SINT Committee Meeting

SUB-COMMITTEE ON INTERNATIONAL TRADE, TRADE DISPUTES AND INVESTMENT OF THE STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

SOUS-COMITÉ DU COMMERCE, DES DIFFÉRENDS COMMERCIAUX ET DES INVESTISSEMENTS INTERNATIONAUX DU COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, June 9, 1999

• 1529

[English]

The Chairman (Ms. Sarmite Bulte (Parkdale—High Park, Lib.)): Gentlemen, welcome to the Subcommittee on International Trade, Trade Disputes and Investment. Pursuant to Standing Order 108(2), this committee is examining Canada's priority interests in the free trade area of the Americas process. We hope to have our report ready in September, well before the meeting of the ministers.

Today we welcome Mr. Mann and Mr. Howse. Who would like to start? Mr. Howse.

• 1530

Yes?

[Translation]

Mr. Benoît Sauvageau (Repentigny, BQ): Madam Chair, I would simply like to ask the clerk a procedural question.

Should the House be prorogued this summer, would we automatically continue with this study in September?

The Chairman: In October, I believe.

Mr. Benoît Sauvageau: In October?

[English]

The Chairman: We hope.

[Translation]

Mr. Daniel Shaw (Committee Researcher): We would, therefore, have to wait for the orders of reference.

[English]

The Chairman: I'm advised by the clerk that if we do prorogue, we will have to renew the mandate again in October, but we can do so. In the meantime, I hope that in the summer we will prepare the report, ask for the mandate to be renewed, and then bring the report out immediately afterwards, after we reconvene.

[Translation]

Mr. Benoît Sauvageau: If I were a pessimist, which I am not by nature, I would say that this study will die once the House is prorogued.

[English]

The Chairman: No, with the motion we can pick it up where we left off.

[Translation]

Mr. Benoît Sauvageau: Why couldn't we do this with the standing committee report on future WTO negotiations?

[English]

The Chairman: It was always our intention that this report be done in September, because we started late in March. So it was always our intention, before there was any discussion about proroguing. We are on schedule in that sense. It was never our intention to bring the report in at this time.

[Translation]

Mr. Benoît Sauvageau: This was out of respect for the witnesses, because I wanted their testimony to be both effective and efficient.

[English]

The Chairman: Mr. Howse will begin. He is here with us from the University of Michigan Law School. Welcome, Mr. Howse.

Professor Robert Howse (University of Michigan Law School): Thanks a lot.

There are certain features of the dispute settlement mechanisms in the WTO and in NAFTA that in my view are increasingly problematic given the role of dispute settlement in constraining and shaping public policy in member countries. I'd like to focus first of all on these features and why I think they should not be duplicated in a future free trade agreement of the Americas.

It's fairly obvious the kind of public policy significance that increasing legalized dispute settlement at the WTO is having. One need only consider the periodicals case, for example, and its implications for the way in which Canada conducts its cultural policy, or the beef hormones case and its implications for the way countries who are members of the WTO go about engaging in health and safety regulation.

So the first feature that seems rather inconsistent with that kind of influence on public policy in liberal democracies is secrecy. The pleadings and proceedings of WTO panels and the appellate body are both secret. So those citizens and groups that are affected have no opportunity to know what's going on in the room. Until recently, the conventional wisdom also was that non-governmental organizations or individuals had no right whatsoever to intervene, even in the form of written submissions to such tribunals.

In a recent case, a WTO case, however, the WTO appellate body held that amicus briefs were receivable by dispute settlement panels and, to some extent at least, by the appellate body. This is a step forward, but it remains to be seen how much influence such written submissions could have if you still have, basically, the proceedings themselves in secret and the pleadings of the states party to the dispute in secret.

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So my first proposition is that one fundamental criterion for dispute settlement in the FTAA be that it be transparent, and that the norms of publicity that surround, for example, normal judicial processes in liberal democracies be applied here as well.

More specifically and additionally, I do think, although again certain language in the WTO dispute settlement understanding was used to facilitate or at least to say that amicus briefs are permitted, in a free trade area of the Americas agreement dispute settlement provision it should be explicitly indicated that such submissions are possible by NGOs or interested individuals. Again, I think one needn't go much further than what's typical of courts in liberal democracies—indeed, some international tribunals such as the Inter-American Human Rights Court—in saying that oral and certainly written submissions of NGOs and interested individuals can be made at the discretion of the tribunal itself.

So I think that's a very important feature. Certainly, there's one kind of dispute settlement under NAFTA, the investor-state dispute settlement, that comes off even worse than the WTO dispute settlement process with respect to secrecy, because not only are the pleadings and the proceedings secret there, but even the results and the statement of complaint may have to be kept secret under the relevant arbitration rules if the consent of the investor is not obtained to the public disclosure of that. One saw what was clear and public, I think—the frustration of the minister, recently, with respect to the cloak and dagger nature of that process. That's something that it would be good to fix, along with fixing or moving beyond the tradition of secrecy in proceedings and pleadings that exist more generally at WTO and in the NAFTA.

So that's my opening proposition.

The question of forum shopping has been raised. It seems to me there are a couple of dimensions to this issue. First of all, I'd like to note that forum shopping, as between NAFTA and the GATT, WTO, is currently the subject of an empirical study by Professor Marc Busch at the department of government at Harvard University. He is actually originally from British Columbia. When his work and the work of some of his colleagues is completed, we'll have a better understanding of what one might call the political economy as opposed to the legalistic dimensions of the forum shopping issue.

