Last updated: 07:53 / Tuesday, 3 January 2017
Jones Day’s Report

Potential US Trade Ramifications of the Trump Election

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Potential US Trade Ramifications of the Trump Election
  • The TPP contains provisions to lower both non-tariff and tariff barriers to trade among the member countries and establishes an investor-state dispute settlement mechanism
  • The United States represents approximately 62 percent of the aggregate GDP of the TPP member countries
  • NAFTA is a free trade agreement between Canada, Mexico, and the United States that became effective on January 1, 1994
  • President-elect Trump has stated that he will notify Canada and Mexico that the United States intends to immediately renegotiate the terms of NAFTA to “get a better deal” for U.S. workers

According to public statements from President-elect Trump, reshaping U.S. trade policy will be a high priority for the incoming Trump Administration. President-elect Trump has announced his intention to, among other things:

  • Withdraw from the Trans-Pacific Partnership (“TPP”).
  • Renegotiate terms of the North American Free Trade Agreement (“NAFTA”), and if NAFTA partners do not agree to participate in renegotiations, submit notice that the United States intends to withdraw from NAFTA.
  • Pursue bilateral trade deals.
  • End unfair trade practices.

Jones Day explores whether and to what extent the Trump Administration may be able to accomplish President-elect Trump’s U.S. trade policy goals and the associated implications for U.S. international trade.

Trade Agreements

Trans-Pacific Partnership (“TPP”)

President-elect Trump has indicated that he will issue a notification of intent to withdraw from the TPP, which was signed in 2015 by the United States and 11 other nations, but has not yet been approved by the U.S. Congress. In a June 2016 campaign speech, Trump stated that, “The TPP would be the death blow for American manufacturing … It would make it easier for our trading competitors to ship cheap subsidized goods into U.S. markets—while allowing foreign countries to continue putting barriers in front of our exports.”

Together with transparency provisions, labor and environmental protections, and other elements, the TPP contains provisions to lower both non-tariff and tariff barriers to trade among the member countries and establishes an investor-state dispute settlement mechanism. For some time, Obama Administration officials were optimistic that the TPP would be submitted to Congress for approval before the end of 2016, but the current political climate appears to have foreclosed this possibility, and the TPP now appears to be dead, at least in its current form. Indeed, Republican leadership in Congress recently confirmed that there would not be a vote on the TPP during the lame-duck session of Congress.

By its terms, the TPP would enter into force 60 days after all 12 member countries confirm domestic ratification. If all 12 countries do not confirm domestic ratification by February 4, 2018, the TPP would take effect once at least six original signatories that account for at least 85 percent of the combined gross domestic product (“GDP”) of the original signatories ratify the agreement. The United States represents approximately 62 percent of the aggregate GDP of the TPP member countries. As such, it would be impossible for the TPP, in its current form, to enter into force without domestic ratification by the United States.

There could be further discussions regarding a trade agreement with one or more of the TPP member countries. With Trade Promotion Authority, which was passed in 2015 and will be available until 2018, the President can send trade agreements to Congress for an up or down vote. This authority makes it easier for trade agreements to be passed by Congress, since members of Congress cannot amend any provisions of the agreements.

North American Free Trade Agreement

NAFTA is a free trade agreement between Canada, Mexico, and the United States that became effective on January 1, 1994. NAFTA was the most comprehensive free trade agreement negotiated at the time and contained several key provisions, including provisions relating to removal of trade barriers, services trade, foreign investment, intellectual property rights protection, government procurement, and dispute resolution.

President-elect Trump has stated that he will notify Canada and Mexico that the United States intends to immediately renegotiate the terms of NAFTA to “get a better deal” for U.S. workers.

During the campaign, Trump described NAFTA as “the worst trade deal ever signed” and said that the agreement has and continues to kill American jobs.

Under Article 2202 of NAFTA, the parties are permitted to renegotiate NAFTA and amend or add provisions. Both Canada and Mexico have stated that they would renegotiate NAFTA, and some renegotiations have occurred as part of the TPP, to which Canada, Mexico, and the United States are signatories.

Should it occur, the renegotiation process would be complex, as the respective legislative bodies in each country also would need to approve amendments to the agreement.

It is uncertain which of the 20 chapters of NAFTA the countries would renegotiate. The likeliest may be Chapter Three, which focuses on duties, non-dutiable barriers, rules of origin, and customs procedures. The Canadian and Mexican governments could use the opportunity to seek to reopen negotiations in areas of importance to them, including the alternative dispute resolutions mechanisms available under NAFTA. After a renegotiation, the legislative amendment process in each country could be lengthy and burdensome.

President-elect Trump has stated that if Canada and Mexico do not agree to a renegotiation, the United States will submit notice that it intends to withdraw from NAFTA. The Trump Administration would have the authority to do so under the President’s power over foreign affairs and Article 2205 of NAFTA, which states: “A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.”

Withdrawal from NAFTA would not, by itself, increase U.S. tariffs on imports from Canada and Mexico, which, prior to NAFTA, averaged approximately 4.3% on imports from Mexico. Instead, raising tariffs on Canadian or Mexican goods following a U.S. withdrawal from NAFTA would require a presidential proclamation.

Past proclamations have lowered duties. However, by issuing a new proclamation, or by revoking President Clinton’s earlier proclamation eliminating duties upon implementation of NAFTA, President-elect Trump could increase tariffs pursuant to Section 201 of the NAFTA Implementation Act, which authorizes the President to, following consultations with Congress, proclaim additional duties as necessary and appropriate to maintain the general level of reciprocal concessions with Canada and Mexico.

Any such actions could face Congressional criticism and court challenges by affected parties. Given that the United States is a member of the World Trade Organization (“WTO”) and, therefore, is bound by the Most Favored Nation (“MFN”) clauses under the WTO agreements, the Trump Administration would be required to apply the preferential rates set forth in the Harmonized Tariff Schedule, the rejection of which could result in a complaint by Canada or Mexico before the WTO.

Transatlantic Trade and Investment Partnership

Although President-elect Trump has not publicly discussed the Transatlantic Trade and Investment Partnership (“TTIP”), which is being negotiated with the European Union, as much as the TPP, the future of negotiations for TTIP also are uncertain given President-elect Trump’s statements that he would review and renegotiate all trade agreements.

Prospects of a successful conclusion of the negotiations, which have already been fraught with opposition from several actors, seem increasingly unlikely in the foreseeable future.

In that regard, following the election, the EU Commissioner for Trade stated that the TTIP negotiations would be placed “in the freezer” for “quite some time.”

Bilateral Trade Agreements

Although, as noted above, the Trump Administration’s support for multilateral trade agreements (i.e., agreements involving the United States and more than one other country) may be uncertain, President-elect Trump has stated that he will pursue bilateral trade agreements (i.e., agreements between the United States and one other country). For example, if the United States withdraws from NAFTA, the Trump Administration could seek bilateral trade agreements with Canada and/or Mexico. In addition, in the wake of a British exit from the European Union, the Trump Administration may pursue a bilateral trade agreement between the United States and the United Kingdom.

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