Why NAFTA's Chapter 19 may not be the right hill to die on

As Canadian trade negotiators pick through the positions on the NAFTA table, one of the trickiest is a dispute resolution system the U.S. wants to scrap.

Chapter 19 allows companies that feel their products have been unfairly hit with anti-dumping or countervailing duties to request arbitration. If a panel with representatives from both countries agrees, it can require the return of those duties.

Negotiators now face a choice of whether they should fight to keep it or use it as a bargaining chip to get something else. It's a system that has benefited Canada in the past, but it hasn't always worked.

If I were Canada, I would concede on this one and fight on other things.- Simon Lester, Cato Institute

Take Canada's infamous battle with the U.S. over softwood lumber.

In the early 2000s, lumber exporters took their case to a NAFTA panel, and won. But the U.S. didn't want to comply, and Canada eventually negotiated a settlement that didn't refund all the industry's money. When that brokered peace expired, the U.S. industry demanded another investigation and the country's Commerce Department levied additional duties, reigniting the dispute. 

"I think you could argue it hasn't really solved the problem they thought they had," said Simon Lester, a trade policy researcher at Washington's Cato Institute think-tank that promotes free-market principles. "If I were Canada, I would concede on this one and fight on other things."

As NAFTA negotiations come down to the crunch in Washington this week, U.S. Trade Representative Robert Lighthizer wants to eliminate Chapter 19. The Americans have never been fans of the way the panels work. 

So Canada has a tough decision to make: does it mount a vigorous defence of this imperfect tool? Does it try to convince the U.S. to replace it with something that might work better? Or does it give in, holding its fire for another front?

Heading into the talks, Canada's stated preference has been the first option. 

'Nobody else uses this'

The preliminary agreement in principle announced with Mexico Monday included some changes to Chapter 11, the investor-state dispute settlement system that allows companies to sue governments when changes in laws and regulations hurt their business.

But it's unclear where things stand on Chapter 19.

Mexico uses it just as much as Canada to push back against unfair American duties.

Lester's no fan of the U.S. Commerce Department's past behaviour in anti-dumping and countervailing cases. But he'd like to see a different approach.

"Nobody else uses this anywhere," he said. "It's not in any other trade agreement."

The European Union decided that member states wouldn't levy anti-dumping duties on one another in their common market. But Americans won't give up their ability to protect politically powerful industries like lumber and steel by punishing Canadian exporters with duties.

"It's dysfunctional," Lester said. "The big trade remedy users are running the show." 

Sometimes false dumping claims are overruled before they even get as far as a NAFTA panel, as happened Wednesday in a newsprint case.

But when they proceed and duties ensue, what's a poor lumber exporter to do?

Lester sees no reason Canada and Mexico can't use the U.S. Court of International Trade, which consists of professional judges that foreign companies should be able to trust to decide cases on their merits. 

"When I talk to trade lawyers today… and I say 'Do you see much difference between Chapter 19 and the Court of International Trade?' And they say no," he said.

And yet, Canadian politicians, stakeholder groups and former negotiators line up to defend the need for these five-person NAFTA panels.

"It achieved some mythical status because of the way the Canadians demanded it," Lester said.

'You can have your damn dispute settlement'

The mechanism was developed for Canada's first trade deal with the U.S. negotiated in the 1980s.

One of its architects, former Canadian negotiator Gordon Ritchie, recalls holding secret meetings with James Baker, the U.S. secretary of state at the time.

Prime Minister Brian Mulroney insisted on a fix for Canada's ongoing dumping duties headache and even flew Ritchie back to Ottawa at one point to brief cabinet on a decision to walk out of negotiations. Mulroney refused to take a call from President Ronald Reagan until the Americans budged.

"OK, you can have your damn dispute settlement proposal," Ritchie recounts Baker saying. 

Early on, it "worked a treat" on almost every kind of case, Ritchie said. Lumber was an exception, but "even on lumber it gave us more bargaining leverage than we would otherwise have had."

But things have changed.

Over time, a tool like this "loses its sharp edge," he said, and the U.S. Commerce Department "gets better and better at appearing to comply" without actually stopping its protectionist behaviour.

This may have been inevitable — in fact, Ritchie thought Chapter 19 would reach its best before date well before now. 

'Flagrant abuse'

The World Trade Organization now provides another way to appeal unfair duties that wasn't in place back then.

But a successful WTO appeal can't remand duties the way Chapter 19 does. What's more, the U.S. keeps blocking the appointment of any new judges to the WTO's appellate body, putting this system in jeopardy.

Canada can't let Chapter 19 go without a replacement, Ritchie thinks. 

"There has to be some guarantee in that agreement that the U.S. will not cheat," he said. 

The "flagrant abuse" of national security provisions only underscores why NAFTA must insist on fair play between partners, in Ritchie's mind.

Few understand American tactics better than Susan Yurkovich, president and CEO of B.C.'s Council of Forest Industries. 

"A firm and well-articulated system is critically important for any trade deal you make," she said. Her industry is still right in the thick of using Chapter 19 in the latest softwood lumber fight with the Americans. 

"You have to have a mechanism to resolve that."

Relying on the U.S. courts system, as Lester suggests, doesn't appeal to Yurkovich.

"Where do we end up in that world?" she said.

NAFTA panels are balanced with adjudicators from both countries, giving an industry like hers more confidence of a fair hearing.

The adjudication is also relatively fast, compared with taking a case to the WTO.

'Vicious son of a bitch'

Chapter 19 would be missed by those who need it. But would trading it off help Canada avoid some other potentially expensive concessions? A dairy market concession, for instance, could cost taxpayers and Canada's rural economy billions. 

It's not a straightforward call.

When it comes to negotiating, "Robert Lighthizer is a vicious son of a bitch," Ritchie said. "This may not be the hill that Mr. Trudeau wants to die on." 

As an alternative, the three NAFTA partners could commit to dispute settlement through WTO reform. The U.S. already agreed to that with the EU. 

"If you're in that sweatbox in Washington ... that may be a way out, politically," Ritchie said.