I'd only note two things. First of all, a proliferation of similar but not identical legal provisions interpreted by different fora is likely to reduce predictability in trade law rules and norms and undermine one of the main purposes of regulating international commercial relations by rules. Therefore, people like myself would sometimes express a certain degree of skepticism about the whole underlying premise of something like the FTAA, which is that you should be doing this stuff regionally as well as multilaterally.

• 1540

However, there are political, strategic, and some business reasons for pursuing some issues in a regional context. If one accepts that, I think one then has to look in some more detail at how those regional rules are going to interact with multilateral rules.

Now, one dimension of this that I bring to your attention is article 23 of the WTO dispute settlement understanding, which says that basically any dispute under the WTO has to be resolved by WTO procedures. The reason I bring this to your attention is that the forum shopping issue arises in the first place because a single claim can have overlapping legal issues between these different regimes. Arguably the effect of article 23 of the WTO dispute settlement understanding is that if you don't want to lose the WTO claim you're trying to make, you're going to pretty well have to litigate the matter in the WTO forum. So in a way what has already been committed to in the WTO places some kind of limitation or constraint on open-ended forum shopping.

You can see that it makes sense that the WTO institutions would have primary if not exclusive responsibility for developing the law of the WTO. The trouble comes when you have almost identical language, but not always entirely identical, in different provisions of NAFTA or other regional arrangements. So then you get the regional tribunals interpreting those, as well as the dispute settlement organs of the WTO, the panels and the appellate body.

It seems to me that if we're not going to stop regionalism altogether, and I don't think it's feasible to do that, then there's no neat solution to this problem. At a legal level, the solution, inasmuch as there could be one, will simply have to be found through the application of various general principles of international law, such as provisions of the Vienna convention that deal with conflicts between different agreements.

I don't think you can put a clause in an FTAA that would provide a neat solution to the problem. If you put in a clause that suggested exclusivity of the FTAA dispute settlement procedure when you have what I've called overlapping claims, then you would be running up against the commitments that the same countries had made in the WTO. So then how do you saw it off? Do you say that in certain kinds of disputes you basically have to go this route, which may mean dropping a WTO claim unless there is similar identical language in the regional agreement?

Well, it's very hard, as I say, to see a neat solution to this problem. This is why I think it will be extremely useful to see the sort of political economy analysis that Professor Busch and his colleagues are doing, which will actually tell us something about the kinds of strategic behaviour that might be involved in governments choosing one kind of forum over another. If it turns out there isn't much risk of opportunism or inappropriate behaviour in choosing one forum over another, then we might just want to leave this issue more or less to international lawyers and tribunals to sort out, using the usual tools of international legal analysis.

The Chairman: Just before you continue, when is that study expected to be released? Do you have any idea?

Prof. Robert Howse: I have a draft of the first instalment, but Professor Busch has organized a major conference at Harvard University early in the fall, I think around October 15, at which a number of people, including myself, are going to be speaking on the forum shopping issue. The results of his research and the research of people that he has been collaborating with will be publicly presented at that conference.

The Chairman: Okay, thank you. Please continue. I didn't mean to interrupt you.

• 1545

Prof. Robert Howse: I was told I had only about 10 minutes and I'm now at 15. Perhaps in fairness to your other witness, it would be appropriate for me to stop at this point and we can pick up on these things later.

The Chairman: Thank you.

Mr. Mann.

Mr. Howard Mann (Consultant and Trade Lawyer): Thank you, Madam Chairman. I've prepared a small handout, which I think has been given around.

[Translation]

First of all, I would like to say that my presentation will be in English, but I am prepared to answer, or at least try to answer any questions in French.

[English]

The questions your clerk sent out with the invitation to appear today fall into two key features, which I propose to make a few comments on, which will be quite similar to Professor Howse's. The first area is key features for a dispute resolution process in the FTAA, both those that are desired and those that may not be desirable. The second key issue is forum shopping.

In terms of the key features for dispute resolution that might be desirable, the first question essentially asked is whether we should sort of pick things from the WTO or from the NAFTA. I'm not sure that's the right way to phrase the question. I think the key question is, what are the best state-of-the-art features you want to be promoting in an FTAA context?

From that perspective, there are probably two critical desirable features. One is an institutional framework that is closer to the WTO model, and the second key feature is a transparency one, as Professor Howse has focused on.

In terms of the institutional framework issues, it's critical, in view of the scope and range an FTAA may include, to have a centralized independent secretariat to administer the processes. It's well beyond the capacity of national secretariats, as one has in the NAFTA model. So that's a starting point.

It's also essential to have what I would call an independent judiciary, for lack of a better word here. It's important to have a roster of independent experts and not rely on diplomats or sitting government bureaucrats, much as one actually sees now in the World Trade Organization process. From that perspective, the NAFTA model was probably better because it looked to independent experts for their panel members. It's also critical to have an appeal process of recognized experts, as the WTO has now—that kind of two-level body of an independent review or dispute settlement board or judiciary.

When I appeared on the dispute resolution issue before the WTO standing committee on trade, I mentioned it was essential to ensure that all the decisions were fully prepared by the panel members themselves and not by bureaucrats working for the secretariat that might house the organization. That is a practice that apparently goes on at the WTO, with some rather disastrous results. It's really critical that the role of the panels be very independent and independent of the secretariat.

