Dispute Settlement and the USMCA

Some of you are undoubtedly basking in warm fuzzy feelings from holiday time spent with friends and family. Others of you are probably just glad to be home, happy to have survived a week or two with family, perhaps wishing you'd had better dispute resolution tools at your disposal.

via GIPHY

I can't help you with that,... but I do want to say a few things about dispute resolution in the new USMCA. Throughout the fall of 2019 the original USMCA text negotiated among the three countries went through another round of negotiations in the United States as House Democrats wrangled with the White House over changes that would ensure the Agreement would be implemented by Congress.

Can't we just be friends?

It has been recognized for some time that there was much in the original USMCA text that Democrats could positively sink their teeth into, particularly around labour rights and the environment. Yet, to no one's great surprise, it was labor rights that resulted in the most important changes to the USMCA facilitating the Agreement's passage in the House on December 19 in a rare bipartisan vote of 385-41. 

The newly agreed text also included important changes to patent protections for biologic pharmaceuticals-- Democrats insisted they be scrapped. But the real action was on labor, and the dispute settlement and enforcement provisions in particular. 

An important caveat/acknowledgment here: part of my geeking out on this owes a debt to Chad Bown (Peterson Institute) and Soumaya Keynes (The Economist) and their brilliant series of podcasts entitled Trade Talks. Episode 113 on changes to the USMCA from December 19 (linked here) is the inspiration for everything below. Hence, some of what follows was suggested by those Bown and Keynes interviewed in this piece, but the conclusions I try and draw about it all are my own. 

My Take Away:

1) I was NOT a big fan of the dispute settlement provisions in the USMCA, in part, because the original text undermined the cause of trilateralism. The 2019 text appears to fix some of my complaints-- Mexico's now covered trade remedies-- but added others, incomplete labor rights enforcement (scroll to the end). 

2) Where labour rights, dispute settlement, and enforcement are concerned, the USMCA's changes are unquestionably some of the strongest ever seen in a trade agreement. However, I also see plenty of scope for protectionist mischief.

Dispute Settlement Structure

Dry, But Always Where Fights Start

The NAFTA was innovative for its time in terms of enshrining forms of dispute settlement into the Agreement's structure. In many respects, the NAFTA's dispute settlement mechanisms are about as close as the United States has ever come to ceding parts of its trade policy to forms of binding supranational governance. There are plenty of caveats to that assertion, but the mere fact that the NAFTA's dispute settlement provisions generated a U.S. Supreme Court challenge to their legality under the U.S. Constitution-- they were upheld-- is telling. 

The NAFTA had three main areas of dispute settlement; Chapter 19, covering anti-dumping and countervailing duties (trade remedy laws); Chapter 11 covering foreign direct investment; and Chapter 20, the high-level state-to-state dispute settlement mechanism. 

NAFTA Chapter 19

I've written elsewhere in this blog about Chapter 19, its origins, function, and the sort of fetishization of its provisions in Canada. In many ways, it was a good idea, but never went far enough because at the end of the day, all any Chapter 19 panels ever did was determine whether domestic trade remedy laws were being used by administrative agencies as intended by the legislatures that enacted them. There is evidence that the presence of Chapter 19 served to curb some of the trade harassment flowing from the (ab)use of trade remedy laws in an increasingly integrated continental economy. However, that the North American economy had become so integrated via supply-chains and intra-industry trade has also had a salutary effect on the weaponization of trade remedy laws.

Chapter 19 never tried to set out objective trilateral standards for what dumping and subsidy were, nor did it infringe on any of the Parties' ability to legislate changes to their respective trade remedy regimes. Coupled with the standard for panel adjudication noted above, Chapter 19 did not result in any loss of national sovereignty. Nevertheless, Chapter 19 was the primary target of a U.S. constitutional challenge that wound its way as far as the 11th Circuit Court of Appeals in 1999. I was certain the Trump Administration would insist on scrapping Chapter 19 entirely, in part because the Trump Administration's own renegotiation objectives stated as much (linked here). 

