What actually happens if we ditch NAFTA?

December 05, 2016

By Michael Stumo

President-elect Trump promises to renegotiate NAFTA and withdraw if he does not get what he wants. What actually would happen if we withdrew from NAFTA?

Certainly the old guard globalists would freak out. "America must lead, not isolate itself from the world!" "We must trade because 95% of US consumers are outside the US!" 

I asked trade law attorney Laurence Lasoff of Kelley Drye & Warren what the result of NAFTA withdrawal would be.  In a nutshell, he said tariff levels for Canada would remain at zero because of the U.S.-Canada Free Trade Agreement that preceded NAFTA. As to Mexico, tariff levels would be governed by our WTO commitments.

Here is Attorney Lasoff's full response:

Article 2205 of NAFTA enables any Party to withdraw from the Agreement six months after giving written notice to the other Parties. At some point thereafter, section 125 of the Trade Act of 1974, which provides the “termination and withdrawal authority” for trade agreements entered into under the original negotiating authority, would kick in. Under section 125, the President would issue a proclamation revoking U.S. tariff concessions under NAFTA. He could then increase, by proclamation, tariffs up to 20 percent above the rates in effect on January 1, 1975. Any increase authorized by section 125 would not go into effect until one year after termination.

Despite this authority, it is reasonable to assume, as far as post-withdrawal tariff levels are concerned, that the U.S. would honor existing tariff concessions negotiated in other trade agreements, including the WTO. To do otherwise could invite retaliation under those other agreement. Thus, duties between U.S. and Canada would likely remain at zero, based on the U.S.-Canada FTA, and duties applicable to Mexico would likely reflect current WTO tariff bindings.

Of course all of this is subject to negotiation, which is one of the reasons that the withdrawal authorities have time frames for implementation.

Of course, there are non-tariff provisions in NAFTA as well.  Chapter 11 includes the infamous Investor-State Dispute Settlement (ISDS) which was vilified during the Trans-Pacific Partnership debate as corporate power giveaway that harms US sovereignty and US taxpayers. There are other non-tariff provisions as well, all of which have differing sets of allies and opponents.

But the tariff result of NAFTA withdrawal would not be earth shattering.

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