Figuratively speaking, hostage strategies only work if you’re willing to kill the hostage. Donald Trump told a rally in Phoenix last night that he’s willing to do so with NAFTA if Canada and Mexico don’t agree to substantial changes in the agreement. Trump’s warning came two days after the first round of negotiations ended with wide gaps between the US and its trading partners:
U.S. President Donald Trump warned on Tuesday he might terminate the NAFTA trade treaty with Mexico and Canada after three-way talks failed to bridge deep differences. …
“Personally, I don’t think we can make a deal. I think we’ll probably end up terminating NAFTA at some point,” Trump said at a political rally in Phoenix, Arizona.
Suggesting a termination might help jumpstart the negotiations, Trump said: “I personally don’t think you can make a deal without a termination.”
He might not get a deal even with a termination. The first round of talks concluded on Sunday, and mostly demonstrated how much the Trump administration wants changed at the expense of Canada and Mexico:
To a large extent, Mexico and Canada are aiming to preserve NAFTA as is, with its duty-free trade among the countries, while updating the agreement with new chapters on e-commerce and other areas of cross-border business reflecting the new economy.
The Trump administration has talked about wanting wholesale changes, including new provisions for “substantial” American — not just North American — content on cars that qualify for duty-free trade; the elimination of a NAFTA panel for settling certain disputes; and “Buy American” preferential treatment for domestic businesses that bid on U.S. government procurement contracts.
Canadian and Mexican officials have voiced opposition to all of those proposals, as well as Trump’s priority on reversing U.S. trade deficits, which the president views as the key measure of bilateral trade relations. There was no indication that the U.S. would be introducing a separate chapter on trade deficits and actions that would be triggered should those figures increase.
During the first round, the U.S. did not offer proposals for revising labor standards — the Canadians have called for “progressive” labor rules. Nor did U.S. negotiators table other potentially contentious issues such as provisions to stop currency manipulation.
They did agree to set an ambitious schedule for further negotiations. The talks will resume a week from Friday in Mexico, then move to Canada later in September, and return to DC in October … assuming everyone’s still talking to one another. Neither Canada nor Mexico will want major changes that put their own nations at a disadvantage from the current status quo, and it looks like Trump’s not willing to trade off a win on “progressive” labor rules. (Thankfully.)
Meanwhile, the Trump administration needs a dramatic change in order to garner the support necessary to get enough Senate Democrats on board for a big foreign-policy win before the midterms. Needless to say, it would have to be a very dramatic change to get 15 of Chuck Schumer’s caucus to hand Trump that kind of victory.
What happens if Trump doesn’t get what he wants? According to White & Case, Trump does have the authority to terminate NAFTA, although it might not take effect for a while — and Congress will have to play along on tariffs:
Given the powers conferred through the Constitution and the Trade Act of 1974, President Trump would very likely have the authority to trigger US withdrawal from the NAFTA without formal congressional approval; however, it is unclear whether withdrawal would automatically terminate the North American Free Trade Agreement Implementation Act (“the NAFTA Act”).Though the NAFTA Act arguably gives President Trump the unilateral authority to raise tariffs on imports from the NAFTA countries, it would likely prohibit him from raising such tariffs above the MFN bound rates set forth in the URAA. …
US withdrawal under Article 2205 might not automatically terminate the NAFTA Act. The President could claim that the NAFTA Act self-terminates after he withdraws the United States from the NAFTA under Article 2205. In particular, Section 109(b) of the Act (“Termination of NAFTA Status”) states: “During any period in which a country ceases to be a NAFTA country, sections 101 through 106 shall cease to have effect with respect to such country.” The NAFTA Act itself does not clarify what constitutes “ceases to be a NAFTA country” (i.e., withdrawal under Article 2205 or congressional legislation); it is also unclear whether the term “NAFTA country” was intended to apply to the United States; and there is no recent (post-WWII) precedent relating to US withdrawal from an FTA. Furthermore, the precise legal effect of repealing only Sections 101-106 of the Act – all falling under Title I (“Approval and Entry into Force of the North American Free Trade Agreement”) is unclear. Finally, unilateral termination of the NAFTA Act would also be subject to the aforementioned constitutional questions with respect to the Presentment Clause.
However, there are legitimate arguments that the President’s withdrawal from NAFTA under Article 2205 would also repeal the NAFTA Act. First, Section 101(a) of the NAFTA Act, which would cease to have legal effect under Section 109(b), contains Congress’ actual, express approval of the NAFTA and its SAA, and Section 101(b) governs the Agreement’s entry into force. Moreover, Article 2205 of the NAFTA does imply that the Agreement would no longer be “in force” for the United States upon US withdrawal from the Agreement. If the NAFTA Act did indeed terminate upon US withdrawal from the agreement, the President would likely be free to unilaterally raise relevant duties or other import barriers through Section 125(e) of the Trade Act of 1974.
But how much of a threat is this? There has been plenty of evidence presented by both sides about whether the US has gained a net benefit or net loss from NAFTA, but bear in mind that Canada and Mexico are our two largest trading partners. Canada is by far our primary source for oil imports too, transporting four times more than Saudi Arabia to the US. Canadian oil imports have tripled since NAFTA went into effect, which has been a handy resource while dealing with Middle East unrest and the need to keep Russian oil exports at a low price in the global market.
The only reason to terminate NAFTA would be to start applying tariffs as a protectionist policy. Canada (and Mexico too) could retaliate by slapping tariffs on oil exports, although that would be just as destructive to them as to us. The hike in oil prices would immediately benefit the tottering regime in Venezuela, as well as Iran and Russia, all three of whom rely on oil exports for much of their economy. Unless carefully managed, a NAFTA termination might end up being a costly example of cutting off our noses to spite our faces.