Paul Moen

Trade Reme­dies Un­der NAFTA: Still Time for Canada to Pivot to Of­fence

Policy - - In This Issue - Paul Moen

Canada must be pre­pared to walk away from talks if the United States in­sists on aban­don­ing the dis­pute set­tle­ment mech­a­nism for trade reme­dies in any new NAFTA. Its real and sym­bolic im­por­tance in un­der­pin­ning the rule of law in NAFTA can­not be over­stated. Just as cer­tain U.S. claims about the un­con­sti­tu­tion­al­ity of the process were de­bunked dur­ing the orig­i­nal Free Trade Agree­ment (FTA) ne­go­ti­a­tions, sim­i­lar ar­gu­ments must be mar­shalled to­day. And as out­lined be­low, Canada and

Mex­ico should also seize this op­por­tu­nity to present sev­eral bold pro­pos­als on re­form­ing trade reme­dies in the NAFTA zone.

On July 17, the United States Trade Rep­re­sen­ta­tive (USTR) re­leased its doc­u­ment out­lin­ing the U.S. pri­or­i­ties for rene­go­ti­at­ing the NAFTA. In a sec­tion ti­tled, “Trade Reme­dies,” the USTR ex­plic­itly iden­ti­fies elim­i­na­tion of the cur­rent dis­pute set­tle­ment mech­a­nism. That goal is re­in­forced with the ad­di­tion of the lan­guage that the U.S. will look to “pre­serve the abil­ity of the United States to rig­or­ously en­force its trade laws, in­clud­ing the anti-dump­ing, coun­ter­vail­ing duty, and safe­guard laws.” Con­versely, Canada and Mex­ico vig­or­ously de­fend the dis­pute set­tle­ment mech­a­nism and view it as es­sen­tial to any new deal. With that, the bat­tle lines on trade have been clearly drawn. But a closer ex­am­i­na­tion of trade reme­dies in NAFTA might help par­ties bridge this big gap.

Trade reme­dies such as anti-dump­ing and coun­ter­vail­ing mea­sures are de­signed to pro­tect do­mes­tic pro­duc­ers from im­ports that are priced be­low mar­ket or even be­low the cost of pro­duc­tion. If un­fair dump­ing or sub­si­dies cause or threaten harm to com­pet­ing busi­nesses, gov­ern­ments may im­pose du­ties to off­set the in­jury, which are then sub­ject to rules-based dis­pute set­tle­ment un­der NAFTA and/or the World Trade Or­ga­ni­za­tion (WTO). Dis­pute set­tle­ment acts as a check and bal­ance on the in­her­ent pro­tec­tion­ist bias of trade reme­dies. But the his­tor­i­cal com­mit­ment of the United States to both NAFTA and WTO dis­pute set­tle­ment for anti-dump­ing and coun­ter­vail­ing duty is now in doubt.

When Canada and the United States first launched free trade ne­go­ti­a­tions in 1986, Canada sought to ex­empt its ex­ports from in­creas­ingly capri­cious U.S. trade reme­dies—es­pe­cially in ar­eas of pork, beer, steel and, of course, soft­wood lum­ber. When this proved un­ac­cept­able to the United States and prompted Canada to walk away from a deal at the eleventh hour, cre­ative ne­go­tia­tors achieved an agree­ment on process. The re­sult was a bind­ing bi-na­tional panel dis­pute set­tle­ment mech­a­nism un­der Chap­ter 19, re­plac­ing do­mes­tic ju­di­cial re­view of gov­ern­ment trade rem­edy ac­tion. The so­lu­tion was rightly her­alded by Prime Min­is­ter Brian Mul­roney and other trade ne­go­tia­tors as a ma­jor step for­ward for the rule of law in Canada-U.S. trade.

The Chap­ter 19 process was made per­ma­nent in NAFTA, and has gen­er­ally worked well for Canada in providing in­cen­tives for ne­go­ti­ated set­tle­ments in sen­si­tive ar­eas such as soft­wood lum­ber. But a con­flu­ence of fac­tors—in­clud­ing a pop­ulist back­lash against trade, a se­ries of ad­verse panel de­ci­sions and claims of un­con­sti­tu­tion­al­ity un­der U.S. law—are all un­der­pin­ning the Trump ad­min­is­tra­tion’s hard push to elim­i­nate Chap­ter 19 in the cur­rent rene­go­ti­a­tion.

In con­trast, Mex­ico has stated its de­fence of Chap­ter 19. And Canada’s for­eign af­fairs min­is­ter, Chrys­tia Free­land, for­mally set out her gov­ern­ment’s six core ne­go­ti­at­ing ob­jec­tives for NAFTA to make the trade agree­ment mod­ern, pro­gres­sive and ap­pro­pri­ate to the con­cerns of the 21st cen­tury. In­cluded in this list of ob­jec­tives deemed to be in Canada’s na­tional in­ter­est along­side cul­ture and sup­ply man­age­ment is “a process to en­sure anti-dump­ing and coun­ter­vail­ing du­ties are only ap­plied fairly when truly war­ranted.” It was a care­fully worded ob­jec­tive.

