North Carolina Journal of International Law

"Connecting North Carolina to the World of International Law"

Consequences for Renegotiation of Chapter 19 of NAFTA

By: Emma Nunn

 

 

 

 

 

 

On August 16, 2017, Canada, Mexico, and the United States began renegotiating the North American Free Trade Agreement (“NAFTA”), a twenty-three year old trade deal.[1] The “daunting challenge”[2] that the NAFTA renegotiations present has been a cause for discourse and discord in the three nations. While all sides agree that NAFTA must be modernized,[3] the initial goal of reaching a settlement by early 2018 is beginning to look more like a dream and less like a reality. Among the roadblock issues is a dispute resolution mechanism laid out in Chapter 19, a seemingly obscure section of NAFTA that has long been a point of contention between the parties.[4]  Chapter 19 allows five member bi-national panels to review controversial antidumping and countervailing duty laws between the NAFTA nations.  While the outright elimination of Chapter 19 would have substantial international repercussions, especially in the industry of softwood lumber[5], the NAFTA signatories should focus on streamlining the determination process and allowing some kind of enforcement for the Chapter 19 panel decisions.

Current Chapter 19 Review and Dispute Settlement Mechanisms

Chapter 19, Review and Dispute Settlement in Antidumping/Countervailing Duty Matters, transfers the judicial review of antidumping and countervailing duty government investigations from the judiciaries of the three NAFTA nations to binational panels of private international law experts.[6]  Through these panels, exporters may challenge antidumping determinations that the importing party makes in a neutral setting.[7] Article 1902 instructs panels to apply the domestic antidumping laws of the importing party’s nation,[8] and Article 1904 states that panels must apply the domestic law in a manner that is in accordance with how “a court of the importing party would otherwise apply” the antidumping law.[9] Panels are made up of five nonpermanent members, and each signatory retains the ability to challenge another’s judge selection.[10] Panel decisions are binding on the nations.[11]

The only mechanism of review allowed is review by an “Extraordinary Challenge Committee” (“ECC”).[12] ECCs do not conduct appeals of panel decisions, however; they merely investigate whether or not a decision has been materially affected by either a conflict of interest of a panel member or whether a panel has departed from a fundamental rule or exceeded its authority.[13] Chapter 19 allows parties to adopt domestic law in response to a panel decision; however, any subsequent legislation must comply with the panel ruling.[14] This “hybrid” system of international dispute settlement is an unusual surrender of national sovereignty to an international body.[15]

“Dumping” policies price exports at far less than their “fair”, or domestic, value.[16] Typically, this kind of a pricing policy is motivated by a manufacturer’s desire to corner to global marketplace.[17]  In the United States, two administrative agencies control antidumping law: the Department of Commerce and the International Trade Commission.[18] Countervailing duty (“CVD”) laws provide for duties on products which have been unfairly subsidized by the country of origin.[19]

Possible Repercussion of Removing Chapter 19

Chapter 19 has its roots in the Canada-US Free Trade Agreement (CUSFTA), which was negotiated prior to NAFTA’s existence.[20]  In the negotiation of this deal, Canada pushed for “reliable access to lucrative US markets,”[21] while the United States remained unwilling to exempt Canada from trade protections they perceived as necessary, especially in the lumber industry.[22] Chapter 19 was intended to breach the gap between the two nations;[23] however, it has had the opposite effect. In fact, the provision is considered so important that in the original treaty negotiations, Canada almost walked away from the table when the United States wavered on Chapter 19.[24]  Canada has reaffirmed its commitment to keeping Chapter 19[25], knowing that its’ elimination has been one of President Trump’s top priorities in the negotiations from day one.[26]

How, then, would the countries be affected if Chapter 19 were removed? The largest point of contention between the two nations is the softwood lumber industry.[27] The United States has long been the largest market for Canadian softwood lumber.[28] Canadian lumber is cheaper and easier to export than American lumber, [29] and unlike lumber from the United States, Canadian softwood lumber is grown on publically owned lands.[30]  In the United States, lumber is grown and harvested on privately owned lands and priced accordingly.[31]  Canadian lumber companies charge a “stumpage” fee for the right to harvest lumber on public lands,[32] which have long been a point of contention with US suppliers,[33] who claim that these fees are below the market rate and effectively subsidize the industry. [34] Chapter 19 was meant to alleviate the tensions between the two nations caused by the softwood lumber industry after years of unsuccessful agreements and appeals to domestic courts.[35] However, more often than not, panels have showed greater deference to Canadian parties and given more leeway to Canadian agency determinations.[36] This disparity has led to debate over possible domestic legislation in the United States as the government tries to find ways to circumvent panel rulings, instead of continuing the policy of agency cooperation with essentially un-appealable panel determinations.[37]

