Disputing the dispute settlement mechanism: Chapter 19 again

  • August 24, 2017
  • Doug Beazley

The negotiation of the bi-national dispute settlement mechanism in the Canada/United States Free Trade Agreement of 1988 is one of those David and Goliath stories diplomats like to tell over long lunches.

Canadian negotiators demanded it. American negotiators balked at it. Prime Minister Brian Mulroney threatened to appeal directly to President Ronald Reagan over it and (according to the version of the story Mulroney tells) Treasury Secretary James Baker finally slapped a memo agreeing to it on a table in front of the Canadian negotiating team — with just minutes left on the clock before congressional authority to fast-track a trade deal was set to expire.

There’s your goddamn dispute settlement resolution,” Baker is supposed to have said.

Thirty years ago, the dispute over dispute settlement came close to scuttling the entire free trade project for a generation. Now the issue is threatening to do the same to the North American Free Trade Agreement — thanks to a U.S. president vocally skeptical of trade pacts and determined to redeem a chaotic rookie year in office with a win on the trade front.

On July 17, President Donald Trump’s administration released its list of goals for the renegotiation of NAFTA — among them the elimination of Chapter 19, the dispute settlement mechanism that was carried forward from the old Canada-U.S. FTA in 1994.

C. 19 allows NAFTA nations to do an end-run around domestic court systems – in cases where one nation imposes anti-dumping or countervailing penalties on another – by convening an independent, ad-hoc, bi-national NAFTA panel to rule on whether the penalties are fair.

The government of Prime Minister Justin Trudeau says it’s willing to follow Mulroney’s example and threaten to abandon the talks entirely if the Americans insist on killing C. 19. Most Canadian legal experts on multinational trade law seem to agree that Canada did right by drawing a line in the sand early.

“At some point it becomes worthwhile to call the administration’s bluff,” says Gus Van Harten, who teaches international investment law at York University. “Even in the event of NAFTA being abandoned by the U.S., we’d have fallback positions in the Canada-U.S. Free Trade Agreement and the World Trade Organization.

“Every trade deal has to have some sort of state-to-state dispute settlement mechanism. If you don’t have that … it puts us in a position of permanent dependency. A trade deal without an enforcement section is just a set of promises. It’s not meaningful.”

The Trump administration’s case against C. 19 breaks down into two silos — the political and the legal. Politically, the administration ties C. 19 in with a broader narrative that portrays NAFTA as a sellout of American interests.

“Trump wants it gone because it irritates him,” says Louise Barrington, a chartered international trade arbitrator who splits her time between Toronto and Hong Kong. “It irritates him that C. 19 appears to impinge on United States sovereignty in the sense that it interferes with the U.S.’s ability to do whatever it wants to do in terms of applying its own laws.

“One of the reasons why international arbitration is so popular in trade deals is that the parties themselves do not trust the other side’s court system to do the right thing. They figure they’ll get short shrift in the other country’s courts.”

Underlying American distrust of C. 19 is the belief that its panels go easier on foreign appellants than they do on countries imposing trade penalties. And Americans do have a reason for feeling singled out: Of the more than 70 cases brought to C. 19 panels under NAFTA, the United States was the target in 47 of them.

But there seems to be no evidence of nationalist bias among the lawyers and retired judges serving on C. 19 panels. Riyaz Dattu, an international trade lawyer at Osler, crunched the numbers: Out of those 47 cases Canada or Mexico brought against the U.S. under C. 19, 36 were decided unanimously.

“There’s no proof that the panels break down along national lines,” he says. “And there’s no proof that U.S. courts necessarily would be easier on U.S. businesses than the current system.”

“The U.S. tends to point to the cases it lost as proof the system doesn’t work,” says Andrea Bjorklund, the L. Yves Fortier Chair in International Arbitration and International Commercial Law at McGill. “But it’s not reasonable to assume that the fact that they lose a case means they didn’t get a fair shake. There’s no evidence of systemic bias on these panels that I know of.”

The legal argument against C. 19 is on far more solid ground. Many constitutional scholars in the U.S. have argued that multinational trade dispute resolution panels violate the U.S. Constitution’s “appointments clause” – which gives the president the authority to appoint federal officials with the “advice and consent” of the U.S. Senate — by allowing officials for whom the president and Senate are not accountable to interpret, or overturn, American law. Others argue the U.S. Supreme Court has always interpreted the clause as having an attenuated effect on matters of diplomacy and trade — meaning C. 19 is probably in the clear, constitutionally.

In the final analysis, the constitutional status of C. 19 may be a moot point. The mechanism simply doesn’t get used very often these days. Canada has filed under C. 19 just three times in the last ten years, while the Americans haven’t taken a case against Canada to a C. 19 panel since 2005.

Thanks in large part to the FTA and NAFTA, over the years the supply chains driving businesses in all three countries have become far more integrated. Countries are less likely to impose trade penalties if they’re only going to boomerang on their own economies. Even if Trump doesn’t know this, Congress does.

“By drawing that red line early, Canada put itself in a position to call his bluff,” says Barrington. “I don’t think Trump has the party support to pull out of NAFTA.”

The irony here is that C. 19 isn’t even the most controversial chapter in NAFTA. That distinction belongs to Chapter 11, the investor-state dispute mechanism that allows private investors to sue a NAFTA nation without first going through that nation’s court system. It was introduced in part because of concerns about corruption in Mexico’s court system — but has since become a symbol for many of how trade deals erode national sovereignty.

“If Trump were truly concerned about sovereignty, Chapter 11 would be target No. 1,” says Van Harten. “It’s just another example of him not living up to his own rhetoric. I think he prefers trade deals that favour the wealthy and well-connected.”

Doug Beazley is a frequent contributor to CBA PracticeLink

(Note: For more on the reopening of NAFTA, see the CBA submission.)