A time of uncertainty
U.S. President Donald Trump has indicated a desire to renegotiate or pull out of the North American Free Trade Agreement.
In the age of fake news, it’s hard to find the facts. The Trump administration is making it up as it goes along, but the facts eventually catch up.
While this is reason for concern among those currently or considering exporting to the U.S., there is no need to panic. Faced with uncertainty, getting a handle on the facts is important to inform your decision making process. As a Canadian business, you should proceed with caution in the time ahead.
Explore the facts on NAFTA and the Trump administration before rushing to action.
NAFTA today and tomorrow
There are three basic scenarios for the future of NAFTA — status quo, renegotiation, or withdrawal.
Despite disputes over specific industries, NAFTA has been very beneficial for all three countries. Since coming into effect in 1994, NAFTA has helped drive economic growth across North America, with merchandise trade among the partners more than tripling during that time.
Rest assured, it’s no simple matter to dissolve or replace the agreement.
If none of the partners decide to renegotiate or withdraw, NAFTA would continue to govern and facilitate trade — as it has for the past 23 years.
If the Trump administration decides to follow through with election campaign promises, it would need to provide Congress with 90 days notice of its intent to renegotiate the Agreement. NAFTA would remain in place during the negotiation process.
The result of renegotiations could be simple tweaking or a fundamental overhaul of the Agreement. In either case, we would end up with a modernized, revised NAFTA 2.0. All three countries would need to sign off on it.
Over $1.0 Trillion (USD)
Total merchandise trade among NAFTA partners in 2015
Source: Global Affairs Canada
This could result from a unilateral decision or from failed renegotiations. It would require 6 months notice of the intention to withdraw.
In this outcome, Canada and U.S. might revert to 1989 Free Trade Agreement, while World Trade Organization (WTO) tariffs, protections and remedies would still be in place.
Trump Administration actions
Between talk of renegotiating Trade Agreements and issuing Executive Orders, the Trump Presidency has raised red flags for exporters.
In the early days of the Trump administration, there has been talk of renegotiating trade agreements and a move toward isolationist trade policies like Buy American. While these policies are not new, any changes should be closely monitored. For more information, you can read our Worried About ‘Buy America’ Policies? blog.
Executive Orders issued during first 100 days
Source: U.S. National Archives
Most of President Trump’s executive orders are signalling potential future action with no immediate effect. A draft April 26th Executive Order was considered to potentially withdraw the U.S. from NAFTA. This may have been a negotiation tactic, but we can’t be sure.
Executive Orders cannot be used to unilaterally repeal the legislation around NAFTA. This is a gray area, however, because the Trump Administration may push the boundaries of what can, in fact, be accomplished with EOs.
You can see all Executive Orders issued at www.whitehouse.gov.
The U.S. may seek two sets of bilateral negotiations over NAFTA, but, so far, Canada and Mexico have insisted on three-way talks.
The U.S. may also use regular trade remedies to protect it’s own interests. U.S. industry has initiated anti-dumping/anti-subsidy complaints in the past, leading to additional duties on targeted imports. Investigations on national security grounds may also be used to lead to quotas or additional duties (e.g. Chinese steel and aluminum).
The role of Congress and the Courts
In any move by the U.S. Executive branch to revisit NAFTA, the Legislative and Judiciary branches may also come into play.
Trade Agreements are technically Congressional-Executive agreements, which implies Congress has some say in whether the U.S. can leave NAFTA. That said, there is no precedent for withdrawal from a trade agreement, so there is little certainty as to what role Congress would or would not play.
Renegotiation 90 days notice required by Congress
Withdrawal 6 months notice required by trade partners
If President acts beyond his authority, Congress or any affected companies could ask the courts to strike down or delay executive action that may be seen as detrimental to U.S. business interests.
How Canadian exporters can prepare
There are a few simple things you can do to help mitigate risk and be prepared during these uncertain times.
Being knowledgeable and staying on top of changing information is important. It’s really the only true way to protect yourself.
Sources of information can include news outlets and trade organizations. You can also seek out expert opinion. You might obtain legal counsel, employ relevant consultants, or contact trade organizations for help.
When moving forward with exports, it is important to consider not only the actual impact of rule changes, but the market perception within your industry. Understanding this nuance can help you overcome perceived obstacles.
To learn about trade policies linked to specific industries that Office of U.S. Trade Representative finds troublesome, you can read this Financial Post article.
There’s no reason to. Renegotiating or withdrawing from NAFTA is a long process that has not even been initiated yet.
In any case, trade will continue between the U.S. and Canada. History has shown it is too important to the economic health of both countries for it to be made difficult in the long-term. You can read more in our Canada’s Deep Trade Ties with the U.S. blog.