Donald Trump Threatens NAFTA

Donald Trump wants to renegotiate the North American Free Trade Agreement (NAFTA). This could be bad news for Canadian business.

Watching Donald Trump’s acceptance speech at the Republican convention was rather like sitting through a gruesome horror movie. To hear the candidate tell it, fire and brimstone (and maybe zombies) are about to rain down on the United States. Only he, the self-proclaimed “law and order candidate,” can stop it.

The speech was a summation of all the fears and fantasies he has been feeding the American people since the primaries got under way. Fear of ISIS. Fear of Mexican immigrants. Fear of Muslims. Fear of rising crime rates. He has found the wellspring of mid-American discontent and is exploiting it to the fullest.

Back in January, it may have been possible to dismiss these as the rants of a fringe candidate with no hope of winning the White House. No longer. Trump has struck a responsive chord with a wide range of voters who feel traditional politicians and their policies have let them down. They strongly believe that Trump will restore lost manufacturing jobs, raise their income levels, defeat terrorism, and “make America great again.”

One of the ways he plans to do that—and this should make all Canadians cringe—is tearing up the North American Free Trade Agreement (NAFTA). In his acceptance speech, he described it as “one of the worst economic deals ever made by our country. Or frankly, any other country. Never, ever again.”

He conveniently blamed NAFTA on Bill Clinton, Hillary’s husband, hoping to tar her with the same brush. Actually, National Public Radio in the U.S. points out that the deal was negotiated under Republican President George H.W. Bush back in the day when his party was the champion of free trade. It was ratified after Bill Clinton took office.

But whatever the history, Trump intends to renegotiate NAFTA “to get a much better deal for America.” And if he doesn’t get that deal “we’ll walk away.”

This all sounds pretty ominous for Canada and Mexico.

But before we get too depressed, let’s flash back eight years to the Presidential campaign of 2008. Barack Obama and Hillary Clinton were locked in a tight battle for the Democratic nomination and both were trying to attract primary votes by being harshly critical of NAFTA. (The Democrats have always been more skeptical of free trade than the Republicans because of their strong trade union support.)

Writing at the time for Opinio Juris, an Internet forum for discussion and debate on international law, Julian Ku, Professor of Law and Associate Dean for Faculty Development at Hofstra University School of Law, noted that both candidates had essentially threatened to withdraw from NAFTA to force Canada and Mexico to renegotiate its terms. Those are exactly the same words we’re now hearing from Mr. Trump.

Ku assumed that Obama would win the election. He then explained that any country can withdraw from NAFTA with six months’ notice under Article 2205. However, he raised the issue of whether a President could act unilaterally or would need support from Congress, which had approved the agreement initially.

“It seems like this is solely the President’s call, since NAFTA is an executive agreement and not a treaty,” he wrote. “But it does seem odd that the President has such broad unilateral authority on a matter on which Congress has spoken with such excruciating detail. Will critics of executive power protest such unilateral executive actions by President Obama?”

Of course, Obama never followed through on NAFTA so the issue was never tested at the time (although he did come under fire for other executive orders.) However, if Trump is elected, it will likely be a much different scenario. He has made free trade generally, and NAFTA in particular, one of his central targets. It is hard to imagine him backing away if he wins the White House.

Most probably, he would demand a renegotiation of the agreement within the first few months of taking office. He may not necessarily trigger Article 2205. Just the threat of doing so would force Canada and Mexico to the bargaining table.

What would happen then? I would expect a long period of uncertainty, which would play havoc with Canadian stocks. It took three and half years from the time the three countries agreed to pursue a free trade deal in June 1990 until it came into force in January 1994. A renegotiation may not take that long, but it wouldn’t be done in a couple of months.

In the meantime, Canadian companies that depend on U.S. exports to survive would be in limbo, and investors would bail out of their stocks. Think cars and auto parts, electronic equipment, aircraft, lumber, paper, aluminum, machinery, chemicals, and more. Canada exported over US$400 billion worth of products and services in 2015, about three-quarters of which was to America.

Our foreign trade is already suffering, with exports down 13.7 per cent in 2015 compared to the year before. If Trump gains the White House and follows through on his NAFTA promise, the next few years will be very difficult for us, and our stocks.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.