Twenty-three years ago, the United States, Canada and Mexico all said, “I do.” If President-elect Donald Trump keeps his campaign promise to “terminate” the North American Free Trade Agreement, divorcing Mexico and Canada could be both messy and costly.
NAFTA, a trade treaty enacted with congressional legislation, was designed to integrate the three economies and their 530 million consumers into a powerful trading bloc. It offers excruciating detail on how the three countries bind their economies together, but virtually nothing on how to unwind it.
The treaty has a provision allowing any partner to leave after six month’s notice, but that’s it. The actual legislation only directs the president to get rid of tariffs, the taxes imposed on goods that cross borders.
“It’s not clear to me that it gives the president the authority’’ to undo the treaty, said Matthew Kronby, a trade attorney in Toronto, who during NAFTA’s passage represented the Canadian Embassy on legislative issues before the U.S. Congress.
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The U.S. Constitution expressly gives Congress the power to regulate foreign commerce. It’s unclear if Republicans who control both the House of Representatives and Senate would go along with a NAFTA exit. Free trade has been a central GOP value for decades, and the United States did more than $1 trillion in business with the two countries last year, almost evenly split between the two and each just a fraction behind U.S.-China trade.
Congress passed the NAFTA legislation in 1993 after the treaty was negotiated in 1992 by Republican President George H.W. Bush. It passed Congress 61-38, mostly with Republicans votes, including Mitch McConnell of Kentucky and Pat Roberts of Kansas. Senate passage came with the help from moderate Democrats, including Washington’s junior senator Maria Cantwell and Dick Durbin of Illinois
Trump has called the NAFTA the worst trade-deal ever, citing the loss of manufacturing jobs to Mexico. It’s a charge experts dispute, with the U.S. Chamber of Commerce insisting that NAFTA has created far more new jobs than the factory jobs lost.
How this plays out matters not just for border states like Texas and California, but also for places such as North Carolina, which exports large volumes of chemicals to Mexico. It matters for farmers in Kansas and across the Midwest, for whom Mexico is the second-largest export market after Japan. Former trade negotiators expect that Mexico would retaliate against U.S. products if Trump attached high taxes to Mexican goods.
Trade today also looks different than it did in the mid-1990s.
“This no longer is Westinghouse building refrigerators on the Mexican side of the border. These are the next-generation turbines of the (Boeing) Dreamliners,” said Arturo Sarukhan, Mexico’s ambassador to Washington from 2007 to 2013, noting products such as turbines cross the border back-and-forth numerous times during manufacture by General Electric and its suppliers.
The private-sector in all three countries invested billions of dollars on technology to integrate their operations on warehouses at the San Diego border, at distribution centers in cities like Dallas-Fort Worth and on railroads and tracks to carry grains from Middle America to Mexico and move auto parts and vehicles across the United States.
Trump has complained mostly about job losses to Mexico, so he could seek to divorce just the southern neighbor, leaving intact the Canada portion of the NAFTA.
“He could send a letter to Mexico and not send anything to Canada,” said Gary Hufbauer, a noted NAFTA expert and veteran researcher at the Peterson Institute for International Economics.
But given how much has been invested, an exit could evoke a legal challenge from U.S. companies, Hufbauer and other experts warned.
And whether he scraps all or part of it, there’s still the prospect of a constitutional challenge from Congress.
“It is very unclear whether a president on his own can eliminate NAFTA. I don’t think there is a definitive answer,” said Sarukhan.
If Trump chooses divorce from both trading partners, a pre-existing U.S-Canada Trade Agreement would take effect. It was signed in 1988, and then was superseded by NAFTA.
“The Canadians are protected by this underlying U.S.-Canada agreement,” Hufbauer said, adding that roughly 90 percent of two-way trade would fall under that older agreement.
There is still another possibility: The same two-page chapter of NAFTA that has a single paragraph allowing exit has another paragraph allowing for it to be amended. Trump could simply tell Mexico and Canada he wants to reopen the deal.
That too would be risky.
“Canada has been pushing to update the NAFTA for years, and Mexico has as well. There has been resistance in the U.S.,” said Laura Dawson, director of the Canada Institute at the Woodrow Wilson International Center for Scholars, an independent research organization. “It is like a balloon. If you prick any part of it, it could all blow up.”
Canadian Prime Minister Justin Trudeau said last Thursday he’s “more than happy to talk” about a renegotiation of NAFTA. Canada would like to undo Buy America provisions in U.S. government purchasing and renegotiate dispute-resolution mechanisms that seem to have favored the United States.
“Once you open a treaty for amendment to deal with one party’s concerns, you also have to consider the other parties’ concerns,” said Kronby, a partner in the trade law firm Bennett Jones. “We’re in uncharted territory here.”
NC and NAFTA
North Carolina lost a 334,884 manufacturing jobs (or 42 percent) during the NAFTA-WTO period (1994-2016), according to the Bureau of Labor Statistics. This figure is for total manufacturing employment, so it takes into account both jobs created by exports and jobs displaced by imports, among other causes of net job change.
These are aggregate numbers, but the Department of Labor tracks instances of specific workers at specific workplaces who applied for special benefits for trade-displaced workers. In North Carolina, 220,902 such workers were certified as having lost their job due to imports or offshoring under the Trade Adjustment Assistance program.
The Economic Policy Institute found that by 2010, 18,900 jobs had been lost or displaced in North Carolina – and about 700,000 in the United States – due to the rise in the trade deficit with Mexico alone since NAFTA was enacted in 1994.
The Economic Policy Institute also found that by 2013, 119,600 jobs had been lost or displaced in North Carolina – and more than 3.2 million in the United States – due to the rise in the trade deficit with China since it joined the World Trade Organization in 2001.
NC and Trade
North Carolina’s largest trade partners in 2015 were Canada, Mexico and China. The state exported $6.8 billion worth of goods to Canada, $3.2 billion worth of goods to Mexico, and $2.1 billion to China, according to U.S. Census data.
According to a report from the N.C. Department of Commerce, the state’s largest exports to Canada and Mexico are chemicals (pharmaceuticals to Canada and base chemicals to Mexico) and machinery. We also exported $318 million in textiles and fabrics to Mexico and $260 million in transportation equipment there in 2014, while we sent $995 million in transportation equipment to Canada that year.