Jennifer A. Hillman is the senior fellow for trade and international political economy at the Council on Foreign Relations (CFR), specializing in U.S. trade policy, the law and politics of the World Trade Organization (WTO), international organizations, and Brexit.
As debate over Congressional approval of the Trump Administration’s revisions to the North American Free Trade Agreement (NAFTA) – set forth in the United States-Mexico-Canada Agreement (USMCA) – heats up, a key sticking point remains the adequacy of the mechanism to enforce the Agreement, particularly its provisions affecting labor and the environment. The NAFTA included three dispute settlement systems—one for challenges to trade remedy actions (anti-dumping and countervailing duty measures) (NAFTA Chapter 19), one for disputes by foreign investors contending that their investments had been harmed by state actions (NAFTA Chapter 11), and one for all other disputes (NAFTA Chapter 20). It is this third mechanism—Chapter 20 of NAFTA and its updated version—Chapter 31 of USMCA—that is the key to whether much of the new USMCA can be enforced through a binding dispute settlement system. For a variety of reasons noted below, Chapter 20 of the NAFTA was inherently flawed and proved to be utterly unworkable. Unfortunately, Chapter 20’s successor does not fix those fatal flaws. Therefore, those in Congress wishing to ensure that the USMCA parties can be held to account for their commitments will need to make serious changes to USMCA Chapter 31.
NAFTA Chapter 20 Flaws
When written in the early 1990s, Chapter 20 was groundbreaking. It established a process that begins with consultations between the disputing parties, followed by conciliation before a Free Trade Commission made up of the trade ministers of the U.S., Canada and Mexico, the establishment of a five-person panel to hear the dispute, the promulgation of a report ruling on the dispute and ultimately the implementation of the rulings and recommendations of that panel.[i]
However, the process has a number of key flaws that contributed to its infrequent use and eventual demise.[ii] Chapter 20 does not require parties to comply with panel rulings. Rather, it provides that once a decision is rendered, the parties “shall agree on the resolution of the dispute, which normally shall conform to the determinations and recommendations of the panel.”[iii] The afflicted party may retaliate with trade sanctions 30 days after the issuance of the panel report, if the parties do not reach an accord. As a result, the ability to achieve a resolution can be affected by the quality of the reasoning, the crispness of the panel recommendations and the willingness of the parties to conform their measures to the panel report.[iv] Second, panelists are chosen according to a “reverse selection process” under which one party must choose two panelists who are nationals of the other party, while the chair of the panel is to be chosen through agreement of the two disputing governments, or by lot if there is no agreement.[v] While this reverse selection process was created in the belief that it would encourage governments to nominate panelists to their own rosters who are independent, objective and well-qualified individuals, instead it has led to significant concerns over and delays in the selection of panelists.[vi] Third, the lack of requirements for panelists to meet deadlines meant that the few Chapter 20 cases that did go through the process were lengthy, beset by significant delays at various steps along the way.
But the most significant flaw in Chapter 20 is the ability of parties to block the establishment of a panel by refusing to appoint panelists or maintain a roster of qualified panelists from which appointments can be made. The U.S. used this flaw to block Mexico’s enforcement of NAFTA provisions related to trade in sugar, with one request for a panel pending for more than four years (which ultimately never convened) in the face of a refusal by the USTR to appoint any panelists. In frustration over U.S. intransigence, Mexico imposed anti-dumping duties and other taxes on U.S. exports of high-fructose corn syrup. The U.S. then turned to the WTO—where the establishment of a panel cannot be blocked—to challenge those anti-dumping duties. Mexico asked the WTO panel to consider the broader context of the dispute over trade in sweeteners and the NAFTA provisions governing Mexico’s right to export sugar, but both the panel and the Appellate Body refused to do so.[vii]Following the failure of the Chapter 20 process in the dispute over sugar, no Chapter 20 panels have been requested and there are no approved rosters of panelists from which to make appointments should a request be filed.[viii]
USMCA Chapter 31’s Changes to NAFTA Chapter 20
The new version of Chapter 20 is USMCA’s Chapter 31. As the following chart comparing the provisions of the two agreements demonstrates, Chapter 31 remains virtually unchanged, barring a few exceptions, from Chapter 20, so the critical impediments to an effective enforcement mechanism remain.
