Time to draw a line in the sand

NAFTA and the softwood lumber dispute
March 31, 2005

In the lead-up to the NAFTA leaders’ meeting in Waco Texas, former free trade negotiator Gordon Ritchie called on Prime Minister Martin to ask US President George Bush to muzzle his trade officials who, he said, are threatening to destroy the NAFTA dispute settlement system. It is extremely unlikely that Bush committed any of his political capital to settling the most intractable of the bilateral trade disputes, softwood lumber. It also raises questions about what else Ritchie, who has just been appointed as advisor to the government on the lumber case, has in mind to resolve this dispute.

For two decades, Canada has fought US trade actions.  It has fought them under NAFTA, at the World Trade Organization and at its predecessor, the GATT. It opted for a negotiated settlement in 1986 to avoid aborting the free trade negotiations, and in 1996 to avoid changes to US trade law that neutralized Canada’s earlier victory.

In the current lumber round, now in its fourth year, the US trade agencies have gone to extraordinary lengths to avoid complying with the legal rulings. They have refused to return the $C4.25 billion (and growing by $150 million a month) in tariff revenue collected from Canadian exporters since 2002. Senior American officials are saying that they will instead dispense it to their US competitors as directed by the Byrd amendment of 2000 (which said the US could redistribute tariffs collected on allegedly unfair imports as payouts to the very companies that brought the complaints), even if the US loses its final NAFTA appeal. They argue that because of an arcane legislative provision, US law now trumps NAFTA panel decisions.

The lumber dispute has dramatically exposed the NAFTA dispute system’s flaws. The US has invoked the Extraordinary Challenge procedure (which was only supposed to be used in the most exceptional of circumstances) six times--twice in the lumber dispute.  Despite NAFTA, the Congress has changed US law several times to reverse dispute losses. NAFTA panel disputes now take an average of 700 days to resolve—more than twice as long as they were supposed to, and longer than disputes settled at the US domestic trade court.

Canadian companies have now taken their fight against the US tariff back to the US court, where they at least have a chance of having the collected duties returned to them if they win. Under the NAFTA process, according to US officials, they now have no chance at all of getting their money back. Hence, the perverse outcome that companies from Mexico and Canada going through the NAFTA dispute process get inferior treatment than, say, a French company going through the US court process.  The final irony is that the Canadian government is also preparing to head to the US domestic trade court to challenge the Byrd amendment (declared illegal by the WTO), the very process it sought to replace with the bi-national dispute panels.

The stakes in the softwood lumber dispute are very high—for the companies, the workers, and for dozens of resource-based communities across the country. However, this dispute is about much more than lumber. It is about the very integrity of the commitments the US government made under NAFTA and the wisdom of the concessions Canada made to secure them.

Government and industry should continue to fight the legal battle through to its conclusion.  They should not cave in to US pressure for an early (and unfavourable) settlement. A legal win will not solve the problem, but it will help improve Canada’s bargaining position in the inevitable negotiation that will result in some form of managed trade agreement. The government should provide adequate support to affected workers and communities, and assistance to the industry to help offset its enormous legal costs. The US is dragging this process out, trying to cripple the Canadian companies financially, and force them to settle on American terms. Any indication that we are anxious to settle will be interpreted as a sign of weakness and an incentive to continue their bully tactics.

If, as expected, Canada wins the legal battle and the US still refuses to remove the tariff and return the duties collected from Canadian producers; if it persists in asserting that US law trumps NAFTA, then Canada should invoke a little-known, but powerful and as yet unused NAFTA provision, Article 1905.  Article 1905 would allow Canada to trigger a bilateral consultation process on the grounds that the US is violating the Agreement. A win, which is likely, would give Canada the right (as trade lawyers have told a Commons committee) to actually withdraw benefits it has extended the United States under NAFTA. The most obvious candidates for the withdrawal of benefits are the investment provisions--for example, national treatment for US investors or Chapter 11 investor-state privileges for US corporations, and, of course, the energy-sharing provisions.

Ritchie, in his memoir Wrestling with the Elephant: The Inside Story of the Canada-US Trade Wars, made it clear that the Canadian team would never have signed the free trade deal without the dispute settlement system, certainly not if it thought that the Americans would show such contemptuous disregard for their commitments. US trade officials believe they can act with impunity because dependent Canada would not walk away from the Agreement, no matter what. 

If we continue to cave in, the Americans will continue to trample over us whenever they have an important interest to protect. Canada must draw a line in the sand. We do have alternatives. Despite the ongoing efforts of our continentalist elites, we still have the capacity to assert ourselves and flourish as an independent nation.

Bruce Campbell is the Executive Director of the Canadian Centre for Policy Alternatives.  This op-ed is based on a paper originally produced for the Centre for Research and Information on Canada.