Trump changes course on NAFTA, drops threat to back out

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U.S. President Donald Trump has backed off a plan to start the process of withdrawing from the North American free-trade agreement after emergency talks with Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto.

The White House had been considering an executive order that would have taken the first step toward pulling the U.S. out of NAFTA, senior officials told U.S. media outlets. The directive, drafted by National Trade Council director Peter Navarro and chief strategist Steve Bannon, was ready to be signed later this week or early next. But after word of the order came out in the media Wednesday, Mr. Trump spoke with Mr. Trudeau and Mr. Peña Nieto by telephone late in the afternoon and abruptly dropped his threat to tear up the deal.

A White House summary of the call said Mr. Trump "agreed not to terminate NAFTA at this time and the leaders agreed to proceed swiftly, according to their required internal procedures, to enable the renegotiation of the NAFTA deal to the benefit of all three countries."

"It is my privilege to bring NAFTA up to date through renegotiation. It is an honour to deal with both President Peña Nieto and Prime Minister Trudeau, and I believe the end result will make all three countries stronger and better," Mr. Trump said.

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The discussions marked a sudden about-face after a week of tough talk and escalating tensions, during which Mr. Trump repeatedly blasted Canada for "taking advantage" of the United States on softwood lumber and dairy.

The prospective executive order had faced widespread opposition, with several senators from Mr. Trump's own Republican Party warning that such a move could provoke a trade war and blow up one of the world's most lucrative commercial arrangements. Business groups, particularly in the agriculture sector, expressed alarm at the prospect of unilaterally abandoning NAFTA.

The draft executive order also threatened to tear open divides within the West Wing itself. While Mr. Bannon, Mr. Navarro and policy guru Stephen Miller are said to favour a tougher, more nationalist trade policy, Mr. Trump's economic adviser, Gary Cohn, and Treasury Secretary Steve Mnuchin prefer NAFTA renegotiations to focus on modernizing the deal and further integrating markets.

After Mr. Trudeau's discussions with Mr. Trump – their second call in as many days – Mr. Trudeau's office was cryptic about the nature of the conversation. "The two leaders continued their dialogue on Canada-U.S. trade relations, with the Prime Minister reinforcing the importance of stability and job growth in our trade relations," read a statement.

The executive order under discussion would not necessarily have pulled the United States out of NAFTA. Instead, it would have given Canada and Mexico a six-month notice period of the United States' intent to withdraw, after which Washington could have pulled out at any time.

Trade experts and a source in the Canadian government said triggering the notice period would not have obliged the United States to ultimately withdraw from the deal.

Instead, sources suggested the move was effectively a negotiating tactic designed to rattle Ottawa and Mexico City, put pressure on the U.S. Congress and throw red meat to the President's base. Saturday is the 100-day mark in Mr. Trump's presidency, a symbolic milestone when he will want to show his supporters he is acting on his agenda.

Mr. Trump, however, would have faced challenges in Congress, the courts and from businesses if he tried to issue the notice, and even greater hurdles if he actually tried to pull out of NAFTA unilaterally.

Foreign Affairs Minister Chrystia Freeland said earlier in the day that she is prepared to start bargaining whenever Washington is. "It's important for all of us to bear in mind that, at this moment, NAFTA negotiations have not started. Canada is ready to come to the table at any time," she told reporters in Ottawa.

A Canadian government source said the draft order on NAFTA appeared to be posturing on the part of the administration ahead of negotiations. The official, who spoke on condition of anonymity, said it was not surprising that Mr. Trump had become increasingly bellicose as talks drew nearer.

Canada's NAFTA strategy – which has mostly consisted of trying to charm Mr. Trump and convince the United States that keeping markets open is in the country's best interest – would not change as a result, the source said.

After Mr. Trudeau's conversation with Mr. Trump, this strategy appeared to have borne fruit.

B.C. Premier Christy Clark, however, urged Mr. Trudeau to hit back at Mr. Trump by banning exports of U.S. thermal coal from her province's ports.

At a campaign event in Surrey, B.C., on Wednesday, less than two weeks before election day in the province, Ms. Clark said the United States had become "hostile" on the trade front and Canada should "ban filthy thermal coal," an industry particularly close to Mr. Trump's heart.

The President had ramped up the NAFTA rhetoric and turned his fire on Canada in recent days.

Last week, he labelled Canada's system of dairy price-fixing "very unfair" to U.S. producers and this week, he accused Ottawa of being "very rough" with the United States on softwood after his country levied tariffs averaging 20 per cent on Canadian lumber.

And he threatened to "get rid of NAFTA for once and for all" if Canada and Mexico don't agree to "very big changes" in the deal.

The Trump administration is expected to formally notify Congress of its intent to renegotiate NAFTA within the next two weeks. That notification would trigger a 90-day countdown to the start of formal talks.

The process reported Wednesday would have been separate from that. Under Article 2205 of NAFTA, any country can withdraw after providing six months' notice to the other two countries. If the United States pulled out, NAFTA would remain in force between Canada and Mexico.

Alan Wolff, a Washington-based international-trade lawyer, said triggering Article 2205 would not force the U.S. to withdraw from NAFTA, but only give it the option to do so. He said an order such as the one Mr. Trump was contemplating could set a timetable for getting a deal, with the threat of withdrawal if the deadline is not met. Or it could simply issue the notice and leave open the question of when a final decision would be made. "My read of NAFTA is that after six-months notice, a party is free to withdraw. It is not automatic or irreversible," he said in an e-mail.

But even taking such a step would have been riddled with problems for Mr. Trump.

For one, it is unclear whether the President has the authority to take the country out of a deal without the consent of the U.S. Senate, said Andrea Bjorklund, a trade-law expert at McGill University. Any order to that effect could face a court challenge, she said. And Mr. Trump would face pressure from both Congress and businesses affected by the move.

"Withdrawing unilaterally would cause great harm to U.S. industry and U.S. consumers, at least in the short-term. It doesn't seem like a decision that should be taken lightly," said Prof. Bjorklund, a former legal adviser to the U.S. State Department and the International Trade Commission.

With a report from Sunny Dhillon in Vancouver