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Article: Renegotiation of, or Withdrawal from, NAFTA: Context and Possible Consequences

Introduction

(“NAFTA”) is a trade agreement signed by Canada, Mexico, and the United States that came into force on January 1, 1994. Its goal was to eliminate barriers to trade and investment, creating one of the largest free trade zones. Since NAFTA came into effect, trade among the NAFTA countries has more than tripled, reaching US $1.1 trillion in 2016 (James McBride and Mohammed Aly Sergie, NAFTA’s Economic Impact, The Council on Foreign Relations, January 24, 2017, available at http://www.cfr.org/trade/naftaseconomic- impact/p15790). NAFTA also provided a mechanism for investor-state dispute resolution, which led to a proliferation of investments in all three countries (NAFTA Investment Law and Arbitration, xxiv (Todd Weiler ed. 2004)). Indeed, the record shows that NAFTA has led to at least 80 investment arbitrations against NAFTA Parties and has resulted in a perfect win-loss record for the United States (Todd Weiler, naftaclaims.com (March 12, 2017), http:// www.naftaclaims.com/).

NAFTA has not been without critics, however. Most recently and perhaps most critical for NAFTA’s longevity, President Trump has pledged to renegotiate NAFTA, and if renegotiation is not possible, then to withdraw from NAFTA altogether. Modification of or withdrawal from NAFTA could have a number of serious consequences for investments and investors. For example, Mexico already has experienced a chilling of investment by U.S. investors in light of the prospect of NAFTA’s coming changes. Additionally, although Canada seems amenable to the prospect of renegotiating NAFTA, Mexico has hinted that it will not sit down with the United States to renegotiate the agreement.

“America First”

Within days of taking office, President Trump formally withdrew from the Trans-Pacific Partnership, another free trade deal, highlighting a significant policy shift under his administration. In tune with what he has dubbed his “America First” policy, President Trump’s White House has said, “[i]f our partners refuse a renegotiation that gives American workers a fair deal, then the President will give notice of the United States’ intent to withdraw from NAFTA” (America First Foreign Policy, (March 10, 2017) https://www.whitehouse.gov/america-first-foreign-policy).

President Trump’s policy towards NAFTA has already had repercussions in the investment community, particularly with respect to investor-state disputes. In what would seem like an unrelated matter, President Trump recently invited TransCanada to reapply for a permit to construct the Keystone XL Pipeline, a pipeline that would bring more than 800,000 barrels per day of heavy crude to the Gulf Coast from Canada (America First Foreign Policy, (March 10, 2017) https://www.whitehouse.gov/america-first-foreign-policy). The Obama Administration had previously denied TransCanada’s permit, causing TransCanada to initiate arbitration against the United States under Chapter 11 of NAFTA, arguing that the refusal to allow the project violated the substantive protections that NAFTA affords investors of the other member states. (TransCanada Corporation & TransCanada Pipelines Limited Request for Arbitration, June 24 2016 para. 1, available at https://www.keystone-xl.com/wp-content/uploads/2016/06/TransCanada-Request-for-Arbitratio-2n.pdf).

In light of President Trump’s executive order allowing TransCanada to reapply for a permit, TransCanada has suspended the NAFTA arbitration. If the State Department approves the project, the NAFTA claim likely will be rendered moot. And while the status of Keystone is not yet certain, President Trump’s decision to allow TransCanada to re-apply for a permit has had the effect of cooling tensions for the time being.

TransCanada’s example, however, seems to be isolated. President Trump’s broader posture on NAFTA could well have the opposite effect in the investment community, as it could lead to uncertainty as to the fate of investor-state disputes under NAFTA’s dispute settlement provision.

Trade Agreements Under U.S. Law

Under U.S. law, trade agreements are not treaties. This means that, unlike a treaty, a trade agreement: (1) is not “self-executing”; (2) does not require two-thirds approval by the Senate; and (3) does not have the force of law upon ratification. Instead, trade agreements are considered “congressional-executive agreements” that are easier to enact than a formal treaty since they do not require a supermajority from the Senate. Instead, the President typically signs a “congressional-executive agreement,” which Congress then puts into effect through implementing legislation, which finally is signed into law by the President. A “congressional-executive agreement” also is limited in scope, as it can deal only with matters that are reserved for Congress and the President under the U.S. Constitution, specifically the powers of Congress under Article 1, Section 8 and the powers of the President under Article II, Section 2. Congress, however, has delegated certain powers to the President dealing with commerce with foreign nations, including the President’s power to enact trade agreements on his own. Given that the NAFTA is one of these congressional-executive agreements (it was implemented by legislation—the North American Free Trade Implementation Act (“NAFTA Act”)) President Trump’s new policy may have far-reaching implications on the modification of and/or the United States’ withdrawal from NAFTA.