Finally, on the institutional side, it is also quite useful to have a review mechanism of the parties, not so much to be able to overturn the decisions of the panel or the appellate body, but to have an overall sense of the flow and organization of the process.

The second feature I would mention here is transparency again. It's important to make advances on what we have now in the WTO at the different stages of the process. There should be notice of potential conflict. That is fairly transparent now at the WTO. They have a website and the notices are actually put on it fairly quickly, so one has at least some sense of what's going on.

On notification of consultation periods and so on, the hearings are, as Professor Howse says, quite a problem still. The public notice of the decisions, at least the appellate body decisions, is quite prompt and quite good. They're made available on the website the day they're released as well. So that tends to be fairly decent. Those elements of the model are important to pick up on.

• 1550

In terms of the actual conduct of the hearings or proceedings, as Professor Howse said, openness of all the arguments, when filed, is critical to achieve. There should be public access and media access to the actual hearings, and acceptance of what has become known in the jargon as civil society briefs or amicus briefs is a critical step—immediately accessible decisions.

It's important to note here, when looking at some of these transparency issues, that in reality there are very few cases that go through the system that really attract a lot of attention. A few cases every year do that, but the number of those cases will not be slowed down by having public access to the hearings. The process won't be destroyed or anything like that. The process will go ahead just fine.

But those really critical decisions that interpret the scope of the law and the very real impact trade law has on every other area of government activity today—at least those key cases will get the breadth of public attention and potentially public input that making decisions on those issues really deserves.

In terms of the non-desirables, first and foremost is the dispute resolution process for investment. I should be specific on that and say the dispute resolution process for investment in NAFTA's chapter 11. It's inevitable and potentially quite valuable to have a strong and good investor-state dispute resolution process if indeed investment will be part of the final product of an FTAA negotiation, as it is intended to be now. If there is an investment agreement, I'm objecting here to the idea that there should be an investor-state dispute resolution process.

Here I'll do a little advertising, as Professor Howse has done. I'm just in the process of finishing a study for the International Institute for Sustainable Development in Winnipeg, which I'm sure the committee has met with before, looking at the chapter 11 investor-state dispute resolution process in NAFTA.

I think it's important to understand that there has been a very critical shift in how that process has worked. It's no longer just investor protection from nefarious government activities. There is a strategic change that has gone on here. The underlying substantive provisions and the process itself have become an offensive weapon, a lobbing weapon, a strategic tool that any form of corporation has virtually unfettered access to.

It is being used to challenge public policy making, public regulation making, and public welfare activity in the normal course of government activity in an attempt to restrict any impacts those activities might have on foreign governments. It's really that critical change from its traditional defensive role to a very strategic offensive role that has set in motion a whole series of events and problems.

Related to that are very poorly defined obligations or disciplines on states, which again were drafted in the context of developing country activities, rather than the regulatory activities of developed countries that are also bound by these provisions.

Layering on top of all of that is the secretive nature of that investor-state process, as Professor Howse has said. It is obviously defective, from any kind of democratic point of view. In terms of the legitimacy of both the agreement itself and the dispute resolution process, it has very significant negative impacts on public acceptability of both the agreement and the process.

The conclusion of that study, which in this case will be available before the end of the month, is essentially that the process needs significant changes, and certainly if an investor-state process is adopted in the FTAA or in the WTO negotiations, there are significant things that need to be done. I've set out a few of those on the next page.

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It's critical to have the substantive obligations clear and precise in the extent to which they are drafted. The drafting of those obligations today is far too broad and leaves essentially every single public policy measure open to challenge, and in a very easy way. I say that not from an alarmist point of view. As I've said, I think it's important to have a good investor-state process, but it needs to be properly structured and it needs to be properly framed for it to be effective.

From a dispute settlement process or procedure perspective, transparency is absolutely critical. At every stage of the procedure, the same kind of transparency issues and schedules that you need in terms of state-to-state dispute resolution, you need in terms of the investor-state process. I think, given the ease with which a foreign investor can initiate the investor-state process, it's also very much worth considering a potential split system for certain types of regulatory activities.

There are already certain exceptions built into NAFTA and the World Trade Organization for legitimate purpose regulation or legitimate objectives: environmental, health and safety, and so on. There is a split system for investors to have access to the investor-state process already in NAFTA in relation to taxation. There's a gatekeeper process whereby the three NAFTA ministers act as gatekeepers for any investor to access the investor-state process on a taxation issue. That kind of a gatekeeper system can be expanded to include other critical public policy areas.

Finally, and this is perhaps a little more substantive, I think it's important to consider, as part of the whole question of an investment agreement, conditioning access of investors to the investor-state mechanism to performance of their own obligations under an agreement. I think it's important that an investment agreement contain obligations on the investors. But that's a substantive issue we won't carry too far here.

Turning to the forum shopping issues, fortunately I have much less to say here. I think, as Professor Howse indicated, probably the most critical issue is comparability of the underlying substantive rules. I think the first step is to make sure that the basic legal rules are going to be very tightly drafted to reflect what's in the other agreements, whether it's in the NAFTA or the WTO. A proliferation of different basic rules will inherently lead to forum shopping, and there's not going to be anything that's going to be capable of stopping that. You'll simply spin the law and say, I don't have access under this rule, I don't have access under that. The critical issue is going to be the underlying compatibility or similarity of the rules.

