[Recorded by Electronic Apparatus]
Wednesday, June 12, 1996
.1543 
[English]
The Chairman: Order. My apologies for being a bit late. I was sent to the wrong room.
Perhaps we should start with our witnesses, and then we'll probably need to have a bit of an in camera meeting to decide how we will get organized and pursue our discussions.
[Translation]
Maybe we could start as those gentlemen are here and then we can discuss amongst ourselves how we'll organize our program.
You've seen on today's notice of meeting that with us today we have Mr. Jonathan Fried, director general, trade policy bureau and coordinator for NAFTA. Welcome, Mr. Fried and you also, Mr. Serge Fréchette, senior counsel, trade law division as well as Mr. John Gero, trade remedies division.
Without any further ado, I would invite you to make your presentation.
[English]
Mr. Jonathan Fried (Director General, Trade Policy Bureau and Coordinator for NAFTA, Department of Foreign Affairs and International Trade): Thank you very much,Mr. Chairman and members of the subcommittee.
As we understand it, this is the first meeting of your subcommittee. We thought, in consultation with the chairman, that most usefully we could help you set the stage for your work program by reviewing with you the major mechanisms and procedures available for the settlement of trade disputes both multilaterally under the World Trade Organization and bilaterally or regionally in accordance with the NAFTA, the North American Free Trade Agreement.
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We have prepared for your use, not only today but as a continuing reference, we hope, a document entitled Overview of Trade Dispute Settlement Mechanisms. It sets out in some detail all of the various mechanisms, procedures, timetables, who may participate in what stage of which proceeding, and so on, and attached to this document in annex tabular form are two charts. The first annex sets out all disputes currently before the World Trade Organization, both those involving Canada and those involving third countries. The second sets out, from the NAFTA secretariat, all of the NAFTA - and free trade agreement before that - dispute settlement cases both in regard to anti-dumping and countervail and government to government that are either in train or have been completed.
So as I say, Mr. Chairman, we offer this to you not so much for detailed consideration today but rather as a reference document that may be useful to refer back to throughout the course of your committee's work.
Subject to your views, we thought we would spend a few minutes with you simply in general terms, setting out the different kinds of disputes and dispute procedures that are involved in international trade, as I said earlier, in order to set the stage for your further work. So I might begin on that basis, largely drawing on the executive summary of this reference document.
Of course, the major and most traditional form of dispute settlement in international trade is of a government-to-government nature. After all, international trade obligations are set out in treaties. Treaties are really contracts between governments at the international level, so the parties to that contract, that treaty, would be the parties to participate in pursuing dispute settlement in regard to differences that may arise thereunder.
That is true both under the GATT and now the World Trade Organization or WTO procedures as well as under the NAFTA, as was the case of the bilateral free trade agreement before that.
I think the important point to note here, which I would emphasize, is that the results of dispute settlement under the WTO and the NAFTA are of course to be fully respected and therefore are binding as a matter of international law, but they do not have automatic domestic legal effect in Canada - or in the United States or other countries, for that matter - until or unless the sovereign government in that country takes the steps, be they legislative or regulatory as the case may be, to implement the decision. No treaty is automatically enforced directly by a Canadian court. The law or the regulation must itself be changed through appropriate domestic authority.
We do highlight in the paper the fact that we have witnessed an evolution in dispute settlement procedures at the international level. When the GATT first came into existence in 1948, dispute settlement procedures were designed more as an aid to negotiation - can we nurture the parties to bargain a compromise? We have witnessed in the last 40 years an increasing formalization and legalization of the process, culminating in the new dispute settlement procedures of the World Trade Organization, which much more clearly reflect a process that involved the enforcement of rights and defence of obligations. Therefore the rulings of dispute settlement panels are increasingly formal and more precise in nature, and although not binding in the same way domestic court procedures would be, obviously each decision, if well reasoned, will have persuasive effect on future cases.
.1550
The second kind of improvement in dispute settlement we've seen and have contributed to in the NAFTA and the WTO is certainty of the procedure. In the GATT, it was possible for countries to block a panel from ever being formed. It was possible to stall by failing to agree on terms of reference or the appointment of panellists or arbitrators. Under the WTO and the NAFTA, the process is that much more automatic. There are timetables set out in the agreements themselves that cannot be blocked by defending countries.
Third, Mr. Chairman, the decision-makers themselves, I think, are more expert both multilaterally and under the NAFTA. In the WTO, countries agreed on what's called an indicative list of experts from around the world that more clearly identifies areas of expertise and ensures their objectivity. Under the NAFTA in government-to-government dispute settlement, governments nominate and agree by consensus on a roster of panellists who, according to the treaty itself, must have specific expertise in the subject matter of the treaty in trade, law or regulation, or in other relevant disciplines.
In the WTO, there's a fourth improvement, Mr. Chairman, which is a second-stage verification of the propriety of what these panels do. It's known as the appellate body. This is, in effect, a process that allows countries who think a panel may have gone too far to have an appellate body of independent persons verify that the panel itself has not made a fundamental error in law.
Finally, under both the NAFTA and the World Trade Organization it is much clearer than it had been under the GATT or the FTA that your right to a remedy at the international level by way of compensatory gestures from the other country, or your right to take retaliation, are indeed to be kept in balance. The NAFTA is very explicit in saying, for example, that a country that has complained, has won the case and did not receive satisfaction, although it may retaliate, may not take excessive action. That itself is subject to dispute settlement.
This NAFTA dispute settlement procedure is set out in chapter 20 of the NAFTA - it formerly was chapter 19 of the FTA. During the five years in which the free trade agreement between Canada and the United States was in force, there were only five disputes, despite the huge volume of trade between Canada and the United States, that arrived at that formal chapter 18 dispute settlement panel stage. Today, as you well know, under NAFTA there is one dispute that has reached the panel stage, and that is concerning the tariff supplied by Canada on dairy and poultry products.
The second kind of dispute settlement, Mr. Chairman, that in measure is unique to North America and due to Canadian initiative is the one area that people often think is dispute settlement, and that's the famous chapter 19 system. We kept the same number in the FTA and in the NAFTA. This is a unique system of binational panel review at the supranational level of domestic decisions concerning anti-dumping and countervailing duty matters.
In other words, what Canada and the United States, and now Mexico, have done under the regime is to have created an international body to serve in the place of a domestic court of review. But even though international in composition, that body must apply the domestic law of the importing country.
