NAFTA Termination Could Pose Several Compliance Challenges, Panelists Say

A termination of NAFTA would cause “all kinds of compliance issues,” mainly for companies operating in Mexico, Drinker Biddle attorney Nicolas Guzman said during an April 28 panel discussion. “So many companies are heavily invested in Mexico, that even if this goes away, they’re going to remain there,” he said during a session at an American Bar Association Section of International Law conference. “So if they’re going to remain there, then I think negative relations would quickly make it important to make sure those operations are being run in an appropriate and compliant manner.” Reports surfaced last week that President Donald Trump was considering withdrawing the U.S. from NAFTA, before he agreed not to terminate the deal (see 1704270007).

Renegotiations could be in jeopardy if the three parties -- the U.S., Canada and Mexico -- can’t finish by the end of January 2018, as many candidates for Mexico’s mid-2018 election have expressed opposition to the pact, said panelist Fernando Holguin Casas, attorney for Mexican law firm EC Legal. The parties are likely aware of this, evidenced by the fact that they have pledged to accelerate negotiations several times, he said. As NAFTA parties display urgency, many companies are betting that the U.S. won’t move to renegotiate other trade deals, despite indications from the Trump administration, so many firms are “pivoting” to CAFTA-DR, “where Central America has become a very attractive investment area, and has similar logistical benefits to Mexico,” Guzman said.

The Mexican government plans to put forth some sort of tax reform if NAFTA were terminated, Holguin said. The tax reform would likely give factories run by U.S. companies in Mexico, or maquiladoras, several tax incentives to allow them to allocate income in the U.S. or any other country where the principal resides, Holguin said. But if the U.S. government ratchets up pressure, several companies would likely relocate from Mexico to the U.S., creating more hostile commercial relations between the countries, Holguin said.

Elana Bloom, general counsel at Portfolio Arts Group, a Connecticut-based company that uses a maquiladora, said the company would likely try to work around any NAFTA termination, as the relationship between the company and the maquiladora is “very strong.” The company would “hope that the Mexican government [would] spring back the maquiladora program that was in place prior to NAFTA” for U.S. individuals investing in Mexico. “So if the maquiladora program can be sprung back into place without too many changes to the tariff structures, I would actually anticipate manufacturing relationships to remain strong.”

U.S.-Canada business relationships and supply chains wouldn’t change too much with any terminated NAFTA, as U.S. duties aren’t that high, said panelist Greg Kanargelidis, attorney at Canadian law firm Blake Cassels. Companies could also more easily claim drawback with any dissolved NAFTA, as the deal imposes tight restrictions on the refund program, Kanargelidis said. Any dismantling of NAFTA could lead to the U.S.-Canada Free Trade Agreement coming back into effect, he said. But that could pose challenges for supply chains, because the deal carries different rules of origin than does NAFTA, Kanargelidis said.