Geoffrey HalePolitical Science 3170

University of LethbridgeOctober 26, 2010

OutlineDispute Resolution

Political significance to the politics of tradeComparing WTO and NAFTA Dispute Resolution

ProcessesImplications for Canadian trade policiesThe Politics of the Softwood Lumber Dispute

Outlier, Tactical Lesson or Reflection on the Limits of Dispute Resolution?

Dispute Resolution and the Politics of TradeDispute resolution is central to the preservation and

development of a rules-based, rather than power-driven system of international trade.Realism (large powers) - “Threats of retaliation must

generate expected costs (greater) than the short term gain from violating an agreement” (H&K)

Realism (small powers) – Capacity to enforce agreements with on larger powers central t0 maintain gains of rules-based trading systems.

All p0wers (game theory) – The maintenance of trust and shared commitment to international trading system directly related to capacity for arms-length resolution of interest-based disputes.

WTO DR system also imposes disciplines on retaliation to limit potential breakdown of international trading system from disproportional responses to interest-based disputes.

Law, Politics and Dispute ResolutionMany WTO requirements ambiguous or vague at

best.Development of case law through permanent

tribunal can reduce uncertainties over time.NAFTA dispute resolution different from WTO in

that it reviews application of national laws to ensure their consistency with national treaty commitments.

Comparing NAFTA, WTO Dispute Resolution ProcessesCUFTA NAFTA WTOMultiple dispute resolution

processes for investment (chapter 11), financial services (14), general trade (19), and the NAFTA Commission (20)

Ad hoc panel composed of members from countries that are parties to the dispute (majority alternates between countries)

Consolidated dispute resolution system

Permanent court – members drawn from many WTO members, but panelists may not sit on disputes to which their own country is a party.

Comparing NAFTA, WTO Dispute Resolution Processes IICUFTA NAFTA WTOBegins with

consultations over alleged breach of treaty

Plaintiffs may request formation of panel Plaintiffs may be

governments or businesses with direct interest in case

Panelists appointed by national governments

Begins with consultations over alleged breach of treaty

Plaintiffs may request formation of panel Plaintiffs may only be WTO

member governments DSB determines composition,

terms of reference of panel, subject to appeal by parties to dispute.

Other countries (“third parties”) may associate themselves with the complaint to secure benefits of relevant rulings / settlements.

Comparing NAFTA, WTO Dispute Resolution Processes IIICUFTA NAFTA WTOPanel Deliberations

Average 12-15 months (vs. intended 10.5 months)

Potential for “Extraordinary Challenge Panel” in cases of challenges to jurisdiction of Chapter 19 panels (“not appeal”)

Recourse remand decision to original national body for review and correction

Panel Deliberations Average 13.5 months (1995-

06) Potential for Appeal to

Appellate Body Average 3 months (1995-06)

Reasonable time for implementation Bilateral – 9.5 months Arbitrator – 12 months

Retaliation Permitted for injured parties ,

but with scope of retaliation subject to authorization by DSP, to recognized level of economic damages from original violation.

Other relevant issuesSignificant proportion of cases in both WTO and NAFTA

dispute systems settled out of court144 panel decisions of 351 cases in 1995-2006.

“Win / loss” statistics of limited valueRelative importance of cases (economic / legal) varies

widelyMany cases involve multiple issues involving both

substantive and procedural questions with varied outcomes.Most claims involve Anti-Dumping, Countervailing Duty

claims growing volume of SPS-related claimsMany cases resolved on technicalities

Process slow, highly legalisticSubstantial systemic benefits – but limited value to

individual firms given elapsed time to settlement, need for “critical mass” in challenging actions of major trading powers.

Who uses Dispute Resolution?Number Complainant Respondant(avg./year) 95-06 07-09 95-06 07-09

G-2 (US, EU) 50% 26% 50% 45%Industrial 38% 23% 38% 23%

(incl. Canada) 2.25* / 2 7.6% 9.7% 4.5% 1.6%

Developing 33% 51% 12% 28%(incl. China) 0.3%9.7% 1.1% 25.8%

• Canada third party in 71 cases – 4.5 / year since 1995• China third party in 71 cases – 4.5 / year since 1995.

