The Controversy of NAFTA’s Dispute Settlement Mechanism
Team Leader: Brandon Robinson
Author: Danté Fanian
One of many problems that NAFTA has according, to President Donald Trump and his administration, is regarding the controversial dispute settlement mechanism that derives from Chapter 11 and Chapter 19 of the North American Free Trade Agreement (NAFTA) agreement. Chapter 11 primarily concerns investor protection. That is, investor-state dispute settlement, also known as ISDS, is centered on protecting foreign investors, such as companies that have foreign branches abroad, to be protected from policies and actions of the home government that fail to meet a set of standards of treatment and that may cause investors economic harm. Further, ISDS gives special legal privileges to foreign investors and corporations, including the right to launch litigation against host governments who fail to meet their required standards. One of the controversies about this provision is that it begs the question if foreign businesses need this type of protection. Many of these foreign investors and corporations are already successful and powerful – giving privileged legal rights seems unnecessary as they should be capable of assessing and evaluating risks of doing business abroad. Chapter 19 of the agreement concerns the arbitration of anti-dumping cases that have often favoured Canada and Mexico.
The U.S. opposition to Chapter 19 stems from the view that it has hampered U.S. anti-dumping cases, as well as sets strict rulings on softwood lumber. The U.S. has proposed that Chapter 11, must at a minimum, include the protection of U.S. domestic objectives in foreign dealings and wishes to remove the privileged rights foreign investors have against their domestic investors.
The American negotiators have been adamant on the removal of Chapter 11 and Chapter 19 provisions of the NAFTA agreement, and have threatened to leave the agreement completely if changes of these nature do not occur. Should Trump have his way in altering or removing the dispute settlement mechanism, Canada will have to adapt to different circumstances in regard to dispute resolution processes. Canada has relied on these dispute resolution mechanisms in the past, as many of its similar trade agreements in foreign countries use investment protection provisions under the foreign investment promotion and protection agreements (FIPAs). Canada has relied heavily on FIPAs and NAFTA’s provisions on investor protection to build many of their trade agreements overseas, the removal of the dispute resolution mechanism can pose challenges for future trade agreements abroad. Canada will surely suffer a loss in great proportions and the same can be said about Mexico. The biggest issue from the Chapter 19 provision is on the softwood lumber dispute, which brings issues of sovereignty and unconstitutionality. Chapter 19 has been a critical provision of NAFTA to Canada and Mexico, who have been protected from the application of U.S. laws on cases concerning traded goods. The elimination of Chapter 19 will have a more significant impact on Canada, as its softwood lumber industry has been protected from many U.S. court cases. This would also support the U.S.’s proposed “Buy America” policy that Trump envisions for the future of NAFTA, that has also been criticized by Canadian and Mexican trade officials.
The proposed changes present many challenges for meaningful negotiations and signals an uncertain way forward. NAFTA’s dispute resolution mechanisms prevent America from taking advantage of the smaller economies of Canada and Mexico, which is why they are willing to fight for them in trade talks. The U.S. and Trump are very firm on these changes as they have insisted on backing out of NAFTA if such adjustments do not occur, but these propositions are have proved to be fundamentally challenging for both Canada and Mexico to swallow.