Modification of NAFTA: Possible Areas of Negotiation

The NAFTA Act arguably gives President Trump the authority to raise tariffs on imports from the NAFTA countries to pre-NAFTA levels. Tariff reductions under NAFTA were implemented via presidential proclamation pursuant to Section 201(a) of the NAFTA Act. Outside of raising tariffs, President Trump also could seek to enter into negotiations to amend NAFTA pursuant to NAFTA Article 2202, which provides:

  1. 1. The Parties may agree on any modification of or addition to this Agreement.
  2. 2. When so agreed, and approved in accordance with the applicable legal procedures of each Party, a modification or addition shall constitute an integral part of this Agreement.

NAFTA Article 2202 is silent on whether congressional approval would be required for any such amendment in order to be “in accordance with applicable legal procedures.” Since its inception, there have been no amendments to NAFTA. Generally, the negotiation of executive agreements is considered within the exclusive purview of the Executive (John C. Yoo, Laws as Treaties: The Constitutionality of Congressional-Executive Agreements, 99 Mich. L. Rev. 757, 758 (2000)). In the case of NAFTA, however, since it is a “congressional executive agreement,” Congress likely must approve any proposed modifications before they enter into force (Id. at 759).

Some have posited that, in addition to raising tariffs, the President could focus on the “rules of origin” that govern what constitutes a finished good produced within the free trade area (Neil Irwin, What is NAFTA and How Might Trump Change It?, N.Y. Times, Jan. 25, 2017, available at https://www.nytimes.com/interactive/2017/upshot/what-is-nafta.html; See also Christopher Wilson, Five Ways Trump Could Improve NAFTA, January 23, 2017, available at https://www.forbes.com/sites/themexicoinstitute/2017/01/23/trump-to-announce-plans-for-renegotiation-of-nafta-five-ways-to-improve-the-agreement/#1afcbdea5562). The President could seek to decrease the components of a finished good that can originate in a non-NAFTA country (Id.). Currently, a certain percentage of component parts of a finished good may originate in non-NAFTA countries, like China (Id.). Requiring more constituent parts of a finished good to originate in NAFTA countries could provide advantages to U.S. manufacturers, but may result in disadvantages to Mexican and/or Canadian manufacturers seeking to export goods to the U.S. (Id.).

The U.S. may also ask Canada and Mexico to expand the definition of a “de minimis” shipment, allowing more goods to be shipped to their countries without taxes (Id.). In 2016, Congress passed legislation to raise the U.S. de minimis value to $800 (Trade Facilitation and Trade Enforcement Act of 2015, Pub. L. No. 114–125 (2016)). Small shipments to the U.S. under $800 are considered de minimis, escaping customs revisions. Canada and Mexico, however, have a much lower de minimis threshold. Encouraging Canada and Mexico to reciprocally expand the de minimis definition would encourage smaller U.S. companies looking to sell their goods abroad.

Modifications also could impact the scope of the investor-state dispute resolution mechanism under NAFTA Chapter 11. The President, for example, could seek to limit the ability of Canadian or Mexican companies to sue the U.S. government under Chapter 11 of NAFTA, although there is no express indication at this time that President Trump is considering renegotiating the dispute settlement provisions of the agreement. The President also could seek renegotiation of the substantive protections afforded under NAFTA, but again there is no express indication from President Trump in this regard.

Withdrawal from NAFTA

 As mentioned, President Trump could (and has threatened to) opt for the more radical option of withdrawing from NAFTA if his oft-touted negotiation skills don't yield the deal he wants. Withdrawal from NAFTA is quite straightforward. NAFTA Article 2205 requires only written notice to the other Parties,. Withdrawal will become effective six months after the notice.