That's different from what the real, I think most important part of a regional agreement is, which is to accelerate tariff reductions or the opening of markets on a regional basis from the business perspective. Those become minor issues from a dispute resolution context. If the fundamental underlying rules are the same, the speed with which you liberalize markets, or the scope in terms of agricultural products or textiles or whatever, becomes much easier to handle in different forums. The impact of forum shopping becomes much less when it's that kind of much more technical rule as opposed to a basic underlying substantive rule.

I think that's a fundamental concern. Beyond that, it becomes critical to have some assurance that similar rules will be applied in a similar way in the different forums, not more strictly in one place and more leniently in another. If there is a proliferation of regional bodies, there may be a need within the context of the WTO, or perhaps overseen by the WTO, for some kind of consultative mechanism to have some kind of...not mandatory imposition of a decision, but to review compatibility of decisions and directions and so on.

Professor Howse has already raised the problem of different aspects of the same facts, different legal aspects, which we've seen in the magazine case. I won't reiterate those points.

Finally, the one other potential option in this area is the NAFTA kind of defender's choice option, which limits the forum shopping by a complainant. If the same issue can be addressed under one or two or three trade agreements, the defender gets to choose which one it would be addressed in as opposed to the state making or initiating the claim. So it reduces the ability to really parse out every particular obligation in a “300 angels on the head of a pin” kind of thing. If there is a mechanism to give the defender the choice, as there is for some provisions of NAFTA, that reduces the attractiveness of forum shopping considerably for a potential state making a claim. That's where I propose to leave it for now.

• 1600

The Chairman: Thank you very much, Mr. Mann. Thank you both.

Mr. Stinson.

Mr. Darrel Stinson (Okanagan—Shuswap, Ref.): I have a few short comments here. First of all, thank you both for being here today. I also want to congratulate you on what you've come up with here. It's basically the same as what we've heard right across Canada, from the secrecy, the lack of transparency, to the lack of clarity of the rules. People ask what's going on here, and nobody seems to know, except a few people. One agreement doesn't coincide with another agreement, so the challenges are made.

Basically, what I'd like to ask you is, can we get a copy of your report when it is done so we can go through it thoroughly? Mr. Howse, you—

Prof. Robert Howse: Yes, it will be done. Usually I work to deadline, so it will be done only shortly before this conference. But I'd be happy to send you a copy in late September.

Mr. Darrel Stinson: I would sure appreciate it.

Mr. Howard Mann: For my part, I also unfortunately work to deadlines, but in this case mine is much sooner. My paper is actually undergoing peer review right now. I will be getting final comments by the end of the week. It will be finished next week and available in final electronic publication format the week after. So you'll have it before the end of the month.

Mr. Darrel Stinson: One of the big concerns here in Canada, and I'm sure it is in the United States, is that the public themselves perceive what goes on as behind closed doors. They're kept out of it, so the fear starts. Then you're fighting two battles all at once. You're not only trying to get a good agreement going, you're also trying to address the public's concern, which is also your obligation. So when we keep it out of the public eye, we fester that fear. This is why I think you're both going in the right area. Thank you again.

The Chairman: Thank you.

Mr. Sauvageau.

[Translation]

Mr. Benoît Sauvageau: I would like to make a few comments. I, too, would like to thank you. We will note with interest the respective studies that you are going to table.

Does the proliferation of these many regional trade agreements give an advantage to small countries, such as the Free Trade Area of the Americas, or does it constitute a disadvantage? When you are a country such as the United States or Canada, or a similar country, forum shopping may be for you, but can a country such as Costa Rica or a similar State really go shopping? Perhaps, in this case, there are not enough negotiators.

I'm not in favour of setting up panels. Could there be some type of agreement between the trade dispute settlement mechanisms at the regional and multilateral level so that there will be less shopping? That's my second concern.

I have one final concern, and it is very simple, perhaps too much so. This question is intended primarily for Mr. Mann; I see that he has a PhD in environmental studies. I don't know about Mr. Howse. If you feel that you can answer, please do so.

Could we, in the case of the Free Trade Area of the Americas, for instance, could we, through these agreements, simply ask the member States to truly live up to the international environmental agreements that they signed, whether we be talking about conventions, treaties or a specific clause that pertains to the environment?

I have no further comments for the time being.

[English]

The Chairman: Professor Howse, would you like to start?

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Prof. Robert Howse: On the last point, I think the problem would be whether you could have an institutionally legitimate role for a trade body to decide whether a country has or has not conformed with its international legal obligations in the area of the environment. I do think it might be interesting to consider the possibility that one could justify, for example, sanctions against a country because it had failed to live up to its international environmental obligations. So what you would be doing there is saying trade measures that otherwise might be illegal under this trading arrangement should be considered acceptable when you're dealing with a country in flagrant violation of these international environmental agreements.

Then you have the interpretative issue of whether they are in flagrant violation. The question is, how do you deal with that? Well, from the WTO context there are a number of ways. You could consult experts, you could have panels of experts, or you could consult international environmental organizations or the secretariat responsible for that treaty, and so on. So I see this as a kind of exception rather than a positive environmental enforcement role for a trading regime.

