Goldman Expects Trump To Withdraw From NAFTA, Congress Readies For A Fight

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.”

NAFTA Talks Heat Up As Trump Administration Takes Aggressive Stance On Autos

Trump"s NAFTA negotiators in recent days put forth a string of bold proposals on everything from auto rules of origin, a sunset clause, government procurement, and gutting dispute panels seen by the other nations as core to the pact. The moves were long-signaled, as was Canadian and Mexican opposition to them, but with a more aggressive stance taken by U.S. negotiators in the 4th round of talks, which will continue today in Washington D.C., many are beginning to question whether a deal is ultimately feasible.  Per Bloomberg:

The fourth round of Nafta talks will continue Monday at a Washington-area hotel, before a ministerial-level meeting on Tuesday. People familiar with the proceedings describe essentially a two-track process: legitimate progress being made to modernize the pact in less contentious areas, including topics like regulations and services, with essentially no progress on the most divisive U.S. proposals.

Nafta’s fate may now hang on how flexible the U.S. is about its demands heading into the fifth round of talks, scheduled for Mexico City around the first week of November. While the parties had wanted to reach a deal by December, officials familiar with the negotiations say the talks are likely to drag on for months.

Of course, hanging over the negotiations are Trump’s regular threats to walk away.

One official familiar with the proceedings, who wasn’t authorized to speak publicly, said on Sunday that it seems more likely Trump will give the mandatory six months’ notice required to leave Nafta, though not necessarily end up backing out. Others were less sure.

“He’s unpredictable, so I don’t know,” said Stephen Moore, a senior economic adviser during Trump’s campaign and chief economist at the Heritage Foundation. “I do feel, though, that his bark has been worse than his bite on trade. That doesn’t mean that he’s retreating. But I think we’re going to see a Nafta 2.0 that will find areas that will give the U.S. even greater benefits, while protecting American workers.”

Mexico has signaled that it won’t negotiate during the six-month window if Trump announces he’ll walk away, and it’s unclear what the next steps would be were that to happen. Congress and others are vowing legal and political fights if the president tries to pull out. If Trump manages to, though, Canada could still fall back on an existing bilateral deal with the U.S.; Mexico has no such previous deal.

That said, as Richard Neal of Massachusetts, the top Democrat on the House Ways and Means committee, said over the weekend, a full withdrawal from NAFTA would require a vote from Congress...a hurdle which Trump has had some difficulty clearing in his first 10 months in Washington D.C.

The proposals have spurred public warnings from prominent U.S. lawmakers and the private sector about the perils of scuttling a deal that over more than two decades has broken down trade barriers, including tariffs, for industries like manufacturing and agriculture.

Warnings are growing from Congress. Richard Neal of Massachusetts, the top Democrat on the House Ways and Means committee, said he prefers a Nafta renewal to a pull-out, which he said Congress would probably block.

If Trump “even suggests that the United States should leave Nafta, to undo that relationship, you would have to go back to Congress. And that would be a much more difficult task for him,” Neal said in a Canadian TV interview with The West Block that aired on Sunday.

The U.S. Chamber of Commerce has issued its own warning. Last week, Chief Executive Officer Tom Donohue visited Mexico City and pledged to fight “like hell” to preserve Nafta. The largest American business lobbying group plans to send an “army” of representatives to Capitol Hill to demonstrate support for the deal, Donohue said.

Of course, as Boston Consulting Group pointed out in a recent presentation to the Motor & Equipment Manufacturers Association, any success in imposing tariffs on imported parts could mean large price increases for American consumers as roughly $2,000 worth of content on each U.S. assembled car is sourced from Mexico.

Meanwhile, Mexico is just one small component of a truly global automotive supply chain with $3,500 worth of imported parts on each car assembled in U.S. plants.

For those reasons, Mexico’s negotiators said they’re still optimistic a deal can be reached because they expect pushback from the U.S. private sector.

Here is the full presentation from Boston Consulting Group:

US Vs Canada: The Numbers Behind the World’s Closest Trade Relationship

Whether we’re discussing the ancient merchants that traversed the legendary Silk Road, or the transfer of goods across modern border lines, trade has always been about building close relationships.

As Visual Capitalist"s Jeff Desjardins notes, there are many examples of strong and mutually-beneficial trade relationships all throughout history, but one doesn’t have to look far back to find what could be considered the closest bilateral relationship ever known: the one between the United States and Canada.

These two countries are each other’s best customers, and they share the world’s longest international border (5,525 miles long). They are both Western democracies with shared cultural heritage and similar standards of living – and each day, the two countries exchange a whopping US$1.7 billion in goods and services.

Our infographic today highlights numbers and tangible examples behind this lengthy relationship between the U.S. and Canada.

AMERICA’S BEST CUSTOMER

Despite China surpassing Canada in 2015 to become America’s largest trading partner in aggregate, the majority of Chinese trade comes in the form of imports ($462B imports vs. $115B exports). That means China is actually only the third-largest customer of American-made goods, buying about 8% of total U.S. exports in 2016.

The largest buyer of American goods is still north of the border – in fact, Canadians buy about 18% of total U.S. exports, which is more than twice that of China.

Canada is the most important international customer for 36 states – and every day the equivalent trade of all U.S./Japan happens over just one bridge (Ambassador Bridge) between Detroit, MI and Windsor, ON.

CANADA’S BEST CUSTOMER

Americans return the favor in a big way: an incredible 76% of Canadian exports are bought by Americans.

It’s estimated that 78% of Canadian exports to the U.S. are raw materials, parts and components, and services used to create other goods in the United States.

CLOSE TIES

Through many years of trade, the supply chains between the two countries have become highly integrated.

Much of the time, the U.S. is buying raw materials and intermediate goods, which get used in final products destined for domestic and global markets. Many of those even get sold directly back to Canada.

This could be buying Canadian crude to reduce reliance on OPEC, importing low cost hydro electricity during times of heavy rainfall, or using Canada’s steady supply of aluminum to make more environmentally sound vehicles.

Few countries in the world have this kind of economic interdependence – and the history, integration, and value of goods traded makes this arguably the world’s closest bilateral trade relationship.