This is a system that obviously was a compromise and a less than fully satisfactory solution from Canada's perspective in the FTA and, absent further progress, was carried forward into a NAFTA context, although it certainly has proven itself to provide tremendous advantages for Canadians. The timetables are much shorter than those of domestic courts in the United States. Exporters from Canada caught up in the system are satisfied, and have been satisfied, that the decisions have been clear and well reasoned. Most of the decisions, as you can see on the first page of annex 2, have been largely unanimous. Only one out of 71 cases has split along national lines. It has been used effectively, in effect going in both directions across the border.
.1555
This procedure also has a second-tier double-check to ensure objectivity and fairness. It's known as an extraordinary challenge procedure, and ``extraordinary'' was indeed intended by the negotiators. Although there have been 71 cases, and some have attracted more publicity than others, the extraordinary challenge procedure has been used but three times in the entire history of this system: once concerning pork; once concerning swine; and, most infamously I suppose, regarding softwood lumber exports from Canada.
In each of the three cases the extraordinary challenge committee, which is comprised of sitting or retired judges from both countries, verified that what the panel itself had done was wholly within the bounds of what it was expected to do under the treaty.
Third, for the first time, under NAFTA, and again yet a different regime for the settlement of disputes, is a system of what would be called mixed or investor-state arbitration.
For the purposes of the obligations regarding foreign investment by foreign investors, and also for certain monopoly and state enterprises, the NAFTA provides a system by which an aggrieved foreign investor may trigger arbitration directly with his host government, without having to politicize the dispute by getting his own government to take up the cause and without having to go into the local courts.
Although this is new within a trade agreement context, it is a system that has long history and long standing. It is very common to Canada's network of foreign investment protection agreements. It helps our investors to have a neutral arbitral system, rather than local courts where they invest abroad.
Certainly the United States includes similar provisions in its bilateral investment treaties, and it parallels fairly closely a system sponsored by the World Bank itself under the auspices of what is known as ICSID, or the International Centre for the Settlement of Investment Disputes, headquartered in Washington.
This is new in a trade agreement context. It was not part of the FTA or the GATT.
No cases have been arbitrated under these provisions to date.
Let me briefly say two other things.
First, this paper also discusses - although I do not intend to comment on this today unless there are questions - the dispute settlement procedures of the NAFTA side agreements on labour cooperation and environmental cooperation.
Finally, Mr. Chairman, this paper also reviews for your consideration the fact that in many ways the kinds of notification procedures and domestic due process procedures that we now codify in the WTO and in the NAFTA themselves are a means of dispute settlement, because they really help to avoid small disputes becoming big disputes.
If I can give you one example, the NAFTA requires, as did the FTA before it, each of the three countries, in regard to government procurement decisions, to have a domestic procedure for independent review of tendering and bidding procedures.
In Canada this is now done by the Canadian International Trade Tribunal, with powers to direct or suggest or recommend a rebidding in order to keep the process fair and open. We have those procedures now guaranteed for our bidders in the United States and Mexico.
If there's an element of self-help at a reasonably accessible administrative review level, then it need not become a national dispute of political dimensions.
That's simply one example, and I think both the World Trade Organization agreement and the NAFTA try to implement that principle in a number of areas, from customs to procurement, to licensing decisions, and so on. The more we can ensure fairness and procedural due process for our investors, traders, bidders and suppliers in other legal systems, the more guaranteed, certain, and predictable will be their access abroad.
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So in some ways, Mr. Chairman, we suggest that this itself is an element of trade dispute settlement.
To conclude, Mr. Chairman, not so much to create work for lawyers but simply to be candid, this paper notes that of course none of these systems are perfect, but Canada continues to seek improvements in trade dispute settlement regimes. After all, as a middle power that can't and won't exercise the kind of economic leverage that power politics demands, we are better served by a system of rules rather than one of leverage.
It's in our national interest to ensure that the rules are under continuous improvement, and the paper sets out the government's efforts to continue to pursue this agenda in the trade field for NAFTA, the World Trade Organization and various regional initiatives such as APEC and free trade in the Americas.
So we hope this is a useful overview and introduction. My colleagues and I are of course at your disposal to answer questions you may have today or to return at a future date for more detailed discussion of some of the issues raised.
Thank you, Mr. Chairman.
The Chairman: Thank you very much.
Are Mr. Fréchette and Mr. Gero making other statements?
Mr. Fried: No.
The Chairman: They are there to support you, Mr. Fried. Yes?
[Translation]
Mr. Sauvageau, the floor is yours.
Mr. Sauvageau (Terrebonne): Mr. Fried, thank you for your presentation but especially for the last part where you said that if we needed you in the future, you'll be pleased to come back and meet us. It's quite nice of you because we will certainly have need of your judicious advice. I also thank you for the excellent document you tabled.
I have a few questions, some of them stemming from a document prepared by our research service. I did not read the document you tabled earlier. My first question might seem a bit weird but I would still like to be enlightened on one point.
I have often put questions, in the House, to the minister concerning the Helms-Burton legislation. The president of Mexico came before us and spoke out against the Helms-Burton Act. Except for the US and another southern country, there has been unanimous opposition to this bill, in Europe and everywhere else.
My first question is then for Mr. Fried who is the NAFTA coordinator. According to the document you gave us, within the NAFTA framework, can Canada contest the Helms-Burton legislation?
[English]
Mr. Fried: Mr. Chairman, this paper is designed solely to describe the mechanisms rather than to provide any legal or other judgments regarding the procedures.
Let me simply say, however, as both Minister Axworthy and Minister Eggleton have said and have confirmed, Canada has already invoked the consultation provisions of NAFTA with the United States to take up the Helms-Burton issue and is currently analysing the next steps that are available to them under NAFTA and under other international procedures.
[Translation]
Mr. Sauvageau: Thank you.
The other question that was raised during a preceding meeting has to do with matters we could discuss here. One of those is on page 22 of the Red Book that I don't have here. I don't belong to the right party so I don't have it on my bookshelves.
It has to do with the panels on anti-dumping duties and countervailing duties. Those panels, unless I am mistaken, should have tabled a progress report concerning anti-dumping and countervailing duties last January but that was not done. Earlier in your presentation, you told us the work concerning those duties was provided for in the free trade agreement as they are in the North American Free Trade Agreement also.