On the first point, I think you're absolutely right that the proliferation of regional arrangements is stretching the negotiating and trade law and policy resources of small countries to the limit already. I mean, many of them hire consultants and private lawyers to represent them in these negotiations. One really wonders whether we need more rules out there, as opposed to giving some time for all the rules that have been negotiated within the WTO to be better understood, with more decisions of those dispute settlement organs. As I hinted, I'm skeptical about going into more and more of these regional arrangements. I'd rather just stick with the amazing number and complexity of rules we already have with the WTO.

[Translation]

Mr. Benoît Sauvageau: Do you have an opinion on the agreement mechanism for the various agreements, the various legal aspects? Would it be a good thing to have a mechanism to try to reconcile the rules?

[English]

Prof. Robert Howse: It would be desirable. I think, though, that it would be very difficult to achieve in a comprehensive way. My belief is that what will happen is it will be achieved by individual rulings of dispute settlement panels that use various international legal rules and techniques of analysis to work out possible conflicts or try to reconcile rules.

One interesting case where this has already happened is the NAFTA panel on agricultural tariffication. Canada signed the Uruguay Round Agreement on Agriculture, and that agreement says you have to convert certain kinds of protection to tariff equivalents. The United States came along and said, NAFTA says you've got to get rid of your agricultural tariffs, so that includes these tariff equivalents you have a right to set as part of the Uruguay Round deal. I think the U.S. argument was kind of disingenuous here, not a strong legal argument. What's interesting is that the NAFTA panel figured out an appropriate way of understanding the interaction between, on the one hand, what the Uruguay Round WTO agreement on agriculture said about these special tariff equivalents, and on the other hand, the tariff elimination obligation of NAFTA. It actually made sense. It was a principled resolution of the problem. Canada won hands down against this disingenuous U.S. argument.

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So I'm not totally pessimistic that one won't solve this problem. But I think you raise the important issue: what if you don't have the kind of legal resources that Canada had in this case to deal with this sort of claim?

[Translation]

Mr. Benoît Sauvageau: Thank you.

Mr. Howard Mann: I would like to add something to what Professor Howse just said. Right now we are examining a solution to this problem in Geneva; this solution involves legal assistance to developing countries, to help them defend their cases before the WTO. Such an agency needs to have access to a great deal of money from a foundation in order to pay the lawyers who do the work for these countries. However, it is possible to do this for cases that are before the courts and also in the case of negotiations.

Let's take the agreement for the Americas, for example. If Canada wanted to do something to help the other countries, it could agree to provide them with this type of legal assistance.

I don't have much more to add to the answer Professor Howse gave to your questions. Is it advantageous for small countries or small States to have a proliferation of agreements? It may be an advantage if they're getting something special from the regional agreements; in the Americas, what's most important is the agriculture sector and perhaps also the textile sector.

The agricultural sector is a really important issue for developing countries. Faster access to the North American market, in particular, than that provided for under international agreements would benefit these countries.

Could we have a clause compelling countries to comply with international agreements pertaining to the environment? Yes, it is possible to have such a clause, but as Professor Howse said, we would have to provide some mechanism for monitoring the activities or the implementation of these agreements. It's difficult to provide for such a mechanism in an agreement, primarily for issues pertaining to business and trade.

We can envision the possibility of setting up a broad environmental commission, somewhat along the lines of the NAFTA environment commission in Montreal, but this is going much further than we have in the other trade agreements. Although we have a commission in Montreal, it cannot determine, for instance, if the countries have fully implemented the international agreements. The power of the environment commission in Montreal is restricted to specific things and its mandate is not as broad as that.

Furthermore, we must realize that the international environmental agreements do not cover all of the major environmental issues of the day. Many environmental problems, particularly issues pertaining to forestry and other things, are not covered by the international environmental agreements.

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When we talk about such a clause, we have to, therefore, determine whether or not we want to establish a minimum, or I should say a maximum baseline for a country's environmental performance, if I can call it that. We must think about this very carefully and determine what type of role such a clause could play.

Mr. Benoît Sauvageau: Thank you very much.

[English]

The Chairman: Thank you.

I have a question, Mr. Howse and Mr. Mann. Coming back to you, Mr. Howse, under article 23 of the WTO a dispute has to be resolved by using WTO procedures. Bearing in mind that you said a single claim can have overlapping issues, can you take me through the magazine case and what happened there? Mr. Mann is laughing because we've had this question on a number of occasions. Maybe you could assist me here. All of a sudden we were going to have our first potential cultural exemption challenge under NAFTA, but what happened there? Were the Americans going to use NAFTA? Could they have used NAFTA?

Prof. Robert Howse: Yes, they could have brought the complaint under NAFTA.

The Chairman: The WTO ruled that the original legislation was invalid, and then we brought in Bill C-55.

Prof. Robert Howse: Right. So now you're asking whether or not the United States could go ahead and challenge C-55 under NAFTA. That's an interesting legal question, and I'll try to give you my sense of how that would have to play itself out.

As I said, we have this exclusivity provision that applies to disputes under the WTO covered agreement. Now, the fine point here is that you have language that is essentially identical to that of the WTO or the incorporation of the WTO national treatment standard into NAFTA. Let's say the United States brings the claim with regard to the new bill under NAFTA. Does this mean it's violating the exclusivity provision? The United States would argue that what it's talking about now are the legal provisions of NAFTA, not the legal provisions of the WTO agreements to which that exclusivity provision article 23 applies. If it didn't want the case litigated under NAFTA, Canada might argue that you can't pretend that the relevant legal rules in NAFTA are not for all intents and purposes based upon the relevant WTO provisions on national treatment. So I think one could argue it both ways.

