Could Mexico Beat the U.S. to NAFTA Withdrawal?

By: Olga Torres and Derrick Kyle
Date: 02/02/2017

One of the major promises of President Trump’s campaign was to renegotiate the terms of, or alternatively withdraw from, the North American Free Trade Agreement (NAFTA). According to a recent Congressional Research Service report, a renegotiated NAFTA with significant changes would likely have to be approved by Congress prior to implementation.  However, after the highly-publicized cancellation of a meeting with Trump by Mexican president Enrique Peña Nieto, any renegotiation of the trade deal may be doomed before it even begins.

President Trump has always left the option of simply leaving NAFTA on the table in case a renegotiation does not occur or is insufficient. The United States has the power to unilaterally withdraw from the agreement under Article 2205 of NAFTA, which says, “A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties.” Unlike implementing a renegotiated NAFTA, President Trump would not require approval of Congress to withdraw from the agreement. Section 125 of the Trade Act of 1974 gives the right to terminate and withdraw from tariff and non-tariff barriers to the president.

The question of whether NAFTA is simply renegotiated or completely abandoned may no longer be only in the hands of the Trump administration, however. After a long campaign of usually unflattering rhetoric directed at Mexico and culminating in the cancellation of the Peña Nieto meeting, many Mexicans have become united in their frustrations with their northern neighbor’s new president. There is a notable rise within Mexico of anti-NAFTA sentiment, even though the trade agreement has been a boon for most of the country. Whether or not the intense feelings of a large segment of the populace will turn into Mexican government action remains to be seen, but if either Mexico or the United States withdraws from NAFTA, there will be huge consequences for both sides. Without another free trade agreement in place, tariffs between the two countries would be based on limits imposed by the World Trade Organization (WTO) agreements. Due to most favored nation (MFN) rules set by the WTO, Mexican tariffs can be much higher than tariffs imposed by the United States. Specifically, under MFN tariff rules, a U.S. tariff increase against Mexico would be limited to a general maximum of 3.5 percent, while Mexico would capable under the MFN rules of increasing its duties to as high as 36 percent.  Although, President Trump could avoid the MFN tariff restrictions by withdrawing from the WTO altogether, a measure he suggested during his campaign and which would have enormous effects on global trade and our international relations with other countries.

Some notable Mexicans are already preparing for a potential trade war with the United States in the event that either nation gives notice of withdrawal from NAFTA. In a television interview in late January, former Mexican president Felipe Calderon suggested retaliation to Trump’s proposed plans in the form of higher duties on U.S. products from key industries from U.S. states represented by the most aggressive legislators.  The goal of this response would be to force affected American businesses and Congressmen to lobby for NAFTA before the Trump administration. Mexican billionaire Carlos Slim called for a “modern” program for replacing imported goods from the United States and said Mexico should have a measured response “without getting angry but without surrendering.”

On February 1, the Mexican government announced that it was beginning a 90-day period of consultation with private industry in preparation of potential NAFTA negotiations in May.  The final outcome of any NAFTA renegotiation, or lack thereof, is as yet unknown, but regardless of the result, the next few months are shaping up to be very interesting with regards to U.S.-Mexico trade relations.

Please feel free to contact us if you need assistance in ascertaining the potential impact of NAFTA renegotiations (or withdrawal) on your company’s operations.