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NAFTA is sinking, and Canada needs a lifeboat

There was zero progress at the North American free-trade agreement renegotiations in Mexico this week. In fact, the talks took a decidedly backward step, with the United States refusing to move off its red-line positions, something that was predictable given the updated negotiating objectives released by the U.S. Trade Representative ahead of this week's session.

This is an "America First" administration, after all, with no interest in accommodation, increasing the likelihood of eventual U.S. withdrawal from the agreement, an action that President Donald Trump has repeatedly threatened, in spite of intensifying business and political pressures to the contrary.

Given that gloomy prospect, let's look at how things could unfold over the next while, bearing in mind that things are fluid and the situation could change.

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First, the negotiations could soon end, even ahead of the 2018 deadline, either with an American walkout or with all three negotiating teams agreeing that there's no point in continuing the process. It could be ended definitively or just suspended for the time being. Ending or suspending the negotiations doesn't terminate the NAFTA, however. It's what happens next that counts.

With negotiations at an impasse, Mr. Trump could send in the six-month U.S. withdrawal notification required under NAFTA Article 2205 – which says that a party "may" withdraw from the agreement on six months' notice – attempting to ratchet up the pressure on Canada and Mexico with the threat of formal withdrawal hovering in the background.

After the six-month period ends and without Canada and Mexico caving on U.S. demands, Mr. Trump could send Canada and Mexico the definitive U.S. withdrawal notice. If he does and the U.S. walks out, that doesn't terminate the NAFTA as a binding treaty. Under Article 2205, it continues in force between Canada and Mexico. More on this point later.

Here's where things get more difficult to predict.

If Mr. Trump notifies U.S. withdrawal without congressional approval, Congress could try to thwart him, a point discussed before on these pages. The Canadian government has been assiduously lobbying congressional leaders and committees – in both the House and the Senate – in a massive and well-orchestrated full-court press, the strategy being to ensure that if and when NAFTA withdrawal is put to the Congress, both houses will turn it down.

Whether that would happen is a good question. Sentiment in Democratic and Republican caucuses has shifted decidedly toward protectionism, thanks to Mr. Trump's own rhetoric and Bernie Sanders' anti-free-trade crusade on the Democratic side.

Moreover, Congress is fully preoccupied with enacting tax reform legislation and won't jeopardize those efforts by confronting the President on trade matters. On this hypothesis, if Mr. Trump seeks approval, some observers predict Congress would vote in favour of withdrawal. That's a discouraging prospect.

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Whatever Congress does or does not do, there will be immediate court action by opposition groups seeking a restraining order and putting the issue of presidential authority versus the powers of Congress on trial. The argument is that Congress has exclusive constitutional authority over international trade plus the fact that neither Fast-Track nor the NAFTA Implementation Act contains withdrawal authority, meaning only Congress can authorize a U.S. pullout.

The result will be ongoing uncertainty as U.S. courts deal with an epic constitutional battle. In the meantime, the NAFTA struggles along as a leaky vessel, as business tries to navigate these legally and politically roiling waters.

It's always possible that with negotiations suspended, Mr. Trump won't try to force through formal U.S. withdrawal, at least initially, but could tweet his annoyance at Canada and Mexico as unfair trading partners, accusing each as unwilling to compromise, and using extensive executive powers to tighten the screws to force both countries back to the bargaining table. Under this scenario, goodwill would dissipate, making it impossible to settle trade wars like softwood lumber and the Boeing-Bombardier battle, or even more mundane trade irritants.

If Mr. Trump actually tossed the NAFTA withdrawal grenade, he would likely include withdrawing from the 1989 Canada-U.S. free-trade agreement as well, which has similar withdrawal provisions. He could then say, notwithstanding lack of congressional approval and ongoing court challenges, that he's prepared to sit down and talk with Canada about a totally new bilateral trade deal. Indeed, judging from his public comments, that seems to be the White House strategy.

As stated earlier, NAFTA says that if one party withdraws, the agreement isn't terminated but remains in force for the other two parties, meaning Canada and Mexico. How does Canada (or Mexico for that matter) sit down face-to-face with the Americans when they are still legally bound to each other under the agreement?

What does the Trudeau government do? Does it refuse any Trump invitation for new bilateral talks? It's a challenging question but needs to be considered because that seems to be where we are heading.

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All this says navigating these stormy and perilous waters in the next weeks won't be easy. The good ship NAFTA is in danger of sinking. Canadians need to have lifeboats ready.

Lawrence Herman of Herman & Associates is a former Canadian diplomat who practices international trade law. He is a senior fellow of the C.D. Howe Institute.

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