Is Dispute Settlement a Hill Worth Dying On?

Those of us following the progress (or lack thereof) through the first several rounds of talks aimed at renegotiating the NAFTA have lamented the difficulty posed for Canada and Mexico by a number of American negotiating positions; among them, tough positions on government procurement, investment protections, and rules of origin. Yet it is the American position on Chapter 19 dispute settlement that seems to be giving Canada one of the biggest cases of heartburn. Frankly, I am not sure why?

There are two reasons for my skepticism. First, Chapter 19 is far more limited in it's capacity to "adjudicate" disputes than is commonly believed. Second, data indicate that the incidence of NAFTA disputes is low, not because of dispute settlement, but because North America has become so integrated that the scope for these disputes is falling.

I'm not suggesting that Canada and Mexico should simply acquiesce to American demands on Chapter 19. But I do think Chapter 19 has become more of a psychological barometer of their relationship with the United States than a mechanism delivering sufficient value to be worth scuttling the talks. I'm not sure Chapter 19 is a hill worth dying on.

What is Chapter 19?

Trade buffs will know that NAFTA Chapter 19 set up a dispute panel system to deal with the application of domestic anti-dumping and countervailing (anti-subsidy) duties levied against imports from NAFTA members.  The idea was to take review of the application of these duties out of the national court systems and place them in some kind of quasi arbitral system. Anti-dumping and countervailing duty laws exist everywhere and are designed to protect domestic industry from the effects of dumping by foreign firms and/or subsidies to those firms conferred by foreign governments.

Progress So Far

In principle, such trade remedy laws are designed to level the competitive playing field. The reality is that national legislatures write these laws in ways obviously favourable to domestic commercial interests. More to the point, trade remedy laws are written in ways giving administrative agencies broad latitude in their application so as to defend domestic interests. To state the obvious, trade remedy statutes are among the most politically sensitive in any country; second only perhaps to agriculture and entitlements.

A dispute settlement system, it was thought, might take some of the air out of the politics, making the application of those duties fairer and less arbitrary. Moreover, by moving legal challenges to these laws away from domestic court systems and into bi-national dispute panels, some believed the legal process would be fairer as well.

Hills 1987 and 1993

In the fall of 1987, Canada and the United States were facing an October Congressional deadline for completing bilateral free trade negotiations. Among the final sticking points was dispute settlement around trade remedy laws. In the midst of a late September round of negotiations in Washington, the Canadian delegation got up and walked away (pictured below) from the table over American unwillingness to have trade remedy laws subject to dispute settlement. For a short time, the entire deal seemed dead.

A "Trade Time Out" 1987 Style

Canada wanted the agreement to permanently exempt each country's products from the application of trade remedy laws-- indeed, this was initially a red-line bargaining position for Canada. Maintaining the applicability of trade remedy laws in the context of a trade agreement ostensibly aimed freeing trade strikes many as inherently contradictory. For the U.S., both exemption from trade remedy laws and the creation of a supranational dispute settlement process with extra-judicial powers were both off the table.

When Canada came back to the negotiations, the two sides agreed to something that fell quite some distance short of what Canada wanted. Instead, Chapter 19 of the Canada-U.S. Free Trade Agreement included a bi-national dispute settlement mechanism to which Parties agreed to have disputes heard. However, the panel system's scope was limited in two very important ways: 1) panels could only investigate and rule upon whether administrative agencies actually applied domestic law as it was written. In other words, had they followed their own rules, and 2) rulings were essentially advisory. The panel had no enforcement power to force agencies to change anything.

Nevertheless, when the NAFTA negotiations began in 1990, Mexico figured it would give exemption from trade remedy a second try. Canada was rightly skeptical of Mexico's efforts, but both were eventually lucky just to get Chapter 19 enshrined in the NAFTA. As limited as it is, American legislators and subsequent administrations have had grave doubts about Chapter 19 from its inception; many arguing it created an unconstitutional, extra-judicial process by which foreigners could challenge U.S. law.

But Does it Work?

If Canada and Mexico are currently angst-ridden over America's NAFTA 2.0 position on Chapter 19, that must be because America is always losing cases, right? Perhaps Chapter 19's limitations are not so limiting after all? In 2002, Patrick Macrory argued that Chapter 19 had been successful in dissuading some of the more arbitrary applications of U.S. trade remedy law to Canadian and Mexican products. Yet, Chapter 19 has also been an abject failure in resolving disputes like softwood lumber. Indeed, every adverse determination by a Chapter 19 panel against American duties comes a new round of administrative investigations and Chapter 19 panels, eventually resulting in a politically negotiated settlement. As long as there's no supranational police power enshrined in dispute settlement mechanisms like Chapter 19, there will always be scope for one side to ignore the mechanism's findings.

Recent data presented by the Petersen Institute's Chad Bown suggests that the real reason for the apparent "effectiveness" of Chapter 19 may be connected to the process and depth of North American integration. Indeed, Bown demonstrates that between 1994 and 2016, the application of trade remedy laws by NAFTA countries against one another has declined and remained low (softwood lumber being an obvious outlier). One reason, Bown argues, is that growth of cross-border intra-industry trade has inherently undercut the rational for private actor claims of injury due to dumping or subsidy by a NAFTA partner. Moreover, each of the NAFTA countries is increasingly applying their trade remedy laws to the same non-NAFTA products from the same non-NAFTA countries.

In other words, it's North American integration itself-- not the dispute settlement mechanisms themselves-- that are driving the decline in anti-dumping and countervailing duty cases by NAFTA parties against NAFTA parties.

A Psychological Barometer

Hence, I think one of the more important components of NAFTA Chapter 19 for Canada is psychological. Chapter 19 has become a touchstone, of sorts, for Canada in terms of how it's being treated by the United States generally. For example, every time there's a Chapter 19 ruling in Canada's favor in the softwood lumber dispute and America more or less ignores it, a loud hue and cry in the Canadian press immediately goes up; American flouting the rule of law, America ignoring trade rules, or America is violating the spirit of the NAFTA.

In essence, Chapter 19 has become a symbol of access to American decision-making, a lever to be pulled to make Canada's case on trade issues that are invariably more important north of the 49th parallel than they are to the south. Chapter 19 is a formalized forum in which to drag the American side to the table to hear Canada's complaints about their treatment.

Moreover, Chapter 19 dispute settlement is something that the Americans have never extended in any other trade agreement... EVER. Canada (and Mexico) are special. Hence, given my doubts about the utility of Chapter 19 in resolving disputes, it's likely that it's become symbolic of the "special-ness" and regard with which Washington views its relationships with Canada and Mexico. For Donald Trump, Mexico certainly isn't "special," but neither is Canada.

How Red a Red Line?

So,... exactly how hard should Canada and Mexico push to preserve Chapter 19 in NAFTA 2.0? Should they demonstrate their resolve and stage a walk-out similar to that staged by Canada in 1987? My answer is no! Let it go! There are bigger fish to fry in these talks. Preserving and facilitating the deepening of North American integration is the greater, more long-lasting solution to any harassment from trade remedy laws. Even the dreaded softwood lumber dispute will eventually go away as firms, workers, and the supply of wood products both transcend and move unimpeded across borders.