Preparing for Changes to NAFTA

Publication March 29, 2017

President Trump has indicated that he intends to commence trade negotiations to reform the current terms of the North American Free Trade Agreement (NAFTA) this May. While the United States has not withdrawn from a trade agreement in 151 years, this streak may soon come to an end depending on the results of President Trump’s discussions with Prime Minister Trudeau of Canada and Mexican President Peña Nieto.  As a result, businesses within the three North American countries should be proactive in preparing for any such change.

Under NAFTA Article 2205 the United States has the ability to unilaterally withdraw from the agreement six months after providing written notice.  While Canada and Mexico can choose to remain in the agreement without the United States, a unilateral withdrawal from NAFTA by any state will have lasting repercussions on global trade and the businesses that rely on it. 

The United States buys almost 80 percent of Mexico’s exports, and Mexico is the second-largest market in the world for American goods.  Should NAFTA be abandoned, trade between Mexico and the United States would be subject to World Trade Organization (WTO) rules, including the WTO’s “most favored nation” duty rates and applicable national laws.  Tariffs for goods into the United States would probably rise, as indicated by a recent statement by the Trump administration that they were considering a 35 percent tariff on goods imported from Mexico.  In addition, valuable intellectual property protections available under the NAFTA might well be lost.

As pertains to the United States’ northern border, a revocation of NAFTA may result in a revival of the pre-existing Canada-US Free Trade Agreement of 1989 (the “CUSFTA”), which NAFTA superseded (but did not replace).  If revived, CUSFTA may keep bilateral trade between US and Canada effectively duty-free.  However, there is no guarantee that CUSFTA will be deemed in effect by President Trump or US courts.  Moreover, just as with NAFTA, President Trump could seek to terminate CUSFTA, thereby leaving Canada-US trade subject to the WTO rules and applicable domestic laws. 

Should trade negotiations sour Mexico, and to a far lesser likelihood, Canada, may consequently choose to increase its own tariffs on United States exports in the absence of a free trade agreement.  In addition, there may be increased bureaucratic hurdles required to move goods across North American borders. 

Given the foregoing, the following measures can be taken now to help prepare for potential changes to NAFTA and possible disputes that may arise thereunder.

First, if contemplating an investor dispute, it is advisable to begin preparing to file now so that the dispute can be commenced prior to the expiration of Article 2205’s six-month notice period should that be activated by President Trump.  Chapter 11 of the NAFTA allows investors who allege that a host government has breached its investment obligations to pursue recourse using one of the following arbitral mechanisms: (1) the World Bank’s International Centre for Settlement of Investment Disputes (ICSID); (2) ICSID’s Additional Facility Rules; and (3) the rules of the United Nations Commission on International Trade Law (UNCITRAL Rules).  A renegotiation of NAFTA may result in the modification or elimination of these provisions and possibly result in investors being left to seek remedies against the state via the host country’s domestic courts, to the extent such remedies are available, or through diplomatic channels.  In light of that, corporations that are currently contemplating an investment in a NAFTA country should consider making their investments through subsidiaries in other jurisdictions (such as the Netherlands) that have trade agreements with Canada, Mexico or the United States that contemplate international arbitration.

Second, to the extent that disruption in North American trade may warrant commencing a dispute against a private party located in one of the NAFTA countries, locate and dust off current service and supply agreements and revisit the terms of such contracts and the avenues for redress provided therein.  Specifically, review the dispute resolution and forum selection clauses in these agreements to confirm what forum and where a dispute must be brought under each agreement.  Having a clear idea of what steps to take to bring an action – should it be the filing of a complaint in court or bringing an arbitration – and where to initiate those proceedings, should the need arise, will save costs and precious time.  Further, take heed when negotiating new agreements to choose a forum and a dispute settlement mechanism that is amenable to your interests should a dispute arise.  It is important to remember that New York offers considerable advantages as a forum for any potential arbitration or litigation.

Finally, double check to make sure anti-corruption policies and procedures are being properly followed (or take the initiative to implement such procedures now).  The Trump administration has not yet shown its hand as to how aggressively it plans on investigating and prosecuting corruption violations.  Maintaining strict compliance with the Foreign Corrupt Practices Act and other anti-corruption laws connected to the Inter-American Convention Against Corruption will not only help prevent against costly and time-consuming government investigations during what may already be a taxing time period, but will help defuse any corruption-related defenses that may arise during investor-related disputes.  

Given the uncertainty of the moment, adherence to the aforementioned steps coupled with the help of informed counsel will help provide some stability in what may end up being turbulent trade waters.

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