If those panels still exist, has a report been produced without our knowing it or has a date been set for such a report to be tabled? And is Mexico part of those panels or are only Canada and the US represented there?
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[English]
Mr. Fried: Mr. Chairman, may I take the second question first?
Although all three countries are parties to the NAFTA and, of course, therefore to chapter 19, the regime is always one of binational panels. So in a case, for example, where the United States might hypothetically apply anti-dumping duties against Canadian and Mexican products, two separate binational panel procedures would be set in motion to review those determinations, one comprising U.S. and Mexican panellists, and the other comprising U.S. and Canadian panellists. So in sum, the NAFTA does not change the procedure that has been available for protecting Canadian exporters since the time of the FTA.
Regarding the working groups, this paper does say a word about that on page 16. The officials have indeed completed their work. It is under ministerial consideration in all three countries. I can't really speak for the minister in terms of the next steps that he and his U.S. and Mexican colleagues may wish to take on this matter other than to say, as I did earlier, that Canada of course continues to be concerned about making improvements in the underlying regime. Dumping and anti-dumping countervail are not appropriate tools in a free trade area. Canada will continue to pursue the elimination of the use of these tools of contingency protection as a long-term goal.
[Translation]
Mr. Sauvageau: Thank you.
Do I have time for one last question, Mr. Chairman?
The Chairman: Go ahead, but your time will be up then.
[English]
We'll give one more question to Mr. Sauvageau.
[Translation]
Mr. Sauvageau: Canada is part of NAFTA and also of the WTO. In case of conflict with the US or Mexico, does Canada have the choice of one or the other of those organizations' tribunals and how is that choice determined? Are there factors or characteristics that determine whether we go before a WTO or NAFTA tribunal?
[English]
Mr. Fried: If I may give you the formal answer to that question, we can give you a short answer or a very long and legal answer. The short answer is that we preserved in the NAFTA all GATT and WTO rights to complain. If Canada has a complaint against the United States or Mexico that arises and can be challenged under either the WTO or the NAFTA, it reserves the right to choose the forum.
Now, of course, in joining with Mexico and the United States, we were conscious that if two countries wanted to complain against the third and one chose the GATT - or now the WTO - and the other chose the NAFTA, the poor third country would be defending itself twice, almost by way of double jeopardy. So the NAFTA encourages the countries concerned to see if they can agree on a forum, but if they don't the NAFTA confirms that you reserve your choice to choose the GATT, WTO or the NAFTA as you see fit.
There is one special rule in this regard and it is in regard to certain categories of environment-related disputes where detailed questions of science of a technical nature are involved.
In the NAFTA, we three countries believe that we did a better job in designing certain special features of the dispute settlement system than we were able to achieve multilaterally in the WTO. We have special provisions for scientific experts to feed into the process to make sure that ostensible health or environmental regulation is not used for protectionist purposes.
We wanted objective assessments of these highly complex areas. If that's the kind of case that's involved, and the defending country thinks, believes, and can show that those are the issues at stake - science of a factual nature - that's the one circumstance in which the party complained against can say, ``Even though you want to take me to the WTO, in this category of cases I can insist you use the NAFTA procedures, because I want that extra scientific verification of the process''. But other than that, as I say, if the matter comes under both agreements, you have your choice of either forum.
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The Chairman: Merci beaucoup.
Mr. Penson.
Mr. Penson (Peace River): Thank you, Mr. Chairman.
I want to thank you gentlemen for being here today. The information you've brought to us is going to be very helpful for us to go through. During the summer I guess we're going to have some time to have a look at this material, and hopefully we'll pick this up again in the fall and move it along. I think we'll probably have you back more than once to help us along in this committee.
Both the briefing we got from Finance and you have said that in a free trade environment, countervail and anti-dumping are not very constructive, and I certainly would agree with that. But when you have a partner that's not willing to drop those measures...
First of all, is there any precedent for any country unilaterally moving away from dumping or countervail?
Second, has any study been done, by your department or anyone, on a cost benefit sort of analysis on trade remedies, such as the cost of the CITT compared with the revenues that come in through duties and tariffs? In other words, we have a bureaucracy that administers this; is it costing us, or are there off-setting duties that cover it?
Mr. Fried: Thank you.
In regard to the first question, with respect, I'd almost reverse the answer. Not all countries in the international trading system have dumping laws to begin with. A very small number of countries are active users of this tool. Canada is right up at the top with the United States and the European Union as one of the countries that is the most active in using anti-dumping and countervailing duty regimes to protect against unfairly traded foreign imports.
So in terms of unilateral examples, very many countries have chosen not to adopt a dumping law to begin with. The Uruguay Round says if you have a dumping law, you must do it in this way rather than that.
Of course, bilaterally and regionally there are several examples of the elimination of trade remedies within the context of a preferential, barrier-free free trade area. The free trade agreement known as the Closer Economic Relations Agreement between Australia and New Zealand is one where those two countries chose voluntarily to negotiate an agreement where competition law on predatory pricing and price discrimination principles would be applied in place of anti-dumping law.
The Treaty of Rome establishing the European Union, to the extent that there is barrier-free trade of a free trade nature within the member countries, says they too will use their competition or anti-trust principles of articles 85 and 86 rather than those of the dumping law within that region.
I trust that responds adequately to your first question. I'll ask Mr. Gero, the expert on trade remedies, to comment on the kinds of studies that have been done or may be available.
Mr. John Gero (Director, Trade Remedies Division, Department of Foreign Affairs and International Trade): On the issue of the macroeconomic costs and benefits of trade remedy laws, presumably you will start to get some of those answers as the House committee on SIMA review starts looking at that. Different people have different views in that context and will, I'm sure, provide the House committee with various analyses as to what they think the benefits or the costs of our own anti-dumping and countervailing remedy regimes are.
To some extent that's going to be in the eye of the beholder. In the review of SIMA I'm sure a number of industries will present to you the benefits of SIMA and the need to strengthen SIMA to ensure their protection against unfair trade, and I'm sure a number of other industries will emphasize the costs of SIMA and the fact that it increases the costs of inputs into their manufacturing, for example. My understanding of the whole process of SIMA review is that it's exactly to get an answer to the kind of question you've just asked from the Canadian economic community.
.1615
Mr. Penson: A number of us will be on that same SIMA review, but the specific question I wanted answered - I know that it's all relative in terms of industry, there are arguments on both sides - is in terms of the actual cost-benefit to government, if we consider the employees who are involved in administering this do the duties collected offset that cost?
