What are the consequences of the U.S. imposing a 5% tariff against Mexico? I heard on Bloomberg that the 5% tariff would be a breach of NAFTA. If the U.S. goes ahead with the 5% tariff, what would be the consequences to the U.S.? Are there any punitive sanctions that are going to be imposed on the U.S. or is NAFTA a non-legally binding agreement that the U.S. can walk out of at any moment?
Well, the situation is still fluid with Mexico not yet having received an official notification (stuff posted on White House's site doesn't quite count as that level of official for NAFTA/WTO purposes). But their trade representative has commented, in principle, that:
“Legally we are approaching this through the lens of NAFTA and [the World Trade Organization], and while we hope for a conciliatory resolution, there are going to be consequences under our legal trade rights,” Malpica said. “According to the rules of international trade, we have the right [to] impose countermeasures.”
As for NAFTA's status, it is still legally binding (although its successor, USMCA has made some changes, but has yet to be ratified by the US Senate). It's not clear that the U.S. is "walking away" (as you put it) from NAFTA in imposing these tariffs. The US could denounce NAFTA altogether, but they don't seem to have announced that. Some analysts predict that if Trump wanted to denounce NAFTA (altogether) without the support of Congress, the case will probably end up in the Supreme Court:
Trade lawyers have long debated whether the U.S. president can unilaterally kill a [Senate-ratified] trade deal. Jennifer Hillman, a former general counsel at the office of the U.S. Trade Representative (USTR), was unequivocal.
"It's a no," she said. "The president doesn't have the authority to withdraw without Congress. It took an act of Congress to get into the NAFTA; it will take an act of Congress to get out of it."
Part of the legal debate over whether Trump can cancel NAFTA on his own comes down to some Constitutional crossover.
The Commerce Clause, or Article 1, Section 8 of the U.S. Constitution, grants Congress the power "to regulate commerce with foreign nations."
"So, if you see NAFTA as a commerce agreement, that means Congress gets a say," Hufbauer said.
But Article 2 refers to presidential executive powers, which have been interpreted by the U.S. Supreme Court as overseeing treaties that deal with foreign affairs.
In a litigation over NAFTA, Hufbauer explained, the Supreme Court would have to decide where the split falls.
Apparently Trump has invoked the International Emergency Economic Powers Act (IEEPA) of 1977 to impose these new tariffs on Mexico:
In taking action against Mexico, the White House has cited its authority under the International Emergency Economic Powers Act (IEEPA) of 1977. As Gary Hufbauer of the Peterson Institute wrote in his seminal election year analysis, the purpose of IEEPA was to give the president tools to impose economic sanctions on America's enemies and adversaries in the face of “unusual and extraordinary threats.” It was never intended to give the president carte blanche authority to impose tariffs on close allies. [...] Hufbauer anticipated in 2016 that an effort by Trump to impose tariffs under IEEPA “would be vigorously challenged as a massive usurpation of congressional power.”
I guess we'll find out in the days ahead (unless Mexico caves in first) if that internal (US) challenge to the president's use of IEEPA (against Mexico) is gonna happen or not. As with other cases of Trump pushing the legal envelope, experts disagree with the legality of this:
Jennifer Hillman, a Georgetown Law school trade law professor, questioned Trump’s citation of the International Emergency Economic Powers Act (IEEPA) in his announcement on Thursday night.
“If you read the text of IEEPA, it’s about the president being able to declare a national emergency to be able to stop financial transactions,” said Hillman, a former World Trade Organization judge.
The law has been used by presidents to impose sanctions on countries such as Iran and Sudan but Trump’s proposed novel application of it has never been addressed by the courts, according to legal experts.
US courts might even allow it:
“It’s clearly beyond the spirit of the law,” said Jessica Levinson, a professor at Loyola Law School. “But is it within the letter of the law? Possibly.”
She said that the issue was a novel one that the courts had not ruled on.
“We’ve never had this kind of stress test of the Emergency Powers Act before.”
So if that internal US challenge fails (to materialize or is unsuccessful) there remains NAFTA's own dispute resolution process, Chapter 19 thereof, which is rather rusty:
The system has not been used heavily in the last 10 years. The best known cases, and all of the currently active cases that involve Canada, are about softwood lumber. Active cases between Mexico and the United States cover U.S. fertilizer, and steel pipe and washing machines made in Mexico.
Nevertheless, NAFTA's own dispute resolution process has more legal power in the US than WTO's dispute resolution mechanism:
Chapter 19 panels have the effective power of a domestic court, while the WTO does not, which makes its decisions easier to ignore.
One other thing to note here however is that some in the US are disputing the constitutionality of these NAFTA panels:
The United States objects to Chapter 19 not only because it frequently has lost these cases before expert panels — forcing it to refund duties — but also because the adjudication panels are composed of representatives of both countries involved in the dispute.
"Chapter 19 does something unique in international trade law. It allows these binational panels to interpret and apply domestic law," said Simon Lester of the Cato Institute, a Washington, D.C.-based think tank that advocates for free markets.
"The U.S. Constitution expects U.S. federal courts to interpret and apply U.S. law. So there is an argument that I think is credible, that the Chapter 19 process infringes the U.S. Constitution."
Chapter 19 of NAFTA provides for private parties challenging duties. A separate state-to-state dispute resolution mechanism is provided in NAFTA's Chapter 20. This has been used even less. In the few Chapter 20 cases involving US and Mexico, the latter won most. However, there's apparently a procedural snag in Chapter 20, in which apparently a party willing to block the appointment of a panel can do so indefinitely. Given what we've learned from Obama's and now Trump's willingness to block WTO Appellate proceedings/appointments, it seem likely the Trump administration would resort to this kind of procedural blocking of NAFTA dispute resolution as well, if they thought it necessary.
So the whole affair is quite convoluted, and could take years to resolve in courts (unlike a bilateral US-Mexico agreement how to deal with immigration in relation to these Trump tariffs). I suppose Trump's team is banking on these issues hoping to get Mexico to concede.
According to 2016 Congressional Research Service FAQ on the topic, it's somewhat fuzzy and complicated but my parsing of the document (especially pages 3 and 16) is that
NAFTA is legally binding (Page 3)
Are FTAs Legally Binding Agreements Under International Law?
A violation by a party to an FTA of an obligation under the agreement may subject that party to state-to-state dispute settlement or investor-state arbitration proceedings before international tribunals in accordance with the terms of the FTA.21 Under the terms commonly employed by FTAs, if the United States violates an FTA obligation, it may be subject to such sanctions as trade retaliation by a complaining country (e.g., increased tariffs on U.S. exports), payment of a fine to an FTA partner country, or payment of compensation to an injured foreign investor.22 However, under terms of FTAs that have been approved by Congress, neither the decisions of dispute settlement panels nor those of international investment tribunals constituted under an FTA’s provisions alter U.S. law
the President can change tariffs (page 16) under US legal system.