The Future of NAFTA and the TPP

The new president-elect of the United States of America, Donald Trump, has pledged during his campaign that he will withdraw from the Trans-Pacific Partnership (TPP) and that he will renegotiate the terms of the North American Free-Trade Agreement (NAFTA) or withdraw from it altogether. This article will seek to explain the viability of these commitments and what their impact would be.

The TPP is a proposed trade agreement which aims to promote trade links and investment between 12 countries that lie on the Pacific Ocean. The notable members are the United States, Mexico, Japan, Australia, Peru and Vietnam. More importantly China is not a member. Amongst the deal’s objectives are lowering and eliminating many tariffs on trade, introducing new labor standards and encouraging environmental responsibility. Obama coined it as the most progressive trade deal because of its emphasis on the protection of workers’ rights, amongst others prohibiting child and forced labor. The deal has been reached in October this year and is currently awaiting congressional approval.

The NAFTA is a trade deal between the United States, Canada and Mexico. Its aims are to eliminate tariff barriers to agricultural, manufacturing, and services; to remove investment restrictions; and to protect intellectual property rights. Like the TPP, NAFTA addresses labour and environmental standards in supplementary agreements. It created commissions which have the power to impose fines on the three countries when there legislation is not in accordance with those standards. The trade deal has been in place since 1993 and has had a profound impact on US business, allowing for example manufacturers to spread their production lines across borders.

The new president-elect has made two pledges concerning these trade deals. He wants to withdraw from the TPP and wishes to renegotiate NAFTA or if it fails, withdraw from it too. Trump opposes these deals because as part of his larger campaign rhetoric, he wants to stop the outsourcing of manufacturing jobs from the US.

On one hand, renegotiating NAFTA would require that the other two trading partners, Canada and Mexico, will be willing to reopen the agreement. Although there seem to be indications that the Canadian Prime Minister Justin Trudeau would be willing, Mexico’s position is somewhat less clear. Furthermore, reopening the deal would mean that the US Congress would have to approve the updated version, which in light of the strong anti-trade climate might be problematic.

On the other hand, withdrawing from the TPP would be simple because it has not yet received congressional approval. Since it has not been ratified, the president-elect can just declare that the US is no longer involved or bound by the deal.

There are many questions as to what would be the impacts of renegotiating NAFTA. The first question is whether the new president can withdraw or renegotiate NAFTA without involving Congress. It seems that he would need the Congressional ratification in either scenario due to the fact that Congress had to ratify the agreement for it to take effect. Such an effort would require a unified Republican Party that we are yet to witness since the elections. Secondly, many US manufacturers have integrated supply-chains across the US-Mexican border. Withdrawing and potentially renegotiating NAFTA could have profound impacts on the production costs, probably resulting in higher prices. Jon Lieber, U.S. director at the Eurasia Group, a geopolitical risk consultancy company, has indicated that these transnational manufacturers would likely sue the US government if it sought to invoke the withdrawal through Article 2205. Thirdly, the stock market would certainly take a hit from these dramatic events. This would in turn affect people’s retirement savings. Furthermore, if a renegotiation or withdrawal upset the car manufacturing industry, the costs of production would rise and, more importantly, we could see loss of domestic jobs in the US, the very reason for which the president-elect criticized the trade agreement. Finally, a US withdrawal from NAFTA could potentially lead to the collapse of the agreement as a whole. In terms of investor protection under International Law, this would be a fall back from progress that has been achieved in this area. Foreign investors would have to rely on domestic courts, diplomatic protection of their home state or would have to wait till another bilateral investment treaty is negotiated between their home state and their state of investment. All in all, the dangers of a withdrawal and renegotiation are pronounced and could undermine the president-elect’s campaign promises.