I was not certain Chapter 19 was a hill worth dying on when the USMCA negotiations began in the spring of 2017. However, my beef with how it all transpired is that the fall 2018 USMCA text excluded Mexico from the application of the new Chapter 10's dispute settlement mechanisms (see also). In my view, this was a clear departure from the spirit of trilateralism supposedly embodied in the Agreement. 

Trilateralism Resurgent?

To my pleasant surprise, Mexico seems to have rejoined the fray. new Chapter 10 of the USMCA embeds the old NAFTA's trade remedy system for all three countries. Why this hasn't drawn more attention in the press is a puzzle I'll leave for another time.
My read of last month's text is the 

That said, Chapter 10 does not appear to address other areas of weakness in dealing with trade remedy. BUT..... but score a small victory for trilateralism!!!

NAFTA Chapter 11

I detected no significant changes to the USMCA investment chapter (now Chapter 14) between the fall of 2018 and fall 2019 texts. As I thought about the renegotiations in the spring of 2017, my suspicion was that the controversy around NAFTA Chapter 11 had effectively put investment protections on the chopping block. USTR's objectives for investment in the renegotiation were ambiguous. However, when I heard Ambassador Lighthizer talk about investment rules as having exacerbated outsourcing during the life of the NAFTA-- through the protections they afforded U.S. companies operating in Mexico-- I was sure investment was out. 

I was wrong. However, rather than getting rid of investment rules in their entirety, the Chapter 14 of the USMCA maintains them only in the U.S.-Mexico context, and then only in a limited set of areas. Canada and the United States agreed to scrap them entirely. 

A Ball of Confusion

Most troubling about this for me is the way in which this adds to the growing patchwork of global investment rules. In North America, the USMCA's investment rules will apply in a limited way only to the United States and Mexico. However, Canada and Mexico remain parties to the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) in which traditional investment rules, including the controversial investor-state dispute settlement (ISDS) mechanisms that caused so much controversy in the NAFTA are embedded in the text.

Finally, where investment is concerned, Chapter 14 of the USMCA undermines the idea of trilateralism.

NAFTA Chapter 20

No one was ever happy with the operation of Chapter 20. The reason why is fairly simple: sovereignty. Chapter 20 was supposed to be a forum for hi-level political consultations and dispute resolution around issues of great significance. When something important could not be resolved by technocrats in the respective bureaucracies, was unresolvable through hi-level consultations among members of the Free Trade Commission-- made up of cabinet-level secretaries responsible for trade-- including disagreements as to the interpretation of the NAFTA, dispute settlement procedures were supposedly available to "arbitrate" among the parties.

In practice, only 3 Chapter 20 cases were ever initiated (2 by Mexico, 1 by Canada), none of which went anywhere. Unfortunately, Chapter 20's dispute resolution processes required the disputing to submit potential panelists to a roster from which the panel would be drawn. However, in practice, the United States neglected the roster-- letting it expire without adding new names-- thereby rendering Chapter 20's dispute resolution mechanisms inoperative.

USMCA Chapter 31: The Fix?

My read of the Trans Pacific Partnership text before Donald Trump took the United States out of the

"Back in the Day"-Style Regionalism circa 2016

Agreement was that it tried to address some of the shortcomings that had plagued NAFTA Chapter 20. Indeed, Chapter 28 of the TPP-12 had a number of provisions that limited the capacity of the Parties to stall, or block the formation of dispute panels. However, the TPP did not have mechanisms for ensuring panel rosters were filled. Indeed, both rosters and agreement on the formation of panels from those rosters were consensus driven exercises. Hence, the scope for stalling and delay remained high where panel formation was concerned. This is not a small problem since the financial impact of trade disputes mounts alongside each delay.

