President-elect Donald Trump made trade policy a key issue in his campaign and has declared his interest in either withdrawing from or renegotiating the North American Free Trade Agreement (NAFTA). Government officials from Mexico and Canada have publicly stated that their respective governments are open to renegotiating the treaty. As a result, companies that do business in Mexico or Canada or engage in cross-border transactions with those countries are likely to confront significant new challenges and uncertainty in the next few months.

Any renegotiation could lead to an increase in U.S. tariffs on imports from Mexico and Canada, which could increase to the levels applied to other members of the World Trade Organization (WTO). There may also be parallel increases in Mexican and Canadian tariffs on imports from the United States. Such shifts would threaten Mexico’s maquiladora industry in particular, which depends upon the tariff-free movement of inputs and finished products to and from the United States. Renegotiation also could affect U.S. firms that supply goods and services to the Mexican and Canadian governments and place in doubt bilateral arrangements facilitating the movement of U.S. workers and executives across the Mexico and Canada borders. Such a dramatic move, moreover, might be a precursor to unilateral U.S. trade measures. U.S. presidents, for example, have significant authority to impose tariffs against foreign trade practices.

What the Trump Administration’s policy priorities would be in any renegotiation are not clear, but changes in tariffs and the protection of U.S. jobs may be at the top of that list. It would not be surprising if President-elect Trump were to wield the threat of withdrawal as a source of leverage in any talks, and perhaps also seek to impose punitive tariffs against imports from Mexico and/or Canada. Any unilateral actions, of course, could prompt Mexico and Canada to retaliate in kind, such that these bilateral relationships deteriorate and market uncertainty increases.

If a Trump Administration goes so far as to withdraw unilaterally from the trade pact, that would also have the consequence of removing the protection that NAFTA’s Investment Chapter provides to the investments of U.S. investors in Mexico and Canada.

The Investment Chapter of NAFTA grants U.S. investors with investments in Mexico and Canada several substantive rights. For instance, Mexico and Canada must grant fair and equitable treatment to the investments of U.S. investors, must refrain from adopting arbitrary measures that may affect those investments, and must not expropriate those investments unless certain conditions are met, including the payment of compensation. The Investment Chapter also allows U.S. investors to seek damages in an international arbitration proceeding if any of those rights are violated. These substantive and procedural protections would no longer be available to U.S. investors if the United States were to withdraw from NAFTA. For those investors who believe Mexico or Canada has violated NAFTA, as long as a party notifies its intention to file a claim while NAFTA remains in force, its ability to seek redress in an arbitration related to that dispute will be preserved, even after any U.S. withdrawal has occurred.

Companies with significant investments in Mexico and Canada would be wise to consider how a withdrawal from, or fundamental changes to, NAFTA might impact their businesses going forward. Reopening NAFTA negotiations could present risks as well as opportunities for those on both sides of the border.

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Photo of Miguel Lopez Forastier Miguel Lopez Forastier

Miguel López Forastier is a partner at Covington & Burling LLP in Washington, DC, whose practice focuses on international arbitration and litigation. Mr. López Forastier has successfully represented a wide range of clients, including those in the oil and gas, mining, communications, financial…

Miguel López Forastier is a partner at Covington & Burling LLP in Washington, DC, whose practice focuses on international arbitration and litigation. Mr. López Forastier has successfully represented a wide range of clients, including those in the oil and gas, mining, communications, financial services, and food industries in both investor-State and commercial arbitrations. Recognized by Chambers Global, Chambers Latin America, and Legal 500 as a leading international arbitration lawyer, Mr. López Forastier’s work is praised by clients for his “thorough analysis, insightful advocacy, and consistently reliable judgment.” Both civil-law and common-law trained, Miguel handles contentious work in English, Spanish, and Portuguese.

Mr. López Forastier is a frequent lecturer on arbitration and international law issues at conferences and universities around the globe. He also sits as arbitrator.

Photo of Jay Smith Jay Smith

Jay Smith is of counsel in the Washington office. He joined the firm after several years as a professor of political science and international affairs, during which he specialized in international trade policy and international dispute settlement. His practice in the International and…

Jay Smith is of counsel in the Washington office. He joined the firm after several years as a professor of political science and international affairs, during which he specialized in international trade policy and international dispute settlement. His practice in the International and Litigation groups draws on this academic and policy experience.

He is currently helping clients develop and implement strategies with regard to the Trump Administration’s recent trade actions, including pursuing country exemptions and product exclusions to the recent steel and aluminum tariffs imposed under Section 232, and product exclusions to the proposed Section 301 tariffs.

Photo of Mary Hernandez Mary Hernandez

Mary Tere Hernandez specializes in international arbitration practice and FCPA investigations.  She is particularly focused on serving clients with operations in Latin America.

Ms. Hernández’s arbitration engagements have included high-stakes disputes under the ICSID, ICC, ICDR, and UNCITRAL rules. Her experience in this…

Mary Tere Hernandez specializes in international arbitration practice and FCPA investigations.  She is particularly focused on serving clients with operations in Latin America.

Ms. Hernández’s arbitration engagements have included high-stakes disputes under the ICSID, ICC, ICDR, and UNCITRAL rules. Her experience in this area includes representation of ExxonMobil in several cases concerning oil facilities in Venezuela, one of the largest international investment disputes in history. Ms. Hernández was also seconded for two years to the international disputes group of ExxonMobil, working on significant arbitration matters during that time.

In the FCPA area, Ms. Hernández has worked on internal investigations and compliance issues on behalf of clients doing business in Latin American countries, including Argentina, Colombia, and Mexico.