Most commentary on the Cana­dian po­si­tion has fo­cused on how Chap­ter 19 is a “line in the sand” for which the Trudeau gov­ern­ment would be pre­pared to walk away from talks. Some com­men­ta­tors have ar­gued that Chap­ter 19 has run its course. For ex­am­ple, Robert Wolfe, pro­fes­sor emer­i­tus at Queen’s Univer­sity School of Pub­lic Pol­icy, ar­gues that Canada has only lit­i­gated three cases in the past decade un­der Chap­ter 19 and that high­ly­in­te­grated con­ti­nen­tal sup­ply chains dis­cour­age lit­i­gants tak­ing such ac­tion.

But one rea­son that the United States has not used Chap­ter 19 much likely has more to do with a lack of U.S. ex­porter com­pet­i­tive­ness into the Cana­dian mar­ket vis-à-vis Chi­nese and other ex­porters. And with the NAFTA zone even more in­te­grated than it was dur­ing the orig­i­nal FTA ne­go­ti­a­tions, the pol­icy ra­tio­nale to seek a mu­tual ex­emp­tion from trade reme­dies is even stronger and ap­peals to the self-in­ter­est of the United States not to im­pose un­due harm on its own pro­duc­ers and con­sumers. Let us build from here.

With the NAFTA zone even more in­te­grated than it was dur­ing the orig­i­nal FTA ne­go­ti­a­tions, the pol­icy ra­tio­nale to seek a mu­tual ex­emp­tion from trade reme­dies is even stronger and ap­peals to the self-in­ter­est of the United States not to im­pose un­due harm on its own pro­duc­ers and con­sumers. Let us build from here.

First, Canada and Mex­ico could res­ur­rect Canada’s orig­i­nal po­si­tion in the FTA ne­go­ti­a­tions by seek­ing a tri­lat­eral mu­tual ex­emp­tion from the ap­pli­ca­tion of each other’s anti-dump­ing and coun­ter­vail­ing duty ac­tions. Trade reme­dies are blunt in­stru­ments in a con­ti­nent char­ac­ter­ized by seam­less and so­phis­ti­cated global sup­ply chains. In­deed, safe­guard ac­tion—a trade rem­edy mea­sures taken to ad­dress cer­tain im­port surges—is al­ready ex­empted on a prima fa­cie ba­sis un­der NAFTA, which could be ex­tended to anti-dump­ing and coun­ter­vail­ing duty mea­sures.

Look­ing around the world, Aus­tralia and New Zealand elim­i­nated trade reme­dies ac­tion be­tween their two coun­tries as far back as 1993 un­der the Aus­tralia-New Zealand Closer Eco­nomic Re­la­tions Trade Agree­ment (ANZERTA). ANZERTA not only elimi-

nates trade reme­dies but also em­pow­ers com­pe­ti­tion tri­bunals with ju­ris­dic­tion over events in the other coun­try where the com­pe­ti­tion is­sue cov­ers both coun­tries. In­ter­est­ingly, the Canada-Chile Free Trade Agree­ment, as amended in 2017, does away with trade reme­dies.

Given that the United States, Canada and Mex­ico all need to ad­dress third-coun­try il­le­gal dump­ing and sub­si­diza­tion, there may be a po­lit­i­cal in­cen­tive for the U.S. to agree on a com­mon ap­proach to man­age trade reme­dies on prod­ucts im­ported into the NAFTA zone.

in sev­eral rounds of the Canada-U.S. soft­wood lum­ber dis­pute, the U.S. con­sis­tently im­posed anti-dump­ing and coun­ter­vail­ing du­ties that over­pro­tect U.S. lum­ber pro­duc­ers and un­nec­es­sar­ily raise the cost of res­i­den­tial con­struc­tion and the price of homes for U.S. con­sumers.

Sec­ond, given that the United States, Canada and Mex­ico all need to ad­dress third-coun­try il­le­gal dump­ing and sub­si­diza­tion, there may be a po­lit­i­cal in­cen­tive for the U.S. to agree on a com­mon ap­proach to man­age trade reme­dies on prod­ucts im­ported into the NAFTA zone. In its stated NAFTA rene­go­ti­a­tion ob­jec­tives, the USTR calls for pro­mot­ing “co­op­er­a­tion among the trade reme­dies ad­min­is­tra­tors of the NAFTA coun­tries” and an “early warn­ing im­port mon­i­tor­ing sys­tem for agreed sen­si­tive prod­ucts from non-NAFTA coun­tries.”