Mr. Fried: I can answer simply from our vantage point. The Department of Foreign Affairs and International Trade is not the responsible ministry for its finance. We do not have oversight of the Canadian International Trade Tribunal or the Revenue Canada stage in the process. We, as a department, do not have a study, a calculus, or access to the numbers of persons or transactional costs, at our disposal.
Mr. MacDonald (Dartmouth): Welcome to the committee. You're primarily dealing with the same committee minus a few other people, John, who are going to be doing the SIMA review, so this stuff is very helpful because we have to really see the context under which that review should take place. What we're hearing here today for most of the committee will be helpful in our deliberations with the SIMA review, as well.
Maybe for the sake of some clarity, because all this stuff can sometimes seem very complex, there are lots of acronyms and lots of chapter numbers and things like that - I'm not sure if it's all there intentionally to confuse the laymen, but I'm sure it gets confusing to the experts, as well - could you take a hypothetical complaint, say under chapter 20 of NAFTA, and walk us through it, give us those time lines and how the thing progresses, because there are some definite time lines when a consultation is done. Explain to us how a consultation gets initiated and perhaps take the same hypothetical situation and walk us through a WTO process. That might be one of the better ways for us to get an idea of the various stages and how those stages work.
Mr. Fried: I will endeavour to do my best. Both processes are in effect a two- or two-and-a-half-stop procedure, as with any situation under a contract you know you're in an ongoing relationship. The first thing you should do if you have any differences is talk to each other face to face.
Both the NAFTA and WTO say that the first step in dispute settlement is to request consultations. Under NAFTA that is done by letter to the other party who you want to talk to, copied to the third country just so they always know what's going on and that there are no secret deals that will adversely affect the third country.
In the WTO, similarly, the request for consultations is delivered to the other government concerned with notice to all other GATT countries. Under NAFTA the date for such consultations must be arranged and take place, if you insist on your strict legal rights, within 30 days. Of course it's open to both countries to say, we want to take longer, we're having a good discussion, maybe there's a way to fix things so we'll carry it out.
In the WTO it's a slightly longer period, 30 days at the first stage, my lawyer tells me, as well. These consultations are confidential in nature, government to government, not because there's a belief that things should be kept from others but rather because at this stage, if what you're trying to do is amicably find a solution, just like in camera sessions, it's easier to do away from the public spotlights where positions may have to be more postured and more rigid.
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At the second stage in the NAFTA is an intermediate step. That is, if you fail to resolve your dispute amicably within that 30-day period or whatever other extended period you've agreed on, you may request a meeting of what's called the NAFTA Trade Commission. The NAFTA Trade Commission is not the European Commission, it's not an independent international bureaucracy. Rather the NAFTA Trade Commission is the three trade ministers acting in their collective capacity for a political oversight of the entire agreement. What you're really doing by saying that you want to take this to the commission is sending a clear signal that this is serious, this is important, you want it at the political level.
The commission must convene within ten days. It can do so even by telephone, by conference call, and it too is given 30 days maximum, unless there is a mutual agreement to extend the period, to settle the dispute.
At that stage, just to follow through on NAFTA, you may request, if you're still not satisfied, the establishment of a dispute settlement panel.
The WTO parallel doesn't have that middle stage, although it is open of course to countries to say that they would like a second round of consultations or a third round of consultations.
Let's go back to the NAFTA. Dispute settlement and the request for the panel triggers the process that sets in motion the establishment of the panel, the filing of the briefs and so on. All of those timetables are calculated more or less on the basis of how many days it takes you to choose the five panellists.
I'll add one bit of detail here, because it's an interesting innovation in NAFTA that we believe helps to ensure objectivity, and it is moving away from what you might call a labour arbitration model where each side chooses its champion and then they agree on a third. We in the NAFTA say you choose from the opposite side. In a Canada-U.S. dispute Canada must nominate two Americans and the United States must nominate two Canadians. You agree on a neutral third.
The panel selection process normally takes 30 to 45 days, because you need a certain amount of time to verify that there are no conflicts of interest, that the disclosure forms are properly filled out, and that the person is above reproach to all sides. I think it may be more useful, rather than giving you each subcategory, to say that, start to finish, after the 60 days you're looking at about 190 days, normally 6 or 7 months, for the panel stage. So in total, start to finish, a NAFTA dispute settlement process comes in under a year, about 315 days. At the time we negotiated that it was much shorter than the then-existing GATT procedures.
Under the WTO the panel stage similarly now has caught up to NAFTA. It's about a six- to nine-month process. Because you're using third-, fourth- and fifth-country panellists rather than just North Americans, and because it's harder sometimes to schedule multi-party proceedings, part of the GATT timetable or WTO timetable depends on when you can schedule a hearing. I can only give you an average in that regard.
The objective of the WTO negotiators was to try to come in at about a year maximum as well, start to finish. Thus far in the early days where there have been, as you can see from the chart, a few panels that have gone to a conclusion, they've kept pretty well to that timetable.
What happens at the end of the process? In both the WTO and the NAFTA, after both an oral hearing and written submissions, or briefs, or pleadings - they're called submissions - the panel is asked to issue a draft report, a preliminary report. This is in effect to give the disputing parties continuing control to some extent over the process, because these are member-driven trade agreements. It's to say to the panel that this is not really what we meant to ask them, we think they've gone off track here, we have some comments for them.
In the NAFTA it's freedom to comment on the complete report. In the WTO process it tends to be only the factual underpinnings for what will be the legal conclusions that are commented on.
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In any event, that's a fifteen-day process under NAFTA. When we receive their preliminary report, if we're involved in a case, we're given two weeks to send comments back to the panel. The panel is then given a further two weeks to revise or amend its draft to take full account of government comments.
In the WTO, the timetable is a bit longer for the panel to take government comments into account. Mr. Fréchette informs me it's four weeks. Again, the panel would then take those comments into account before issuing its final report.
So there are not too many differences today. When we negotiated NAFTA, we were well ahead of where the multilateral system is, and by setting a precedent we think we contributed to a more effective dispute settlement model under the WTO.
Finally, Mr. Chairman, I mentioned that the WTO added a second stage, the appellate body stage. That is a very rapid procedure, in part because they wanted the review to be limited. That could add a further 90 days if the appellate body process is triggered, as it has been once by the United States in the reformulated gasoline case. Does that help?
