FAAE Committee Report

INTRODUCTION

Pursuant to the House of Commons Standing Order 109, as effective March 7, 2005, the Government of Canada is pleased to respond, to the Ninth Report of the Standing Committee on Foreign Affairs and International Trade entitled “Dispute Settlement in the NAFTA: Fixing an Agreement Under Siege.”

RECOMMENDATION 1

That the federal government move beyond informal consultations with the United States on NAFTA trade dispute settlement matters, and actively and formally engage the United States to the extent necessary, but particularly through the use of the NAFTA's Chapter 20 (see Recommendation 12), to ensure that the original intent of Chapter 19, and thus the NAFTA, is respected.

The Government agrees that the original intent of NAFTA Chapter 19 should be respected. To that end, the Government is pursuing all available avenues, both formal and informal, to challenge U.S. trade remedy and other actions that may be inconsistent with the original intent of NAFTA Chapter 19. Canada has engaged the United States at the highest level to press for the improved functioning of and a commitment to Chapter 19. The Prime Minister and the President have instructed their respective officials to review the operation of Chapter 19 and provide advice for areas of improvement. Regarding the possible use of NAFTA Chapter 20 to enforce Chapter 19 obligations, NAFTA Article 2004 explicitly exempts matters covered by Chapter 19 from its application.

RECOMMENDATION 2

That the Government of Canada work with its NAFTA counterparts to develop criteria to restrict the introduction of trade remedy challenges under Chapter 19 that are frivolous and/or without merit.

The Government agrees with the Committee. It is Canada's longstanding position that trade remedy measures have no place in the integrated market envisaged by first FTA and now the NAFTA. That is why Canada believes that it is important to keep an open dialogue on the evolution of trade remedy use within the highly integrated North American market. An example of such dialogue is taking place under the recently proposed North American Steel Strategy, which was presented to NAFTA leaders on June 27, 2005 in the context of the Security and Prosperity Partnership agenda, and will be implemented within the context of the North American Steel Trade Committee. This type of exchange could enable industry to take a broad North American perspective to market distortions and situations which could give rise to the incidence of trade friction and possible trade actions. This in turn would lessen the use of trade remedy actions and requests for Chapter 19 reviews of such actions. Finally, the merits of individual cases can only be judged in the context of actual Chapter 19 challenges.

RECOMMENDATION 3

That the federal government collaborate with the United States and Mexico to give Chapter 19 panel rulings precedent value over subsequent panel rulings covering the same products.

Any such change, as advantageous as it would be, would clearly require a re-opening of Chapter 19, which would not be in Canada's best interests at this time. While NAFTA Panel decisions do not constitute formal precedents, they may have some informal influence on subsequent Panel decisions involving the same issues. One option that the Government has proposed exploring is the possibility of providing for reciprocal recognition of NAFTA binational panel rulings in each country. This would be done in order to have recourse to additional domestic remedies and tools to compel compliance with NAFTA Chapter 19 binational panel rulings.

RECOMMENDATION 4

That the Government of Canada enter into discussions with its NAFTA partners to reduce the frequency of multiple remands on the same case.

Any such change, as advantageous as it would be, would clearly require a re-opening of Chapter 19, which, as noted, would not be in Canada's best interests at this time. Multiple remands by investigating agencies further to the decisions by the U.S. Court of International Trade are frequent. In fact, limitations on the number of remands might make it more difficult for panels to effectively direct conclusions of Chapter 19 reviews. Finally, while multiple remands may be an inconvenient and time consuming element of the Chapter 19 dispute settlement process, panels have used the authority to preclude investigating authorities from any further analysis and have issued instructions to make determinations consistent with panel decisions thereby effectively terminating the remand process.

RECOMMENDATION 5

That the federal government officially protest to the U.S. government and vigorously defend the legitimacy of Chapter 19 and the NAFTA when the United States undertakes actions that disrespect the legitimacy of panel decisions.

