Four scenarios if Trump tries to pull out of NAFTA

The tone surrounding the negotiations to update NAFTA has taken a gloomy turn, especially for agriculture, with a growing consensus that there’s a real chance President Trump will try to follow through on his repeated threats to pull the U.S. out of NAFTA.

Even Prime Minister Trudeau, after meeting with Trump on Wednesday, sounded like someone who was trying to raise expectations of a NAFTA collapse, saying the Canadian government is “ready for anything.”

“It’s probably 50/50 that Trump actually does withdraw,” says Carlo Dade, director of the Canada West Foundation’s Trade & Investment Centre and senior fellow with the University of Ottawa, in the interview below.

So what happens if that coin toss lands on the ‘withdraw’ side?

Given Congress has a more favourable view of NAFTA and free trade than the President, it would likely be messy. Here are four possible scenarios outlined by Dade and co-author Naomi Christensen in this Canada West Foundation analysis):

Carlo Dade

1) The President tries to pull out of the deal but Congress doesn’t agree

In one word. Gongshow, says Dade. The U.S. Constitution explicitly says Congress has sole power over foreign trade, but Congress has also ceded authority to the president to negotiate and withdraw from trade agreements. There are mixed opinions on what would happen if Trump unilaterally tries to withdraw, and so it would quickly wind up in the Supreme Court.

“This isn’t an issue on finer legal points, like the travel ban. This goes to the heart of the U.S. Constitution and separation of powers, so it’s going to be a mess on that front,” he says.

Congress would likely also try to block funding for the withdrawal effort.

Carlo Dade joined us on RealAg Radio on Thursday to discuss possible scenarios where President Trump tries to withdraw the U.S. from NAFTA:

2) The President and Congress agree to withdraw

If Trump gets approval from Congress to leave NAFTA, trade between the two countries would revert to the Canada-U.S. Free Trade Agreement. Things might not change much on day one, as most tariffs would be unchanged, however non-tariff pieces in NAFTA, such as mechanisms for dispute settlement and regulatory cooperation, could be lost. Canola and live cattle tariffs, for example, would remain at zero. NAFTA would become a bilateral deal between Canada and Mexico.

3) The U.S. withdraws from both NAFTA and the Canada-U.S. trade deal

Since many of Trump’s problems with NAFTA are related to Mexico, and given Trump’s comments this week about possibly maintaining a bilateral deal with Canada, this case isn’t likely, but World Trade Organization terms would apply if the U.S. dropped out of both NAFTA and the CUSFTA. The average tariff in the U.S. for countries with WTO ‘most favoured nation’ status was 3.5 per cent in 2016. Again, NAFTA would remain between Canada and Mexico.

4) The U.S. withdraws from both NAFTA and CUSFTA, and imposes tariffs higher than WTO levels

In this case, the U.S. would withdraw from or ignore all agreements and chooses to implement punitive tariffs, similar to what’s happening with Bombardier. Again, Trump only has the power to adjust tariffs in emergency cases, which Dade says would quickly be challenged in court.

Given the challenge the President faces in getting Congress on board with terminating NAFTA, another scenario would see talks drag on, NAFTA remain unchanged, and Trump ultimately blaming Congress for failing to enable his agenda.

“That’s a very real possibility, that he would engage in that scenario,” says Dade.

It’s normal for countries to table some non-starters in negotiations as a negotiating tactic or for domestic political reasons, he says, citing Canada’s proposed gender chapter.

“The difference with Trump though is these (non-starters) may not just be negotiating ploys. These things may actually be serious, and they may actually be using them to undermine the talks. We don’t know that for sure,” says Dade. “The fact that it is even a question is highly troubling.”

Read more of the Canada West Foundation’s analysis, including more detail on tariffs under NAFTA, the CUSFTA and WTO terms, here.

 

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