Mexico and Canada are pushing back to get a good agreement, but there is still a long way to go.
One of the most contentious items on the NAFTA renegotiation agenda is conflict resolution, with the US looking to overhaul the treaty’s existing dispute settlement mechanisms (DSMs). This is no minor issue: NAFTA’s DSMs provide the legal backbone that gives the treaty its teeth.
NAFTA currently provides three avenues for dispute settlement depending on the type of controversies: chapter 11 (investor-state dispute settlement mechanism), chapter 19 (dispute settlement in antidumping and countervailing duty matters), and chapter 20 (dispute settlement on compliance with NAFTA at the national level).
Ch.11 and Ch.20 are not unusual in international trade or investment treaties, and the protections offered by them are likely to survive in one form or another whether or not they continue to be part of NAFTA. On the other hand,Ch. 19 is quite unique, and has been singled out by the current US administration as a target for elimination in the NAFTA negotiating objectives.
Not surprisingly, Mexico and Canada are pushing back. In what follows UBS -a brokerage firm- review what each of these chapters does, what the US is proposing with respect to them, what would happen in their absence, and what the Canadian and Mexican positions are on these issues.
Under Chapter 11, when a country loses it has to pay damages to the complainant. The US has had success under this process. Not only have US companies won arbitrations in both Canada and Mexico, but also the country, out of 21 arbitrations, has obtained 10 dismissals, and 9 decisions which “we equate with dismissal, with two results still pending. Canada, by our count, was targeted 37 times and lost or settled 7 times, with 5 cases still pending”.
Mexico lost or settled 5 out of 27 cases, with 6 still pending. Canada has received the most complaints under Ch.11, and the US under Ch.19.
Under Ch.20 the US brought one complaint against Canada, and Mexico two against the US.
The US received the largest number of complaints under Ch.19. of the 43 finalized complaints against the US it was ordered to review AD/CV duties in 30 instances. Canada and Mexico both have 14 resolved complaints. Canada had to address issues with AD/CV duties on 5 occasions and Mexico had to do it 9 times.
Considering that in 2015 the volume of trade in merchandise between NAFTA members reached USD 1tn the fact that only 71 complaints have resulted in any action shows how little this provision is used. It is more likely that its relevance lies more in its ability to dissuade countries from engaging in unfair trade practices.
Mexico and Canada also presented a united position regarding the US’ stance. In case the US opts out of investor protections, such as the ones established in Ch.11, Mexico and Canada have said that they will seek their own bilateral arrangement, excluding the US from said negotiations. Despite earlier speculation to the contrary, Mexico’s trade negotiator Idelfonso Guajardo recently appeared to close the door for unilateral investor protections for US businesses operating in Mexico. In our view lacking strong investor protection may hamper US FDI in Mexico.