New NAFTA Settlement, Same Old Dispute

Why Canada is willing to risk everything to preserve NAFTA’s dispute-settlement system, and why, perhaps, it shouldn’t be.

by Jaquelin Coulson

During the 1987 negotiations of the Canada-United States Free Trade Agreement, then Prime Minister Brian Mulroney identified one particular provision as the “essential condition” for Canada’s acceptance of the deal. Later, in 1994, it was scrupulously carried over into the North American Free Trade Agreement (NAFTA). Today, in the midst of tense renegotiations and the US administration’s stated aim to “eliminate” the dispute-settlement clause, NAFTA’s Chapter 19 may once again become the hill that the Canadian government is willing to die on. 

Formally titled the “Review and Dispute-settlement in Antidumping/Countervailing Duty Matters,” Chapter 19 provides a mechanism by which NAFTA parties can appeal the decisions of trade partners to levy either countervailing duties on exports which they consider to be subsidized by the exporting government, or antidumping duties on goods which are sold below market price. Under the dispute-settlement provisions, countries can have these duties reviewed by a binational panel of five mutually agreed-upon trade experts, rather than by domestic courts. The panel’s decision is binding; however, the panel determines only whether the importing government is following its own trade laws, not whether the laws themselves are ‘reasonable’ or ‘just.’ This mechanism entails a compromise that enables a bypassing of domestic courts without eliminating state sovereignty over the matter.

For Canada, the dispute-settlement mechanism is a safeguard against its larger and sometimes “heavy-handed” trade partner. In 2016, trade with the US accounted for 76.3% of Canada’s exports, and 52.2% of imports, while only 12.6% of American imports and 18.8% of exports were exchanged with Canada. Canada’s generally higher dependence on American trade partially explains its insistence on having a neutral arbiter to prevent the US from taking advantage of its lesser bargaining power by levying unfair duties. Mulroney’s former chief of staff Derek Burney has illuminated this concern quite simply in saying, “we don’t trust [American] trade-remedy tribunals, we never have.” Proponents of the dispute-settlement mechanism continue to doubt that the US International Trade Administration and court system could deliver truly unbiased judgements on antidumping and countervailing duties, and the fact that NAFTA panels have historically tended to favour Canada lends weight to these concerns. 

This mistrust toward the American system applies also to its lack of expeditiousness. Chapter 19 dictates that final panel decisions must be issued within 315 days of the request for review, and although these deadlines are not always met in practice, an early assessment of the dispute-settlement mechanism found that cases filed and appealed with a NAFTA board took only 42% as long as those filed with the US Court of International Trade and appealed to the Court of Appeals for the Federal Circuit. For companies with high volumes of cross-border trade, timeliness can mean the difference between bankruptcy-inducing deficits and recoverable short-term losses.

A prominent example of the dispute-settlement process is seen in cases concerning Canadian exports of softwood lumber, an issue which flared up every few years between 1982 and 2006, until the signing of the Softwood Lumber Agreement cooled tensions somewhat until its expiry in 2015. America’s grievance is essentially that Canadian lumber producers benefit from using public rather than private land, and pay ‘stumpage’ fees that are so low as to constitute a government subsidy. Canadian producers have also been accused of ‘dumping’ their products into the US at less than their Canadian market cost, imparting an artificial advantage. In response, the US levies countervailing duties to insulate American lumber producers from unfair competition. As of November 2017, the Canadian government has requested that a NAFTA panel review what is now the fifth softwood lumber dispute since 1982. Former trade diplomat Colin Robertson says that the perpetuation of these disputes “underlines why Chapter 19 is essential.” Indeed, it’s estimated that Canadian softwood producers will pay $3.4 billion in duties over the next two years before reaching a settlement on the matter, but if the US succeeds in eliminating Chapter 19, the costs could ultimately be far greater.

Beyond merely redressing unlawful levies, there is evidence to suggest that Chapter 19 has had a “chilling effect,” in which the mere threat of filing with a NAFTA panel induces countries to police themselves and act lawfully. A study by Washington’s Peterson Institute for International Economics found that NAFTA partners have imposed far fewer antidumping and countervailing duties on each other than on other trade partners. In the US, for instance, only 1.3% of NAFTA imports were subject to such duties, as opposed to 9.2% of imports from China, and 2.7% of those from the rest of the world.

While these factors seemingly give Canada ample reason to uphold the Chapter 19 provision, some have doubts as to how necessary NAFTA’s dispute-settlement system really is. Queen’s University Professor Robert Wolfe posits that after 23 years of North American free trade, trilateral supply chains have become so integrated that imposing duties on Canadian imports would do more harm than good to American businesses and consumers, particularly in sectors like the automotive industry which require frequent cross-border trade. In the case of softwood lumber, home construction firms for instance strongly oppose duties on Canadian lumber, as they only raise production costs and translate to lower profits. Skepticism about Chapter 19’s necessity is further entrenched by the fact that Canada has utilized the dispute-settlement process only three times in the past decade, as opposed to dozens of times in the early years of NAFTA. Moreover, even if North American economic integration is not as complete as to do away with dispute-settlement provisions entirely, the development of a similar mechanism by the World Trade Organization has made NAFTA’s system less crucial, and arguably even “redundant.” Similar to Chapter 19, the WTO’s mechanism assesses whether duties contravene WTO rules, and a ruling in Canada’s favour would compel the US to reimburse unlawfully levied duties. 

The effectiveness of NAFTA panels has also faced doubt. According to former Canadian ambassador Derek Burney, the Americans “tend to ignore rulings they do not like,” and there is nothing in Chapter 19 which prevents countries from simply modifying their laws to align with trade practices which were previously ruled unlawful by NAFTA panels. Consequently, Canada may be better off conceding the Chapter 19 issue in exchange for a victory on another important matter, such as ending discriminatory government procurement policies.

For the time being though, Prime Minister Trudeau and Minister of Foreign Affairs Chrystia Freeland are framing the dispute-settlement provision as a prerequisite for Canada’s compliance with a renegotiated NAFTA. Whether this is their sincerely-held position or merely a strategic bluff, it will undoubtedly create tension with US negotiators. The question is whether disagreement over Chapter 19 will be enough to sink NAFTA altogether, and on that matter, only time will tell.