In the USMCA, the Parties can conceivably stall in the filling of rosters, but Article 31.8 ensures that no Party can indefinitely block the nomination of names to the roster, or the formation of panels. If, for example, one Party objects to proposed roster names and no alternatives can be mutually agreed, the proposed names will be added. Moreover, failure to nominate roster names will not be allowed to hamstring the formation of panels.

Labour Enforcement
Labour and the environment have been firmly entrenched as part of the global trading regime, arguably since the NAFTA put them there via the Side Agreements negotiated by President Clinton in 1993 (Labour Text, Environment Text).

While the language in trade agreements around labor and environment has continued to get stronger-- for example, there are often explicit prohibitions against reducing labor or environmental standards for the purposes of enhancing your exports-- critics have complained about the lack of enforcement teeth in any of these provisions (me included, here). Moreover, labor rights advocates, as well as union leadership in the United States, wanted to see trade agreements used to forcibly raise labor conditions among America's trading partners.

Still Rhymes With NAFTA

The United States thought they had advanced the ball on labor rights and standards enforcement with the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), specifically with Chapter 16 providing the basis for formal proceedings challenging the failure to adhere to standards as set out by the International Labor Organization (ILO). In September 2014, the United States it would launch a complaint asserting Guatemala was not meeting the labor standards set out in the CAFTA-DR. Unfortunately, Chapter 16 of the CAFTA-DR has a two-part standard for demonstrating a violation of the Agreement; first that ILO standards are not being enforced, and second, that those standards are having a substantive impact on trade flows.

Unfortunately for the United States and labour advocates, the panel's 2017 decision favoured U.S. arguments in the first, but not the second. Guatemala was not adhering to ILO standards, but the failure to do so was having no impact on trade. Hence, it looked as if efforts to shift the focus of labor rights in trade agreements from mere lip-service to something with teeth had come up short yet again. 

USMCA Pro Labor?

When the renegotiation of the NAFTA began, labor quickly became a focal point for discussion. I have a number of reservations about how this entire issue was handled within the USMCA. For

example, I am all in favour of raising the working conditions and wage rates of workers. For some, the new $16/hr minimum wage provision for goods to qualify for tariff free treatment under the USMCA's rules of origin are an important means of ratcheting up Mexican labor standards. Similarly, changes to Mexican labor laws enacted in late 2019 as a condition of the USMCA were also cheered as important advances. Moreover, some would argue that were it not for the USMCA as leverage, Mexican authorities would not have had the political will to enact changes to collective bargaining rules, etc. 

Fine.

But I am suspicious of the stated noble intent of some of these proponents since many of them represent organized labor in the United States, all of whom are less interested in the wage rates or rights of Mexican workers than they are in protecting the jobs of American workers. Indeed, the entire scheme of rules of origin, of which the wage condition is a part, is pretty plainly designed to protect American jobs. There will undoubtedly be a number of Mexican facilities that will easily meet these new requirements. However, by imposing a wage condition for tariff free treatment, the USMCA could make quite a few, comparatively less efficient, Mexican manufacturing outlets less competitive at those higher wage rates. 

Sovereignty

One (okay, me) could probably argue that Mexican sovereignty has been compromised over all of these issues from the start. Mexico's (and Canada's) relative dependence on U.S. market access for a large percentage of its GDP put Mexico in an awkward position vis-a-vis the Trump Administration's many demands when renegotiation began. Again, some have argued that Mexicans themselves were not unhappy to accept some of these "demands" since they could help break political resistance in Mexico to important changes. However, there's also the notion that both Mexico and Canada were in the awkward position of being "price takers" throughout and were lucky the USMCA did not turn out worse. Indeed, I thought the USMCA would be dramatically different from the NAFTA. It was not. 

Yet, in important areas, the USMCA imposed a number of changes, particularly on Mexico; among them legislated changes to labor laws. However, one can have lots of laws on the books, but enforcement is another question altogether. And, in light of US frustrations over the outcome of the Guatemala (CAFTA-DR) episode, the question of enforcement of labor laws under the terms of the USMCA was front-and-center throughout the fall of 2019 as House Democrats wrangled with the White House over changes to the Agreement.

