Chapter 19

THE DISPUTE MECHANISM NEARLY KILLED FREE TRADE THE FIRST TIME AROUND AND NOW THE U.S. HAS IT IN ITS CROSSHAIRS

As Canada returned to the bargaining table in Washington Wednesday, the pressure to revamp the North American Free Trade Agreement has reignited an old feud over a provision that nearly killed the original deal: Chapter 19.

Prime Minister Justin Trudeau has reaffirmed that Canada will sign no pact without a dispute resolution mechanism like the one contained in the chapter.

“We need to keep the Chapter 19 dispute resolution because that ensures that the rules are actually followed. And we know we have a president who doesn’t always follow the rules as they’re laid out,” Trudeau said during a telephone interview with an Edmonton radio station on Wednesday.

The mechanism has long frustrated U.S. Trade Representative Robert Lighthizer who views it as an infringement on American sovereignty and wants it removed.

Finding a way forward may depend on how much each side is willing to budge and whether a compromise can be found that allows both parties to claim they didn’t cave to the other’s demands, trade analysts say.

“At the end of the day, Canada will need to point to something and say ‘see? We didn’t just cower, we got a win,” said Christopher Sands, director of the Center for Canadian Studies at Baltimore, Md-based Johns Hopkins University. “The U.S. needs the same thing.”

The question of whether Chapter 19 should be protected at all costs largely depends on how useful you believe the original mechanism still is. Here, opinions are divided.

The application of antidumping and countervailing duties arose as a vital concern for Canada in the early 1980s. It was around that time that the U.S. ramped up use of the duties due to a variety of factors, including a broadening of the criteria under which they could be applied and a transfer in responsibilities for unfair trade practices from the U.S. Treasury to the Department of Commerce, according to a report by Dan Ciuriak, senior fellow at Waterloo-based Centre for International Governance Innovation.

Findings of trade “injuries” by U.S. courts soon increased so sharply that by the time Canada sat down at the bargaining table in 1988 to discuss the Canada-U.S. Free Trade Agreement, antidumping was a major issue — one important enough that former Prime Minister Brian Mulroney was willing to walk away from the talks rather than sign a deal without a mechanism for sorting out disputes.

“Chapter 19 was seen as a major achievement in the process,” noted Lawrence Herman, a former Canadian diplomat who practises international trade law at Herman and Associates. “And since then, it’s become a sort of article of faith.”

But the use of Chapter 19 — which was subsequently built into the current NAFTA deal — has declined enough that some question whether it is really necessary anymore. Indeed, while the provision was used frequently following its introduction, filings have thinned out in the last 10 years.

What’s more, the U.S. International Trade Commission has made recent decisions in Canada’s favour — reversing duties on Bombardier’s CSeries aircraft and Canadian newsprint — leading some to wonder whether concerns about Canadian companies getting fair treatment in the U.S. court system are overwrought.

There are other criticisms: the panels haven’t always been all that effective. The U.S. didn’t comply with a ruling in favour of Canadian softwood lumber exporters, leaving Canada to negotiate a settlement. Then the U.S. reopened the dispute and applied additional levies anyway.

What’s more, the World Trade Organization has introduced new ways for countries to challenge trade remedies — ones that didn’t exist in the ‘80s — though the U.S. is frustrating that system by blocking the appointment of new judges to the WTO appellate body.

“In the short term I think we could live without it,” said Robert Wolfe, a professor emeritus at Kingston-based Queen’s University who has studied Canada’s trade policies for decades. “What I’ve said is that the Canadian negotiators should scream and yell and pound the table and say we have to have Chapter 19 — and then give it up for something better. Make Lighthizer pay for it.”

Others are less certain. The decline in the use of Chapter 19 coincides with that long period in which anti-dumping cases pushed by the U.S. against Canada fell, partly because of the gradual integration of the two economies, Ciuriak said. But that trend has already begun to reverse under U.S. President Donald Trump, with the administration even dusting off a little-used provision that allows governments rather than companies to initiate a case.

“The Trump administration has come back full bore on anti-dumping,” Ciuriak said. “So yes, anti-dumping had become a bit of a nonissue. But then Trump comes along and not only does he want to get rid of Chapter 19, he’s creating new reasons to keep it and to raise its importance to Canada at the negotiating table.”

And while U.S. institutions are currently issuing judgments that are “reasonable,” the White House could still influence them by appointing more-protectionist officials, he added.

As each side digs in its heels, neither is saying much publicly about a possible third option, though that doesn’t mean it isn’t possible. Trade experts including Larry Herman have suggested modifying Chapter 20 of NAFTA, which deals with state-to-state disputes, in a way that preserves some of the protections in Chapter 19.

Chapter 20 panels, which assemble trade experts to determine whether countries have run afoul of their NAFTA obligations, could be empowered to return duties that were improperly applied, he said.

Others, including Sands of Johns Hopkins, have suggested reviving the Chapter 19 provisions in the original Canada-U.S. free-trade deal. Those measures were suspended, not repealed when NAFTA was signed, and have already been approved by Congress and Parliament. They are also bilateral which would allow the U.S. to at least remove the panels from its relationship with Mexico. Whether that would satisfy Mexico is an open question, as Washington’s current “agreement in principle” with the country makes no mention of Chapter 19.

But if the U.S. is serious about submitting a text of the final agreement to Congress by Oct. 1, any talk about alternate options may be “purely theoretical,” Herman said.