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Ottawa filed its request on Tuesday for a binational panel under the North American free-trade agreement to strike down the United States’s punitive tariffs on Canadian softwood.

DARRYL DYCK/THE CANADIAN PRESS

Canada is taking its lumber fight against the United States to one of the most contentious elements of NAFTA – Chapter 19, which sets up trade panels to settle disputes.

Ottawa filed its request on Tuesday for a binational panel under the North American free-trade agreement to strike down the United States's punitive tariffs on Canadian softwood.

The move comes as Canada takes an increasingly hardball approach to NAFTA renegotiations and just one day before talks resume in Mexico City.

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Read more: Softwood lumber: The never-ending battle

Chapter 19 is one of the key sticking points in NAFTA talks: The Trump administration wants to abolish the panels while Canada has vowed never to give them up.

Ottawa is keen to keep Chapter 19 – and invoke the panel in the current softwood dispute – because Canada has previously emerged victorious when appealing its case through NAFTA in the long-running lumber battle.

"We are enclosing a Request for Panel Review pursuant to Rule 34 of the NAFTA Rules of Procedure for Article 1904 Binational Panel Reviews," according to the letter submitted on Tuesday by the Canadian government to Paul Morris, U.S. Secretary of the U.S. section of the NAFTA Secretariat.

Shipping Canadian softwood south of the border is technically a bilateral matter between Canada and the United States. Prime Minister Justin Trudeau's Liberal government has been hoping to keep the lumber issue separate from NAFTA talks, but the Trump administration has said Canada won't be able to keep the two issues apart so easily.

Ottawa plans, at least for now, to give no ground on the White House's core protectionist demands in hopes that mounting pressure from the U.S. business community will cause the Trump administration to blink.

In Canada's view, U.S. demands in four key areas of NAFTA are non-starters – dispute resolution, including Chapters 11, 19 and 20; a 50-per-cent U.S. content requirement on all vehicles made in Canada and Mexico; severe limits to the amount of American government contracts Canadian and Mexican firms can bid on; and a sunset clause that would force the renegotiation of NAFTA every five years.

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Ottawa, however, will try to reach agreement on less contentious areas such as cutting red tape at the border and expanding the deal to cover digital commerce.

Sources with knowledge of the Canadian thinking say the Trudeau government would rather not reach a deal than agree to a bad one, and is bracing for the possibility NAFTA talks will unravel.

U.S. Commerce Secretary Wilbur Ross warned on Tuesday that the U.S. will walk away from NAFTA if key problems are unresolved, adding that Canada and Mexico would suffer far more than the U.S. if the pact is dissolved, Reuters reported.

"I would certainly prefer them to come to their senses and make a sensible deal," Mr. Ross told a Wall Street Journal forum.

"In any negotiation, if you have one party that is not in fact prepared to walk away over whatever are the threshold issues, that party is going to lose," Mr. Ross added.

Dispute resolution is scheduled for just one day of discussion in this session, on Nov. 21 – the last day of this round of negotiations – according to a schedule of the talks obtained by The Globe and Mail.

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Among the other controversial subjects, rules of origin – which include the Trump administration's U.S.-content demand for autos – is scheduled for four days of talks from Saturday to Tuesday, and procurement will get two days, on Friday and Saturday. The schedule also lists "balance of payments" as a topic of discussion Sunday, something that could include discussion of the U.S. trade deficit, which the Trump administration has vowed to erase.

On Chapter 19, in which binational trade panels review punitive tariffs – such as the ones the United States is levying on Canadian softwood – Washington wants the panels done away with and such cases handled instead by the regular court system. Ottawa has declared this is a red line and will never agree to lose the panels.

For Chapter 11, which allows companies to sue governments for policy decisions that hurt their businesses, the United States wants the right to opt out of the provision. And on Chapter 20, which directs government-to-government trade disputes, the United States wants tribunal decisions made non-binding, so the losing side can simply ignore them.

In the softwood dispute, the final determination on Nov. 2 by the U.S. Department of Commerce resulted in a countervailing duty of 14.25 per cent and anti-dumping duty of 6.58 per cent against most Canadian lumber. The combined tariffs of 20.83 per cent against the majority of Canadian softwood imports into the U.S. compared with 26.75 per cent in the preliminary findings.

The reduction in tariff rates came as cold comfort to Canadian producers, which had been hoping for a breakthrough softwood deal.

In Tuesday's letter, Canada said the review through Chapter 19 should focus on "the final determination of the U.S. Department of Commerce in the countervailing duty investigation of softwood lumber from Canada."

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Canada's Chapter 19 request is backed by seven provinces affected by the duties, with support also from lumber producers that include West Fraser Timber Co. Ltd., Canfor Corp., Tolko Industries Ltd., Resolute Forest Products Inc. and J.D. Irving Ltd. Provincial forestry associations also endorsed the appeal.

Another option is for Canada to take its lumber case to the U.S. Court of International Trade. On Tuesday, the Canadian government kept that option open by writing a separate letter to the U.S. section of the NAFTA Secretariat: "We are enclosing a Notice of Intent to Commence Judicial Review, pursuant to Rule 33 of the NAFTA Rules of Procedure."

Canada could also appeal through the World Trade Organization in 2018, industry observers say.

The Commerce Department's Nov. 2 decision "against Canada's softwood lumber producers is unfair, unwarranted, and deeply troubling," according to a statement issued by Foreign Affairs Minister Chrystia Freeland's office.

"We will vigorously defend our industry against these unfair and punitive duties," added BC Lumber Trade Council president Susan Yurkovich.

The Commerce Department imposed the countervailing duty as a punitive measure against what the U.S. sees as subsidized Canadian lumber, while saying the anti-dumping duty is for selling softwood below market value.

The new anti-dumping rate kicked in on Nov. 8. The new countervailing duty would take effect after the U.S. International Trade Commission votes, by Dec. 7, on the issue of U.S. lumber producers being injured.

This week, the American railway company that owns the Port of Churchill in northern Manitoba, and the rail line connecting it to the rest of the country, served Ottawa with a notice of intent to file a claim under NAFTA's Chapter 11.

OmniTrax claims that the Harper government's decision to dismantle the Canadian Wheat Board and move to a free-market system for farmers to sell their grain robbed the port of vital shipments and made the business non-viable. OmniTrax said it will sue for $150-million unless Ottawa agrees to repair the railway and port and take them off the company's hands.

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