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Canada can’t afford to sign renegotiated NAFTA without dispute resolution protections, say original NAFTA negotiators

By Neil Moss      

It's worth walking away from a new NAFTA deal if it does not have Chapter 19 protection, even if that means risking the U.S. withdrawal from NAFTA or auto tariffs, say trade observers.

Trade observers say Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland, pictured May 31, 2018, in Ottawa, are right not sign a renegotiated NAFTA without Chapter 19 protections. The Hill Times photograph by Andrew Meade
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Two top negotiators of the original North American Free Trade Agreement say Prime Minister Justin Trudeau is right not to sign onto NAFTA’s renegotiated agreement if it does not include the Chapter 19 dispute resolution mechanism.

“Without a dispute resolution chapter or mechanism, the agreement is worthless,” said Mickey Kantor, who led U.S. trade negotiations during the latter days of the original NAFTA negotiations under U.S. president Bill Clinton as the U.S. Trade Representative from 1993 to 1996.

Every international agreement, especially trade agreements, need enforcement provisions, Mr. Kantor said.

At the crux of the divide between the United States and Canada has been Chapter 19, a dispute resolution chapter that sets up a review panel with arbitrators from the two disputing countries independent from American courts.

Mr. Kantor, who also served as Mr. Clinton’s commerce secretary from 1996 to 1997, said the dispute resolution mechanisms aren’t perfect and need updating, but also said not to have one in the trade deal would be egregious.

Prime Minister Justin Trudeau (Papineau, Que.) told an Edmonton radio station on Sept. 5 that Canada needs Chapter 19 because U.S. President Donald Trump “doesn’t always follow the rules as they’re laid out.” Mr. Trudeau said he would not sign NAFTA without a dispute resolution mechanism and exemptions for cultural industries, and said the dispute resolution mechanism in Chapter 19 ensures trade rules are followed.

Canada, led by Foreign Affairs Minister Chrystia Freeland (University-Rosedale, Ont.), has been back at the negotiating table since Aug. 28 (aside from a break over the Labour Day weekend), the day after the United States and Mexico reached a preliminary bilateral trade agreement.

Canada could “survive” America’s withdrawal from NAFTA, said Carlo Dade, director of the trade and investment centre at the CanWest Foundation. He said while NAFTA is “important,” economic modelling shows it would result in a two per cent hit on Canada’s GDP. Given that about 33 per cent of Canada’s GDP is in export to the United States, Mr. Dade said a two per cent hit is “survivable,” and he said he thinks the two per cent hit “overstates” the impact. It’s essential for some regions to protect NAFTA, but other areas, especially Western Canada, rely less on the agreement.

“We can survive losing NAFTA, what we can’t survive [on] is a president that’s going to wake up in the morning and decide unilaterally to declare tariffs,” Mr. Dade said.

The outstanding issues include the dispute resolution clause, supply management, and the new version of a sunset clause, among others.

Colin Robertson says Canada should demand dispute resolution protections even if it means being subject to auto tariffs. Photograph courtesy of Colin Robertson

Colin Robertson, who was involved in the original NAFTA negotiations on the Canadian side, said the dispute resolution mechanisms needs to be a hill for Canada to die on.

During the original negotiations, Canada was willing to walk away from the deal if it didn’t receive Chapter 19 protections, but it was only after prime minister Brian Mulroney asked to speak to president Ronald Reagan that the U.S. bent on the issue.

The original NAFTA talks were kicked off by the adoption of the Canada-U.S. Free Trade Agreement in 1988, which led to a divisive 1988 Canadian federal election over the issue, and over the next six years, negotiations began to bring Mexico into the fold, which eventually occurred in 1994 with the signing of NAFTA, replacing the original trade pact between Canada and the United States.

Mr. Robertson said it remains “very important” to Canada, as without it there would “likely” be more actions by the Americans because there wouldn’t be an independent body checking their trade assessment methodology.

“Just by [Chapter 19’s] placement it acted as a deterrent [for] the commerce department from saying, ‘We can get away with this,’ ” Mr Robertson added, even though Chapter 19 has infrequently been used.