At the end of the day, though, where the United States might have the better argument is that not all of the features of NAFTA are identical, and it doesn't simply incorporate WTO provisions but in some sense actually modifies them. The exceptions are a bit different. Of course, the new claim would also be related to the provisions on trade and services, and there's quite a different structure to the NAFTA provisions on trade and services than to the provisions of the WTO agreement on services.

If I were a panellist to whom this argument was raised, I would probably say that article 23 does not prevent you from bringing a NAFTA claim, even though part of your NAFTA claim would relate to NAFTA provisions that are almost identical to those litigated by the WTO dispute settlement organs.

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The Chairman: Correct me if I'm wrong here, but was it not to the advantage of the Americans to try to invoke NAFTA on Bill C-55 because the procedure for retaliation under NAFTA is different from that of the WTO?

Prof. Robert Howse: Yes. The way the so-called cultural exception is drafted in NAFTA is very peculiar, and I suppose it could lead to the view that it would be easier to take retaliatory action under NAFTA than in the WTO setting. With regard to trade and services more generally, it's clear—I shouldn't say it's clear, but in some respects it might have been easier to make the trade and services argument under the NAFTA provisions than under the WTO agreement on trade and services.

My own view is that the new legislation violates national treatment with regard to trade in goods. It's just a way of doing indirectly what the WTO appellate body said you couldn't do directly. So I think whether the United States wanted to go back to the WTO or to NAFTA, it would have basically won the case.

The Chairman: Thank you.

Mr. Mann.

Mr. Howard Mann: First, in terms of the so-called cultural exemption, it's not so much an exemption from the rules of NAFTA as it is a way of saying, okay, we've breached NAFTA and we know that. We are applying this exemption, and you can penalize up to the value we agree on or a value that is otherwise determined. It's a way of acknowledging and living with a breach of the rules of NAFTA and paying the price for that. To that extent, it is perhaps an easier way to get to the final point of punitive tariff escalations or whatever in other industries, that kind of penalty process. It's built in, as it were, for those kinds of cultural issues. But it isn't so much an exemption from the rule of law as it is a recognition that you have breached the rules and are prepared to pay to do so in those areas.

One other aspect, though, of the potential breadth of issues yet to come may well be the investor-state issues. Depending on what happens now in terms of subsidies or other types of measures taken in order to kind of backstop the potential impacts of the new version of Bill C-55, or whatever it might be called, it wouldn't surprise me at all to see foreign companies in the publishing business in Canada at some point turning around and using the investor-state challenge to complain about non-national treatment they receive either by not receiving subsidies or some other mechanism if it harms their interests.

The one panel award that has been issued and made public under the investor-state process is the award on preliminary issues of jurisdiction in the Ethyl or MMT case, and there the panel said that based on no initial reason the same measure couldn't be the subject of challenge in the state-to-state process and in the investor-state process separately. One is the investor's rights, one is the state's rights, and the potential use of the state-to-state mechanism does not block the use of the investor-state mechanism.

So I think we're still in a situation of waiting for another shoe to drop on that issue.

The Chairman: Mr. Stinson, you wanted to ask a question.

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Mr. Darrel Stinson: Yes. I didn't know we were going to get into C-55. It seems we are. I find it interesting. I'm sure the minister had the same advice as what we heard here today. So I have to wonder why it was even put forward the same as the MMT, what's going on here. Again we come back to what was originally said here—the lack of clarity. What constitutes all these little triggers to be set off? And why the difference of interpretation? Is the language that much different in these agreements between one country and the other? This is basically what we're looking at here. We're saying it's interpreted one way and they're saying it's interpreted another way. So therefore we get into a little bit of a trade dispute here. Sometimes I have to wonder if a lot of it's not just politics.

Mr. Howard Mann: It's all politics.

Mr. Darrel Stinson: Thank you.

Mr. Howard Mann: It is at the beginning, but that being said, I think there are probably two additional elements, if I might. One is these are very large and complex agreements and it is inevitable that there will be differences of interpretation as the life of these agreements plays out. That's why you institute a proper and hopefully transparent dispute resolution system. That's not a bad thing; that's a good thing. That's a good way to go about resolving these differences.

Second, sometimes mistakes simply happen. One thing that happens—and I've been there myself, when I was working for the Canadian government doing negotiations—is that you understand what your objectives are when you're at the table, when you're drafting a document. You work toward those objectives, and sometimes you simply don't recognize something else creeping in the back door. It may not even have been put there on purpose by your colleagues from another country.

Mr. Darrel Stinson: Yes. It also brings up another question then, which is, why is there not a sunset clause more in line with the timeframe, where this can be addressed without creating a trade dispute, say, two years down the road? Why were these agreements not red-flagged on a sunset clause, where if there is a problem, they have to start over again, instead of treating them as trade disputes?

Mr. Howard Mann: I take it, if you're talking about a sunset clause for the entire agreement, you would then be in a situation of having to renegotiate the entire agreement. Once the agreement is open for renegotiation, it's all open.

Mr. Darrel Stinson: It's all open.

