Dispute Resolution: NAFTA and WTO

1. Dispute Resolution: NAFTA and WTO Geoffrey Hale Political Science 3170 University of Lethbridge October 26, 2010

2. Outline • Dispute Resolution • Political significance to the politics of trade • Comparing WTO and NAFTA Dispute Resolution Processes • Implications for Canadian trade policies • The Politics of the Softwood Lumber Dispute • Outlier, Tactical Lesson or Reflection on the Limits of Dispute Resolution?

3. Dispute Resolution and the Politics of Trade • Dispute resolution is central to the preservation and development of a rules-based, rather than power-driven system of international trade. • Realism (large powers) - “Threats of retaliation must generate expected costs (greater) than the short term gain from violating an agreement” (H&K) • Realism (small powers) – Capacity to enforce agreements with on larger powers central t0 maintain gains of rules-based trading systems. • All p0wers (game theory) – The maintenance of trust and shared commitment to international trading system directly related to capacity for arms-length resolution of interest-based disputes. • WTO DR system also imposes disciplines on retaliation to limit potential breakdown of international trading system from disproportional responses to interest-based disputes.

4. Law, Politics and Dispute Resolution • Many WTO requirements ambiguous or vague at best. • Development of case law through permanent tribunal can reduce uncertainties over time. • NAFTA dispute resolution different from WTO in that it reviews application of national laws to ensure their consistency with national treaty commitments.

5. Comparing NAFTA, WTO Dispute Resolution Processes CUFTA  NAFTA WTO • Multiple dispute resolution processes for investment (chapter 11), financial services (14), general trade (19), and the NAFTA Commission (20) • Ad hoc panel composed of members from countries that are parties to the dispute (majority alternates between countries) • Consolidated dispute resolution system • Permanent court – members drawn from many WTO members, but panelists may not sit on disputes to which their own country is a party.

6. Comparing NAFTA, WTO Dispute Resolution Processes II CUFTA  NAFTA WTO • Begins with consultations over alleged breach of treaty • Plaintiffs may request formation of panel • Plaintiffs may be governments or businesses with direct interest in case • Panelists appointed by national governments • Begins with consultations over alleged breach of treaty • Plaintiffs may request formation of panel • Plaintiffs may only be WTO member governments • DSB determines composition, terms of reference of panel, subject to appeal by parties to dispute. • Other countries (“third parties”) may associate themselves with the complaint to secure benefits of relevant rulings / settlements.

7. Comparing NAFTA, WTO Dispute Resolution Processes III CUFTA  NAFTA WTO • Panel Deliberations • Average 12-15 months (vs. intended 10.5 months) • Potential for “Extraordinary Challenge Panel” in cases of challenges to jurisdiction of Chapter 19 panels (“not appeal”) • Recourse  remand decision to original national body for review and correction • Panel Deliberations • Average 13.5 months (1995-06) • Potential for Appeal to Appellate Body • Average 3 months (1995-06) • Reasonable time for implementation • Bilateral – 9.5 months • Arbitrator – 12 months • Retaliation • Permitted for injured parties , but with scope of retaliation subject to authorization by DSP, to recognized level of economic damages from original violation.

8. Other relevant issues • Significant proportion of cases in both WTO and NAFTA dispute systems settled out of court • 144 panel decisions of 351 cases in 1995-2006. • “Win / loss” statistics of limited value • Relative importance of cases (economic / legal) varies widely • Many cases involve multiple issues involving both substantive and procedural questions with varied outcomes. • Most claims involve Anti-Dumping, Countervailing Duty claims  growing volume of SPS-related claims • Many cases resolved on technicalities • Process slow, highly legalistic • Substantial systemic benefits – but limited value to individual firms given elapsed time to settlement, need for “critical mass” in challenging actions of major trading powers.

9. Who uses Dispute Resolution? Number Complainant Respondant (avg./year)95-06 07-09 95-06 07-09 • G-2 (US, EU) 50% 26% 50% 45% • Industrial 38% 23% 38% 23% (incl. Canada) 2.25* / 2 7.6% 9.7% 4.5% 1.6% • Developing 33% 51% 12% 28% (incl. China) 0.3% 9.7% 1.1% 25.8% • Canada third party in 71 cases – 4.5 / year since 1995 • China third party in 71 cases – 4.5 / year since 1995.

