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A Closer Look at NAFTA’s Dispute Resolution Provisions

Posted July 26, 2017

Despite Prime Minister Trudeau having repeatedly stated that he will not discuss renegotiation of the North American Free Trade Agreement in public, his remarks at a press conference earlier this week left little room for doubt about Ottawa’s stance concerning one specific aspect of the talks that could potentially be a deal-breaker.

When asked about a recent newspaper account citing an unnamed “senior Canadian official” saying that the prime minister considers the NAFTA dispute settlement provisions that Washington wants to see scrapped, a “red line” he will not cross, Trudeau reiterated comments made last week by Ambassador David McNaughton that “a fair dispute resolution system is essential for any trade deal that Canada signs on to and we expect that to continue to be the case in any renegotiated NAFTA.”

Although Trudeau was alluding to a particular chapter of NAFTA, rather than the more general proposition that there must be some form of dispute resolution system in place, there are actually several mechanisms in the pact for resolving trade conflicts – something that often causes confusion.

Three main types of trade disputes are addressed in NAFTA, which are set out in separate chapters: Chapter 11 (litigation over the treatment of foreign investment), Chapter 19 (appeals of anti-dumping/countervailing duty decisions), and Chapter 20 (government complaints about compliance with NAFTA obligations).

The Chapter 20 state-to-state dispute resolution option has only been used three times since the agreement came into effect in 1994 and is generally acknowledged to have worked very poorly in practice; largely due to a novel but cumbersome “reverse selection” process that was designed to eliminate any impression of bias in the panel members. As a result, the NAFTA countries have more often than not opted instead to elevate such inter-governmental disputes to the World Trade Organization.

Under Chapter 11, a foreign investor of one NAFTA party can sue the government of another party (e.g., a Canadian company that has invested in the United States can sue the U.S. government) on the basis that it has been treated worse than its American competitors, or that it has generally not received treatment that was “fair and equitable.” A recent example of Chapter 11 in practice was the lawsuit filed by TransCanada Corp. when it sought to recoup $15-billion for what it alleged was the Obama administration’s politically motivated rejection of the Keystone XL oil pipeline.

While this sort of investor-state dispute settlement (ISDS) provision features in almost every international trade agreement, it has also been widely criticized for being overly secretive and lacking in transparency. More recently, ISDS has become a lightning rod for free trade opponents who contend the “unaccountable” process puts the interests of multinational corporations ahead of those of the public; and furthermore argue that such claims (or the threat of them) are “anti-democratic” insofar as they inhibit the capacity of domestic governments to pass legislation addressing legitimate public policy concerns, such as labour standards or health and environmental protection.

The NAFTA dispute procedure Trudeau was referring to is Chapter 19, which sets out a special appeals process regarding the imposition of anti-dumping and countervailing duties.  Such trade remedies are imposed on the basis of determinations by domestic agencies (in the United States, it is the Department of Commerce and the International Trade Commission) and the decisions of these agencies can be appealed to domestic courts (in the U.S., appeals go to the Court of International Trade, then the Court of Appeals for the Federal Circuit, and then the Supreme Court).

NAFTA Chapter 19, however, sets up a special appeals process that allows Canadian and Mexican respondents in U.S. proceedings to appeal the agency decision to an ad hoc NAFTA panel (i.e., private lawyers who act as judges in a particular case) instead of to domestic courts. The process is also available in relation to Mexican and Canadian anti-dumping and countervailing duty cases, taking appeals out of their domestic courts.

When reviewing U.S. agency decisions, a NAFTA Chapter 19 panel acts like the Court of International Trade, in the sense of reviewing the agency’s interpretation and application of U.S. law, and remanding to the agency if necessary. But unlike the Court of International Trade, NAFTA Chapter 19 panel rulings cannot be appealed.

More tomorrow on the historical background and significance of the Chapter 19 trade dispute resolution process and how bargaining over this contentious provision could possibly factor into the upcoming NAFTA talks.