Mr. MacDonald: That's very good.
The Chairman: Mr. Assadourian.
Mr. Assadourian (Don Valley North): Thank you very much.
I'll follow up on Mr. MacDonald's question. Is it possible to put what you said in a form that we can follow one by one? I'm trying to be as cooperative as I can, but I'm not a lawyer.
Mr. Fried: We'd be pleased to put out a notional time line or something like that in a graphic form.
Mr. Assadourian: I would appreciate that.
I have a few short questions. The first one you can answer quickly, if possible. If we lose the case in NAFTA, can we take the same case to WTO and the other way around?
Mr. Fried: No.
Mr. Assadourian: So it's final when you lose this.
Mr. Fried: Yes. The theory, which is in the Canadian interest as well, is what you would call domestically double jeopardy. If it's the same measure and the same matter at issue, why get prosecuted twice? If you think of yourself as a defendant, you don't want to be attacked twice, in two different places.
If you're a complaining party, why should you get two kicks at the same issue, especially since in so many areas the WTO and NAFTA rules are identical? For the fundamental principles of national treatment and non-discrimination at the border, the NAFTA in effect incorporates the WTO rule. You're really enforcing your rights and obligations under exactly the same principles. So you have a choice at the beginning to choose one or the other, but no two kicks at the can.
Mr. Assadourian: I have one other question. Who pays for the process to begin? Is it your department or the complainer or the association of business people? How does it work?
Mr. Fried: It's not even departmental, as I understand it. I'll have to get more detail for you, but it certainly is government expense shared among the participating government parties for the process.
Because it's not a permanent tribunal and doesn't have grand chambers, it's not a terribly expensive process to run. These people are paid on a per diem basis for the days they serve as panellists, and a small secretariat is maintained as a court registrar sort of thing in each of the three capitals for administrative purposes.
Mr. Assadourian: My final question has nothing to do with NAFTA or WTO or the trade agreement with the U.S. It's to do with the commitment we have with Israel, which will be signed very soon. Can you assure us that we will have a similar dispute settlement mechanism in that agreement, based on the NAFTA or the WTO concept?
Mr. Fried: Mr. Chairman, of course I'm not at liberty to discuss an agreement that hasn't been signed at this point, but it's fair to say that a Canada-Israel free trade agreement, like others, has to be consistent with the GATT and the WTO, which means that the kinds of rights and obligations that are to be enforced will be of the same nature. I think it's fair to anticipate that the governments will believe that these kinds of procedures are best suited, at a government-to-government level, to enforce similar rights and obligations. I think one can expect a government-to-government procedure resembling the WTO and chapter 20 dispute settlement.
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Mr. Assadourian: Would that be standard for each and every country in the world? If you're going into a free trade agreement that says so in the WTO or -
Mr. Fried: What I'm trying to convey, Mr. Chairman, is the following.
I haven't done a comprehensive survey of the one hundred or so free trade agreements that exist around the world, but it is fair to say that the panel procedure, preceded by consultations at a government-to-government level, with panellists on an ad hoc basis, is common and has been proven to work under forty years of GATT experience and now under WTO and other free trade agreements.
Mr. Assadourian: All right. Thank you.
The Chairman: If I may use my privilege as the chairman to put a question, if a panel makes a decision is it final or can it be appealed, say, to the Supreme Court of the United States?
Mr. Fried: Under the WTO, as I mentioned, Mr. Chairman, the panel report is final subject only to an appellate body saying there has been a fundamental error of law. In the NAFTA we were confident enough in the fairness and objectivity of the panel itself and provided that preliminary report stage to keep the panel focused, such that no appellate stage has been included.
I tried to be clear at the outset, Mr. Chairman, in explaining that these panel proceedings, both under the WTO and under the NAFTA, take place at the international level, applying, in effect, international law, the law of one or the other treaty.
As as result, international rights and obligations are not of a nature that are enforced or enforceable by domestic courts. It's really the other way round. It's the international panel reviewing whether your domestic action by an administrative agency or by a piece of legislation or what have you conforms with your international obligations.
The panel report, once issued or once final or once blessed by an appellate body, is out there at the international level, but it has no automatic effect. It doesn't nullify a law and it doesn't take it off the books as a charter decision might in Canadian courts. It simply says, if we win a case against the United States, to take a hypothetical example, you, the United States, are now under an international obligation to bring yourself into conformity with this panel decision.
That means it is incumbent on them to either amend their law or change their regulatory practice or administrative procedure to bring their domestic system into line. We, as Canadians, couldn't immediately go into a domestic U.S. court and say, make this happen.
However, if the United States does not allow it to happen or if we don't reach some other compromise during that 30-day cooling off period at the end, they either must - and this has always been the case under the GATT - offer us compensation, as it's called, which means tariff or other trade concessions of equivalent value to the harm they're doing by maintaining an unfair barrier, or if they refuse to do that or if we find it unacceptable, we have the right to take retaliatory measures up to the equivalent commercial level of the damage they've done.
I hope that clarifies the relationship between the international and the domestic court procedures.
The Chairman: Yes, it does, but I was also getting at another point.
Indeed, when an arbitrator or an arbitration court or an arbitration panel rules on international law, it does not necessarily mean that the domestic legislation or constitution will give the necessary power to enforce the decision.
But in the present case, the panel rules on domestic law, not on international law. It rules, say, on the basis of U.S. law. So the question that arises is will the United States accept that an international body pass final judgment on its own laws, which are to be interpreted ultimately by the Supreme Court? Is it a possibility that recourse would ultimately be placed to the Supreme Court because what is being interpreted is U.S. law?
.1635
Mr. Fried: Mr. Chairman, I take it you wish me to focus on chapter 19, the system of international panel review using domestic law.
Indeed, at the time the free trade agreement was first approved with this chapter 19 procedure in place, both Congress and the administration on the U.S. side were concerned to ensure that an international body applying domestic law would be enforced and respected, both in their own system and in ours, by section 96, superior courts in Canada. There was an exhaustive review by, in effect, the Congressional Standing Committee on the Judiciary as to the constitutionality of this procedure.