10. Declining number of Canada-US Trade Remedy disputes Reviews of US Reviews of Canadian determinations determinations FTA 1989-93 • Antidumping 8 4 • Subsidies/countervail 6 — • Injury 5 7 • Extraordinary challenge • procedures — 3 NAFTA 1994-2006 • Antidumping 20 10 • Subsidies/countervail 13 — • Injury 4 9 • Extraordinary challenge • procedures — 2 [Source: Dymond and Hart, 2007: 48]

11. Softwood Lumber – Aberration or “Canary in the Coal Mine?” • Several disputes since early 1980s • Softwood Lumber I (1983) – US Department of Commerce rejects challenge to Canadian provincial forest management policies • Softwood II (1986) – Canada agrees to SLA I – 15% export tax on all softwood lumber exports in response to US DOC finding of injury (1986-91) • Softwood III (1991-96) – Further disputes under NAFTA; concluded by SLA II – export tax agreement on Cdn. Exports (1996-2001) • Softwood IV (2001-06) – Multi-tiered dispute at NAFTA, WTO, US Court of International Trade – concluded by agreement on two-tier export tax combined with export quota for low tax provinces (QC, ON, MB, SK).

12. Common features of disputes • Challenge by U.S. Industry (Coalition for Fair Lumber Imports) strongly supported by lumber state senators (Pacific NW + Southeast US) • Effort to identify Canadian forest management practices (esp. stumpage fees) as effective subsidy causing harm to U.S. industry  reflective of different forest management, property ownership and taxation policies in each country. • Competing interests in both countries • Different forest management practices, industry structures in BC, Ont./QC, Maritimes • Dissenting voices: US consumer groups (esp. Homebuilders), Canadian environmental groups and B.C. First Nations.

13. Softwood Lumber IV • Aggravating features • Initiated by B.C. Government’s insistence on cancellation of SLA III (2001), challenging U.S. Policies under NAFTA • U.S. “Byrd Amendment” (1999)  providing share of AD / CVD duties levied to plaintiffs – “ambulance chasers’ bill of rights” (ruled in violation of WTO, 2003, NAFTA, 2005) • US DOC rejection of initial Chapter 19 NAFTA rulings • Mixed results from Canadian appeal to WTO, muddying legal waters • CFLI constitutional challenge to NAFTA dispute resolution processes under Chapter 19 (opposed by Bush administration) • Growing politicization of NAFTA in both countries made political climb-down risky  pressures for negotiated settlement

14. SLA III: “the Good, the Bad and the Ugly” • Negotiation of 7 year “market stabilization” deal – driven by falling U.S. Housing, lumber prices • $ 4 billion of $ 5 billion in US duties collected returned to Canadian producers • Binding arbitration of disputes by LCIA • Renders constitutional challenge “moot” • Two-tier, phased export tax • No barriers to Cdn. Imports when prices over $US 365/mcf • Escalating tax • 15% (BC, Alta) with no volume constraints • 5% (ON, QC, MB, SK) with quota. • $ 1 billion in US duties retained • $ 500 mm to community funds (e.g. rebuilding New Orleans) • $ 500 “signing bonus” to industry • Followed by collapse of U.S. housing prices in 2006-09 Weekly average prices: USD / mcf. 2005 393.12 2006 325.73 • 283.12 2008 256.25 221.92 Oct.2010 252

15. Summary • Growing integration of Canadian, U.S. economies has reduced vulnerability of Canadian firms to U.S. trade remedy sanctions  only 2 cases since 2004, 1 “successful”. • Dispute resolution system remains vulnerable to political end runs in Washington by special interest lobbies with political connections. • Disputes based on major differences in regulatory systems best contested through WTO  enabling coalitions of aggrieved countries to increase critical mass of economic risk to major trading powers. • 10 of 14 recent cases (2007-10) against major trading powers in cooperation with one or more major powers.