|
Issue |
NAFTA Chapter 20 |
USMCA Chapter 31 |
|
Scope: Issues Subject to Chapter 20/31 Dispute Settlement |
Covers all state-to-state disputes (except trade remedies (Chapter 19)) over: a) interpretation, b) violations, or c) nullification or impairment of NAFTA. |
Covers state-to-state disputes over interpretations, all claims of violation plus nullification or impairment of most of USMCA (Chapters 2, 3, 4, 5, 6, 7, 9, 11, 13, 15 or 20) but not certain specified chapters.* |
|
Choice of Forum |
If dispute could be heard either by WTO or NAFTA panel, either forum at discretion of complaining party unless third party prefers NAFTA. In that case, consultation between parties on which forum; if no agreement, dispute "normally" settled under NAFTA. Environment and SPS disputes solely under NAFTA. Once forum chosen, chosen forum is exclusive. |
Complaining party may select the forum (USMCA versus WTO or any other forum if both parties members). Once forum selected, chosen forum is exclusive |
|
Consultations |
Minimum of 30 days (45 days if third party requests joining; 15 days for perishable goods); must be requested in writing. |
Consultations within 30 days (15 days for perishable goods; must be requested in writing and must include identification of specific measure at issue, and legal basis for complaint. Adds requirement that consultations may be held "by technological means," that parties make requested personnel of their government available, and that consultations "shall be confidential." |
|
Establishment of a panel |
Request in writing if consultations and Commission failed to resolve matter within 30 days; third party with substantial interest in matter entitled to join as complaining party. |
Request in writing if consultations and Commission failed to resolve matter within 30 days; third party with substantial interest in matter entitled to join as complaining party; request for panel must include identification of measure at issue and legal basis of complaint; terms of reference are for panel to make findings, determinations and any jointly requested recommendations. |
|
Roster of potential panelists |
Roster of up to 30 individuals willing and able to serve established by consensus by January 1, 1994; roster members appointed by consensus for term of 3 years and may be reappointed. |
Roster of up to 30 individuals willing and able to serve as panelists established by consensus by date of entry into force of agreement; roster remains in effect for a minimum of three years or until parties constitute a new roster. For labor and environment disputes, disputing parties select a panelist with expertise or experience in labor or environmental law or practice. |
|
Panel Selection |
Panel comprised of 5 members; chair chosen first by agreement of parties or by lot if no agreement, then each party selects 2 panelists who are citizens of the other disputing party; if a party fails to select a panelist within 15 days, panelists selected by lot. A disputing party can exercise peremptory challenge against any individual not on the roster. |
Panel comprised of 5 members; chair chosen first by agreement of parties or by lot if no agreement, then each party selects 2 panelists who are citizens of the other disputing party; if a party fails to select a panelist within 15 days, panelists selected by lot. A disputing party can exercise peremptory challenge against an individual not on the roster unless no qualified and available individual on the roster possesses necessary specialized expertise, in which case no peremptory challenge. Process for replacement of panelists who resign, are removed or become unable to serve. |
|
Panel Proceedings |
Model Rules of Procedure established by Commission; third party entitled to attend hearings, make written and oral submissions and receive written submissions; panel can use agreed upon experts. |
Rules of Procedure and Code of Conduct as updated and adopted by Commission; includes right to at least one hearing (open to public) before panel held in capital of responding party; opportunity for initial and rebuttal written submissions (to be made public); confidential information protected; electronic document filing. |
|
Function of Panel |
No NAFTA provisions.
Model Rules of Procedure established by Commission. |
Panel makes objective assessment and presents report with: a) findings of fact; b) determination of whether measure is inconsistent, or party failed to carry out its obligations, or measure (if within scope) nullifies or impairs; c) recommendations (if jointly requested) on resolution of dispute; and d) reasons for findings and determinations. Interpretations in accordance with Articles 31 and 32 of Vienna Convention on Law of Treaties; panel decisions by consensus or if not possible, by majority vote; anonymous separate or dissenting views permitted. |
|
Suspension or Termination |
No NAFTA provisions |
Panel may suspend its work for up to a year at request of complaining party; may suspend its work at any time if disputing parties request; if work suspended for more than 12 consecutive months, panel proceedings lapse unless disputing parties decide otherwise |
|
Panel Report |
Initial report provided in 90 days to parties; parties can provide written comments on report within 14 days; panel or disputing party can request views on comments; final report (including potential reconsideration based comments) issued within 30 days of initial report, unless the parties decide otherwise. Final report transmitted to the Commission within a reasonable period; Commission publishes report in 15 days. |
Initial report in 150 days (120 for perishable goods) after panelists appointed; delay of up to 30 days permitted unless disputing parties agree otherwise; parties can submit written comments on initial report within 15 days; final report (including potential reconsideration based on comments, views or further examination) within 30 days of initial report unless parties decide otherwise. Final report to be made public 15 days later (except for confidential information). |
