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Canada Prepares for Possible U.S. Exit from NAFTA

January 12, 2018

As rumblings of a U.S withdrawal from NAFTA continue, the Canadian government has begun to proactively prepare for this possibility. Earlier this week, Reuters reported that Canada is “increasingly convinced” that President Trump will follow through on his previous threats to abandon renegotiation discussions and announce that he will begin the formal process of withdrawing the U.S from the almost 25-year old trade agreement.

These most recent threats came on the same day that Canada announced it would be appealing some of the tariffs recently levied on Canadian goods by the Trump administration to the World Trade Organization (WTO).

The Withdrawal Process

Article 2205 of NAFTA states that “a Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties.” Written notice to the other NAFTA members is required to start the timer on the six months.

It is unclear whether President Trump would be able to initiate this process on his own, or whether he would require Congressional approval. Under the Commerce Clause in the U.S. Constitution, the President can negotiate and sign trade agreements, but is not the ultimate decision maker. The power to approve or cease U.S. participation in any trade agreement lies with Congress.

Canada’s Position

The sixth round of NAFTA discussions is scheduled for January 23 to 28th in Montreal. Despite proactive preparations for a U.S exit, Canada intends to remain at the negotiation table. Canada is also continuing to meet with state governors and others in Washington D.C. in the interim.

Canada’s Foreign Affair Minister told CTV News that:

Our approach from the start has been to hope for the best but prepare for the worst, so Canada is prepared for every eventuality.

The Canadian government remains optimistic that there can still be a positive resolution to the contentious issues that have stalled the ongoing trade talks.

Canadian officials told CBC News that they are prepared both for President Trump to signal his intent to withdraw before the end of January, or for the possibility that he will keep negotiations going.

In the event of a withdrawal, Canadian ministers would use the six-month notice period to continue talks with allies in Congress which have the power to vote on American trade agreements.

The U.S’ Position

In response to the ongoing rumours, the White House has said that “there has been no change in the President’s position on NAFTA”. This provides little clarification, since President Trump has repeatedly threatened to withdraw from the trade agreement since before he was even elected.

Potential Outcomes

Some economists predict that even if the U.S leaves NAFTA, a “zombie” form of the agreement could continue. Members of Congress would have to authorize any new tariffs on goods coming from Canada or Mexico.

We will continue to follow developments with NAFTA as the talks continue and will provide updates as they become available.  In the interim, if you have begun to anticipate what impact the ultimate outcome of the negotiations will have on your business in Canada or the U.S., contact the knowledgeable team at Feigenbaum Tax Law. To make an appointment, contact us online, or call our office toll free at (877) 275-4792.

Tagged: NAFTA. U.S withdrawal