Recommendations Moving Forward

Despite the chill that Chapter 19 has imbued into the otherwise friendly relationship between the United States and Canada, it has been undeniably effective in mitigating disputes in the softwood lumber industry[38], and it would be unwise to eliminate the section entirely. Despite the unexpected length of panel proceedings, the binational panels have proved to be more qualified and impartial than their domestic counterparts.[39]  Most decisions have been unanimous, and when they are not, have been very rarely split along national lines, even though judges risk domestic contempt by ruling against their home nation.[40] Further, Chapter 19’s implementation has actually decreased the number of AD/CVD actions brought. [41] Prior to the Chapter’s existence, the countries went back and forth on Softwood Lumber regulations, continuously creating new trade agreements when the old ones expired because each side perceived the other as doing it material harm.[42]

While it does not seem like a make-or-break section of NAFTA, abandoning Chapter 19 would have a range of possible consequences, and none would be favorable to any nation long term. The most negative possible consequence would be Canada’s abandoning of NAFTA.[43]  Chapter 19 is seen by some as the “compromise that saved [NAFTA]”[44] during the initial negotiations. The United States does one quarter of its all its international trade with Canada and Mexico[45] and cannot afford to damage relations with either nation. Even if Canada does stay in NAFTA if Chapter 19 is eliminated, the state of many industries, including softwood lumber, would be thrown into turmoil.[46] At one point, in 1986, Congress was debating over no less than six bills that would define United States CVD law in a way that would force Commerce to find a subsidy on Canadian softwood.[47] The United States does not have the time or resources to do something similar today[48]; therefore, it is more practical for the country to refine the preexisting agreement than to abandon the chapter and risk thousands of hours wasted on unnecessary legislation.

There are undeniably flawed aspects of Chapter 19; the most damaging of which is the potential for creating what one commentator (consider naming the commentator) refers to as a “hydra” of legislation from a single trade dispute.[49] Because the panels can only affirm or remand the decisions of agencies, one dispute can multiply into a tangled mass of NAFTA proceedings, and the final results rarely look like what the panels initially mandated.[50] Rulings in a party’s favor can be stripped of their meaning by legislative acts and domestic legislation that evade the mandated result of the panels.[51]

Many of the current issues with the Chapter 19 dispute resolution mechanism could be fixed if panels were given some way to enforce their rulings. The panel’s rulings are binding on the parties in that particular case, yet they are not binding on the dispute resolution panel in general; the body is not required to be consistent with itself.[52] An appeal process exists, but in appearance only.[53]  ECC appeals are rarely granted, and even when they are, holdings are seldom overturned.[54] This leaves parties with few options if they disagree with a ruling. Short of leaving NAFTA, there is not much they can do to dispute a ruling. The United States in the past has convinced Canadian parties to settle out of court rather than allow for the possibility of an unfavorable ruling.[1] It would be most practical to allow the panels to force the countries to comply with their decisions, whether through the threat of sanctions or otherwise.

Conclusion

The renegotiation of NAFTA is one of the most important international events of the year. Many parts of the agreement need refining, and Chapter 19 is certainly among them. Hopefully President Trump and the leadership of Canada and Mexico can renegotiate the treaty in a way that keeps important elements of the agreement, such as Chapter 19, but streamlines the outdated procedures, adds feasible methods of enforcement, and embodies the spirit of the original agreement.

[1]  The North American Free-Trade Agreement Negotiation Begins, The Economist (Aug. 17, 2017), https://www.economist.com/news/finance-and-economics/21726711-rewriting-north-americas-trade-rules-will-not-be-easy-north-american-free-trade. [Use Perma.cc for your links]

[2]  Id.

[3] Binyamin Applebaum, U.S. begins NAFTA Negotiations with Harsh Words, N.Y. Times (Aug. 16, 2017),  https://www.nytimes.com/2017/08/16/business/economy/nafta-negotiations-canada-mexico.html?_r=0. [Perma.cc]

[4] Alex Panetta, NATFA: Is Chapter 19 worth fighting for?, Macleans, (August 23, 2017), http://www.macleans.ca/economy/nafta-is-chapter-19-worth-fighting-for/ [perma: https://perma.cc/N73K-FWPW]

[5]  See Daniel N. Adams, Back to Basics, the Predestined Failure of NAFTA Chapter 19 and its lessons for the design of International Trade Regimes, 22 Emory Int’l L. Rev. 205 (2008) (describing the issues in the softwood lumber industry prior to the enactment of Chapter 19, any of which could potentially resurface if the Chapter was removed).