Because trade agreements are not treaties in the traditional sense, however, some might argue that withdrawal is not as simple as Article 2205 provides. Specifically, it is worth considering whether President Trump has a unilateral right to withdraw from NAFTA without Congressional approval, or whether withdrawal from NAFTA under Article 2205 results in an automatic termination of the NAFTA Act.

As to the first issue, the majority consensus appears to be that President Trump has the power to withdraw the U.S. from NAFTA without Congressional approval. This position finds support in the U.S. Constitution as well as in the Trade Act of 1974, which is the prevailing U.S. law governing trade agreements. On the one hand, under Article 1, Section 8 of the U.S. Constitution, Congress has delegated certain powers related to commerce with foreign nations to the President, thereby allowing the President to execute domestic trade policies with foreign nations by way of trade agreements in accordance with his foreign affair powers under Article II of the U.S. Constitution. Section 125 of the Trade Act of 1974, on the other hand, allows the President to withdraw from any trade agreement made under that Act, which will become effective at the end of the period specified in the relevant agreement. Thus, taking into account the clear wording of NAFTA Article 2205, President Trump may very well unilaterally withdraw from NAFTA by following the procedure set out in the Agreement.

With respect to the second issue, it is quite likely that withdrawal from NAFTA under Article 2205 also will lead to the repeal of the NAFTA Act. Section 109(b) of the NAFTA Act, which governs the termination of the NAFTA status, states that:

During any period in which a country ceases to be a NAFTA country, sections 101 through 106 shall cease to have effect with respect to such country.

Accordingly, it could be argued that the NAFTA Act provides for automatic termination in the event that the U.S. withdraws under NAFTA Article 2205.

Additionally, Section 101(a) of the NAFTA Act, which deals with Congress’s approval of NAFTA, would cease to operate as a result of Section 109(b) of the NAFTA Act and, as a result, Congress’s approval over NAFTA would no longer have any legal effect.

Withdrawal from NAFTA could have significant consequences for U.S. investors with investment disputes against Mexico/Canada or vice versa. In addition to doing away with the substantive protections and the dispute resolution mechanism afforded to investors under Chapter 11, withdrawal from NAFTA also would have practical implications for investors who have live disputes against one of the member states. Specifically, U.S. withdrawal would create serious time constraints for investors wishing to submit investment disputes to arbitration. A plain reading of NAFTA Article 2205 suggests that investors could bring new claims only during the six months between the notice of withdrawal and the date it becomes effective. NAFTA Article 1119, further complicates an investor’s right to submit claims to arbitration, as it requires submission of written notice of intent to submit a claim to arbitration at least 90 days before the claim is presented. This considerable time crunch is further complicated by NAFTA Article 1137, which provides that a claim formally is submitted to arbitration when the request for arbitration (a document more complex than the notice of intent and akin to a complaint) has been received by the Secretary-General under the ICSID Convention or the ICSID Additional Facility Rules, or when the notice of arbitration (the analogue to the request for arbitration) has been received by the disputing party under the UNCITRAL Arbitration Rules.

The importance of the foregoing is enhanced by the fact that, unlike most other investment protection agreements that typically guarantee investment protections for 10 to 15 years after the instrument has been terminated, NAFTA does not include any such provision. Thus, once the six month period is up, an investor who relied on the dispute settlement provisions and the substantive protections of NAFTA may be left without recourse other than suing the host country in domestic courts, with the usual sovereign immunity and other complications that usually come with suing a sovereign in its own courts.

Investors with already pending claims, however, should not be concerned about the possibility of the United States’ withdrawal, since their claims have already been perfected. It is a well-established principle of international law and treaty interpretation that withdrawal from an international instrument cannot have retroactive effects on pending proceedings. For example, cases initiated against Ecuador before the notice of denunciation of the ICSID Convention continued even after Ecuador’s denunciation had taken effect (Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No. ARB/06/11, Decision on Jurisdiction, (Sep. 9, 2008); Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5; Corporación Quiport S.A. and others v. Republic of Ecuador, ICSID Case No. ARB/09/2; Murphy Exploration and Production Company International v. Republic of Ecuador, ICSID Case No. ARB/08/4; Repsol YPF Ecuador, S.A. and others v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador), ICSID Case No. ARB/08/10). Likewise, cases brought against Venezuela following its denunciation of the ICSID Convention also continued after the denunciation had taken effect (Venoklim Holding B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/22)).