|
Implementation |
Upon receipt of final report, parties to agree on resolution of dispute; normally conformity with recommendations of final report, if not, compensation. If no agreement on resolution within 30 days, prevailing party may retaliate ("suspend benefits of equivalent effect"). Commission can establish panel to determine if retaliation is excessive. |
Within 45 days of receipt of final report, the disputing parties to agree on the resolution of the dispute. If unable to agree, the complaining party may retaliate ("suspend the application of benefits of equivalent effect") or seek compensation. If the responding party believes the retaliation if manifestly excessive or that it has eliminated the non-conformity or nullification or impairment, it may request that the panel be reconvened and issue its determination in 90 days/120 days. |
|
Alternative Dispute Resolution (ADR) |
Each party shall, to the maximum extent possible, encourage and facilitate the use of arbitration and other means of settling commercial disputes between private parties in US, Canada or Mexico. No party shall provide for a private right of action. |
Each party shall, to the extent possible, encourage, facilitate and promote through education, the use of arbitration, mediation, online dispute resolution and other procedures to resolve commercial disputes between private parties in US, Canada or Mexico. Parties shall provide procedures for recognition and enforcement of arbitral awards (i.e., compliance with New York Convention on Arbitral Awards or Inter-American Convention on International Commercial Arbitration). No party shall provide for a private right of action. |
* Not subject to challenge for nullification or impairment under USMCA Chapter 31: trade remedies (Ch. 8); the sectoral annexes on chemicals, cosmetics, ICT, energy performance standards, medical devices and pharmaceuticals (Ch. 12); investment (Ch. 14); temporary entry (Ch. 16); financial services (Ch.17); telecommunications (Ch. 18); digital trade (Ch. 19); competition (Ch. 21); SOEs (Ch. 22); labor (Ch. 23); environment (Ch. 24); SMEs (Ch. 25); competitiveness (Ch. 26); anticorruption (Ch. 27); good regulatory practices (Ch. 28); publication and administration (Ch. 29); administrative and institutional provisions (Ch. 30); and macroeconomic policies and exchange rates (Ch.33)
The changes that were made include:
1) the scope of USMCA Chapter 31 is more limited than NAFTA, in that NAFTA permitted panels to be convened to hear both violation complaints and nullification and impairment cases (non-violation cases) for everything in the NAFTA except trade remedies and the labor and environment side agreements, while Chapter 31 permits violation cases for all chapters of USMCA [except trade remedies] but it excludes non-violation cases for claims under USMCA’s chapters on labor, environment, digital trade, financial services, telecommunications and a number of others;
2) the addition in Chapter 31 of specific provisions on the function and duties of the panel and the possibility for the suspension or termination of a panel;
3) the provision of additional time for panels to work (initial report in 150 days rather than 90; additional 30-day delay permitted; 45 days rather than 30 for parties to agree on resolution after panel report issued); and
4) rosters of panelists are to be established by consensus by date of entry into force of the USMCA and remain in effect for a minimum of three years or until parties constitute a new roster.
The last change—that rosters will be established by consensus by date of entry into force of USMCA and will remain in effect until a new roster is constituted—is critical to ensuring that the establishment of a panel cannot be blocked. If that requirement is faithfully executed, it would considerably improve the viability of Chapter 31 because panels could always be established by selecting panelists from the agreed upon roster. However, simply stating a requirement for the establishment of a roster does not guarantee that it will be done. Indeed, NAFTA Chapter 20 had similar language, requiring that the NAFTA parties “shall establish [a roster of panelists] by January 1, 1994” but no agreed upon roster was ever promulgated. Therefore, Congress will need to ensure the existence of agreed upon rosters from all three parties before it votes on USMCA approval
The responses that USTR Ambassador Lighthizer has provided to Congress underscores the lack of a genuine fix to all of the Chapter 20 problems and the skepticism Congress should have about the Administration’s intent to faithfully execute the roster requirement. For example, Ambassador Lighthizer stated “I would point out the obvious and that is that panel blocking is permitted under the current NAFTA as well as under the USMCA.”[ix] If the requirement to have agreed upon rosters that remain in place is properly implemented, then it is not clear how the U.S. would lawfully be able to block a panel. Ambassador Lighthizer has also stated that “we can enforce our laws . . . using our unilateral law and Section 301,” referring to Section 301 of the Trade Act of 1974 which gives the President authority to take action against certain unfair trade practices.[x] If the USMCA contained a binding and effective dispute settlement mechanism, there would be no need to resort to Section 301, which, because of its unilateral nature, invites retaliation.
Recent press reports indicate that USTR may be willing to address at least some of these concerns.[xi] Enforcement was included in the list of four issues that Democrats have been working to improve before the USMCA implementing legislation is submitted to Congress, with USTR apparently providing a counterproposal to the Democrats initial request for changes to Chapter 31.