Just as in Canada we may choose, under any regulatory regime, to say if you want to appeal you must go to this court or that court, so too the United States concluded under its system that it was free, through congressional legislation implementing the FTA, and again implementing the NAFTA, to say if you have a problem with a U.S. anti-dumping or countervail decision, for purposes of review you shall use, or may use, the system set out in chapter 19, as implemented in our domestic law, and we, the U.S. Congress, give those decisions, signed by the President, the force of domestic law.
That is true for the International Trade Commission, and through the force of an executive order of the President, which has been of standing authority, he, in advance, on the books, has directed all U.S. officials in the administration to act in conformity with the international panel decision, which is in effect a direction to the commerce department to obey and act in a manner non-inconsistent with the international panel.
Just as in Canada, under the Charter of Rights, someone may raise a question as to whether a system is constitutional, so too in the United States the opportunity or possibility exists that an aggrieved party may question whether the whole system is constitutional. No such challenge has been pursued in the six or seven years we've had the FTA and now NAFTA in force.
One or two times we've seen an industry think about it and maybe take the first step, but from our reading of the literature - and we're obviously not American legal experts, but from our understanding - the consensus of legal opinion, the vast majority, in the United States seems to be quite confident in the legitimate constitutionality of the chapter 19 system within the U.S. legal system.
Mr. Penson: I'd like clarification on the point you've raised. When a trade dispute arises and there's a final settlement, if one of the parties chooses not to make the changes that are required, then the other party has the right to retaliate by putting on tariffs. Do those tariffs have to apply to that sector, or can they choose any sector they want to apply the tariff to? I just need clarification.
Mr. Fried: There's a middle step here. If the party that loses the case, to put it in the colloquial, doesn't change its law or practice or what have you, it should - ``should'', I guess, is the right word - offer up some other compensation. After we win a case, the United States could say, ``Well, we can't lower the tariffs on widgets; it's just too politically difficult. Would you be happy if we lowered the tariffs on something else, up to the same volume of trade?'' In that situation it's an offer of compensation of equivalent commercial effect.
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If neither is done, Canada obviously has the right to retaliate.
It's not limited to tariffs. It's limited in effect. The real technical term is ``withdrawal of equivalent benefits''. The benefits that the United States would otherwise have under the agreement in my hypothetical case are not only tariff in nature, but concern services or investment and others.
So if we don't have the United States change its law and we don't get compensation, we could consider withdrawing benefits of a non-tariff nature. Both the NAFTA and the WTO express a strong preference for circumscribing the scope of the dispute, and although it's not a binding obligation, both agreements use language to suggest that parties should, whenever possible, look to the same or related sectors.
It may not be possible. There may not be any trade in the other direction, but what you don't want necessarily is a situation where a dispute in one part of the country regarding one kind of commodity suddenly spills over to the banking industry at the other end of the country, or else it really...it disrupts.
Mr. Penson: That is possible.
Mr. Fried: It is possible.
Mr. Penson: It would create a lot of problems, because an innocent industry may be affected, an innocent party may be affected without any fault of its own, so that would be a serious implication if that happened.
Mr. Fried: On the other hand, Mr. Chairman, if I may, this has been the same rule as the one under the GATT for forty years, at least in the area related to tariffs and goods, and sometimes that offer of compensation helps. If you can't bring yourself quickly enough for one industry but you want the overall trade between your two countries to continue harmoniously, maybe you would say, ``We can't give you tobacco. How about if we give you leather?'' That way, there's still a healthy trade of imports and exports overall.
The Chairman: Colleagues, it is now a bit past 4:40 p.m. The meeting is supposed to be over at 5 p.m. I gather from our talk, though, that we could prolong until 5:30, but then the bell will ring and it will be over. I would really like your own feelings. I'm prepared to proceed with the second round, bearing in mind that we'll be eating up the time we need for private discussion.
Mr. Sauvageau.
[Translation]
Mr. Sauvageau: Could we ask our guests if they could stay a little longer?
[English]
The Chairman: Of course. It is the courteous thing to do.
If you're willing to stay longer, gentlemen...
Mr. Fried: We're at your service.
The Chairman: Thank you very much. Do you feel we have time for a second round?
Mr. Assadourian: I have to leave at 5:30 p.m.
Mr. MacDonald: Mr. Chairman, I think that if the witnesses are prepared to stay...this is sort of an exploratory meeting and they've given us a lot on the table. Even if some members have to leave, there are still questions to be asked if the witnesses can stay for a few extra minutes.
The Chairman: All right. Let's go with the second round.
Mr. Sauvageau.
[Translation]
Mr. Sauvageau: My first question will be very brief, as will be the answer, probably. Could you tell us something about the Canada-Israel bilateral agreement? Could you tell us what the time frame is? We were told July, January or even later. What is it, exactly?
[English]
Mr. Fried: Mr. Chairman, I'm really not in a position to talk in great detail about that. Obviously, in light of the recent election in Israel, contacts are being made through our embassy in Tel Aviv to ensure that this remains a priority early in the administration of the new government, but our experts are not with me today. I can't give you a detailed sense of it, but we can certainly report back to you in writing if that would be of assistance to you.
[Translation]
Mr. Sauvageau: Thank you and I understand...
[English]
Mr. Assadourian: I would appreciate receiving a copy of the letter you send.
Mr. Fried: We'll address it to the chairman of the committee.
The Chairman: Very good. We'll pass it around.
[Translation]
Mr. Sauvageau: If I may, I would like to change the topic and deal with the matter of softwood lumber. I understand that under the softwood lumber agreement, export quotas are the same as quotas for 1995 production, that is 14 billion linear feet. Now I can't remember all the details. How would a new business wanting to get into the export market go about obtaining an export quota? Is this provided for in the Canada-US agreement?
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[English]
Mr. Fried: I'll ask Mr. Gero to respond, if I may, Mr. Chairman.
Mr. Gero: There are two parts to the question. First of all, how Canada allocates the 14.7 billion board feet is not in the agreement. That's something for Canada to decide.
The undertaking vis-à-vis the United States is that there would 14.7 billion board feet without any export fees attached to it. We are undergoing at the moment the whole question of how that14.7 billion will be allocated among various enterprises and companies and producers, and I think there are detailed consultations with the industry and with the provinces that are affected by the agreement - they are ongoing now - with a view to trying to have a decision as soon as possible as to who gets what part of these allocations.
