One of the main reasons for Ottawa’s willingness to negotiate dairy tariffs with the United States is a bid to save Chapter 19 – the supra-national dispute resolution system that deals with punitive duties.
The system has been considered non-negotiable by Ottawa since the start of trade talks. Back in the late 1980s, Canadian negotiators took a high-stakes gamble for the sake of the chapter, abandoning negotiations with the U.S. until it was included. But in a new deal drafted between the U.S. and Mexico, the clause has been scrapped.
Some professionals argue that the dispute resolution clause has seen its day, replaced by the World Trade Organization. But others, including former Canadian diplomats who worked on U.S. trade deals, point out that the Trump administration has also taken issue with the WTO system – making Chapter 19 more important than ever.
“The Trump administration is generally antagonistic to international dispute settlement bodies of any kind, including the WTO, so this is a reflection of a highly nationalistic approach to the whole process of international trade disputes,” said Lawrence Herman, a former Canadian diplomat and international trade lawyer.
Chapter 19 uses a system of bilateral panels to adjudicate anti-dumping and countervailing cases. It predates NAFTA, as it was written into the free-trade agreement between Canada and the United States in the late 1980s before Mexico came into the fold. Along with disputes over apples and pork, a critical case that’s relied on Chapter 19 has been Canadian softwood lumber, subject to punitive tariffs from the United States. The industry has seen “a series of adjudications” by bi-national panels that have supported Canada’s position, Mr. Herman said.
There are other avenues for Canadian industries to grieve duties they perceive as unjust, including the recent case of the U.S. International Trade Commission striking down duties against Bombardier. But Mr. Herman said that by scrapping a key component of Canada’s negotiating position, Mexico has shown "elements of bad faith.”
Trade lawyer Mark Warner, who has worked in both Canada and the United States, disagrees. “I think the Mexicans have made the right judgement about it.” He pointed to flaws in the system that permit a lack of compliance to Chapter 19 rulings, particularly in the softwood case. To him, the issue isn’t worth fighting over, especially at the cost of a trilateral trade agreement.
“Look, Chapter 19 made a lot of sense in 1988 in the Canada-U.S. free-trade agreement, because in those days, you didn’t have the World Trade Organization with its strong dispute settlement system,” Mr. Warner said.
That argument was countered by Patrick Leblond, the University of Ottawa’s CN-Paul M. Tellier Chair on Business and Public Policy. The U.S. government under Donald Trump has made moves to weaken the WTO, he said, rendering the Chapter 19 clause a critical option. “They complain the WTO is infringing U.S. sovereignty,” Mr. Leblond said. “Are there some reforms that can be done that would be satisfying to all sides? That’s not clear."
While Mr. Warner acknowledged that Mr. Trump’s challenges of the WTO dispute settlement process may be an argument for keeping Chapter 19, he warned that ″if you’re serious about it ... you might lose NAFTA over it.”
Derek Burney, the chief of staff to former prime minister Brian Mulroney, remembers the risk Canada took in the late 1980s for the sake of Chapter 19. “We wouldn’t have done the agreement without it. In fact, we walked away from the negotiations when the Americans were reluctant to discuss it,” Mr. Burney said.
To him, the Chapter 19 clause has always been critical because of the sheer size of the U.S. market. “When you’re dealing with an economy 10 times your size, it’s very important that you have something that balances the playing field,” Mr. Burney said. “It serves as a check on the capricious manner in which these institutions in the U.S. often behave."
Measuring the specific economic advantages of the Chapter 19 system is “next to impossible,” according to Douglas Porter, chief economist at the Bank of Montreal. "I personally do think it’s important, especially given the current U.S. administration, to have at least one extra level of protection,” he said. But while Chapter 19 gives companies some certainty they won’t “constantly be barraged by the whims of trade actions,” he said, that process takes time – and the current tariffs show the immediate damage that is caused by punitive duties.
As the clock ticks on Canada’s response to the U.S.-Mexico deal, Mr. Burney acknowledges that Ottawa has been put in a tough position. But things weren’t simple at the FTA negotiating table, either. “It wasn’t easy for Canada to walk away 10 days before the deadline in 1987, I can tell you,” he recalled. “That was a very difficult decision for the government to make at the time. It worked out, but it might have had the alternative effect.”