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September 4, 2018

To: The Hon. Chrystia Freeland, Minister of Global Affairs

From: Christopher Sands

Re: Alternatives to NAFTA Chapter 19

Date: September 4, 2018

The status of the Chapter 19 dispute resolution provision is the most vexatious remaining issue in the NAFTA negotiation endgame. This mechanism uses binational panels that have the power to require domestic agencies that make antidumping and countervailing duty (AD/CVD) determinations to change them, if they find those determinations were made in a way inconsistent with their own countries’ laws. 

The United States wants to eliminate NAFTA Chapter 19 panels in the name of restoring sovereignty, while Canada sees them as a valuable method to resolve disputes impartially, rather than through US or Canadian courts, at a World Trade Organization panel, or through state-to-state mechanisms.

Mexico appears to have given up on Chapter 19 as part of its bilateral agreement in principle, further undermining the trilateral NAFTA Chapter 19.

If Chapter 19 cannot be retained, there are three “Plan B” options for Canada.

1.     Revive CUFTA Chapter 18

Canada-U.S. Free Trade Agreement (CUFTA) Chapter 18 allowed for the establishment of a cabinet-level “implementation commission” to address general disputes. To the extent this chapter is reflected in NAFTA, it was in NAFTA Chapter 20, which sets up a North American Free Trade Commission made up of the trade ministers of the three NAFTA partner countries to discuss further liberalization and possible coordination of positions in relation to trade negotiations beyond North America, such as in World Trade Organization rounds.

Veteran Canadian trade negotiator and litigator Lawrence Herman has argued for the use of NAFTA Chapter 20 mechanisms as an alternative to Chapter 19 panels. In part, Herman’s reasoning is that whereas NAFTA Chapter 19 panels review agency decision-making in the application of AD/CVD against the requirements of domestic law to protect against arbitrary or unfair use of such duties, there is a need for an a priori dialogue on economic integration and policy responses that would be better held at the cabinet level. This could be initiated under NAFTA Chapter 20 as Herman suggests, but also under CUFTA Chapter 18, with the main differences being that CUFTA Chapter 18 commissions would not include Mexican representation but would allow for participation by cabinet-rank individuals other than the trade ministers (e.g. foreign ministers, environment ministers, defence ministers, or others such as the US Vice President and Canadian Deputy Prime Minister as appropriate).

2.     Revive CUFTA Chapter 19

If NAFTA Chapter 19 was eliminated, Canada could seek to revive CUFTA Chapter 19. CUFTA’s Chapter 19 was the model for NAFTA Chapter 19. The latter added Mexico and allowed for trilateral panels, and the United States also insisted on language restricting panellists to judges and former judges because economists and other academics permitted to serve on CUFTA Chapter 19 panels were considered insufficiently deferential to governmental determinations.

The advantages of reviving CUFTA Chapter 19 include the fact that the system is familiar, and it has already been approved by Congress and Parliament. Since CUFTA application was only suspended when NAFTA was ratified, not repealed, reviving Chapter 19 would not necessarily spark a difficult legislative debate.

3.     Recourse to Domestic Court Review

Before 1989, disputes over AD/CVD determinations were appealed by affected firms in domestic courts, specifically the Canadian International Trade Tribunal and the US Court of International Trade. If bilateral and even multilateral dispute settlement bodies undermine sovereignty as Ambassador Robert Lighthizer contends, the recourse to domestic court review is a logical goal for the United States.

The Government of Canada, and Canadian firms, should not assume that the US Court of International Trade (and the Court of Appeals for the Federal Circuit, the court to which decisions of the CIT are appealed) cannot provide a fair review of US agency decisions. Recent cases have shown a willingness to overrule federal agencies in favour of foreign plaintiffs.

Canada might make a more compelling case that the United States might not want AD/CVD disputes to be exclusively adjudicated before its own Court of International Trade in light of recent judicial reconsiderations of the principle of “Chevron deference” in administrative law. Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. was a landmark case in which the United States Supreme Court set forth the legal test for determining whether to grant deference to a government agency's interpretation of a statute which it administers. Attorneys General for 17 US states have called for reducing or eliminating Chevron deference, and in 2017 the House of Representatives passed a bill to end Chevron deference.

Reduced judicial deference to agency interpretations, whether as a result of a judicial or legislative action in the United States, could make the U.S. Court of International Trade a riskier venue for the U.S. government to defend AD/CVD determinations. The US Trade Representative may be persuaded that retention of NAFTA Chapter 19, or the revival of CUFTA Chapter 18 or 19, offer better options for preservation of the U.S. trade remedy system than recourse to domestic courts.

Canada’s Plan A Must be a Trade Deal with the United States

The importance to Canada of market access to the United States is too great to allow the Government of Canada to abandon talks over the issue of NAFTA Chapter 19. President Trump’s recent insistence on this point was undiplomatic, but not inaccurate. If a trilateral agreement including both the United States and Mexico is not attainable, a bilateral agreement between the United States and Canada must be secured. In either context, AD/CVD disputes will continue and a means to address these is important for Canadian firms. If the United States will not compromise on the elimination of NAFTA Chapter 19, Canada does have Plan B options it can pursue.

 

Christopher Sands is senior research professor and director of the Center for Canadian Studies at the Johns Hopkins University School of Advanced International Studies (SAIS) and a nonresident senior associate of the Center for Strategic and International Studies (CSIS) in Washington.

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.