U.S. proposes de-fanging NAFTA’s enforcement systems

ARLINGTON, United States — The United States has requested a drastic weakening of the systems that enforce the North American Free Trade Agreement by settling disputes, sources said Saturday of the latest American proposals that would drastically overhaul NAFTA.

The U.S. wants to strip down the three sections that settle disputes: Chapter 11 that lets companies sue governments, Chapter 19 that allows companies to fight to overturn duties, and Chapter 20 on country-to-country disputes.

The American proposals would render all of them toothless. Chapter 11 would become voluntary, with countries being allowed to opt out. Chapter 19 would be eliminated entirely, after a phase-out period. And Chapter 20’s panels would become an advisory body.

This would have a major effect on the trade agreement as all the bodies meant to act as its watchdogs would be de-fanged, said a source familiar with the talks, asking to remain anonymous. 

“It’s very much NAFTA-minus,” he said.

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The biggest anticipated fight is over Chapter 19. Canada walked out of the original free-trade negotiations with the U.S. in 1987, refusing any agreement without a mechanism that allows companies to fight anti-dumping duties. Over time, Canadian companies have used it in softwood-lumber cases, and could use it again if the Bombardier-versus-Boeing dispute drags on. 

Members of President Donald Trump’s team describe these panels as a violation of sovereignty, where foreign, unelected courts make judgments on how domestic law should be applied. It echoes a longstanding argument made by groups on the left critical of trade deals.

An example of one case that has raised the ire of NAFTA critics involves U.S. company Bilcon — now seeking US$101 million after it won a suit against the federal and provincial governments under Chapter 11, after its plans for a quarry and marine terminal were blocked in Nova Scotia.

One prominent trade analyst suggests Canada might easily let Chapter 11 die.

The Canadian government has occasionally lost suits, like Bilcon, while the U.S. is undefeated, a dominant track record that has some baffled over why the U.S. would want to weaken it.

“Dropping this would not be difficult for Canada to agree,” said a paper earlier this year from Dan Ciuriak, former deputy chief economist of Canada’s foreign-affairs department, and leader of its modelling division.

“All in all, the demise of NAFTA Chapter 11 should be accepted by Canada.”

But Chapter 19 is a different story — his paper points out this chapter was deemed critical for Canada entering NAFTA in the first place.

Another analyst says the cumulative effect of all these moves would be a weaker NAFTA.

“It makes the NAFTA a toothless agreement if you can’t enforce it,” says Peter Clark, an Ottawa trade consultant present at the talks.

“(It makes trade) less predictable.”

The U.S. has now made a series of requests deemed non-starters by the other countries, prompting members of the Canadian and Mexican delegations to wonder whether the Americans even want a NAFTA deal. 

The U.S. demands deemed poison pills include:

—An expiry clause, where NAFTA would automatically end after five years unless all countries extend it.

—A drastic increase in Buy American protections on public contracts.

—An abrupt, near-immediate overhaul in where auto parts are sourced to benefit U.S. manufacturers.

—Veto power over future Canadian changes in its milk classification system.

The series of non-starters has the other countries wondering whether President Donald Trump’s goal is to make others countries walk away, declare he has no choice but to make good on his threat to cancel NAFTA, and either end NAFTA or force the other countries back to the table in panic.

The Bank of Canada governor said the uncertainty over NAFTA remains a drag on the economy.

Stephen Poloz said it’s hard to calculate what the impact would be of NAFTA ending. It depends on a series of factors, including under the most drastic scenario where there is no free-trade deal in North America and thousands of companies make individual decisions over whether to maintain investments and pay tariffs.

“The shock to the economy would be a negative one,” Poloz told reporters Saturday while attending world financial meetings in Washington.

“It would cause a rethink of investment plans… How much there would be is impossible to know… Reactions can vary — from nothing, to expanding in the U.S., to shutting down… It’s impossible (to predict now).”

Alexander Panetta, The Canadian Press