of NAFTA by a simple majority vote. The same process would therefore apply to leave the agreement. Conversely, U.S. law does not contain any procedure to follow in such a case, and the President had been delegated the power to adopt several measures which were to give effect to NAFTA. Proclamation 6641, among others, in which a number of NAFTA’s preferential tariffs are provided, was issued by former President Bill Clinton. It would therefore mean that, failing any mention to the contrary, the ability to implement a measure implicitly includes the power to revoke it. 

Only the American courts could settle the issue definitely. They have already sidestepped the matter twice with Presidents Carter and Bush. The issue in these cases was considered to be political and not legal. In order to obtain a decision from the U.S. Supreme Court, Congress would need to formally attempt to judicially establish its constitutional authority instead of avoiding a confrontation with the President, by requesting that the courts pave the way by deciding on the issue up front. This is called the “political question” doctrine.

In any event, such a judicial procedure would take time. In addition, regardless of the case involved, President Trump can actually make NAFTA practically inoperative. He has in fact the power to decree customs tariffs under various internal legislation on trade deficits, national emergencies and security, to name a few. The recent decision of the U.S. Department of Commerce to impose a 219.63 % tariff on Bombardier’s 100- to 150-seat aircrafts, based on the argument that the company has received equivalent countervailable subsidies, is a representative example. Administrative measures and additional border controls could also be imposed, contributing to indirectly restrict the access to the U.S. market. 

These are therefore times for negotiation. Since figures are part of the diplomatic language, what are they saying? Actually, the trade deficit of the U.S. is largely with Mexico, goods and services included. According to US Trade Representative statistics, this deficit was about US$55.6 billion in 2016. Certain U.S. demands during the negotiations are also directed specifically at Mexico, including the demand to enact “acceptable” labour legislation in terms of minimum wage, work hours, health and safety, etc. Conversely, the trade balance of US$12.5 billion with Canada for 2016 was in favour of the U.S. 

It is true that, if only goods are considered, Americans indeed do import more than they export, both with Canada and Mexico. However, this is not a special situation for these NAFTA countries. According to the Peterson Institute for International Economics, which is based in Washington, the U.S. trade deficit for non-oil goods globally rose from US$120 billion to US$510 billion between 1994 and 2013. U.S. indebtedness also followed a similar curve over time. Economists explain that it is because the U.S. needs to finance abroad the purchase of goods and services exceeding its revenue. This overconsumption is first and foremost a social phenomenon, influenced by numerous factors, including the decline in household savings. 

As for jobs, the U.S. Department of Commerce estimates that exports to Canada supported 1.6 million jobs there in 2015. With respect to job losses, rapid technological advances in recent years, reducing the need for unskilled labour, would largely explain changes in the work environment of industrialized nations. 

Free-trade agreements are therefore not the source of these patterns, although they can influence their development. Authorities in the three NAFTA countries are therefore currently working to find an acceptable compromise for everyone, their respective economies being highly integrated, and thus interdependent. In the meantime, NAFTA is until further notice still in effect, and business can carry on. In view of the situation, however, we advise to focus on the compliance of your products, the clarity of your agreements with your partners and the documentary traceability of your operations. The goodwill of border agents in exercising their discretionary powers is your most precious asset during custom controls, and careful planning of your exports is your best predictor of success.