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In the Trump era, Canada might need NAFTA’s Chapter 11

President Donald Trump speaks before signing executive orders related to trade, at the White House in Washington, March 31, 2017. Now that the Trump administration has outlined what it wants in a renegotiation of the North American free-trade agreement, it’s time for Canada to post its own NAFTA 2.0 wish list.

ERIC THAYER/NYT

Now that the Trump administration has outlined what it wants in a renegotiation of the North American free-trade agreement, it's time for Canada to post its own NAFTA 2.0 wish list.

For many, killing Chapter 11 would be a good place to start.

That's the provision that allows companies to directly sue governments for damages – one of the most controversial and maligned parts of the deal.

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It's worth recalling that Chapter 11 was put in NAFTA at the insistence of U.S. negotiators. Basically, the Americans didn't trust Mexican authorities to play fair with U.S. companies. They wanted an insurance policy in case Mexico arbitrarily nationalized key industries, as it had done in the oil business.

Few would have imagined what actually happened.

Canada has become the main target of Chapter 11 claims, which allow companies to seek compensation before quasi-judicial panels for investment losses caused by unjust government actions.

Ottawa has been sued 39 times since 1994 – more than either the United States or Mexico – resulting in damages of about $170-million, paid mainly to resource and chemical companies. No Canadian investor has successfully won a case against the United States.

Given that track record, it's not surprising that the Trump administration wants to "maintain and … improve" the dispute settlement regime, according to a draft letter to members of Congress from acting U.S. Trade Representative Stephen Vaughn.

It might seem counter-intuitive, but keeping Chapter 11 might also be good for Canada, particularly as the United States takes a protectionist turn.

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NAFTA's investor-state rules have been a lightning rod for trade critics. Opponents argue the panels undermine national sovereignty by giving foreign companies special powers to bypass domestic courts and regulations.

The reality hasn't been nearly as dire. A case in point is last month's win by Canada against U.S. drug maker Eli Lilly. A panel unanimously rejected the company's $500-million claim that Canadian courts broke NAFTA's intellectual property rules when it invalidated the patents on two of its drugs – one for treating bipolar disorder and another for attention-deficit disorder.

The ruling puts to rest lingering fears that these tribunals would become a way to circumvent the Supreme Court of Canada, which had already upheld the government's right to invalidate the patents.

At issue in the Eli Lilly case was Canada's "promise doctrine," which has been a flashpoint of patent litigation in Canadian courts for years. Canada is virtually alone among developed countries in requiring that patent owners prove their products actually do what their original patents claim they do.

Canada has also suffered humbling Chapter 11 defeats, typically caused by the actions of provincial governments. In 2010, Ottawa compensated forestry company AbitibiBowater $130-million for Newfoundland's expropriation of hydroelectric facilities and timber rights. And in 2015, the government paid more than $17-million to Exxon Mobil and Murphy Oil over a requirement they spend research money in Newfoundland and Labrador.

But the headlining-grabbing claims for hundreds, if not billions, of dollars rarely go anywhere. Ottawa has paid out relatively little in the 23 years NAFTA has been in place. Many cases fail completely or result in dramatically reduced compensation awards. More than half of the cases against Canada were eventually dismissed or withdrawn.

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The U.S. record on Chapter 11 is also uneven. In 2015, a panel threw out a multibillion claim for damages by the owner of Detroit's Ambassador Bridge over Ottawa's construction of a rival cross-border span. And in 2007, courier giant UPS lost a ruling over alleged unfair pricing policies at Canada Post and its Purolator subsidiary.

"You could argue that it hasn't been a boon for American investors," Toronto trade lawyer Lawrence Herman said. "They've won a few, but they've lost a lot. The record is mixed."

There are many good reasons to rein in or scrap Chapter 11. It hasn't fulfilled its original purpose and it's produced a raft of nuisance lawsuits.

But the protectionist posturing by the Trump administration means Canadian companies could face increased risk of arbitrary and unfair treatment in the United States.

Now it's Canada that needs a little insurance. Having Chapter 11 in the back pocket might not be a bad thing.

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