I think it's fair to say in regard to the issue you've raised - the question of on what are the allocations going to be based: is it strictly going to be historical shipments, or are there going to be considerations for increased capacity or a new producer that's coming onstream now in light of investments that have taken place in the past couple of years? These are all the kinds of issues that will go into the discussion on how the code of allocation will take place.
[Translation]
Mr. Sauvageau: To be specific, Mr. Chairman, the total figure was arrived at based on total 1995 exports, but the quota per business has not yet been determined.
[English]
Mr. Gero: The number, 14.7 billion, was a negotiated number between Canada and the United States. Obviously one looked at the historical totals in that regard, but it didn't say that this was the number in 1995 and therefore this is what's in the agreement. It's a number that was arrived at through the negotiations. How one will then allocate that internally in Canada will take into consideration, I suspect, both historical situations and the capacity in Canada at the moment and in the next couple of years in light of investments.
[Translation]
Mr. Sauvageau: But until then - and you perhaps cannot say when the deadline for the final agreement will be - , would it be possible for a company that has just purchased two or three million dollars worth of equipment to modernize to start exporting softwood lumber or would it have to wait for the officials to complete their interminable negotiations?
[English]
Mr. Gero: At this very moment, anybody who wants to ship lumber to the United States is shipping softwood lumber to the United States. There's nothing stopping any Canadian enterprise from shipping lumber to the United States. The only control at the moment in the context of what gets shipped is, as you know, that the agreement doesn't only have an annual number of 14.7 billion; there is an anti-surge mechanism in place as well that says that in any particular quarter the free shipments will not exceed 28.75% of that 14.7 billion.
So until those allocations are decided upon in Canada, the way Canada administers that system is that everybody is allowed to ship up until the national number reaches 28.75% in any particular quarter, and at that point all shipments after that will be charged an export fee of $50. But again, that's only in the context of the quarter, and of course, as of July 1 everything gets set back to zero and the free shipments continue.
The other thing we made clear to all exporters is that at the time these allocations will be made they will be made for the year April 1 to March 31, which is the actual year of the agreement, and that any shipments they've shipped during these first two intermediate periods when there have been no allocations will obviously get deducted from their annual allocations. So all the shipments will count in the context of their allocation; it's just that at the moment it takes a while to decide on the actual allocations.
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The Chairman: Mr. Penson.
Mr. Penson: I want to ask you about the softwood lumber dispute too. There are all kinds of difficulties with administering the system we have in place and I'm hearing it from companies in my riding. But I don't want to deal with that. I want to deal with it in the context of what could be any dispute. It just happens to be softwood lumber. Maybe you can correct me if I'm off base here, because I'm not sure I have this right.
If an industry is having a problem and they decide they want the Canadian government to take this dispute to a NAFTA panel, all that happens in NAFTA is that the American government, in this case, would have to apply their domestic law. I understand that the law in the case of softwood lumber has been changed slightly since the last time we went to a dispute settlement with the United States, so that makes it very difficult for us to win on that case. That's my understanding.
If that's the case, why would the Canadian government not take a dispute like that to the World Trade Organization? Would we have a better chance of winning there? If the United States is just changing its domestic law to stymie us in a case like softwood lumber, wouldn't that be recognized by the people at the World Trade Organization who hear the case, where it has a much broader base through whatever number of member countries we have now?
Help me out here to understand this a little bit better. It seems to me that we have some difficulties with the United States trying to circumvent this whole process.
Mr. Gero: I don't think it's a question of U.S. circumvention of the process; it's a question of what the rules are. You have to appreciate that there are two different kinds of dispute settlement mechanisms.
In the U.S. case, what chapter 19 does in the context of NAFTA is to allow parties, not only governments but individual private parties, to bring before a binational panel the question of whether a U.S. agency has administered U.S. law consistent with that U.S. law. In essence it replaces the domestic court of appeal procedure. It's available not only to governments but also to the private sector. In fact, in a large majority of cases - for example, in dumping as opposed to countervail - governments aren't even involved and it's private sectors that take those cases to a chapter 19 process.
What it's examining is whether the U.S. administering agencies have done the case consistently with U.S. law, and that's what the chapter 19 process is; it's a unique kind of process.
In the context of NAFTA, at the moment there are no specific rules on what those laws should state in the context of the trade remedy areas in anti-dumping and countervail, but it has this appeal procedure. We've been pressing hard to get NAFTA rules in those areas, but so far it's not been possible.
Mr. Penson: To those working panels, you mean?
Mr. Gero: Yes, to the working groups. That's right. In essence, countries are free to change their laws because there are no NAFTA obligations in that regard.
I will turn to the WTO section. In WTO there are specific rules on what the law should state. Some of them are more general and some of them are more specific, but there are rules on both subsidy countervail and anti-dumping.
If you take a case to the WTO, you're not looking at whether a U.S. administering agency has administered U.S. law consistent with that U.S. provision. What you're looking at is whether U.S. law itself is consistent with the United States international obligations in the WTO. There you have, as John described, a state-to-state dispute settlement, because Canada would be taking the United States to court to say that the United States law does not conform with their obligations in the WTO. So you're looking at two different things.
Mr. Penson: In this case it would be Canadian law, wouldn't it?
Mr. Gero: No, it's U.S. law, because in a U.S. countervailing case what you have is a U.S. corporation claiming that there are unfair Canadian subsidies. Under U.S. law they are asking the Department of Commerce to rule first of all that such subsidies exist. Then they're asking the International Trade Commission in the United States to rule that those unfair Canadian subsidies, if the Department of Commerce finds such unfair Canadian subsidies and countervailable subsidies, are creating an injury to the U.S. domestic producer.
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Mr. Fried: I would like to add that, coming full circle to the question, the changes you mentioned in the U.S. law were occasioned by their implementation of the Uruguay Round agreements themselves. We all had negotiating objectives, particularly to make the rules tighter on subsidies, countervailing duties, and anti-dumping duties. In a multilateral negotiation with 120 countries, we didn't get all of the precision we had hoped.
Given everything we've said so far about other government-to-government disputes, to challenge the U.S. law for its consistency with WTO obligations first of all would take about a year, as we said. Secondly, the result would not necessarily be guaranteed under these new and not as precise rules as we would have hoped. Third, as you noted earlier, even if you win the case, the United States may not choose immediately to implement it in that area, in which case you're facing the compensation or retaliation option.
