Candidate Trump ran for US president on a platform heavy on fair-trade/anti-globalization rhetoric. Among his campaign statements were proposals to 1) renegotiate NAFTA, 2) impose significant new tariffs on imports from China and 3) scrap the Trans-Pacific Partnership (TPP) trade agreement. This legal update provides the first in a series of analyses on what the incoming administration's options are and what steps it is likely to take on a variety of international trade and economic policies.
The global outlook for trade and international economic policy was already impacted by the decision of the United Kingdom to leave the European Union as well as resistance among EU member states to recent trade agreements negotiated by the EU Commission. A lack of clarity around the steps the Trump administration might take adds to the existing uncertainty. One clear policy development is that TPP will not get a vote in Congress this year. We noted in a prior update that there was little chance for TPP to receive a vote in the "lame duck" session regardless of the election outcome. Under a Trump administration the outlook for TPP beyond this year is poor. If the President-elect follows through on his campaign promises, then the incoming administration will actually withdraw from the agreement entirely. This would set the stage for them to start from scratch on its international economic plan in Asia.
Beyond TPP, negotiations with the European Union over the Trans-Atlantic Trade and Investment Partnership Agreement (TTIP) are in limbo as negotiations, which were already bogged down, cease in the waning days of the Obama administration. The outlook for the Trade in Services Agreement has deteriorated as negotiations have stalled and negotiators are running out of time. Negotiators are giving one last hard push at trying to close out the Environmental Goods and Services Agreement (EGSA). Even if negotiators can conclude the agreement, the notice and consultation requirements laid out in the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 ("TPA" or "fast track") likely prevent the current administration from being able to sign the agreement even if negotiations conclude.
Obviously, the proposal to renegotiate or withdraw from NAFTA is one of the headline-grabbing proposals. President-elect Trump's specific proposal is that if Canada and Mexico were unwilling to renegotiate the agreement, he would withdraw from NAFTA. Canada has already indicated an openness to a renegotiation. Mexican officials have expressed an openness to discussing the agreement but so far have distinguished "discussions" from "renegotiation." Thus, the incoming administration may not have any reason to try to make good on the pledge to withdraw from NAFTA immediately upon taking office. However, it is worth understanding what a Trump administration's options are with regard to withdrawing from NAFTA.
NAFTA was enacted domestically by statute when Congress passed the implementing legislation making the required changes to US law. However, Chapter 22 of the NAFTA agreement provides a mechanism for parties to the agreement to withdraw—specifically, Article 2205 Withdrawal: "A Party may withdraw from this Agreement six months after it provides written notice of the withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties." Although the US has never withdrawn from a free trade agreement with such a provision, it is generally assumed that the president, exercising his Constitutional power over foreign policy, is authorized to give notice on behalf of the United States to terminate a treaty, including NAFTA.
Once the United States has announced its intention to withdraw from NAFTA, there still must be, in most cases, additional steps taken to return the United States' trade regime to a pre-NAFTA state. Section 109(b) of the NAFTA implementing legislation states that if "a country ceases to be a NAFTA country, sections 101 through 106 shall cease to have effect with respect to such country."
Section 101 of the implementing legislation provides congressional approval for the agreement and Statement of Administrative Action that was submitted to Congress. Section 102 governs how the agreement relates to state law. Section 103 governs provisions that require consultation and layover of provisions by Congress. Section 104 provides the authority for the president to take executive action to implement regulations necessary to implement the agreement. Section 105 establishes the NAFTA secretariat. Section 106 governs the appointment of individuals to NAFTA dispute settlement panels. Aside from the expiration of these specific provisions, where NAFTA obligations were incorporated into US law through statutory amendments, further legislative action may be necessary to remove those provisions from US law. For example, the NAFTA obligated the Parties to impose restrictions on the availability of duty drawback. The NAFTA Implementation Act amended the US duty drawback statute to reflect those restrictions. The duty drawback statute would have to be amended after withdrawal from the NAFTA or else those restrictions would remain part of US law. Similarly, any regulations that were issued to implement NAFTA obligations will remain in effect until they are officially withdrawn or revised.
The preferential tariff rates for goods from Mexico and Canada established by NAFTA face a different process. These tariff rates were authorized through the grant of proclamation authority to the president by Congress under Sec. 201(a)(1). Specifically, the statute states: "[T]he President may proclaim (A) such modifications or continuation of any duty, (B) such continuation of duty-free or excise treatment, or (C) such additional duties." The NAFTA preferential tariff rates were proclaimed by President Bill Clinton on December 15, 1993. Some have questioned whether the incoming president could unilaterally eliminate these preferential tariffs without approval from Congress. It would appear that there are several sources of proclamation authority that could be used by the president to return tariffs on goods from Mexico and Canada to the prevailing "most-favored nation" (MFN) rates that apply to most other WTO members who are not part of a free trade agreement with the United States.
Section 125(b) of the Trade Act of 1974 authorized the president to terminate at any time, in whole or in part, any proclamation made under this act. Because the NAFTA preferential tariff rates were proclaimed pursuant to Section 604 of the Trade Act of 1974, the president has the authority to withdraw President Clinton's proclamation setting the NAFTA tariff rates.
Even if this authority is not sufficient, the incoming administration could rely on section 111 of the Uruguay Round Agreements Act that states "the President shall have the authority to proclaim - (1) such other modification of any duty, (2) such other staged rate reduction, or (3) such additional duties, as the President determines to be necessary or appropriate to carry out Schedule XX." Schedule XX refers to the MFN rates that apply broadly to all WTO members unless more liberal access is provided through a free trade agreement. Should the incoming administration withdraw from NAFTA, it may be able to rely on this authority to increase duties on imports from Canada and Mexico to the bound MFN rates.
In conclusion then, it appears clear that the incoming president could withdraw from NAFTA based on the language in Article 2205. Based on the language and section 125(b) of the Trade Act of 1974, there is at least a colorable argument that Congress has granted this authority to the president without requiring further consultation with Congress. It is not clear though that this would automatically reverse the duty reductions implemented under NAFTA. However, there are statutory authorities the incoming administration could cite as justification for raising duties. Given the six-month timeline for withdrawal to be effective, it is possible that challenges to such actions could be initiated in US courts.
The legal ambiguity notwithstanding, as a practical matter we do not expect the new administration to formally withdraw from NAFTA or try to withdraw the duty reductions implemented under NAFTA as a first step.
In addition to renegotiating or withdrawing from NAFTA, other top trade priorities for the Trump administration are 1) stopping the TPP deal, 2) stopping "unfair imports," 3) ending "unfair trade practices," 4) pursuing bilateral trade deals and 5) taking measures to "retain and return manufacturing jobs," such as lowering the business tax rate and eliminating regulations on businesses and restrictions on domestic energy.
In addition to the ability to withdraw from NAFTA or potentially use the authority under NAFTA to raise duties, other statutes provide the president with broad authority to raise tariffs, at least temporarily, on various countries. An analysis of these statutes and the authorities they grant will be provided in a subsequent legal update.
Originally published on November 17, 2016
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