By: Carlos Véjar
The US Government announced recently that one of its objectives in the renegotiation of NAFTA is the elimination of NAFTA’s dispute settlement chapter dealing with administrative determinations on unfair trade practices (anti-dumping and countervailing duties). This mechanism, which is unique in the world, is contained in NAFTA Chapter 19. The US position generated concern and confusion among industry players and made it evident that there is a significant lack of knowledge with respect to the different dispute settlement procedures in NAFTA and their operation. By way of example, the Mexican Senate formally asked Mexican government negotiators to reject the elimination of Chapter 19 as this would result in anti-dumping disputes being resolved in accordance with US laws rather than NAFTA rules. It escaped their attention that the laws of the jurisdiction that issued the anti-dumping measure are always used in the review process in Chapter 19 cases and that, in any event, Chapter 19 has always been an alternative voluntary and optional review mechanism.
The US negotiating objectives omit any reference to the investor-state dispute settlement mechanism (“ISDS”) contained in Chapter 11. USTR’s statements that the “dispute settlement provisions should be designed to respect our national sovereignty and our democratic processes” seem to suggest that there is a chance that the US could also seek to eliminate Chapter 11. The only express reference to dispute settlement mechanisms in the US negotiating objectives seems to apply to the general dispute settlement proceedings regarding the application or interpretation of the agreement (i.e., Chapter 20) where the US mentioned its desire to improve the transparency of such proceedings.
Canada and Mexico have expressly referred to the dispute settlement mechanisms in their respective negotiating objectives. Both governments want Chapter 19 to stay and have observations regarding Chapter 11. For example, Canada has stated that “Just as good fences make good neighbors, strong dispute settlement systems make good trading partners” and that Canada’s objectives include “reforming the Investor-State Dispute Settlement process, to ensure that governments have an unassailable right to regulate in the public interest”. Mexico has said that it wants to keep and modernize all of the dispute settlement mechanisms, including Chapters 11 and 19 and the dispute settlement mechanisms for financial services, to make them more efficient and transparent.
The center of the debate so far has been Chapters 11 and 19. These are the chapters that are in full operation. Interestingly, there has been very little polemic with respect to Chapter 20 despite the fact that it has a deficiency of such a magnitude that it renders the mechanism inoperable (e.g., the lack of an agreed list of arbitrators to solve disputes when parties are unable to agree on the composition of the panel). Other dispute settlement mechanisms in NAFTA such as the mechanisms for financial services, labor and environment and the limited mechanisms for private commercial disputes regarding agricultural goods (Article 707) and alternative dispute procedures (Article 2022) have received almost no coverage.
When one looks at NAFTA carefully, it is clear that even after two decades NAFTA continues to appear as a “modern” and “innovative” agreement with respect to dispute resolution proceedings. It has specialized rules for different types of disputes and it even has institutional structures such as the NAFTA Secretariat and the Free Trade Commission which have an important role in the dispute resolution process. This reflects the importance that dispute resolution had over twenty years ago. Today there is substantial debate on whether these mechanisms should stay or go or be “harmonized” into one single mechanism that would cover all types of disputes, including labor, environment and others that apply to potential new disciplines such as e-commerce, state-owned enterprises, intellectual property or anti-corruption matters.
It is also clear that often institutional structures start to be a problem when ideas change. When this happens, the only way of addressing this issue is apparently to either change the structures or abandon new ideas. In the NAFTA context, there seem to be two ideas or propositions: (1) NAFTA has been the worst trade deal ever and it needs to be renegotiated or (2) NAFTA has been a good deal but it needs to be “modernized”. Which of these ideas will prevail? Can they co-exist? How will these ideas impact NAFTA’s institutions and rules? (As a side note, it should be clarified that the correct term for updating NAFTA is “renegotiation”
rather that the widely used term “modernization”. Whether NAFTA is “modernized” or not will depend on the outcome of the renegotiation. A more trade restrictive agreement with tougher rules of origin and fewer avenues for resolving disputes could hardly be qualified as a more “modern” deal).
The above propositions which apply to NAFTA generally are also present in the dispute resolution arena. Many still consider treaty arbitration as the most civilized means of solving disputes and believe it is a sine qua non for free trade agreements i.e., NAFTA dispute resolution proceedings are good. Other voices (which were silent for a long period of time and are often based on a poor understanding on how the mechanisms work) believe that the settlement mechanisms constitute a loss of sovereignty and a threat to democracy and the right to regulate in the public interest i.e., NAFTA dispute resolution proceedings are bad and need to be changed.
Before answering whether the mechanisms are good or bad and whether they need to be renegotiated or eliminated, perhaps the discussion should center on why the mechanisms were created and candidly respond whether such goals have been achieved and, if not, what needs to be done to achieve them.
Without entering into too much detail, NAFTA provides in Article 102.1(e) that one of the purposes of the agreement is to create effective procedures for the implementation and application of [the] agreement, for its joint administration and for the resolution of disputes. What can we say about this goal today? Has it been achieved? In my view, NAFTA has had mixed results in this respect (often poor results). Some mechanisms work, others work with some deficiencies and others frankly do not work at all. It would be hard to say that all of them are “effective” to resolve disputes. To illustrate this point, it is useful to highlight the following:
Chapter 20 has solved disputes such as cross-border trucking services, broom corn brooms and agricultural goods but has been ineffective in solving disputes such as sugar, tuna and country of origin labeling for meat products. These disputes had to be solved in the WTO rather than NAFTA because Chapter 20 lacked a list of arbitrators to resolve panel formation issues. This affected the certainty and operation of the mechanism.
Chapter 19 has several deficiencies but despite that, numerous cases are resolved through this mechanism (approximately 146 so far according to the NAFTA Secretariat). To name just a couple of problems with Chapter 19, there have been substantial delays in the formation of binational panels (in some cases over a year to get the agreement of both governments involved) and the standards of review vary from country to country, which has not permitted the creation of a consistent Chapter 19 jurisprudence. There are also claims that the arbitrators’ fees are too low (which affects the quality of the decisions) and that there are limited experts available to participate as panelists.
Chapter 11 has had the best results in terms of operation. This is due in large part to the fact that the establishment and operation of tribunals are left to institutions, such as ICSID, that are independent from NAFTA. Some decisions issued by the Chapter 11 tribunals, however, have required NAFTA countries to intervene and issue binding notes of interpretation. This means that arbitral tribunals under Chapter 11 may not be interpreting NAFTA correctly or consistently all the time. Some critics of the mechanism pointed to similar issues in connection with the negotiation of the Transpacific Partnership Agreement (TPP). There is definitely room to improve this chapter.
The mechanisms under the Labor and Environment chapters are limited to consulting and follow up efforts on outstanding issues relating to labor and environmental policies and measures. Claims stay at the consultation phase because it is virtually impossible to establish a panel that can issue a final and binding award as the defendant’s consent is required to establish the panel. No panel has ever been formed to resolve disputes under these Chapters.
In short, there are enough issues with the dispute settlement mechanisms under NAFTA to justify their renegotiation. The main question is which ones will disappear, remain or change and whether some of them will be replaced by new mechanisms. In any event, the mechanisms should be evaluated based on their operation on a case by case basis considering their specific purpose and effectiveness, the parties’ political and commercial interests and the cost and benefits of maintaining them. The discussion so far has been too general to be useful
By: Carlos Véjar