Mr. Howard Mann: You need to then go back and get proper parliamentary approval or congressional approval and everything else. You need to go through the entire ratification process again. So if you sunset these agreements, with the breadth they have, it's virtually impossible to deal with them that way, I would think. You're going to end up with a constant negotiating process that not only will small developing countries find it impossible to play, but countries like Canada will begin to find it impossible to keep up in terms of the personnel and so on also. Just the mechanics of it will become truly overwhelming.

However, there are potential ways to amend the agreement. You do have the large rounds at the WTO and so on. In terms, for example, of the investor-state provisions in chapter 11, there's a specific mechanism in there to account for potential variances of interpretation. The parties can set out a binding interpretation specific to chapter 11. So there are different ways to deal with that kind of an issue.

Mr. Darrel Stinson: [Editor's Note: Inaudible]...outside of these agreements, the softwood lumber agreement. Now, I don't know if we want to touch on that right now. I'd really like to talk to you sometime with regard to how that was set up and the problems they found there through lack of interpretation, through lack of clarity.

Mr. Howard Mann: I'll just give you a very quick answer, and I'll let Professor Howse deal with these issues. What's actually happened now is a chapter 11 challenge to the implementation of the softwood lumber agreement. That's the Pope & Talbot case. One sees an effort to smooth over this dispute between Canada and the United States, which goes on for a decade. The agreement is reached, and now the implementation of that agreement is being challenged by a private investor under chapter 11.

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I don't have a magic answer to that issue, other than to suggest that these are extremely complex issues, that one does need to have some flexibility in terms of being able to adjust them as one goes along. There are going to be teething pains. The real issue is going to be the willingness of ministers, and particularly the trade ministers, to both acknowledge and address the problems that are at the root of those teething pains, I think.

The Chairman: Mr. Howse.

Prof. Robert Howse: I'd like to say something about softwood lumber. I think this also relates to how we got ourselves into the predicament on the investor-state issue in NAFTA.

I don't understand why...or to put it a little differently, I think there must have been problems with the advice on the basis of which the federal government negotiated an agreement on softwood lumber with the United States. It's true that because of the fact that there are no actual rules in NAFTA on subsidies and countervailing duties, the Americans could always change the law even after we won at the binational panel process. But there are a range of provisions in the WTO subsidies agreement that I believe the United States would have been violating had countervailing duties been imposed. Yet there seems to be a kind of lack of assertiveness on the part of those officials dealing with this matter.

In the investor-state situation, I don't know on what advice the Canadian government paid out on a very speculative claim. Ethyl got itself a good, aggressive, and creative lawyer who made a novel claim based upon certain U.S. views that when a government changes its regulations and a company suffers financial loss, that's a kind of taking or expropriation the company should be entitled to have compensation for, and applied that argument in an international law context where, generally speaking, unless a government is trying to do, as it were, nationalization surreptitiously, that kind of argument would not be accepted. It was a novel, aggressive claim.

Whoever was advising the government clearly got nervous and advised a multi-million-dollar settlement, so what happens now is you have ambulance-chasing. Do it again and again because these people will pay out; rather than fighting a novel and, in my view, weak legal argument, they'd rather just pay out a damages settlement. I think there should be some investigation as to on what advice that happened.

I know the view...because I was at a meeting where our minister and the Mexican minister were both present. I know the Mexican view is that these cases should be fought, that this is not a reasonable interpretation of what expropriation means in international law, whatever it might mean in the U.S. constitutional tradition. And we ought to fight that, and we ought to have fought the softwood lumber case at the WTO.

I just want to make one more point, which is that this raises a serious issue about whether the officials responsible for handling these cases are properly protecting Canadian commercial interests. I, for one, would be very keen on some kind of legal provision that actually allows business interests to petition for a WTO action to go forward—not just business interests but other affected groups; petition that the Canadian government take an action forward rather than leaving this all to the discretion of officials and the Department of Foreign Affairs and International Trade.

If, then, the government views the case as not meritorious enough to go forward to the WTO, it should be required to give that business petitioner reasons as to why it thinks the case should not go forward on the legal merit.

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Leaving the interests of Canadian business and international trade up to the discretion of officials whose interests may be different from those of workers and managers and shareholders, it seems to me, is no longer a justifiable option.

Mr. Darrel Stinson: Thank you.

The Chairman: Yes, Mr. Mann.

Mr. Howard Mann: Can I come back on a couple of points here?

First, I agree with the point on settlement of the Ethyl case, but I do want to make it clear that that was not the first time Canada had been faced with the chapter 11 issues. What we're talking about there was the first actual initiation of the arbitration process, the first time it had played out.

In fact there are at least three or four strategic uses of chapter 11 that have come before. One was the Pearson Airport issue, where the foreign member of that consortium threatened to use chapter 11 if a full settlement of the contract wasn't reached. There has also been the use of chapter 11 threats in terms of tobacco legislation, in terms of approvals of drugs and the regulatory process for that, and other instances. Also there have been a number of cases in Mexico where it has been used, and still only one in the United States.

The fact is this is now part of the strategic arsenal of lobby groups, the most sophisticated lobby groups who then trot out the Gordon Ritchies and so on to make the arguments in parliamentary committees and elsewhere. It's part of the arsenal of lawyers in a very aggressive sense in terms of representing clients in different forms and contexts, and so on. So the role of chapter 11, as I said earlier, or the investment protection notion, has actually been flipped now into a very aggressive, strategic tool, and that's why we see this rather large increase in the issues and the problems it raises—critically important issues, I think.

