A world without the North American Free Trade Agreement would be sure to disrupt the auto supply chain in Canada and the U.S.
But just exactly what would happen if the United States decides to exit the agreement remains an open question with no clear answers. That’s because that country’s departure from NAFTA, a possibility that became more realistic following the most recent round of renegotiations, is virtually without precedent, analysts say.
“The things we have taken for granted we should not take for granted anymore,” said Jeff Rubin, senior fellow at the Centre for International Governance Innovation in Waterloo, Ont. “We have taken for granted that globalization and her handmaiden, free-trade agreements, are both desirable and inevitable. That’s being challenged.”
NAFTA negotiators met in early December and parted ways for the holidays Dec. 15. They did so without signing off on any chapters after a week of talks. They will reconvene in Montreal beginning Jan. 23, 2018.
U.S. trade negotiators have reportedly proposed requiring vehicles built within the NAFTA region to have at least 85 percent North American content, including 50 percent U.S.-made content, to cross the borders tariff free. It’s a proposal that negotiators from Canada and Mexico have found unacceptable, just as most automakers and suppliers have.
“It would seriously disrupt the auto-supply chain, and it would [put] North American producers in all three countries at a disadvantage against the world,” said Douglas George, consul general of Canada in Detroit.
President Donald Trump has repeatedly threatened to withdraw the United States from NAFTA, and sharp disagreements over the American trade team’s proposals have made that possibility more realistic.
It is unclear what would happen if Trump withdraws the U.S. from the agreement, but analysts said it would certainly be messy.
For one, Trump cannot instantly withdraw the U.S. with the stroke of a pen or the sending of a tweet. He can only withdraw on six months’ notice.
During this window, experts said to expect automakers and others to sue the U.S. government in an attempt to keep NAFTA rules in place and to put pressure on Congress to challenge Trump’s authority to pull out of the agreement on his own, seeing as it was only ratified in the U.S. because Congress approved it.
“You can have this weird situation where Trump makes his analysis on NAFTA, but behind the scenes there’s paralysis,” said Christopher Sands, director of the Johns Hopkins Center for Canadian Studies in Washington, D.C.
“He can say we’re leaving NAFTA in six months, but it’ll get stuck in the rule-making process. Plus, the auto industry can sue and potentially wait out Trump.”
Still, if NAFTA is blown up, analysts said it is likely for the three nations to pursue bilateral trade agreements with each other. For Canada and the U.S., their pre-NAFTA free-trade agreement would likely come back into play, though the two sides might try to modernize the agreement.
But bilateral deals are seen by many in the automotive industry as less than ideal because the requirements of each deal are unlikely to sync.
“Bilateral agreements have some advantages, but the major downside is the potential for rules to not match up perfectly,” Sands said.
No matter what happens in renegotiations, Canada and Mexico -- and the industries that depend on NAFTA -- are receiving a serious message from Washington: They can no longer assume free trade as a given.
“You always knew where the U.S. stood,” Sands said. “The idea that the new administration would come in and upset that apple cart makes the U.S. much less reliable as a partner, even if we decide to just leave NAFTA as it is.”