Negotiations between Canada and the U.S. regarding a new North American Free Trade Agreement (NAFTA) have bogged down over American demands to scrap the trade agreement’s dispute resolution system.
Known as "Chapter 19," the dispute resolution mechanism allows companies on either side of the border to request arbitration if they feel that their products have been unfairly hit with anti-dumping or countervailing duties. If an arbitration panel comprised of representatives from both countries agrees with the claim, it can force the return of those duties.
U.S. trade negotiators say the dispute resolution system doesn’t work and want to eliminate it entirely from a revised NAFTA deal. Canadian officials must decide if they want to fight to keep it or use the trade dispute system as a bargaining chip to get something else in the negotiations.
Chapter 19 has benefited Canada in the past but hasn't always worked. In 2000, lumber exporters took their case to a NAFTA arbitration 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.
Canadian officials have, up to this point, fought to keep Chapter 19 in NAFTA, saying that some form of resolving disputes between trade partners is needed – even if the system used is imperfect.
The preliminary agreement in principle announced between the U.S. and with Mexico includes 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 with Mexico and the U.S. In the past, Mexico has used arbitration panels as much as Canada to push back against what it considers unfair American duties.
The European Union has ruled that member states cannot 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.
The World Trade Organization today provides a way to appeal unfair duties that wasn't in place when NAFTA was born. 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 international dispute resolution system in jeopardy.
