Jon R. Johnson was a former adviser to the Canadian government during NAFTA negotiations and is the author of The Art of Breaking the Deal: What President Trump Can and Can't Do About NAFTA, published by the C.D. Howe Institute.
Incoming U.S. Commerce Secretary Wilbur Ross will be releasing a list of NAFTA matters for discussion shortly as renegotiation of the trilateral trade deal is high on the agenda of President Donald Trump. While the renegotiation may commence soon, Mr. Trump has threatened to tear up the North American free-trade agreement as a negotiating strategy. Can the President follow through with this threat and unilaterally cause the U.S. to withdraw from NAFTA, or must Congress agree?
The possibility of a unilateral withdrawal without Congressional approval would put real pressure on the Canadian and Mexican governments to agree to U.S. demands. However, in my report I show that under the Constitution, Congress must agree if the U.S. wishes to withdraw from NAFTA because the President and Congress have joint authority over trade agreements.
Still, the President could attempt to withdraw from NAFTA without congressional assent, by asserting his constitutional authority over foreign affairs. In such a case, U.S. courts will not intervene unless Congress actively asserts its authority over trade, underscoring the importance to Canada of working closely with Congress.
To elaborate, the President has the power to frustrate NAFTA by taking various executive actions. While the sole power to impose duties rests with Congress, Congress has delegated powers to the President to act unilaterally to address national emergencies and other situations. These powers include the ability to raise tariffs and to adopt other border measures. The 35-per-cent tariffs that have been threatened against Mexico and the 45-per-cent tariffs threatened against China could be imposed under Section 301 of the Trade Act of 1974 and, bizarre as it sounds, the Trading with the Enemy Act (or TWEA) of 1917. Section 301 actions may be initiated by the United States Trade Representative against practices that are "unjustifiable, unreasonable or discriminatory." The TWEA can be applied in times of national emergencies. While the expression "national emergency" seems extreme, the 10-per-cent surcharge initiated by Richard Nixon in the early 1970s was upheld under the TWEA. Section 301 may be the Trump administration's weapon of choice against China and Mexico, as Mr. Trump and his supporters have described Chinese and Mexican trade practices as unfair.
The exercise of such powers by the U.S. administration could be very costly to the U.S. economy and would doubtless provoke retaliation from U.S. trading partners, as well as litigation both in the U.S. court system and before international bodies such as the WTO.
While the President's anti-NAFTA rhetoric has been directed at offshoring and balance of payments issues with China and Mexico, Canada is at risk of being sideswiped by aggressive anti-trade and anti-NAFTA measures that the President may adopt. Canada must be prepared to negotiate NAFTA with the U.S. administration and has wisely indicated a willingness to so. Canadian negotiators must begin working with industry immediately to be educated on the implications of U.S. demands, and can draw upon their recent experience with the TPP negotiations. However, the Canadian government must be willing to exercise its rights under international trade agreements. The governments of Canada and Mexico need to secure support in Congress. Members of the House and Senate, as well as state governors, will be sensitive to damage to U.S. businesses and job losses in their congressional districts and in their home states by the adoption of punitive trade measures.
While Congress is the one body that can limit damaging trade policies originating with the President, this is not to say that it won't consider protectionist policies on its own. For example, the proposed border adjustment tax that has been of major concern originates with Congress. It would exempt earnings from exports from tax and would increase taxes on imports by denying a deduction of their cost. Exempting earnings from exports while taxing other earnings is clearly a prohibited export subsidy under WTO rules. Denying a deduction for the cost of imports in computing income severely discriminates against imports and also violates WTO rules. If Congress follows through with this measure, many businesses, such as U.S. retail operations that employ tens of thousands of Americans, will suffer irreparable harm. Complex supply changes in the North American auto trade and other businesses would also be at risk, with adverse effects on U.S. workers.
Fortunately, this is a case where the Trump administration does not appear to support protectionism. Mr. Trump considers the border adjustment tax as being too "complicated" and incoming treasury secretary Steven Mnuchin is critical of the plan.
What these developments show is that Canada will have to variously lean on the administration or Congress to quash ideas emerging from the other body and, if necessary, appeal to U.S. courts to contest hurtful policies.