MASTHEAD-2Back in 1987 the Canada-US FTA was saved by a last minute deal on a dispute-resolution mechanism, remembers Stanley Hartt. He urges the Trudeau government to stand firm on the issue in upcoming NAFTA renegotiations.

By Stanley Hartt, July 28, 2017

On October 3, 1987, at the very last minute for concluding a satisfactory Free Trade Agreement between Canada and the United States, Treasury Secretary James A. Baker III burst through the doors of an ante room in his own suite of offices in the historic Treasury Building in Washington. He had a compromise to offer to the Canadian delegation on the arcane issue of the procedure to resolve disputes regarding anti-dumping and countervailing duties.

The urgency arose from the authority Congress had given to President Reagan to negotiate an agreement with Canada accompanied by so-called “fast track authority,” whereby Congress agreed to vote for or against the proposed agreement, without any ability to amend it.  But that was true only so long as it was presented for Congressional review by October 5, 1987.  Fast track authority was essential if Canada’s negotiators were to have confidence that any offers made to obtain valued access to America’s markets would not be nickeled and dimed by demands for a second wave of concessions on the part of legislators.

Baker told the eight Canadians in the room that he had motorcycle riders waiting to take the agreed text of the Elements of the Free Trade Agreement (legal drafting of formal texts would come later) to the Speaker of the House of Representatives and the president of the Senate. Should he send them?

Signing an agreement without any ability to test the validity of each party’s application even of its own domestic legislation would have been naïve in the extreme.

The issue that had sparked the crisis that very nearly led to a failure of the mammoth efforts, on both sides of the border, to craft a ground-breaking, economy-building historic trade pact between the two neighbours was the mechanism to be used to settle disputes about whether sanctions were legal and appropriate when invoked to punish alleged dumping (pricing exported goods at less than the price charged in the home market or below their cost of production) or subsidization of exported goods by the application of countervailing duties.

As an aggressive trader, the US often applied such measures under its domestic laws in response to pressures from industry lobbies, but not necessarily in conformity with established legal principles. Signing an agreement without any ability to test the validity of each party’s application even of its own domestic legislation would have been naïve in the extreme.

The negotiators had hit upon a fair solution – the establishment of bi-national panels composed of 25 people knowledgeable about trade matters from each of Canada and the US.  Each country would appoint two panellists for a particular dispute and the first four thus chosen would chose a fifth panellist and the five panellists would elect a Chair. In practice, a rotation was established where the fifth panellist was selected alternately from Canada or the US. The job of the panel was to ensure that the parties applied their domestic laws fairly and even-handedly.

Someone had brought to Secretary Baker’s attention very late in the process the fact that, under US law, decisions that were final and binding on US citizens or entities could not be delegated to foreign persons or panels.  This concern, however legitimate, threatened to derail the very basis of our deal, and Derek Burney, the delegation’s leader and the Prime Minister’s Chief of Staff had a long conversation with Prime Minister Mulroney explaining the impasse. We were all polled about whether we thought that, in the absence of this control on politically-motivated trade remedies, there was any purpose in salvaging the otherwise extremely advantageous and well-negotiated deal. We unanimously, and reluctantly, agreed that the answer was “no.”

So it was heartwarming and surprising when Baker frantically rushed into our conference room to make a proposal to solve the problem he had raised: an “extraordinary challenge” procedure would be added, whereby a panel of three judges, selected from among judges or former judges of a federal court in the US or a court of superior jurisdiction in Canada (i.e., federal appointees), could review the legality of bi-national panel decisions, and, if appropriate, reverse them.

We took a quick vote and told Baker to send the motorcycles.

Canada has won its fair share and lost its fair share of these disputes, mostly where we should have won or lost.

This system has worked extraordinarily well. Canada has won its fair share and lost its fair share of these disputes, mostly where we should have won or lost. In other words, the panels have done their intended jobs of keeping the parties on the straight and narrow. The same concepts, evolved in their detail but essentially adapted to a tripartite setting, were later incorporated in the NAFTA Agreement.

But we are now in a situation where President Donald Trump has instructed his US Trade Representative (USTR) to re-open the NAFTA Agreement and seek to improve and update it. That’s fine. Canada, too, has a long list of matters that have developed over the years or were “forehead slappers” that we realize should have been included but were overlooked. As such, re-opening NAFTA is not necessarily a terrible thing.

Under the current version of “fast track authority,” now known as “Trade Promotion Authority,” the USTR is obliged to provide a summary of specific objectives for NAFTA renegotiation, no less than 30 days before the commencement of negotiations. This document, dated July 17, 2017, has many items of interest to Canada and many that should be concerning. But, among these, two items go to the very heart of how Canada needs to protect itself from arbitrary exercise or inappropriate application of US domestic trade law.

Under the heading “Trade Remedies,” the document records the objectives to “Eliminate the Chapter 19 dispute settlement mechanism” and “Preserve the ability of the United States to enforce rigorously its trade laws, including the anti-dumping, countervailing duty and safeguard laws.”

Under the heading “Dispute Settlement,” it seeks to “Encourage the early identification and settlement of disputes through consultation and other mechanisms.”  It goes on to allude to the need to have a dispute settlement mechanism that is “effective, timely, and in which panel determinations are based on the provisions of the Agreement,” as well as one that is “transparent,” among other criteria.

This cuts to the heart and core of whether the revised Agreement will be worth the paper it is written on.  Prime Minister Justin Trudeau has already responded that “a fair dispute resolution system is essential for any trade deal that Canada signs onto, and we expect that that will continue to be the case in any renegotiated NAFTA, that we will continue to have a fair dispute resolution system.”

In every negotiation, there are a few items that are “no-give” matters, which a party simply cannot afford to accede to.

The US appears to prefer to have US Courts determine the application of US law, arguing that panels have not always determined matters before them in a manner consistent with law or even the provisions of the Agreement.  Canada’s view has always been that not only are panels cheaper and swifter forums for resolving trade disputes, but the court system in neither country is staffed with experts trained in the subtle nuances of international trade law, which is a highly sophisticated and well-developed legal specialty.

In every negotiation, there are a few items that are “no-give” matters, which a party simply cannot afford to accede to.  Prime Minister Trudeau wisely decided not to include in his response the kind of ‘red line” language that political leaders often come to regret. Yet it will be important for Canadians, including the millions whose jobs depend on NAFTA continuing to function as heretofore, to understand that this is one area, however obscure, on which Canada will indeed have to dig its heels in - if it becomes clear that nothing less than being prosecutor, judge and jury as to its own behaviour in dumping and subsidy matters will satisfy the Americans.

Panels may not be the only way to skin this cat, but the negotiators will have to come up with some form of check and balance against politically-motivated overkill on dumping or countervail matters. Otherwise, the unilateral application of US trade remedies will make this a one-sided deal not worth having.

Stanley Herbert Hartt, OC, QC is a lawyer, lecturer, businessman, and civil servant. He currently serves as counsel at Norton Rose Fulbright Canada. He was Deputy Minister of Finance when the FTA was negotiated and one of the 8 Canadians in the room when the “Elements” were agreed to.