As inauguration day approaches, there are many questions about Donald Trump's promise to renegotiate or "tear up" the North American free-trade agreement. What does it mean for Canada-U.S. trade?
Could Mr. Trump terminate or "tear up" NAFTA?
Not exactly. However, under Article 2205 of NAFTA, the United States could withdraw from the agreement on six months' notice. NAFTA would remain in force between Canada and Mexico.
Could the President make the decision to withdraw the U.S. from NAFTA or renegotiate it on his own, or would Congress need to approve the decision?
The President likely has the legal authority to withdraw the United States from NAFTA on his own, and that authority may well extend to overriding some statutory provisions giving effect to the United States' NAFTA obligations. Even if Congress challenged the President's authority on these matters, a challenge likely would take far longer than the six-month NAFTA notification period to work its way through the courts, and the courts might refuse to take sides. Therefore it is prudent to assume that a Trump administration has considerable latitude to pull the U.S. from NAFTA with or without Congressional support.
Is Mr. Trump likely to withdraw the U.S. from NAFTA?
No. The United States has too much to lose from unilateral withdrawal, given the deep economic ties NAFTA has produced among the United States, Canada and Mexico. It is far more likely that the U.S. will use the threat of withdrawal to renegotiate aspects of NAFTA. Canada has already received indications from the coming Trump administration that it intends to formally open negotiations on NAFTA as soon as it takes office.
What will be on the table if NAFTA is renegotiated?
Canada's asks are likely to include greater access to U.S. procurement – including constraints on "Buy America" policies – deeper regulatory co-operation, improvements to the state-to-state dispute settlement mechanism and possibly reforms to the investor-state dispute process.
However, the United States will hold the stronger hand in any negotiations. Despite Canada's professed willingness to reopen NAFTA, a Trump administration will be looking not to improve trade flows, but for Canada and Mexico to "pay" for access to the U.S. market.
For example, while Canada may want to modernize NAFTA's rules of origin – which determine which goods qualify for duty-free treatment – to make them easier to use, the United States will want to make those rules more restrictive. The United States will also seek to eliminate the binational dispute settlement mechanism that allows Canadian governments and businesses to challenge U.S. anti-dumping and anti-subsidy determinations before bilateral panels rather than in U.S. courts. U.S. asks may well include concessions by Canada in sensitive areas such as
supply-managed agriculture, the lifting of foreign investment restrictions in the telecommunications sector, limits on Canadian softwood lumber exports and changes to intellectual-property rights to more closely mirror the U.S. system.
While the president-elect's NAFTA-related opprobrium has been directed at Mexico, Canadian negotiators – as well as Canadian businesses and their U.S. allies – will need to be nimble in order to preserve, let alone improve on, the status quo for Canada-U.S. trade.
What happens to Canada-U.S. trade if the U.S. does withdraw from NAFTA?
The Canada-U.S. free-trade agreement (FTA) was never terminated; it was merely suspended for so long as NAFTA is in force between Canada and the United States. Therefore, if the United States were to withdraw from NAFTA, FTA probably would come back into force.
When NAFTA was concluded, the intention was that FTA would kick back in automatically if NAFTA ceased to apply to Canada-U.S. trade, but it is not entirely clear if some sort of affirmative action is required. And the U.S. potentially could terminate FTA too, also on six months notice, leaving Canada-U.S. trade to be governed by WTO rules, including the WTO's "most-favoured nation" duty rates.
However, that scenario seems highly unlikely. The principal focus of Trump's opposition to North American free trade has been Mexico. By contrast, the FTA was one of the legacy achievements of the Reagan Administration. It is difficult to imagine Trump wanting to undo that legacy, or that his new U.S. Trade Representative, who was a senior member of the Reagan trade team, would want to do so either. Nevertheless, the mercantilist orientation of the Trump Administration means that it may want to get something in exchange for continuing FTA.
What would it mean for bilateral trade if FTA did come back into force?
Under FTA, bilateral trade in nearly all goods would remain duty-free. However, FTA rules of origin are less precise than those in NAFTA and more likely to lead to disputes.
Reversion to FTA would also make it harder for Canadian exporters to avoid the effects of U.S. safeguard actions against injurious imports, which can be expected to become more commonplace under a Trump Administration. It would also mean the end of NAFTA's binational dispute settlement mechanism for dumping and subsidy disputes because the equivalent mechanism under FTA was time-limited. Preserving the binational dispute settlement process was a key objective for Canada when NAFTA was negotiated, although its value has eroded over time.
FTA also offers less comprehensive protections for services and investment trade than NAFTA does. For example, FTA protections do not extend to certain important services like rail transportation or provide for investor-state dispute settlement like that in NAFTA's Chapter 11.
Reasons for Canadian business
to be wary after Jan. 20
These are only some of the concerns a Trump presidency raises for Canada-U.S. trade. Others include expanded "Buy America" policies, U.S. engagement with the WTO, and the shape of U.S. tax-reform efforts, which will involve Congress and could include border tax adjustments or other measures that have major implications for trade.
Mr. Trump's nominees for key trade positions, including for commerce secretary and the head of the new National Trade Council, as well as his postelection threats to companies in the auto sector, demonstrate his intent to follow through on campaign promises to change the way the United States has conducted trade relations for past 25 years. While the principal targets of these changes will be China and Mexico, the clear message from the Trump transition team has been that the Trump administration "will put American workers first." That makes Canada vulnerable to both direct and collateral damage.