CFTA

On October 24, 2017, the Office of the US Trade Representative (USTR) announced a new initiative in which countries benefiting from the Generalized System of Preferences (GSP) will be subject to heightened scrutiny. USTR Robert Lighthizer said the review will be “creating a more proactive process to assess beneficiary countries’ eligibility” and ensure non-compliant countries do not receive US trade preferences.

The new effort will include the USTR and other federal agencies’ review of each beneficiary developing country’s (BDCs) compliance with GSP eligibility every three years. After review, compliance concerns could initiate a full country practice review by the White House to determine GSP eligibility. BDCs in Asia will be the focus of the first assessment period with other countries to follow in the second and third years. The interagency process complements the existing petition receipt and public input process for country practice reviews.

Thousands of products from 120 BDCs receive duty-free treatment as part of GSP. There are 15 eligibility criteria components to qualify for the program. Some qualifications include combating child labor, respecting worker rights, intellectual property rights protection, and providing the US with equitable and reasonable market access.

On December 31, 2017, GSP is scheduled to expire. A GSP authorization bill could be approved by Congress prior to its expiration.

The National Customs Brokers & Forwarders Association of America, Inc. (NCBFAA) issued a Question & Answer document today regarding the uncertainty surrounding the possible U.S. withdrawal from the North American Free Trade Agreement (NAFTA) as well as the U.S.-Canada Free Trade Agreement (CFTA). The NCBFAA communication, written by John Kent of Kent & O’Connor, Inc., acknowledged that this is ‘uncharted territory’ with no clear path forward; however, the information provided below offers some clues as to what may lie ahead:

NAFTA Article 2205: A party may withdraw six months after it provides written notice.  If a Party withdraws, the Agreement shall remain in force for remaining parties.

A Key Question: Can the President invoke the withdrawal Article unilaterally without consent or approval of Congress?

Answer: Probably. The underlying legal authority for U.S. free trade agreements is the Trade Act of 1974, which authorized the President to negotiate free trade agreements and submit those agreements to Congress under the “fast-track” procedures. All subsequent extensions of fast track/TPA negotiating authority incorporated key provisions of the Trade Act, including Section 125, called “termination and withdrawal authority.”  NAFTA was negotiated under the authority granted by the Omnibus Trade and Tariff Act of 1988. Section 1105 of that law applied the termination and withdrawal provisions of Section 125 to NAFTA.

Section 125 provides, in part:

“(a) Every trade agreement entered into under this Act shall be subject to termination, in whole or in part, or withdrawal, upon due notice, at the end of a period specified in the agreement…….

“(b) The President may at any time terminate, in whole or in part, any proclamation made under this Act.

The provision also gives the President authority to proclaim higher U.S. tariffs subject to specified limits (from 20% to 50% above the tariffs in effect on January 1, 1975). And, it states generally that existing tariffs shall remain in effect for a year after termination, although the President has the authority to increase tariffs to their pre-agreement level by proclamation sooner than one year.

While many trade law experts believe that Section 125 does provide the authority for the President to withdraw from NAFTA, other legal scholars disagree. This likely would be challenged in federal courts.  Nevertheless, such a challenge probably will not succeed. Previously, in two instances where Presidents had terminated a treaty by Executive Order, the courts dismissed the cases as presenting a “nonjusticiable political question.”

Question: If the President gives the six-month notice followed by withdrawal, then what is likely to happen?

Answer: The President has clear authority in the NAFTA Implementation Act to rescind the previous Proclamations eliminating tariffs or implementing other NAFTA provisions. He also has authority as described above to increase tariffs — even beyond their previous rate. Therefore, duties can be expected to reappear or even increase from their pre-Agreement level.

Beyond this, it is important to understand that, while the U.S. would no longer be a Party to the NAFTA agreement, this does not mean that the NAFTA Implementation Act is repealed. That is a statute passed by Congress and cannot be repealed by Executive Order.  Nevertheless, the NAFTA Implementation Act itself states that several provisions of the implementation law will “cease to have effect” with respect to a party to which the U.S. does not apply NAFTA. And, many of the NAFTA Implementation Act provisions are worded conditionally and would cease to have effect with respect to Canada and Mexico.  So, by the terms of the Act itself, a great deal of the NAFTA Implementation Act would no longer be in effect.

Therefore, we could expect to see (subject of course to the discussion below about Canada), among other things:

— increased duties

— return of the Merchandise Processing Fee and other customs fees

— end of the Temporary Entry of Business Persons visas.

Question: If NAFTA withdrawal occurs, will the U.S-Canada FTA automatically take effect?

Answer:  Canada and the U.S. formally agreed through an exchange of letters in January 1993 to “suspend” the operation of the CFTA when NAFTA took effect, with the suspension to remain in effect for such time as the two governments are Parties to NAFTA.  This implies that if either one of the countries is no longer a party to NAFTA, the USCFTA will automatically spring back to life and the suspension would be lifted.

Yet, this conclusion is muddied somewhat by Section 107 of the NAFTA Implementation Act, which addresses the relationship of the CFTA to NAFTA. According to the Senate Report accompanying the NAFTA Implementation Act, Section 107 is structured to implement the understanding reached through the exchange of letters.  Specifically, Section 107 suspends the following specific provisions of the CFTA:

• Sections 204(a) and (b), relating to drawback
• Section 205(a), relating to certification of origin enforcement
• Section 302, relating to import relief measures
• Section 304(f), relating to biennial reports
• Section 404, relating to AD/CVD law amendments
• Section 409, relating to subsidies
• Section 410(b), transition provisions

Further, Section 107 states that these provisions shall remain suspended until such time as the as that suspension itself is terminated. This may imply that some official action may be required to “terminate the suspension” for these provisions.  In other words, if the U.S. withdraws from NAFTA, do the U.S. and Canada then have to formally agree (through an exchange of letters or other means) to “terminate the suspension” for these specific provisions?

By specifying the suspension of particular sections of the CFTA, Section also raises the question, what about the other sections not mentioned in Section 107? The Senate Committee report provides this explanation: “It is the Committee’s understanding that, in cases where the CFTA [Implementation] Act carries out U.S. obligations under the CFTA that will continue in effect under the NAFTA, those provisions of the CFTA Act either remain in place or are amended in this [NAFTA] implementing bill.”

As the Senate Report suggests, the NAFTA Implementing Act does amend certain provisions of the CFTA Implementation Act to address what will apply if the CFTA is once again in force. For example, Section 204 of the NAFTA Implementation Act states that Section 403 of the CFTA, which phased out customs user fees for Canadian imports, will apply if the CFTA is in force (that is, if one or both of the countries is no longer a party to NAFTA).

With no precedent as a guide, it is not clear whether the CFTA will automatically take effect if the U.S. withdraws from NAFTA or whether the two parties must agree to terminate the suspension. There is room to interpret the language to reach either conclusion.  Much will depend on what the two governments want the result to be.

And, of course, all of the above assumes that the U.S. will choose NOT to terminate or withdraw from the U.S.-Canada FTA, as well. Such a move would be highly unlikely, but it is nevertheless an option.

The original post from NCBFAA may be found here.

Deringer will continue to monitor developments with regards to NAFTA and CFTA and provide updates as information becomes available.