By William Mauldin and David Luhnow

Rather than kill Nafta, Donald Trump and his advisers appear set for to push for substantial changes to the rules governing trade with Mexico and Canada, an effort that could prove difficult to negotiate and perilous to the regional economy.

The president-elect vilified the North American Free Trade Agreement during the campaign and threatened to pull the U.S. out of the trade deal -- but only if Mexico doesn't agree to substantial modifications.

Mr. Trump hasn't released a blueprint for his new vision of Nafta, but his comments and those of his advisers suggest they want to make big changes. Among the likeliest would be special tariffs or other barriers to reduce the U.S. trade deficit with Mexico and new taxes that would hit American firms that have moved production there. His team may also seek to remove a Nafta provision that allows Mexican and Canadian companies to challenge U.S. regulations outside the court system.

Soon after he takes office, Mr. Trump is set to ask government officials to examine the ramifications of abandoning Nafta, according to a transition-team memo, CNN reported. Longstanding disputes between the U.S. and its neighbors -- including country-of-origin labels for beef and Canada's softwood-lumber exports -- could be addressed in a revised Nafta, according to the memo.

The stakes are high. The U.S. imported and exported a total of $1.1 trillion in merchandise to and from Canada and Mexico last year, compared with about $700 billion with the European Union and $600 billion with China.

Canada and Mexico are intertwined in a complex system of supply chains, with some components crossing borders more than once before the final product is sold to consumers. Breaking up Nafta would upend numerous industries, and the biggest victim would be Mexico, which promotes itself as a platform offering global manufacturers duty-free access to the U.S.

Mexican officials say they are willing to update the 22-year-old treaty, including adding new chapters on e-commerce and other aspects that didn't exist in the mid-1990s. Mexico would also sign on to any pledge to prevent currency manipulation given that it has a free-floating currency.

But Mexican officials are wary of revisiting tariffs and export quotas.

"We can't get lost in an old debate about traditional tariffs...that's a debate from the last century," Economy Minister Ildelfonso Guajardo told a business conference earlier this month. Reopening the treaty would create "a long line" of special interests in all three countries trying to get protection, he added.

Jaime Serra, Mexico's trade minister when Nafta was negotiated, said that steps like agreeing to voluntarily restrict exports should be off the table. Export quotas, he said, would be 'the beginning of pure protectionism, and it would be shooting both of our countries in the foot."

Concluded in the George H.W. Bush administration and enacted with amendments under former President Bill Clinton, Nafta eliminated tariffs among the North American countries over time and set rules of the road for investment, labor and the environment.

Mr. Trump repeatedly warned of across-the-board, double-digit tariffs on imports from Mexico to reduce the trade deficit, which he links to the loss of manufacturing jobs. While Congress has given the president the ability to levy big emergency tariffs, they could eventually be challenged successfully at the World Trade Organization.

Mr. Trump's brash warnings to trading partners may be just the opening bid innegotiations that could end with relatively low tariffs or other barriers to Mexican goods.

Mr. Trump and his aides appear fixated on the U.S. trade deficit -- $61 billion last year with Mexico alone -- and ways it could be reduced.

Some Democrats and labor groups have also embraced blunt measures to reduce the trade deficit. The House Democrats who led the opposition to President Barack Obama's Pacific trade agreement said they're willing to work with Mr. Trump on a more balanced trade policy.

Rep. Brad Sherman (D., Calif.) suggests negotiating within the framework of Nafta the option for Washington to impose special tariffs of up to 4% on Mexican goods to reduce the bilateral trade deficit to $25 billion, excluding oil and agricultural goods. "Good neighbors have balanced trade relationships," Mr. Sherman said.

Besides traditional trade barriers, enforcement cases and tariffs, Mr. Trump and his advisers have discussed special taxes that could be levied on goods produced by U.S. companies that have moved production off shore.

Among various tax plans, one supported by House Republicans would raise money off goods imported into the U.S., in a similar fashion to the value-added tax that affects American products sold abroad. The "destination-based cash-flow tax" could be challenged at the WTO, but Mr. Trump's advisers say they will use Washington's leverage at the Geneva-based trade body to change the treatment of VAT and other border-adjusted taxes.

Some experts following Mr. Trump's trade plans say he is likely to negotiate removing some Nafta provisions that have grown increasingly unpopular, such as an international arbitration system known as investor-state dispute settlement.

The arbitration, codified in Nafta's chapter 11, allows investors from one country to sue the government of another country and obtain compensation outside the traditional court system when their rights are violated or their property is seized.

If Mr. Trump doesn't get what he wants in the talks, as president he has the authority to pull the U.S. out of Nafta in a matter of months and could do so, perhaps warning about such a move in his first days in office, lawyers say. If the U.S. leaves Nafta, then the two-decade-old agreement could be replaced with bilateral trade agreements, which Trump advisers say they prefer to multilateral tie-ups.

Write to William Mauldin at and David Luhnow at

(END) Dow Jones Newswires

November 21, 2016 11:48 ET (16:48 GMT)

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