It isn't just a question of ambulance-chasing, as it were, by a few clever lawyers; there is very much an ingraining of strategic issues and the strategic use of this. In fact some of Professor Howse's former colleagues—I think he used to be at the University of Toronto—will shortly be releasing a study on the strategic use of what they call the privatization of trade law.

The Chairman: Could we have a copy of that report?

Mr. Howard Mann: Well, that's not mine.

The Chairman: Okay.

Mr. Howard Mann: That book is in the process of being readied for publication, and it does indicate not just the strategic uses of chapter 11 but a series of what goes under the rubric now—and what Sylvia Ostry and others have called—of the privatization of trade law; the opportunities for private corporations to use trade law to require challenges to be made through U.S. mechanisms, which might be the kind of thing you're talking about in terms of Canada. I don't know.

Certainly through chapter 11 or through the investor-state process, where you have unquestioned direct access, you have the right to initiate it yourself. You don't have to get the permission of the state, you don't have go through the state, and the ability to use that not just to address narrow commercial issues but very broad public policy issues—health and welfare and environmental health and welfare—has now become quite apparent through the strategic use of these instruments.

The Chairman: I have one quick question. When you look at the non-desirables for a dispute resolution process in the FTAA, it's chapter 11. Yet when the ministers met, with the fifth year anniversary of NAFTA, they talked about trying to redefine the expropriation, narrow the definition. There seemed to be a lot of resistance, not just from the Americans but from the Mexicans as well. A Mexican minister went on record to say what we need is to embark on a public affairs campaign to say how wonderful NAFTA is. So in light of that feeling, how realistic is it for us even to be able to negotiate these changes or these problems that we see with chapter 11 in an FTAA?

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Mr. Howard Mann: In terms of the Mexican view, I think it's important to understand that they've done very well through the use of the investment agreement, or the investment chapter of NAFTA. They're the second-ranking developing country now, in terms of investment inflows. They're a major destination for European and Asian investment into North America, and so on. They're doing very well.

From their sort of narrower perspective, I can understand a reluctance. It's almost good for them, in terms of promoting investor confidence, to lose these cases, including environmental cases, that are on against them, and to be able to turn around and say, “You see, we apply the rules. We live by the rules we sign. We're open and transparent about it now. We signed this agreement; we're going to live by the rules. We're a safe place for you to invest. And if it takes a few environmental decisions, or a few environmental consequences, so be it.”

Now I don't want to say that's.... I think it's easy to take that reasoning a little too far, but I think one can see a Mexican perspective in this, in terms of not wanting to touch some of these issues right now.

On the other hand, specifically in terms of NAFTA, there is a special mechanism built into chapter 11 that allows these issues to be addressed without reopening NAFTA itself.

There's provision in chapter 11 for an interpretive statement that can restrict the far edges of this that are being claimed by some lawyers—some of the more creative reasoning. So that's one avenue that can be used.

In terms of the FTAA, I think at a certain point in time we do have to ask what the Canadian interest is here. To simply say we're negotiating an FTAA and to say now that we will be there at the end of the day, no matter what it looks like, is wrong. We have to be prepared to say it's quite possible the agreement won't be good and we won't be there at the end of the day. I think it's important in that context to set out very clear markers as to what the Canadian interests are, and that includes the democratic principles that underlie a lot of these issues—sustainability, democratic rights, human rights, and so on. It also includes ensuring that at the end of the day, investor rights don't include being able to have that kind of potential rampant impact on public health and welfare activities of a government.

The Chairman: Professor Howse, you are shaking your head.

Prof. Robert Howse: I think a large part of the Mexican position is that these claims arise out of an unreasonable or, to put it charitably, very speculative interpretation of the legal language of NAFTA. As I said at the other meeting, at which the minister was present, the idea that some kind of interpretive understanding would prevail in arbitration proceedings is misguided. You can't amend a treaty by the back door. Some kind of agreement between the parties that did not, in this case, have itself the status of a treaty instrument would be one factor among a range of others that would be taken into account in any kind of arbitration proceeding.

But there's a special problem here, because essentially what you've done in the investment chapter of NAFTA is you've given certain rights to investors, to private businesses. And to tell the businesses now that we don't like the way their lawyers are using the chapter, so we'll conspire as ministers to shut this down.... Well, you don't give people rights under a trade agreement and then take them away. That looks very bad. It looks very bad from the perspective of the rule of law, from the perspective of security, and certainty of the rules of the game in international trade.

Now maybe I would have said you shouldn't have done it this way in the first place. But given that it has been done this way, I don't think an effective response strategy is to try to cobble together some kind of interpretive statement that purports by the back door, as it were—not the back door, but through a route other than treaty amendment—to roll back these rights.

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I think one is faced with the fact that this is a treaty, and the treaty language itself, unless changed by another treaty instrument, is going to be the number one factor in any arbitration ruling. That language is interpreted according to the principles of public international law.

Where there's lots of hope is that if you start to defend these actions vigorously, I think you'll win most of them, because this isn't any kind of accepted definition of expropriation or taking of property just because some business loses revenue due to the government changing some general public policy.

The Chairman: Thank you very much, gentlemen. Thank you for coming. Thank you, colleagues.

We look forward to receiving the reports that are forthcoming, and thank you for advising us on the other report.

The meeting is adjourned.