Recommendation
The most efficient and comprehensive way to address the flaws in USMCA Chapter 31 would be to replace the entire chapter with the dispute settlement provisions in the Trans-Pacific Partnership (TPP), now in effect as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP). Because Mexico and Canada are already parties to the CP-TPP, they have already agreed to the dispute settlement provisions in the CP-TPP. Moreover, the TPP provisions were negotiated to correct for the flaws in NAFTA Chapter 20 that were well-known to the U.S., Mexican, and Canadian TPP negotiators. The TPP dispute settlement system is “designed to be broader, deeper, faster, and more transparent than either the WTO’s Dispute Settlement Understanding or [NAFTA Chapter 20.]”[xii] If TPP disputes are not resolved in consultations, a three-person panel is appointed to hear the dispute. The TPP rules provide an elaborate system of what to do if any of the required appointments cannot be made; action or inaction by the parties thus cannot block the establishment of a panel.[xiii] Moreover, the TPP avoids the use of the “reverse selection process”, so the U.S. would be able to appoint a U.S. national to the panel to hear its disputes. It also includes tighter and more specific time limits. Finally, the TPP provides for a broader range of remedies (compliance, pay compensation to the complaining party, permission of retaliation in the form of a suspension of benefits, or payment of a fine), making it less likely that there would be long-running disputes over compliance with a panel report.[xiv]
If no agreement can be reached to substitute the TPP’s dispute settlement provisions for USMCA Chapter 31, then Congress should insist: 1) that rosters of panelists from the U.S., Canada, and Mexico be agreed upon pursuant to USMCA Article 31.8 and presented to Congress before the implementing legislation is voted on; 2) that the Statement of Administrative Action clarify whether, and if so, how and under what conditions, USTR believes that panels can be blocked; and 3) that the Statement of Administration Action clarify when and in which circumstances USTR believes Section 301 can be used to enforce an obligation arising under the USMCA or to respond to a Chapter 31 panel report.
[i] NAFTA, articles 2006-2017. NAFTA Chapter 20 was modeled on the state-to-state dispute settlement system of the U.S.-Canada Free Trade Agreement (CFTA), CFTA’s Chapter 18.
[ii] In the 27 years since NAFTA’s completion on December 15, 1992, only three Chapter 20 panel decisions have been rendered, none after 2001 when the U.S. refused to appoint panelists to resolve a dispute over trade in sugar with Mexico.
[iii] NAFTA, article 2018.1.
[iv] From the outset, there were concerns about the quality of the panel reports issued under Chapter 20’s precursor, CFTA Chapter 18. See, Gantz, David, “Addressing Dispute Resolution Institutions in a NAFTA Renegotiation,” Mexico Center, Baker Institute for Public Policy, April 2018, pp. 17-18. In addition, the decision in Cross-Border Trucking Services (Case No. USA-MEX-1998-2008-1, February 6, 2001) which affected border crossings at the U.S.-Mexico border has never been fully implemented. Gantz at p. 19.
[v] NAFTA, art 2011. Art. 2011(1)(c) provides that “[w]ithin 15 days of the selection of the chair, each disputing party shall select two panelists who are citizens of the other disputing party.”
[vi] In the Cross-Border Trucking Services dispute, there was a 15-month delay in the selection of panelists. See, Gantz, David, “Addressing Dispute Resolution Institutions in a NAFTA Renegotiation,” at fn. 93, noting the U.S. concern that Canadian or Mexican nationals on the panel would favor their own governments.
[vii] Mexico-Tax Measures on Soft Drinks and Other Beverages, WT/DS308/AB/R, adopted March 24, 2006.
[viii] The NAFTA Secretariat's website listing for "Roster Members" includes only rosters for Chapter 19 proceedings.
[ix] Response of USTR Amb. Lighthizer to question from Senator Carper, U.S. Senate Finance Committee hearing, June 18, 2019.
[x] Id. “Our view is that we can enforce our laws in the rare circumstance where there was a blockage by using our unilateral law and the 301. . . . And why did we do that? . . we think it will be very rarely used. But in a situation where, for example, someone challenged the trade laws of the United States, you want to be in a position where you can preserve your rights.”
[xi] “The administration has agreed to fix problems with how disputes between governments are resolved that plagued the North American Free Trade Agreement and were not corrected in the USMCA deal.” Politico, September 13, 2019.
[xii] Hillman, Jennifer, “Dispute Settlement Mechanism” in Assessing the Trans-Pacific Partnership, Jeffrey J. Schott and Cathleen Cimino-Isaacs, eds, Peterson Institute of International Economics (2016), p.214
[xiii] For a fuller discussion of the TPP’s dispute settlement system, see, Hillman, Jennifer “Dispute Settlement Mechanism” in Assessing the Trans-Pacific Partnership, Jeffrey J. Schott and Cathleen Cimino-Isaacs, eds, Peterson Institute of International Economics (2016).
[xiv] TPP, Chapter 28.19