In those circumstances, as the minister himself has said, not an ideal result but one that industry itself and provincial governments all supported would be for us to move more quickly, have some certainty in our trade, and know exactly what the terms are for at least the next five years. The minister wanted to do that which the industry and the provinces all supported doing.
Mr. Penson: We've made obligations at the WTO too, at the GATT round. One of those is that we would meet the international law. Maybe it's time to test and see whether our stumpage royalty fees do fit that requirement. If they don't, shouldn't they be changed to reflect that so we are in compliance with international law?
I can understand that some industry may not want to do that, but certainly that would provide some kind of stability in this whole area. We're all hoping we get five years of peace under this deal, but I think it sets a bad precedent to always be negotiating ceiling limits. At some point maybe we need to face that head on ourselves. I guess that's not for you to answer, but that's my view anyway.
The Chairman: Mr. Assadourian.
Mr. Assadourian: Thank you very much.
I'll give you a hypothetical example. Say an industry decides to take a case and in the first year says it has a problem, and you go with the case. You decide to go with the WTO - with the States. The U.S. says no, we don't think we should go with the WTO; we'd like to go with NAFTA. Who decides?
Mr. Fried: I tried to answer that earlier, if I may, Mr. Chairman. In all cases but one, we decide. The complaining party chooses. If it wants to go with the WTO, it's its choice. The one exception to that rule is the environmental cases that involve technical, scientific aspects, because we ourselves accept that we have a better and more responsive system under NAFTA. So in all circumstances but that special category, if we're complaining against the United States, we can decide.
Mr. Assadourian: You can decide which to use.
Mr. Fried: That's right.
The Chairman: Mr. MacDonald.
Mr. MacDonald: Thank you, Mr. Chairman.
For my colleague from the Reform Party, in my attempt over the last two months to try to get up to scratch in some of this stuff, I've had some of the same questions. Perhaps the officials could tell me whether or not I've absorbed enough from the briefings.
In dealing with softwood lumber, we have been successful going through the process in the past. My understanding was that it was after consultation with the industry and with the stakeholders, who said that, rather than go again and go through chapter 19 to ascertain whether or not the U.S. laws had been applied consistently and properly in this case, they wanted peace; they didn't want to be dragged through the knothole again on process and win a moral victory just to find that again and again they were denied access. So the government had the consensus of the stakeholders, including the provinces affected, that this was the preferred route. It wasn't necessarily the preferred route of the department or the government, but after consultation it was the consensus. I think I'm correct in that.
.1700
It's interesting, I think, to contrast both. On softwood you're dealing with the application of U.S. laws, the countervail and anti-dumping, which is allowed for under the free trade deal, under NAFTA. When you deal with Helms-Burton - which you didn't raise but is another interesting one - we're dealing with whether or not a law passed by the U.S., because this is a different type of law, is inconsistent with the international agreement, with the international law.
I think it's good to show the differences between the two. One deals with countervail and anti-dumping and the allowance under NAFTA for the use of trade remedy law. It's my understanding that one of the things we've been trying to get through the trade remedy group looking at this is an agreement with the U.S. that trade remedy law has no place in a free trade deal. Indeed, if that were the case, we wouldn't be having some of these problems.
I want to ask a specific question when we're dealing with the two trade deals - one with the WTO and one with NAFTA.
My reading of both of these agreements, or more particularly the NAFTA, tells me that there are some areas where we have won some hard-fought battles, particularly on our cultural exemption. If indeed a challenge were made by the U.S. - we know they're concerned - we have much greater protection, because we specifically negotiated those clauses under NAFTA. However, if the U.S. chose to go to WTO, the hard-fought-for exemptions we have under NAFTA simply are not there under the WTO.
Mr. Fried: No, I wouldn't put it that way -
Mr. MacDonald: You mentioned the other area, where it's up to the state that is challenged to choose the venue.
Mr. Fried: Respectfully, I would disagree with the premise. NAFTA deals with culture in a very explicit way by way of exemption. Architecturally, the agreement is different. Under NAFTA, to take, for example, the area of services, we trade services. In cultural industries under NAFTA, if we said nothing, all services are covered unless we take a specific reservation. So it's an inclusive agreement in which you have to take things specifically out.
Under the WTO there is an agreement called the General Agreement on Trade in Services, the GATS. Although there are some very minimal obligations of transparency, such as treating everybody just as bad or just as well as anybody else, which is the MFN principle, no service sector is covered unless it is voluntarily placed on the list. So if you haven't volunteered cultural industries to be included in the list in the first place, there is no need for an explicit exemption or reservation to take them out.
It's our view, as it has been from the beginning, that in effect cultural industries are equally protected under NAFTA and under the WTO, although the same result is achieved through different legal techniques because of either the positive or negative approach.
I don't know whether my colleagues wish to add to that.
Mr. Gero: No, that's right.
Mr. MacDonald: You're basically saying that although the mechanisms and the text are different, it's the government's belief that a challenge to our cultural industries could be sustained at either one of these forums.
Mr. Fried: We're confident in our case.
Mr. MacDonald: Okay.
The Chairman: Before we offer the usual words of thanks, I reflect a point that Mr. Sauvageau raised with me. If you were going to suggest to us which would be the most interesting cases we should look at in order to understand, to get a feel of the dispute settlement mechanisms, what would be your off-the-top-of-the-head suggestion?
Mr. Fried: Mr. Chairman, you may be asking an official to pass the wrong kind of judgment. I will answer you only at a technical or an official's level.
We cannot be of tremendous assistance to you in regard to disputes currently before panels or in the midst of dispute settlement. Just as a matter currently before the courts is not something that can be discussed openly, so too matters before panels or in train in dispute settlement are not ones in which necessarily, as officials, we are in a position to make large amounts of information available.
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As a result, simply at a technical level in terms of learning lessons - and I offer this, as I say, solely from thinking through the kind of information that may be at your disposal - you would have more access to more information and may be able to draw more lessons by doing anything but current disputes. Looking at past disputes, of course, gives you a complete record of what has already transpired.
Looking ahead to the future and the kinds of improvements we seek, both on government-to-government procedures and the kinds of matters appropriate in a free trade area...are ones where good thinking is to be had in pushing the agenda forward.
So I would only offer that in terms of the kind of assistance we may be able to provide to you from our department.
The Chairman: Thank you very much. This was a very helpful session, and we may well ask you to come back somewhere along the way. Thank you very much.
Mr. Fried: Thank you for your patience.
Proceedings continue in camera