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A key dispute resolution system whose preservation Canada has long marked as a must-have in any NAFTA deal will be the focus of talks between Canada and the United States when negotiations resume on Wednesday.

Sources have told The Globe and Mail that Chapter 19 and dairy supply management are the main hurdles to surmount in arriving at a revised North American free-trade agreement.

For Ottawa, Chapter 19 is an insurance policy against the United States using its greater economic heft to squeeze Canadian exports with punitive tariffs. But for Robert Lighthizer, U.S. President Donald Trump’s trade chief, the provision is an unacceptable infringement on American sovereignty.

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Whether the two sides can bridge this divide will dictate the outcome of the negotiations. And experts have outlined several potential compromises, including putting a sunset clause on Chapter 19 – obliging Canada to invoke the provision only after going through U.S. courts – or emasculating the system by making compliance with its decisions voluntary.

Canadian officials have believed from the start of talks that – despite Mr. Lighthizer’s opposition to Chapter 19 – Mr. Trump would ultimately not hold up a deal over the provision, said one source with knowledge of Canada’s negotiating strategy. This assumption will soon be put to the test.

Chapter 19 allows countries to challenge each other’s punitive duties in front of binational trade panels. The system was created for the Canada-U.S. free-trade deal that preceded the NAFTA – Ottawa nearly walked away from negotiations in 1987 when the United States initially balked at the provisions.

Canada has subsequently used the system to successfully overturn American tariffs on softwood lumber, and argues it is a deterrent against capricious tariffs from the United States.

Mr. Lighthizer demanded Chapter 19 be abolished in his opening negotiating position last year. The U.S.’s tentative NAFTA deal with Mexico, unveiled last week, wrote Chapter 19 out of the deal.

Behind the scenes, said sources briefed on the talks, the United States has shown willingness to discuss Chapter 19. Negotiators last week worked on ways to combine the chapter with two other dispute settlement provisions – Chapter 20, which adjudicates other trade spats between the countries; and Chapter 11, which allows businesses to sue governments at trade tribunals – into a single system, the sources said.

One industry source said there was discussion of a Chapter 19 compromise that would keep the provision but subject it to an expiration date or renegotiation in a few years’ time. Such a move would allow Mr. Lighthizer to claim victory, but give Canada the hope of keeping the system in place in future, post-Trump negotiations.

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A Canadian government source, however, said the United States had not proposed any compromises, including the expiration date, to Canadian negotiators.

The proposed U.S. deal with Mexico on Chapter 11 offers another possible compromise that could be applied to Chapter 19: An “exhaustion clause” that would oblige Canada to see its case through the U.S. courts system before taking it to a NAFTA panel.

A third possibility, said Ohio trade lawyer Daniel Ujczo, is that Chapter 19 be made non-binding, effectively defanging the provision but giving Canada a fig leaf to claim victory.

Mr. Ujczo, with the firm Dickinson Wright, argued Canada’s decision to prioritize Chapter 19 made more sense from an optics standpoint – to get something from the talks it could claim as a victory – than a practical one. In recent months, for instance, the U.S.’s own International Trade Commission struck down Trump administration tariffs on Bombardier jets and Canadian newsprint, suggesting Canada can trust the U.S. system to give it a fair hearing.

“I don’t think we really need Chapter 19 anymore,” he said. “I don’t think it’s the hill to die on.”

That Mr. Trump will eventually accede has been Canada’s bet for more than a year. Canadian officials, speaking on condition of anonymity, contend that the President cares more about the automotive sector and dairy market access than dispute settlement provisions. This confidence has allowed Canada to publicly mark Chapter 19 as a red line in the belief that it will ultimately prevail.

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But Mr. Lighthizer could yet prove a wildcard. The U.S. Trade Representative has argued ideologically for years against international dispute resolution mechanisms, both in NAFTA and at the World Trade Organization. In his view, they impinge on countries’ sovereignty.

In a 2007 debate for the Council on Foreign Relations, he argued that the WTO’s dispute resolution system was “veering off course” by frequently rebuking the United States. In his negotiating objectives ahead of NAFTA talks, he vowed to ensure the “protection of U.S. sovereignty” and abolish Chapter 19.

Dunniela Kaufman, a Washington-based Canadian trade lawyer, said Chapter 19 particularly vexes U.S. nationalists because – unlike Chapters 11 and 20 – it doesn’t simply give NAFTA panels the right to enforce the trade deal itself; rather, it empowers them to interpret U.S. domestic law.

“It’s not about enforcing the rules of the trade deal. Rather, it says ‘You, U.S. court, your interpretation is wrong,’ ” she said.

But for Canada, with an economy a fraction the size of the U.S.’s, having some sort of recourse is a necessity.

“How do you have international trade without a binding dispute resolution mechanism?” she said. “You have more powerful countries squeezing others.”

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