Given the high-pro­file trade rem­edy cases of im­ports from Asia, in­clud­ing Korea and China, these ob­jec­tives could pro­vide an added pol­icy and po­lit­i­cal in­cen­tive for the United States, Canada and Mex­ico to ne­go­ti­ate a com­mon regime to deal with dump­ing by non-NAFTA coun­tries. Some busi­ness groups in Canada have high­lighted this is­sue in their NAFTA sub­mis­sions, and the ini­tia­tive could find sup­port among steel pro­duc­ers and unions on both sides of the bor­der.

Third, as an in­terim step to move to­wards this goal, Canada and Mex­ico could pro­pose a mea­sure to tem­per the pro­tec­tion­ist im­pact of trade reme­dies. One so­lu­tion is a tech­ni­cal “lesser duty” rule in the ap­pli­ca­tion of do­mes­tic trade rem­edy law, which could con­sider the down­stream im­pact of anti-dump­ing and coun­ter­vail­ing duty ac­tion on work­ers and con­sumers on both sides of the bor­der. The Euro­pean Union has a “com­mu­nity in­ter­est” pro­vi­sion that looks at the down­stream im­pact of im­pos­ing anti-dump­ing and coun­ter­vail­ing du­ties. It is time for three coun­tries that share the world’s largest trad­ing re­la­tion­ship to fol­low suit and con­sider the adop­tion of a sim­i­lar pub­lic in­ter­est pro­vi­sion in NAFTA. Here is how it could work.

In the ap­pli­ca­tion of anti-dump­ing and coun­ter­vail­ing duty law, there tends to be a mis­match be­tween the of­fence and the cor­re­spond­ing penalty. In al­most all cases, the duty lev­els ex­ceed the ex­tent of the harm. This gives do­mes­tic pro­duc­ers a wind­fall of pro­tec­tion, im­poses higher costs on users and con­sumers, and re­sults in a net loss to the econ­omy. For ex­am­ple, in sev­eral rounds of the Canada-U.S. soft­wood lum­ber dis­pute, the U.S. con­sis­tently im­posed anti-dump­ing and coun­ter­vail­ing du­ties that over­pro­tect U.S. lum­ber pro­duc­ers and un­nec­es­sar­ily raise the cost of res­i­den­tial con­struc­tion and the price of homes for U.S. con­sumers. U.S. pro­ducer in­ter­ests po­lit­i­cally out­weigh those of the con­struc­tion in­dus­try and of con­sumers at large, de­spite Canada’s chal­leng­ing U.S. du­ties and win­ning re­peat­edly un­der NAFTA and WTO pan­els.

Ap­ply­ing the “lesser duty” rule would re­duce du­ties to the level ac­tu­ally re­quired to off­set in­jury and would help move stake­hold­ers to­ward the po­si­tion of un­der­stand­ing that trade reme­dies are pro­tec­tive mea­sures that im­pose more costs than ben­e­fits on the econ­omy main­tain­ing puni­tive du­ties. In the case of soft­wood lum­ber, the Trump ad­min­is­tra­tion might even be re­cep­tive to a lesser duty prin­ci­ple, given the brand­ing of the pres­i­dent as a cham­pion of the lit­tle guy for home buy­ers and con­struc­tion work­ers, rather than sac­ri­fic­ing their in­ter­ests to U.S. lum­ber pro­duc­ers.

For its part, the Trudeau gov­ern­ment re­cently dra­mat­i­cally re­duced the anti-dump­ing duty on dry­wall im­ports from the United States. Bal­anced against Canada’s do­mes­tic (al­beit for­eign-owned) pro­duc­ers of dry­wall were the down­stream users of dry­wall—namely con­trac­tors and oth­ers in the con­struc­tion in­dus­try—many of whom were locked into long-term sup­ply agree­ments. In the end, the gov­ern­ment re­duced the level of duty to an amount that would give suc­cor to the down­stream users, builders and po­ten­tial home-own­ers, while still main­tain­ing a level of duty which would com­pen­sate do­mes­tic pro­duc­ers for harm suf­fered.

Given the mov­ing pieces in the cur­rent NAFTA talks, the highly-in­te­grated na­ture of the NAFTA econ­omy and our com­mon cause in ad­dress­ing il­le­gal dump­ing and sub­si­dies from other re­gions of the world, Canada, the United States and Mex­ico should use this op­por­tu­nity to pivot to higher ground by propos­ing bold ini­tia­tives that might just work in a Trumpian `art of the deal’ world.

Shut­ter­stock photo

While Canada must be pre­pared to walk away from NAFTA talks if the U.S. in­sists on aban­don­ing the Dis­pute Set­tle­ment Mech­a­nism of Chap­ter 19, Paul Moen writes that other trade reme­dies might emerge from a cre­ative ap­proach to the talks.

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