Crown jewel or outdated tool? The pros, cons and complications of Chapter 19
It was the final night of tense trade negotiations and Canada finally got what it had long sought. Known as Chapter 19, it was an independent dispute resolution system that would determine whether punitive duties tacked onto exports were being applied unfairly. It was the crown jewel of Canada’s original free trade negotiations with the United States, a testament to refusing to capitulate even when talks almost died. “Politically, it has an iconic significance,” said Gordon Ritchie, deputy chief negotiator of the Free Trade Agreement in the late 1980s and one of the architects of the Chapter 19 clause. “This was the last, absolute bottom line of the original … negotiations.” Roughly 30 years later, Chapter 19 again finds itself at the centre of heated negotiations between the two countries. After NAFTA talks restarted last week, Canadian negotiators reportedly re-emphasized their desire to preserve the dispute panels for duties despite U.S. officials’ public statements that they want to kill the mechanism.
Outside the negotiating room, trade lawyers and experts are divided over whether the future of Chapter 19 is worth fighting for.
The provision gives countries the ability to challenge each other’s tariff duty decisions in front of an expert panel made up of members from both countries, instead of leaving it to a U.S. or Canadian court to preside over its government’s own trade squabble.
The dispute mechanism focuses on punitive duties imposed on imports that a government believes are being unfairly subsidized by the exporting country, or dumped on the foreign market at a significantly lower price than they are sold for domestically.
Critics in the U.S. have long despised Chapter 19, and view its bilateral panels as unconstitutional infringements on national sovereignty. In a new draft trade deal between Mexico and the U.S. announced last week, the provision appears to have been dropped.
To some, it’s a valuable tool to challenge U.S. tariffs on softwood lumber or other Canadian exports, especially considering the unpredictability of the Trump administration; for others, it represents an outdated mechanism that is of dwindling use. Some say conceding it could mean securing a better deal on more pressing trade issues facing Canadians.
The original Chapter 19 was meant to be temporary, said Mark Warner, a trade lawyer who practises in both Canada and the U.S. The dispute resolution mechanism was supposed to be reviewed and potentially replaced in five years, he said, but was ultimately made permanent when it was adopted into NAFTA, which came into effect in 1994.
Unlike when it was conceived in the 1980s, tariff disputes can be resolved outside Chapter 19 panels by the World Trade Organization, Warner said.
He warned that Canadian officials’ public insistence that Chapter 19 is non-negotiable could backfire if it opts, in the course of the negotiations, to compromise on the mechanism or eliminate it altogether.
“They painted themselves into a corner and I don’t know how they get out of it,” he said.
Trade lawyer Clifford Sosnow said Canada should be open to compromise on Chapter 19, but that we should get something in return. “I think that it’s a bargaining chip that can be used, and should be used for leverage,” said Sosnow, a partner at Fasken Martineau who has argued before Chapter 19 panels. “But it’s a very big ask, simply because it has deep political and emotional resonance among the Canadian public.”
Sosnow said he thinks Canadian negotiators should be willing to give up the clause if it means scoring exemptions from all U.S. “Buy American” or national security provisions, as well as opening U.S. state and munici- pal procurement contracts to Canadian companies. However, Ritchie, one of the architects of the provision, believes Chapter 19 is worth fighting to keep.
For Canada in the 1980s, having some kind of dispute resolution process meant legal challenges against U.S. government tariffs did not have to be heard in a U.S. courtroom, where some fear Canada would not get a fair shake.
At the time, Canada was being clobbered by “protectionist trade actions” by the U.S. Congress, which was using its trade laws to unfairly “slap penalties on imports from Canada,” said Ritchie. Having a dispute resolution mechanism for these tariffs was crucial for Canada, which pulled the plug on negotiations because of the Americans’ reluctance to include it in the free trade agreement. The U.S. finally relented and, in the early years of the trade deal, Chapter 19 panels repeatedly sided with Canada that “the Americans had not applied their own laws fairly,” he said.
But the system has its limits, he admitted. Ritchie said the dispute resolution has not had “the horsepower” to rein in heavily political softwood lumber disputes, which have been fought repeatedly before Chapter 19 panels. In the 2000s, despite repeated rulings by the panels in Canada’s favour, Ritchie said the U.S. government refused to abide by their decisions, prompting the Canadian government to cut a deal that temporarily ended the lumber dispute. The spat has since reignited. Ritchie said the Chapter 19 resolution also doesn’t cover current U.S. tariffs on Canada-made aluminum and steel, imposed on national security grounds.
“Even if we save Chapter 19, we’re by no means home-free. We have very serious problems in our bilateral relationship,” Ritchie said. “If I was the chief negotiator (in the current trade talks), I would be urging the government to authorize me to demand that any new agreement address these issues: the national security loophole and maintain Chapter 19.”
As talks resume this week, we may soon find out whether Chapter 19 will be a bargaining chip or a bottom line.