(Re: Sovereignty, who was doing the negotiations?.... Mexico had to sign off on the final terms, but the negotiations over labor rights enforcement (primarily in Mexico) were mostly between House Democrats and the White House).  

Annex 31-A: Rapid Response Investigations

The outcome of negotiations between House Democrats and the White House were annexes to the larger state-to-state dispute resolution procedures of Chapter 31. My read of how they work (partly

Pesky Details

based on the Peterson Institute podcast noted above) is as follows:

1) a private party, say a firm or labor rights group in the United States, can initiate a complaint to the U.S. Government under Annex 31-A alleging a failure to enforce labor laws at specific manufacturing facilities in Mexico. 

2) The U.S. will do a bit of investigating of its own, but then submit a request to Mexico to respond to the allegations within 10 days. If Mexico chooses to initiate an investigation, it will have 45 days to complete it. 

3) Whether Mexico investigates or delays, the United States can the United States can temporarily, but immediately, impose/ban imports from the facility alleged to be in violation of labor laws. 

4) If after good faith efforts to consult, investigate, and report on the veracity of the allegations no consensus can be reached, a binational panel will be struck to formalize an investigation.

5) The Panel can request a "verification" visit (Annex 31-A.7) to the Mexican facility in question (sovereignty). If that request is denied, a finding against Mexico would likely follow. 

Interestingly, and importantly, the USMCA attempts to redress the shortcomings discovered in the CAFTA-DR in two ways: first, the actual Labor Chapter of the USMCA (Article 23.3, footnote 4) eliminates the two stages of evidence by negating the need to show an impact on trade flows from the failure to enforce. Moreover, Article 23.5, footnote 5 clarifies further stating:

"For purposes of dispute settlement, a panel shall presume that a failure is in a manner affecting trade or investment between the Parties, unless the responding Party demonstrates otherwise."

Second, the terms of Annex-A shifts the evidentiary burden of proof to the respondent (Mexico, in this case) to show that labor laws are being enforced. In the absence of proof from the Mexico, restrictions on the manufacturing facility in question will remain. 

Final Thoughts

As President Trump is fond of saying, "we'll see what happens." However, I see a lot of capacity for  lawyerly mischief in all of this. Much as the NAFTA's Chapter 11 created incentives for ISDS suits unforeseen by negotiators, or domestic trade remedy laws are used to harass foreign producers, I can see the new labor provisions possibly being abused. Annex 31-A.11 includes "good faith use" language supposedly protecting against such abuse, but with the burden of proof placed on the respondent state and trade restrictions placed immediately on the suspect facility, I can imagine this mechanism being used for some competitive harassment. Moreover, while the focus of negotiators has been mostly on Mexican labor laws and enforcement, what if (like NAFTA Chapter 11) all of these rules are turned on Canada and the United States and the enforcement of their labor laws? I suspect Mr. Trump will not be quite so effusive about his negotiating prowess then.

Another Blow to Trilateralism

Finally, there is also an Annex 31-B, Rapid Response Mechanism between Canada and Mexico. Hence, institutionally, we have another patchwork that undermines the notion of trilateralism; two rapid response mechanisms, one for U.S.-Mexico, one for Canada-Mexico, but nothing for Canada-U.S. Annexes 31-A and -B are identical texts, but reinforce the idea that Mexico is different, an unequal partner in shared prosperity that is more of a threat requiring special provisions. 

Last time I checked, the whole point of an integrated single market was to lift everyone's living standards. Too much of the USMCA entrenches the balkanization of North America's living standards....Saying the USMCA "could have been worse" is cold comfort. given the political rhetoric of the day (walls, anti-immigration, vilification), it may be that the USMCA is all we can hope for.