On August 27, the U.S. and Mexico announced a “preliminary agreement in principle” on the renegotiation of NAFTA—a deal reached without Canada, which sat out the latest bilateral talks. Canada’s Foreign Minister, Chrystia Freeland, has joined negotiations this week in hopes of reaching a trilateral agreement by Friday, August 31. Despite the significant publicity around this announcement, the ultimate fate of NAFTA still remains uncertain, given that Canada was not part of the bilateral deal and many details have yet to be released.
Link to CNBC Squawk Box discussion on NAFTA with Ambassador Robert Holleyman, Crowell & Moring (8/29/18).
The parties are attempting to conclude negotiations to allow for the Mexican President Enrique Peña Nieto’s Administration to sign the deal before he leaves office on December 1. By statute, U.S. Trade Promotion Authority (TPA) procedures require the Trump Administration to notify Congress 90 days before it can sign any agreement, which it seeks to do while Peña Nieto is still in office. U.S. Trade Representative (USTR) Robert Lighthizer has said he will notify the agreement to Congress this Friday, with or without Canada.
While the U.S. President has the authority to negotiate trade agreements, he does not have the authority to implement trade agreements. Once negotiations are complete, the President must notify Congress and then submit an implementing bill for approval by both houses of Congress (see TPA statutory timelines below). The vote under TPA is a yes or no majority vote on the negotiated agreement and amendments are not permitted. The preliminary “agreement” with Mexico, or one to be reached with Mexico and Canada, has no legal significance until it is approved by Congress. This process is expected to continue into 2019.
Trade Promotion Authority Timeline
Source: Congressional Research Service
According to USTR fact sheets, the preliminary agreement with Mexico includes the following:
- Market access: Maintains zero tariffs on originating agricultural and industrial products
- Autos/Auto parts: Requires 75% of auto content to be made in Mexico or the United States and 40-45% of automobile content be made by workers earning at least $16/hour in order to qualify for duty-free treatment; it is unclear if existing facilities will be exempted from this requirement
- Other industrial products: Strengthens rule of origin for other industrial products such as chemicals, steel-intensive products, glass, and optical fiber
- Textiles: Limits rules that allow for non-originating inputs to qualify for duty-free treatment, including for sewing thread, pocketing fabric, narrow elastic bands, and coated fabric
- Agriculture: Enhances rules for sanitary and phytosanitary standards and protects use of certain geographical indicators (GIs)
- Intellectual property: Protects biologics data for 10 years, extends minimum copyright terms to 75 years, and enhances patent and trademark protections
- Digital trade: Minimizes localization requirements on data storage and processing, limits requirements for disclosure of proprietary source code and algorithms, and limits civil liability of Internet platforms for hosting non-IP content
According to press reports, the agreement also includes the following:
- Sunset clause: Requires the U.S. and Mexico to renew the agreement 6 years after entry into force, for the agreement to extend beyond a 16 year-period
- Investor-State Dispute Settlement (ISDS): Limits ISDS protections outside of the oil and gas, energy, telecommunications, and infrastructure sectors
- Autos/Auto parts: While not made explicit, reports suggested that Mexico could receive an exception from supplemental import duties arising from the national security investigation into autos and auto parts. This suggests that the U.S. is still considering implementing new supplemental import duties on autos and auto parts pursuant to Section 232 of the Trade Expansion Act of 1962.
NAFTA termination and replacement?
In announcing the deal, President Trump suggested he could terminate NAFTA and replace it with the bilateral U.S.-Mexico agreement if no agreement is reached with Canada. Actually doing so would raise two immediate legal concerns: 1) whether President Trump can withdraw from NAFTA without Congress, and 2) whether the Trump Administration has legal authority to enter into a bilateral agreement with Mexico under TPA procedures, given that the Administration previously notified intent to renegotiate NAFTA in May 2017.
Termination: The consensus is that President Trump can unilaterally terminate NAFTA – although not all of the provisions enacted as part of the original NAFTA implementing legislation approved by both houses of Congress and signed into law in 1993. NAFTA is not a “treaty” from a constitutional perspective because it was not approved by two-thirds of the U.S. Senate in accordance with Article II, section 2 of the U.S. Constitution. NAFTA is an “executive agreement” approved through the adoption of ordinary legislation adopted by both houses of Congress under TPA.
Article 2205 of NAFTA provides that “[a] Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties.” The president shall have 60 days following the day of withdrawal to submit to Congress recommendations as to the appropriate rates of duty for those articles which were affected by the termination.
To date, there has been no litigation challenging the President’s power to withdraw from a trade agreement. A legal challenge may be made in U.S. courts on the basis that the President had exercised his delegated powers to negotiate trade agreements in a manner inconsistent with what the Constitution and/or Congress intended. As noted above, however, the legal consensus is that the President can withdraw from NAFTA given the explicit termination clause embedded in the agreement. Therefore, it is not likely that such a challenge will be successful.
Bilateral or trilateral replacement agreement: A Mexico-U.S. only agreement would face political difficulties: Mexico has thus far indicated a strong preference that Canada remain a part of any agreement, and leading U.S. lawmakers have also made statements in favor of a trilateral agreement. Mexico has suggested that Canada could join the agreement during the 90-day period before it is signed. Further questions also remain about whether Canada’s later entry would satisfy TPA notification procedures.