[6]  Stephen J. Powell, Expanding the NAFTA Chapter 19 Dispute Settlement System: A Way to Declaw Trade Remedy Laws in a Free Trade Area of the Americas?, 16 Law & BUS. Rev. Am. 217, 221 (2010)

[7] Id. at 223.

[8] North American Free Trade Agreement, U.S.-Can-Mex., ch. 19, Dec. 8 1993, 107 Stat. 2057 (Hereinafter NAFTA)

[9]  NAFTA, supra note 6 art. 1904 para. 3. (The panel shall apply the standard of review set out in Annex 1911 and the general legal principles that a court of the importing Party otherwise would apply to a review of a determination of the competent investigating authority).

[10] Adams, supra note 5 at 215.

[11] Powell, supra note 6 at 222.

[12]  Overview of the Dispute Settlement Provisions, NAFTA Secretariat, https://www.nafta-sec-alena.org/Home/Dispute-Settlement/Overview-of-the-Dispute-Settlement-Provisions (last visited Sep. 22, 2017). [perma: https://perma.cc/FC2R-TT4Y]

[13] Id.

[14] Adams, supra note 5, at 216 (“While Chapter 19 permits parties to alter their domestic law in response to a decision, the signatories to NAFTA are bound – both by their obligations under NAFTA and under the relevant domestic implementation legislation – to comply with the panel rulings.”)

[15] Powell, supra note 4.

[16] Edward Tracy, Comment, NAFTA Chapter 19 Binational Panel Reviews- Still a Zero Sum Game: The Wire Rod Decision and its Progeny, 27 Am. U. Int’l L. Rev. 173, 178 (2012).

[17] Id.

[18] Powell, supra note 6, at 230.

[19] Adams, supra note 5, at 211.

[20] Id.

[21] Id. at 212.

[22] Id. at 213.

[23] Id.

[24] see Chris Fournier, This Obscure NAFTA Chapter Could Be Canada’s Deal Breaker Again, Bloomberg Politics, (July 24, 2017), https://www.bloomberg.com/news/articles/2017-07-24/this-obscure-nafta-chapter-could-be-canada-s-deal-breaker-again.  Perma.cc

[25] Id.

[26] Applebaum, supra note 3.

[27] Adams, supra note 5, at 211.

[28] Id. at 217.

[29] Abby C. Foster, Summary and Explanation of the U.S.-Canada Lumber Dispute, https://pennstatelaw.psu.edu/_file/aglaw/Lumber_Trade.pdf (Last accessed Sept. 22, 2017) [perma: https://perma.cc/D9LX-DBC2].

[30] Adams, supra note 5, at 217.

[31] Id.

[32] Id.

[33] Id. at 218.

[34] Id.

[35] Id.

[36] Juscelino F. Colares & John W. Bohn, NAFTA’s Double Standards of Review, 42 Wake Forest l. Rev. 199, 215 (2007).

[37] Powell, supra note 4 at 231.

[38]  Adams, supra note 5 at  241-242 (describing the ways in which Chapter 19 has facilitated the process of negotiating lumber disputes between Canada and the United States and encouraged accountability between the nations).

[39] Id. at 233.

[40] Colares & Bohn, supra note 30 at 232 (“Panelists that rule against their own government, in favor of a petitioner, risk becoming unpopular with both governments involved.”).

[41] Adams, supra note 5 at 233.

[42] Id. at 217-24.

[43] Fournier, supra note 19.

[44][44] The North American Free Trade Agreement Negotiation Begins, supra note 1.

[45] Id.

[46] Powell, supra note 6 at 224 (supporting the view that Chapter 19 has decreased AD/CVD initiations by NAFTA countries against each other over time).

[47] Adams, supra note 5 at 219.

[48] See id.at 217-220 (describing the state of the softwood lumber dispute prior to Chapter 19’s implementation; today’s divided legislature would have even more of an issue passing laws relating to softwood lumber).

[49] Id. at 234.

[50] Id.

[51]Id., Powell, supra note 4.

[52]Tracy, supra note 13 at 212.

[53] Id.

[54] Id.

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