Canada, Mexico tell U.S.: Decide whether you want a NAFTA dispute settlement process

Canada and Mexico are applying pressure on the United States to decide whether it wants to be part of NAFTA's investor-state dispute mechanism, threatening to sideline it unless it commits to participating fully.

Multiple sources say the conversation came to a head this week over how to settle disagreements between states and corporations, with the two countries refusing to let the U.S. rewrite the rules for Chapter 11 of the agreement if it can't commit to being part of it.

Chapter 11 is the investment component of NAFTA — not to be confused with the bankruptcy filing term. NAFTA's Chapter 11 provides businesses with predictable investment climate and a dispute settlement procedure should issues arise.

The Trump administration wants the right to opt out of the binding dispute resolution panels, because it views them as an invasion of sovereignty and an incentive for companies to outsource to Mexico by guaranteeing them a forum to sue for unfair treatment.

"We basically said to them, 'If you want to opt out, that's fine — you're gone,'" said an official with knowledge of the talks who described the American reaction.

"You can imagine that the U.S. negotiators didn't like it."

Options becoming clearer

The source was one of several who agreed to discuss the issue on the condition of anonymity because of the sensitivity of the talks.

A series of options are beginning to crystallize behind closed doors, including:

• Canada and Mexico could sign a side-letter or annex to cover their co-operation on the subject in the agreement.
• Canada and Mexico could abandon the dispute resolution section altogether and rely on other forums, including using the dispute resolution provisions of the revamped Trans-Pacific Partnership that both countries signed this past week.

Along with auto content and a possible sunset clause, the dispute settlement process is one of three contentious areas where Canada and Mexico have tabled creative proposals at this week's talks to counter what were seen as untenable American ideas.

The success or failure of those efforts won't be known until Monday, when U.S. trade czar Robert Lighthizer pronounces on those efforts at a joint news conference with Foreign Affairs Minister Chrystia Freeland and Mexican Economy Secretary Ildefonso Guajardo.

Last Tuesday, as the talks opened in earnest, Canada's chief negotiator Steve Verheul asked his American counterpart, John Melle, whether the U.S. had changed its position on making the dispute resolution process voluntary.

No, Melle replied and, according to multiple sources, he stressed that the U.S. would not participate.

According to one of the Canadians, their message to Melle was: "You leave us no choice but to seek other arrangements in order to provide protection for investors."

Another source aware of the content of the talks said Canada doesn't like the U.S. answer and is considering the possibility that one section of the dispute resolution agreement will simply be left out of the agreement, allowing negotiators to move on to other issues.

Canada and Mexico have tabled different proposals but none have gained traction, the source said.

Canada modelled its proposal on what it negotiated with the European Union in its Comprehensive Economic and Trade Agreement, or CETA.

The CETA model established a new "investment court system" that would be public, and use professional and independent judges, moving away from the traditional temporary tribunal process.

U.S. businesses wary of certain portions of NAFTA

The Mexican proposal is closer to the current dispute resolution model, the source said.

One source said the Americans have said they may want to opt back into Chapter 11, but the source said as far as Mexico is concerned, "once you're out, you're out."

Trade lawyer Mark Warner said he believes Canada's position is a ploy to divert attention from a larger, related priority — saving Chapter 19, which lays out the appeal process for anti-dumping and countervailing duties.

The U.S. wants to scrap that section, but it is sacrosanct to Canada.

"It's an attempt to put the cat among the pigeons," Warner said.

The investment component provided by Chapter 11 isn't as critically important as some believe, Warner said, because Canada and Mexico will already have investor-state protections in TPP. In addition, Warner pointed to the World Bank's International Centre for Settlement of Investment Disputes.

But he said American business might get nervous about losing legal rights other countries have, and raise its voice against the U.S. proposals.

That appears to be a distinct possibility.

Neil Herrington, vice-president of the U.S. Chamber of Commerce, said in an interview that the investor-state protections are critical to American businesses.

One of the non-American officials at the talks appeared to invite them to raise their concerns.

"Well," he said, "U.S. stakeholders should talk to their government."