Trump’s Trump Card

The sixth round of negotiations regarding the North American Free Trade Agreement will conclude at the end of January. Currently, negotiations are taking place in an atmosphere of uncertainty, since Trump may announce that he will abandon the treaty.

Trump has been a constant critic of the United States’ trade deficit, and one of his campaign promises was that he would reduce it. That’s why he has begun to take action like removing the U.S. from the Trans-Pacific Partnership, creating new regulations for trade with China and renegotiating NAFTA, to name a few. His State of the Union Address on Jan. 30 will be a key moment: He may announce his intention to withdraw from the treaty.

NAFTA’s rules for the withdrawal of a signatory country include a stipulation that a country can leave the agreement six months after having sent written notification to the other parties. Still, after those six months have passed, the other parties must approve the departing country’s withdrawal. In other words, abandoning the treaty isn’t automatic. Therefore, if Trump announces the United States’ withdrawal from NAFTA, it could just be a bargaining chip to buy popularity in the United States among his voter base; it is possible that the United States’ withdrawal may not be approved.

Things get even more complicated when we add the electoral processes in Mexico and the United States. The seventh round of negotiations will occur in March, and if there is no significant movement toward an agreement, there is a high probability that the two sides will reach an impasse, and negotiations will be on hold until 2019, after the midterm elections in the United States.

If the United States formally withdraws from NAFTA, trade will be regulated by the World Trade Organization, specifically under the most favored nation clause. The low tariffs provided through the WTO’s structure still wouldn’t alleviate the trade deficit, and could lead Trump to attempt to impose aggressive tariffs and taxes on imported goods in order to reduce the deficit. If Trump truly has this goal in mind, some analysts say that he could go as far as to announce his withdrawal from the WTO.

Such a scenario presents the possibility of a dispute between the U.S. executive and legislative branches over who has the authority to sign trade agreements, since the U.S. Constitution stipulates that trade laws and agreements fall within the jurisdiction of the legislative branch. If Republicans lose the majority in the November elections, a dispute like this would be even more likely. In addition, any U.S. industries that would find themselves affected by a withdrawal from NAFTA would likely join the debate over the powers of trade legislation.

For Canada and Mexico, uncertainty exists regarding the renegotiation of NAFTA. Both countries’ currencies have been negatively impacted. The possibility of abandoning the treaty is an attractive negotiation tactic for Trump, who would likely use it to improve his position throughout the negotiation process, as well as for political capital in the upcoming midterm elections.

Canada and Mexico must seek to minimize both the damage that the United States’ withdrawal could do and the current atmosphere of uncertainty.