Trade Compliance

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The Significance of NAFTA’s Chapter 19

Posted July 27, 2017


When Justin Trudeau said this week that a fair dispute resolution system is “essential” for any trade pact that the country signs and furthermore, reportedly told officials that NAFTA’s Chapter 19 dispute settlement provisions are a “red line” that his government will not cross, he was echoing the negotiating position of former Prime Minister Brian Mulroney in connection with the groundbreaking Free Trade Agreement between Canada and the United States.

After more than a year and half of talks, in October 1987, Mulroney shocked American negotiators by walking away from the table over what he called his “essential condition” – an impartial dispute-settlement mechanism that would give Canada a way to resolve trade conflicts outside of U.S. courts. The high-stakes gamble paid off and the resulting compromise became the CUSFTA’s Chapter 19, a new provision allowing for the replacement of judicial review for final trade remedy determinations with a binational panel review. Just two days later, an agreement was finally reached between the two countries.

Derek Burney, Mulroney’s chief of staff during the CUSFTA talks and a key player in the original NAFTA negotiations in his role as Canada's ambassador to Washington, said the reason why the Canadian side was willing to risk so much to get the dispute mechanism into the deal was because “we don’t trust their trade-remedy tribunals, we never have.”

Indeed, since a Canadian concern was that U.S. federal government agencies and tribunals were consistently not applying their own antidumping and countervailing duty law correctly and moreover that the U.S. court system couldn’t be relied upon to objectively review duties imposed by the U.S. government on Canadian imports in a timely manner, binational panel review – putting the process, at least in part, in the hands of non-nationals – was seen as an important concession. “We wouldn’t have the trade agreement if we didn’t get that dispute settlement,” Burney said.

NAFTA Chapter 19 is essentially a direct transcription of CUSFTA Chapter 19 with certain adaptations because of the addition of Mexico. The provision allows Canada/Mexico to bypass the U.S. judicial review process when the U.S. government imposes antidumping and/or countervailing duties after a Canadian/Mexican competitor has been determined to be gaming the rules of trade by receiving unfair subsidies or selling its products into the United States at below market prices to the detriment of an American industry. In such cases, Canada/Mexico can use Chapter 19 to create an independent, binational panel of five arbiters, trade experts agreed upon by both parties, who will decide whether or not the AD/CV determinations are legitimate based on U.S. domestic laws.

Some U.S. industries, most notably American lumber producers, have vigorously argued against the Chapter 19 dispute settlement mechanism, claiming that it prevents the United States from fully enforcing its own trade laws. Over the years, Canada has won numerous victories before these binational panels that have reversed decisions by U.S. officials to impose punitive duties on a wide range of goods such as cattle, magnesium, hot-rolled steel, color-picture tubes, greenhouse tomatoes and, of course, softwood lumber.  

“The Chapter 19 system is unconstitutional, unworkable in practice, and for decades has seriously undermined the enforcement of U.S. law against unfair trade practices by Canada and Mexico, to the detriment of U.S. industries and workers,” claimed a recent statement from the U.S. Lumber Coalition.  While these assertions are debatable, in the list of the Trump administration’s goals for renegotiating NAFTA, U.S. Trade Representative Robert Lighthizer says he will seek to “eliminate the Chapter 19 dispute settlement mechanism.”

According to research by Chad Bown, a senior fellow at the Peterson Institute for International Economics, having Chapter 19 as part of NAFTA has meant there are a lot fewer trade cases among the U.S., Canada and Mexico, in part because there’s a good chance they will be referred to a binational panel and eventually dismissed. Bown speculates that taking the provision away would likely result in “a lot more” anti-dumping and countervailing duty cases against Canada and Mexico.

Patrick Leblond, a senior fellow at the Centre for International Governance Innovation, arrives at a similar conclusion and paints a dire picture of what scrapping the dispute resolution mechanism would mean to trade and the economy:

If Chapter 19 were removed from NAFTA, then the Trump administration could more easily impose unwarranted antidumping and countervailing duties on all sorts of goods imported from Canada and Mexico for years and years until the dispute is ultimately settled by the U.S. court system.

For Canadian and Mexican producers affected by such duties, it would mean losses and, in some cases, shutting down their business altogether. For American consumers, such duties would mean higher prices for either the products that come from Canada or Mexico or for American products made with components imported from the United States’ NAFTA partners.

In return, to force the U.S. government’s hand, it is very likely that Canada and Mexico would retaliate immediately by imposing their own duties on various U.S. product imports. The end result would be a trade war in which everybody loses—and ultimately, it could mean the end of North America’s economic integration.

However, other experts question whether Chapter 19 is still needed, given that in the last decade Canada has only initiated three cases under the provision. Robert Wolfe, professor emeritus at Queen University’s School of Policy Studies in Kingston, suggests Canada may want to consider bluffing, and when push comes to shove, give in on Chapter 19 in exchange for something better, gaining concessions on Trump’s “Buy American” rules, for example, which restrict the ability of Canadian companies to bid on U.S. government contracts.

“If you had to choose between a real restraint on Buy American and keeping Chapter 19, I’d yell and pound the table and give up Chapter 19,” Wolfe said. “A lot more Canadian jobs might benefit from stopping discriminatory government procurement in the U.S.”