US Proposes "Sunset Clause" That Would Kill NAFTA After 5 Years

After President Donald Trump said Wednesday that the US would be open to striking bilateral trade agreements with Mexico and Canada if the three neighbors can’t come to an agreement on Nafta, Bloomberg is reporting the administration's negotiators have proposed a “sunset clause” that would see the North American Free Trade Agreement expire after five years unless the parties agree to extend it.

According to Bloomberg’s sources, the proposal was presented to a small group of negotiators, and is the latest sign that the talks – the fourth round of which began Wednesday – remain at an impasse with the self-imposed soft year-end deadline rapidly approaches.  

To be sure, the Trump administration insists that real progress is being made. US Trade Representative Robert Lighthizer kicked off the fourth round of talks on Wednesday by announcing an agreement on a chapter on competition.

Specifically, Lighthizer said the countries have agreed to increase “procedural fairness in competition law enforcement.” Previously, the parties agreed to revise a chapter on small and medium-sized businesses.

Canada and Mexico rejected the idea of a sunset clause after Commerce Secretary Wilbur Ross floated the idea last month, saying they wouldn’t be able to tolerate the uncertainty it would create for businesses seeking to make long-term investments. Besides, Nafta already has an exit provision allowing members to withdraw after giving six months of notice.

Mexico’s ambassador in Washington Geronimo Gutierrez has said a termination clause would erode business confidence in the region, while his Canadian counterpart has said the Trump administration wouldn't be able to drum up the domestic support.

“If every marriage had a five-year sunset clause on it, I think our divorce rate would be a heck of a lot higher,” Canada’s ambassador to Washington David MacNaughton said last month.


“We can have that discussion, but I really do think it won’t be Mexico and Canada that are pushing back against the secretary, it will be a lot of Americans.”

Of course, the sunset isn’t the only controversial proposal being pushed by the administration. A US proposal over so-called rules of origin for vehicles that would raise the threshold for how much of a car must be built within the Nafta countries to receive the pact’s benefits to 62.5% currently, while adding a US-specific content component.

Rules of origin will be discussed by negotiators on Friday, Sunday and Monday, Bloomberg reported.

The negotiations are happening against a backdrop of heightened trade tensions between the US and Canada. The US Commerce Department last week imposed an astonishing 300% tariff on Bombardier’s C-Series jets, making it virtually impossible for the Canadian aerospace company to sell its planes in the US, and potentially scuttling a deal with Delta Air Lines worth $5 billion. In response, Trudeau, who visited the White House on Wednesday, suspended purchases of equipment manufactured by Boeing until the company drops a complaint against Bombardier that led to the tariff.

While experts maintain that there’s no connection between the Bombardier tariffs and Nafta, it’s difficult to imagine how the trade dispute wouldn’t cast a pall over the negotiations – particularly since officials in both the US and UK worry that the sanctions could drive Bombardier, which has struggled to close deals in recent years, to financial ruin.