Canada: Arbitral Dispute Resolution In Flux: US Positions In NAFTA Renegotiations

On May 18, 2017, the United States served notice on Mexico and Canada that it intended to renegotiate the North American Free Trade Agreement ("NAFTA"). The first round of negotiations is scheduled to begin in Washington D.C. on August 16th continuing to August 20th.

On July 17, 2017 the US Trade Representative ("USTR") released a document entitled "Summary of Objectives for the NAFTA Renegotiation". This document sets out the goals of the United States for revisions to NAFTA (the "US Objectives"). The US Objectives are subdivided into different categories, with each one a major component of the NAFTA negotiations.

In response to the release of the US Objectives, the Canadian government has decided to extend indefinitely the consultation period which was set to expire on July 18, 2017. Any Canadian person or organization is free to provide comment on Canada's objectives at this time.

Overview of the US Objectives

Overall, the US Objectives reflect a tweaking of NAFTA rather than full overhaul as Donald Trump had suggested as a Presidential candidate on the campaign trail. In many cases, the proposed changes echo the provisions of the Trans-Pacific Partnership ("TPP"), an agreement the United States pulled out of shortly after Trump took office. Further, the US Objectives generally seem heavily tilted towards addressing perceived imbalances and issues regarding the US trade relationship with Mexico. Many of the provisions relate to matters in which there is already a great deal of coherence between the stated US position, and current Canadian law.

However, several points in the US Objectives demonstrate either a lack of understanding of the theory and practice of international trade, demonstrate a surprising inconsistency, or directly conflict with what have historically been fundamental Canadian and even US positions.

Understanding the US Objectives is essential for the Canadian government to negotiate an outcome consistent with its goals. Understanding these US objectives is also essential for any stakeholders with an interest in either of the two major arbitral processes available to individuals and businesses under NAFTA: Chapter 11 Investor-State Arbitration and Chapter 19 Dispute Resolution Panels.

Specific Provisions

1. Investment Protection and ISDS

The US Objectives are relatively silent on investment protection and ISDS mechanisms, providing only two points of interest. First, they speak of securing more rights for US investors in NAFTA countries, while simultaneously ensuring that foreign investors are not granted greater substantive rights in the United States than US investors. Second, they speak of reducing or eliminating barriers to US investment in all sectors in the NAFTA countries.

It is highly unlikely that either Canada or Mexico will agree to an alteration in the investment protection provisions that would see substantial gains for US investors in their territories without any form of corresponding or reciprocal gains for their own investors.

What is more likely is that the investment protection provisions and ISDS mechanisms will remain relatively stable. The current rules certainly have not been operating to the detriment of US investors and, historically, the United States government has been a major champion of the forms of investment protection provisions set out in NAFTA. Those seeking to anticipate what tweaks the United States may seek might look to the investment chapter negotiated under the TPP.

There is likely to be an increased emphasis on involvement of civil society in investment arbitration disputes. This may include mandatory transparency in process and documents and the opportunity to file intervenor or amicus briefs. This would fit with the US Objectives' desire to see dedicated chapters on labour and the environment – with an emphasis on ensuring that the new NAFTA looks beyond just trade issues. This also dovetails with increasing pressure in Canada and the United States towards greater public involvement in such cases.

This also fits with the approach taken by Canada and the EU in CETA. What may be interesting is whether Canada attempts to sell the United States and Mexico on buying into another aspect of CETA that was enacted to achieve these goals: the "Investment Court" concept. The intention of the EU has been to expand this concept into a truly multilateral venue that would replace ad hoc arbitration with a system more analogous to a court – which can develop its own binding appellate authority.

However, the US track record with supranational judicial bodies is far from enthusiastic. Given the nationalistic drum that was beaten heavily by the Trump campaign, and by the current leaders of the USTR, it appears highly unlikely that such an accommodation would be made.

The second US Objective in the investment sphere, improved market access for US investors, is also unlikely to bring many Canadian changes. Canada has traditionally always strongly protected the Investment Canada Act, provincial securities laws requiring Canadian board members and representation on Canadian corporations, and the protection of certain industries (especially the cultural industries).

Given that Canada has recently made certain concessions, such as a major increase in the Investment Canada Act threshold for reviewing transactions, any further concessions would likely be difficult.

2. Elimination of Chapter 19 and Trade Remedies

Under NAFTA Chapter 19, member nations benefit from a dispute resolution mechanism that may be triggered by aggrieved companies, providing an alternative to judicial review by domestic courts in antidumping and countervailing duty cases. Instead, binational panels would hear petitions and render judgements, binding upon NAFTA governments.

While US firms were initially active as applicants, having instituted approximately fifty percent of hearings brought before binational dispute resolution panels in the first two years of NAFTA coming into force, the United States has nonetheless been primarily on the receiving end of dispute resolution proceedings, having acted as respondent in approximately two thirds of matters instituted under NAFTA Chapter 19.

Notably, the binational panels established under NAFTA Chapter 19 were convened for the Softwood Lumber disputes, whereby Canadian softwood lumber exporters contested duties imposed by the US Department of Commerce ("DoC"). On August 13, 2003, a NAFTA binational panel found that the benefits granted to Canadian exporters were not sufficient to constitute a subsidy, such that imposed duties were unjustified. NAFTA panels later rejected, on five separate occasions, the calculated duties suggested by the DoC.

Recently, however, the softwood lumber dispute has reared its ugly head. On April 24, 2017, the DoC made a preliminary determination that countervailable subsidies are being provided to producers and exporters of certain softwood lumber products from Canada; a final determination on the subject is expected no later than September 6, 2017. It would be expected that imposed duties would be subject to the dispute resolution process provided by NAFTA Chapter 19, which had previously been used to great success by Canadian softwood lumber exporters. It is therefore unsurprising that the USTR has expressed its desire to eliminate the NAFTA Chapter 19 dispute settlement mechanism.

In the negotiation of the Canada-US Free Trade Agreement, Canada's key objective was the elimination of trade remedy cases with the United States, a laudable and eminently logical goal for a true free trade area. The binational panel system, which continues today under NAFTA, was a second-best solution. Canada has made clear that this was essential to trading confidence, and that Canada would not sign a NAFTA which left Canadian exporters to the unreviewable mercy of US courts. Canada may well have to re-examine its attachment to Chapter 19.

Conclusions

The US Objectives provide a window into the potential outcomes of NAFTA negotiations and provide considerable insight for stakeholders that have an interest in the outcome of those negotiations. With the start of negotiations rapidly approaching, time is of the essence for any interested parties to make representations to the government regarding their views on the components of NAFTA which they wish to see addressed.

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