In the lead-up to the 2002 midterms, George W. Bush was advised by his chief of staff Karl Rove to implement steel tariffs, but Mexico and Canada were exempt. Mr. Dade said part of the exemption was partly based on NAFTA’s protection provisions, like Chapter 19.

It would be an act of “extreme heresy” to not suggest that Chapter 19 isn’t important for Canada, said Peter Clark, a trade lobbyist who has represented steel and dairy companies.

There is a way for the United States to remove Chapter 19 from a renegotiated NATFA, but for Canada to keep dispute resolutions between Canada and the U.S., said Christopher Sands, the director of the Canadian Institute at John Hopkins University. He said the dispute resolution can be removed in NAFTA, but restored under the Canada-U.S. Free Trade Agreement, which was suspended when Mexico joined NAFTA in 1994. It would give a political “win-win” to both countries.

Canada needs as many dispute resolution mechanisms that it can get as a protection against an unpredictable U.S. president, said Mr. Dade.

Chapter 19 acts as one of those checks, as does the U.S. International Trade Commission.

“We have not found, in the past, the International Trade Commission to be as apparently methodologically rigorous as it has been [currently],” Mr. Robertson said.

More recently, the U.S. International Trade Commission ruled unanimously against duties imposed on Canadian newsprint by the commerce department.

There is a fear, Mr. Robertson said, that current commissioners on the U.S. International Trade Commission who were appointed by former U.S. president Barack Obama will be replaced at the end of their terms by more protectionist commissioners appointed by Mr. Trump.

The axing of the dispute resolution mechanism has not been as a great driving force by Mr. Trump as dairy is, but is for U.S. Trade Representative Robert Lighthizer.

Mr. Lighthizer, a longtime trade lawyer, who has argued cases in front of dispute resolution panels, said he sees Chapter 19 as a threat to American sovereignty.

“[Mr. Lighthizer] believes strongly that these panels don’t work,” Prof. Sands said. “So this is his issue, the president trusts him and is willing to back him in ways that he hasn’t always been willing to back Wilbur Ross or other cabinet members.”

If this was the sole issue on the table, and especially if Canada made concessions on supply management, it’s unclear if Mr. Trump would demand Chapter 19 be removed, trade observers say.

“If the president were to say, after having a conversation with Justin Trudeau, in which Canada is making certain … concessions, that Mr. Trump may decide it’s more important to have Canada in the agreement than not,” Mr. Robertson said, adding that Mr. Trump might want Canada in the agreement because it’s unclear if a U.S.-Mexico agreement is congressionally viable.

On the other hand, if Canada feels forced to walk away from the table, Mr. Trump has threatened slapping auto tariffs on Canada if talks fall apart.

“I think with Canada, frankly, the easiest thing we can do is to tariff their cars coming in,” Mr. Trump said when he announced the U.S.-Mexico agreement in principle.

A 25 per cent tariff on Canadian autos could have a one per cent or more impact on the Canadian economy, according to a BMO economist. It could result in a 40 per cent drop in auto production, concluded a CIBC report.

Speaking at an event at the National Gallery in Ottawa on Sept. 5, New York Times White House correspondent Julie Davis cited a passage in Mr. Trump’s book, Art of the Deal, in which the American president argued that a negotiator has to be seen as a “crazy person” who will walk away from the table at any point in order to achieve the desired deal.

“A lot of what [Mr. Trump] is doing is being willing to be seen as just crazy enough to walk away,” Ms. Davis said.

Mr. Robertson said the government feels its worth risking auto tariffs, if it means protecting Chapter 19.

There is some question whether the imposition of auto tariffs will be connected to a new NAFTA deal or not. Mr. Dade said auto tariffs can be slapped on Canada even if a new NAFTA is renegotiated. If the U.S. Commerce Department finds the lack of auto production in the United States represents a national security threat, as was the rationale for imposing steel and aluminum tariffs at the end of May. The commerce department is currently looking at the issue.

nmoss@hilltimes.com

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