August 31, 2018 / 10:48 PM / in 3 months

Dispute resolution in focus as NAFTA talks drag

TORONTO/WASHINGTON (Reuters) - Canada and the United States ended talks to revamp the North American Free Trade Agreement (NAFTA) on Friday without reaching a deal. One longstanding issue is Chapter 19 of NAFTA, a dispute resolution mechanism that the United States significantly scaled back in a bilateral deal it reached with Mexico.

Flags of the U.S., Canada and Mexico fly next to each other in Detroit, Michigan, U.S. August 29, 2018. REUTERS/Rebecca Cook

WHAT IS CHAPTER 19?

Chapter 19 gives the United States, Canada and Mexico the right to challenge each others’ anti-dumping and countervailing duty decisions in front of an expert panel with members from both countries involved in a dispute.

Anti-dumping cases are used to block imports on the basis that the exporting country is not trading fairly, for example by subsidizing a domestic industry so it can set low prices.

WHY HAVE A DISPUTE MECHANISM IN NAFTA?

When NAFTA and the earlier Canadian-U.S. Free Trade Agreement were negotiated, Canada pushed the United States to give up the right to bring anti-dumping cases against its neighbors completely, but the United States refused.

Chapter 19 was a compromise. During a speech in Ottawa last year, Canadian Foreign Minister Chrystia Freeland reminded her audience that Canada had walked out of trade talks with the United States in 1987 over the issue.

WHO HAS BENEFITED FROM CHAPTER 19?

The system has not been used heavily in the last 10 years. The best known cases, and all of the currently active cases that involve Canada, are about softwood lumber. Active cases between Mexico and the United States cover U.S. fertilizer, and steel pipe and washing machines made in Mexico.

In the mid-2000s, in the midst of the last round of softwood lumber disputes, Chapter 19 panels repeatedly ruled against the United States, before the Canadian government cut a deal that temporarily ended the dispute.

“Canada’s negotiating position at the very least was significantly strengthened by the determinations it was getting under the Chapter 19 process,” said Matthew Kronby, a trade lawyer with Borden Ladner Gervais in Toronto.

ARE THERE ALTERNATIVES TO CHAPTER 19?

Anti-dumping or countervailing duties can be challenged in the courts of the country imposing the duties.

Another option is the World Trade Organization, whose 164 members have the right to challenge each other over unwarranted trade restrictions, illegal subsidies and other unfair practices. But Kronby said Chapter 19 panels have the effective power of a domestic court, while the WTO does not, which makes its decisions easier to ignore.

The United States has criticized the WTO dispute settlement process and is currently blocking appointments and reappointments of judges. Because three judges are needed on each appeal, the system looks set to break down when two judges’ terms expire in December 2019.

ARE THERE REASONS FOR CANADA TO COMPROMISE?

While Canada has stood firm on Chapter 19 so far, giving up the dispute mechanism would not hurt as much as compromising on the dairy industry, which is the other contentious issue in the talks. Canada’s 11,280 dairy farmers form one of the country’s most influential political lobbies.

“We don’t use it as much as people think, it’s not as effective as people think,” said Toronto-based trade lawyer Mark Warner, who argues that Chapter 19 may not be worth fighting for. “The question is, Do we have 25 percent tariffs on our cars and no NAFTA in order to make a point about Chapter 19?”

Others say it is more important than ever.

“Look at the amount of protectionist measures introduced by the U.S. in the last couple years,” said Brian Kingston, a vice president at the Business Council of Canada. “If this is a trend that is only going to get worse, then Canada needs a mechanism to respond.”

Reporting by Julie Gordon in Washington, D.C., and Allison Martell in Toronto; Additional reporting by Tom Miles in Geneva; Editing by Denny Thomas and Leslie Adler

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