Declining number of Canada-US Trade Remedy disputes

Reviews of US Reviews of Canadian

determinations determinationsFTA 1989-93 Antidumping 8 4 Subsidies/countervail 6 — Injury 5 7 Extraordinary challenge procedures — 3NAFTA 1994-2006 Antidumping 20 10 Subsidies/countervail 13 — Injury 4 9 Extraordinary challenge procedures — 2

[Source: Dymond and Hart, 2007: 48]

Softwood Lumber – Aberration or “Canary in the Coal Mine?”Several disputes since early 1980s

Softwood Lumber I (1983) – US Department of Commerce rejects challenge to Canadian provincial forest management policies

Softwood II (1986) – Canada agrees to SLA I – 15% export tax on all softwood lumber exports in response to US DOC finding of injury (1986-91)

Softwood III (1991-96) – Further disputes under NAFTA; concluded by SLA II – export tax agreement on Cdn. Exports (1996-2001)

Softwood IV (2001-06) – Multi-tiered dispute at NAFTA, WTO, US Court of International Trade – concluded by agreement on two-tier export tax combined with export quota for low tax provinces (QC, ON, MB, SK).

Common features of disputesChallenge by U.S. Industry (Coalition for Fair Lumber

Imports) strongly supported by lumber state senators (Pacific NW + Southeast US)

Effort to identify Canadian forest management practices (esp. stumpage fees) as effective subsidy causing harm to U.S. industry reflective of different forest management, property ownership and taxation policies in each country.

Competing interests in both countries Different forest management practices, industry structures in BC,

Ont./QC, Maritimes Dissenting voices: US consumer groups (esp. Homebuilders),

Canadian environmental groups and B.C. First Nations.

Softwood Lumber IVAggravating features

Initiated by B.C. Government’s insistence on cancellation of SLA III (2001), challenging U.S. Policies under NAFTA

U.S. “Byrd Amendment” (1999) providing share of AD / CVD duties levied to plaintiffs – “ambulance chasers’ bill of rights” (ruled in violation of WTO, 2003, NAFTA, 2005)

US DOC rejection of initial Chapter 19 NAFTA rulingsMixed results from Canadian appeal to WTO, muddying

legal watersCFLI constitutional challenge to NAFTA dispute resolution

processes under Chapter 19 (opposed by Bush administration)

Growing politicization of NAFTA in both countries made political climb-down risky pressures for negotiated settlement

SLA III: “the Good, the Bad and the Ugly” Negotiation of 7 year

“market stabilization” deal – driven by falling U.S. Housing, lumber prices

$ 4 billion of $ 5 billion in US duties collected returned to Canadian producers

Binding arbitration of disputes by LCIA

Renders constitutional challenge “moot”

Two-tier, phased export tax No barriers to Cdn. Imports

when prices over $US 365/mcf Escalating tax

15% (BC, Alta) with no volume constraints

5% (ON, QC, MB, SK) with quota. $ 1 billion in US duties retained

$ 500 mm to community funds (e.g. rebuilding New Orleans)

$ 500 “signing bonus” to industry

Followed by collapse of U.S. housing prices in 2006-09Weekly average prices: USD / mcf.2005 393.12 2006 325.73 2007283.12 2008 256.25 221.92 Oct.2010 252

SummaryGrowing integration of Canadian, U.S. economies

has reduced vulnerability of Canadian firms to U.S. trade remedy sanctions only 2 cases since 2004, 1 “successful”.

Dispute resolution system remains vulnerable to political end runs in Washington by special interest lobbies with political connections.

Disputes based on major differences in regulatory systems best contested through WTO enabling coalitions of aggrieved countries to increase critical mass of economic risk to major trading powers.10 of 14 recent cases (2007-10) against major trading

powers in cooperation with one or more major powers.