With NAFTA negotiations going badly, Goldman Sachs has published a report, “Thoughts on the Potential US Withdrawal from NAFTA”, that concludes that the US is likely to withdraw from the trade agreement next year “At this point, efforts at revising the agreement look likely to be unsuccessful, though a deal is still possible, in our view. If the talks do not result in a revised agreement by early 2018, we believe that the Trump Administration could announce its intent to withdraw from NAFTA.” The NAFTA agreement calls for a six-month notice period before a nation can withdraw and “we believe it would follow a similar pattern to the strategy the White House has used in recent decisions on immigration (the DACA program), Iran, and health subsidies. Each involved a disruption to the status quo pursuant to a campaign pledge, with delayed implementation and an expectation that a new arrangement might be negotiated in the interim.”
Trump has threatened to pull out of the pact several times if “America First” demands are not met. Following an unsuccessful fourth round of discussions, the parties have accepted that end 2017 timeframe for reaching agreement will no longer be achieved and talks will extend into Q1 2018.
According to Goldman, major sticking points in the talks are:
5-year sunset: The US has proposed that NAFTA would be terminated after 5 years unless all three parties agree to keep it in force. As a practical matter, this would result in a prescheduled renegotiation every ?ve years and increase uncertainty while the agreement is in effect, decreasing the bene?ts of the agreement on investment and cross-border trade ?ows.
Chapter 19: NAFTA allows member countries to settle anti-dumping and countervailing duty disputes through binational arbitration, which has been a priority for Canada in particular. The US has called for Chapter 19 to be non-binding.
Investor-state dispute settlement (ISDS): The US has called for the ISDS program to exist on an opt-in basis. ISDS allows companies to seek recourse against policy changes in NAFTA countries that infringe on property rights, such as expropriation of assets.
Government procurement: The Trump Administration is seeking “dollar for dollar government procurement, which would mean that Mexican or Canadian companies could bid on US government contracts equal only to the amount of Mexican or Canadian contracts open to US companies. This would reduce the amount of US government contracts open to NAFTA partners to a fraction of the current amount.
Rules of origin: NAFTA currently requires auto imports to include at least 62.5%n regional content, i.e., parts from NAFTA countries. The Trump Administration has proposed raising this threshold to 85%, and requiring 50% US content. These levels seem unattainable, in our view, since the US applies only a 2.5% tariff on cars imported from outside NAFTA, and with such high content requirements auto companies would be better off paying the tariff instead.
While Goldman acknowledges that some of the demands might be merely part of a negotiating strategy, it cautions that some of them are of a binary nature, with little room for compromise versus the current agreement.
It sees three reasons for expecting the talks to fail:
First, the recent proposals suggest that the Trump Administration is not concerned about the possibility of a failure to revise the agreement.
Second, an announcement to withdraw from NAFTA would be in keeping with the strategy the White House has recently followed on other issues. The Administration’s recent decisions regarding the Iran agreement, the DACA program, and ACA subsidies have followed the same pattern: The White House has announced that it will end the status quo, against expectations, but that it will allow for an interim period where a new arrangement could be negotiated. In these examples, the White House has left Congress with the responsibility for establishing a replacement.
Third, it is far from clear that there would be suf?cient support in Congress to pass a revised NAFTA agreement at this point. We believe most trade-skeptic lawmakers might not want to be associated with even a revised version of the agreement, and most pro-trade lawmakers might prefer the status quo, although they might be more supportive of a revised agreement if the US has already announced a withdrawal from NAFTA.
On that basis, it expects the White House to give notice of US withdrawal.
Meanwhile, the risk of a US withdrawal is galvanising efforts by Congress and the business sector to thwart Trump if he does, indeed, serve notice. A legal challenge is thought to be certain from both sides of the House and the auto industry. As the WSJ notes “Congressional trade lawyers and attorneys from private firms in Washington have begun meeting informally to come up with ways to challenge any decision by President Donald Trump to pull out of the North American Free Trade Agreement.”
While contingency planning is in its early stages, the WSJ acknowledges that it has thrown up a critical question“ How much authority does the president actually have to scuttle an existing trade agreement? ‘This is sort of uncharted territory where no one really knows,’ said Warren Maruyama, a former trade official in the Reagan and two Bush administrations…Mr. Maruyama agreed that the president probably has the power to cancel or gut Nafta, but he expects challenges—with a chance of success—if Mr. Trump attempts to kill the deal unilaterally. “There are people who are desperately scouring [key provisions of trade law] on Capitol Hill and law firms and at the U.S. Chamber of Commerce right now to try to create some kind of argument that Trump can’t do this,” said Mr. Maruyama, now partner at Hogan Lovells LLP in Washington.”
The potential avenues for challenging a withdrawal appear to be twofold, either on the basis that it is unconstitutional, or that a President can’t reverse laws which were passed by Congress with regard to its implementation. Should Trump serve notice, any parties, such as lawmakers or businesses, with standing could seek an injunction in a Federal court. If that fails, the WSJ reports that Congress could still take further measures to exercise leverage over the White House “The Congressional Research Service said in a 2016 report that a final notice of withdrawal from the president ‘appears sufficient’ to release the U.S. from its international obligations under Nafta, but that Congress might wield a variety of powers to dissuade a president from canceling the deal, including through its control over the budget. Congress in theory could also pass a law reinstating Nafta or a similar agreement, but lawmakers are divided on the issue and unlikely to advance legislation protecting a trade agreement, especially if they don’t have a veto-proof majority.
For a moment, let’s assume that the US leaves NAFTA, what would it mean in economic terms?
Goldman explains that besides short-term uncertainty if the US does withdraw from NAFTA, Goldman predicts that the economic fallout will likely be relatively modest.
“A NAFTA withdrawal announcement would create near-term uncertainty but would likely have relatively modest economic effects, as the US-Canada trade would be likely to be covered under a prior free trade agreement, and exports to Mexico constitute only 1.2% of GDP. Most estimates of the trade gains from NAFTA suggest that it raised the level of US GDP by less than 0.2%, and some of these gains might have occurred anyway as Mexico has substantially lowered tariffs for non-NAFTA countries since the deal was implemented. That said, tariffs would rise, non-tariff barriers would increase, and some industries could face more substantial disruption. The auto sector would be most affected, as tariffs on some vehicles are still quite high outside of trade agreements and supply chains have been integrated across borders. Agricultural trade, while not as large, would face important constraints given high protective tariffs on certain products.”