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As the Trump administration begins a consultation with Congress on the North American Free Trade Agreement (NAFTA) renegotiation objectives, Chapter 19 regarding dispute settlement is emerging as one of the most controversial aspects of the US agenda.

US Trade Representative (USTR) Robert Lighthizer notified Congress of the administration’s intention to renegotiate NAFTA last week, kicking off a 90-day domestic consultation about the country’s objectives. The mechanism falls under the US Trade Promotion Authority (TPA) law – the same provision used by Barack Obama to push for Trans-Pacific Partnership approval in 2015 – involving legislators ahead of official negotiations, in the hope of a smoother implementation process once a new agreement has been reached by all parties.

“The [TPA] trade-off is that in lieu of being able to make amendments afterwards, Congress gets input on the front end, in order to establish what the negotiating objectives are going to be. There’s a real emphasis on communication and pre-clearance, and then when it comes back to Congress at the end, it’s supposed to get an up-or-down vote,” Dean Pinkert, a partner in Hughes Hubbard’s international trade group who used to work at the US International Trade Commission, tells GTR.

Under the TPA, the USTR may not enter into formal negotiations until 90 days after this notice is provided to Congress. Official NAFTA renegotiations can therefore start any day from August 16, 2017.

Establishing effective implementation and aggressive enforcement of the commitments made by our trading partners is vital to the success of those agreements. Robert Lighthizer, US Trade Representative

The letter sent by Lighthizer to Congress mentions the need to modernise the 25-year-old agreement to cater for intellectual property provisions, digital and services trade, which were all in their infancy when the original NAFTA was signed. These are points where the administration, Congress, but also Canada and Mexico, are likely to reach an easy consensus.

However, another part of the letter is cause for concern. “Establishing effective implementation and aggressive enforcement of the commitments made by our trading partners is vital to the success of those agreements,” writes Lighthizer. The comment reflects a point made more strongly in the draft of this letter, leaked at the end of March, which suggested a mechanism to impose tariffs if imports start to threaten US industry.

 

Chapter 19 controversy

The idea suggested by the Trump administration is to modify or even scrap Chapter 19 of the agreement, which says that in case of a trade dispute, an independent binational panel must be formed to evaluate the situation and come up with a solution. The rule has raised some questions in the US, particularly in industries that have been negatively affected by the open market, which feel like the US should be more aggressive in protecting its interests.

For example, US Lumber Association comments: “Due to highly questionable panel decisions under NAFTA’s Chapter 19 dispute settlement mechanism, billions of dollars of unfairly traded goods have entered the US unimpeded, costing hard-working American men and women their jobs.”

The association makes the point that the binational panels are not appointed by the president or confirmed by Congress, yet they replace independent US court review of anti-subsidies and antidumping duties and render binding judicial decisions interpreting US law.

“Chapter 19 denies US industries their constitutionally protected rights of due process and judicial review. No recourse exists in instances where a NAFTA panel renders biased decisions that run counter to US law. The Chapter 19 system must be eliminated from the NAFTA,” it adds.

While these concerns are understandable, what would happen without the panel system is so far left to interpretation, and could be “pretty controversial”, according to Pinkert.

The idea is that Canada and/or Mexico would be subject to reintroduction of the original duties that applied to their country pre-NAFTA in the event of an injury to the US industry because of a surge of imports from those countries. Dean Pinkert, Hughes Hubbard

“There’s a reference in the draft document to snap-back safeguard arrangements. The idea is that Canada and/or Mexico would be subject to reintroduction of the original duties that applied to their country pre-NAFTA in the event of an injury to the US industry because of a surge of imports from those countries,” he says.

Some hope that the renegotiation could be concluded by the end of this year, but according to Akin Gump international trade partner Stephen Kho, this seems unlikely. “This proposed timetable is very aggressive; thus, it would not be surprising if the renegotiations were to actually continue into next year,” he says.

The USTR is required to provide more details regarding its negotiating objectives (as agreed with Congress) at least 30 days before it starts negotiations with Canada and Mexico, so watch out for the next letter in July.

Rumours about President Trump’s intention to sign an executive order to withdraw from NAFTA emerged at the end of April, prompting the heads of states of Canada and Mexico to call their US counterpart in a plea to review the decision. Since then, statements coming from the White House have appeared much more conciliatory, but many believe Trump is still ready to withdraw from the agreement if he doesn’t get what he wants from the renegotiation process.