Will state-to-state dispute resolution be a NAFTA 'red line' for the Trudeau government?

Will Chapter 19 be a deal-breaker in the renegotiation of the North American Free Trade Agreement (NAFTA) starting next month?

On July 17, the Trump administration's letter to Congress on its negotiating objectives for NAFTA included the abolition of the Chapter 19 state-to-state investment dispute resolution system. This is not new. Last March, The Globe and Mail had reported, "The Trump administration says it wants to eliminate from NAFTA the Chapter 19 dispute settlement system, which grants Canadian companies a means of directly appealing decisions by the U.S. government where Washington has slapped duties on their products."

The CBC has explained, "Dispute settlement provisions included in NAFTA's Chapter 19 allow Canada to appeal U.S. lumber duties to both a NAFTA review panel and the World Trade Organization. Appeal panels frequently rule against U.S. interests..."

This morning, The Globe and Mail reports, "The Trudeau government is prepared to walk away from NAFTA negotiations if the Trump administration insists that dispute-settlement panels be removed from the accord, a senior official says. ...A senior Canadian official who was not authorized to speak on the record said Prime Minister Justin Trudeau regards Chapter 19 as the “red line” that Canada will not cross. ...The official said Mr. Trudeau is ready to walk away from the negotiations if U.S. Trade Representative Robert Lighthizer declines to relent on the panels."

Asked this morning about that news report, Prime Minister Justin Trudeau commented, “I am not going to negotiate in public, certainly in advance of the negotiations. But as our ambassador said just last week to the Americans, a fair dispute resolution system is essential for any trade deal that Canada signs on to and we expect that to continue to be the case in any renegotiated NAFTA.”

University of Prince Edward Island political science professor Peter McKenna has argued, "The Canadian government simply cannot afford to have Chapter 19 administrative panels eliminated or substantially defanged. It would severely undermine our trade interests and leave us with no safety valve or protection from U.S. trade remedy laws. Canada would thus be extremely vulnerable to a protectionist Trump White House, industry-beholden Congress and a highly politicized U.S. International Trade Commission. It goes without saying that Canadian trade negotiators - working closely with their Mexican counterparts - have to ensure the survival of Chapter 19."

McKenna adds, "Abolition of the NAFTA panels, then, has to be a non-starter and clearly non-negotiable for the Trudeau government. It’s a deal-breaker for us. Without the right to appeal, we may as well pick up our trade marbles and walk away from the bargaining table. Otherwise, Ottawa would be playing into Trump’s hands and recklessly jeopardizing billions of dollars in Canadian exports to the U.S. marketplace."

The Canadian Centre for Policy Alternatives has taken a slightly different view: "A 2005 House of Commons report identified major problems with the Chapter 19 process. Because of U.S. obstructionism, these reviews are arguably more time consuming, costly and unfair than appeals through U.S. domestic courts. Moreover, if you win in the U.S. courts you can get your money back. Under Chapter 19 the process just starts over again."

The CCPA adds, "Even if the review process were abolished completely, Canadian exporters will still be able to have a final determination reviewed in the U.S. courts. The Article 1904 review process has been used 21 times by Canadian exporters since 1995. Its loss would be felt, but its benefits should not be exaggerated."

We will be closely monitoring developments on this front and making strategic interventions throughout the negotiation process.

The Council of Canadians has argued that the removal of the Chapter 11 investor-state dispute settlement (ISDS) provision, along with the energy proportionality clause, and water as a service, investment and good should all be top line demands from the Trudeau government.

Foreign Affairs minister Chrystia Freeland will reportedly outline Canada's negotiating objectives to a Parliamentary Committee on August 14.

The negotiations are set to start just two days later on August 16 in Washington, DC.