The Government agrees with the Committee that the functioning of Chapter 19 should be a high priority for the Government. The Prime Minister and Canadian Ministers have raised and will continue to raise Canada's concerns about the Chapter 19 dispute settlement mechanism with President Bush and other senior members of U.S. Administration. More recently, there has been a strong Canadian reaction in the face of the United States' refusal to revoke the duty orders and refund the deposits on softwood lumber following the August 10 decision of the Extraordinary Challenge Committee (ECC). In addition to high level interventions with the U.S. Administration, Canada is pursuing litigation at the U.S. Court of International Trade challenging U.S. actions in response to the ECC ruling.

RECOMMENDATION 6

That the federal government engage with its NAFTA partners to ensure that extraordinary challenge committees are used only in extraordinary circumstances and not as a general appellate court.

The Government agrees with this recommendation and has consistently made the point that the Extraordinary Challenge Committee mechanism is to be used only in extraordinary circumstances and is not to be used as de facto appeal mechanism.

RECOMMENDATION 7

That the federal government collaborate with Mexico and the United States on consolidating, adequately funding and improving the competence of the NAFTA Secretariats, in order to provide the Free Trade Commission with the support that it requires to adequately administer its treaty functions.

The Government agrees that the three NAFTA countries should collaborate on ensuring that NAFTA obligations can be properly administered. The issues relevant to that objective are currently being examined by the senior officials tasked with reviewing the operation of Chapter 19. Canada has long argued that the United States should increase the funding and staffing levels for the U.S. Section of the Secretariat to enable it to function more efficiently. The United States has indicated that it is willing to explore this issue.

RECOMMENDATION 8

The Government of Canada work with its NAFTA partners to create a permanent roster of panellists, clarify the rules on who is allowed to serve on a panel, increase the remuneration of experts serving on Chapter 19 panels and ensure that each country has a full roster of panellists. The federal government should consult with industry when creating this permanent list.

The Government agrees. Canada is working with its NAFTA partners, the United States and Mexico, on this issue. In the context of both the senior officials process and the Chapter 19 Operation Working Group, efforts are being made to improve the selection and retention of fully qualified panellists. Canada is also seeking to streamline its internal panel selection process so that the process works more efficiently. Annual updating of the curricula vitae of panellists, increases in remuneration of panellists and panellist assistants, and possible mechanisms to ensure the prompt appointment of panellists are all under active consideration. Regarding the proposal that industry be consulted on the appointment of trade experts to the permanent list of panellists, it should be recognized that the pool of available Canadian trade experts is small relative to the United States. Allegations of potential conflicts of interest as well as possible questions of bias could be raised and the appointment process could become unnecessarily complicated.

RECOMMENDATION 9

That the Government of Canada pressure the U.S. to ensure that Section 129 of the Americans' Uruguay Round Agreements Act not be used to avoid the implementation of NAFTA panel determinations.

The Government agrees with the Committee's position. With respect to softwood lumber, a WTO Panel ruled, in March 2004, that the U.S. International Trade Commission's (ITC) May 2002 threat of injury determination violated U.S. WTO obligations. In response to the ruling and pursuant to Section 129 of the Uruguay Round Agreements Act, the United States Trade Representative instructed the ITC to conduct a new investigation to determine whether the U.S. industry was being threatened with injury. The ITC issued a new affirmative threat of injury determination on November 24, 2004. The United States has indicated that it will not revoke the duty orders or refund the duty deposits in response to the NAFTA Injury Extraordinary Challenge Committee (ECC) decision on the grounds that the ITC's November 2004 determination provides a new legal basis for the continued imposition of duties. In anticipation of this U.S. position, on January 19, 2005, Canada took pre-emptive action and appealed the U.S. amendment of the duty orders to the U.S. Court of International Trade (CIT). Shortly after the appeal was filed, Canada requested a stay of proceeding, pending the outcome of the NAFTA ECC process. In light of the ECC decision, Canada in concert with the provinces and industry will be requesting that the CIT lift the stay of the proceeding to secure U.S. compliance with its domestic law and NAFTA obligations. The CIT could issue a decision in early to mid 2006.

RECOMMENDATION 10

That the federal government explore all avenues to achieve a common definition of dumping in the agricultural sector that excludes production costs in integrated markets, as well as a common timeframe for the investigation of dumping charges that reflects the production or business cycle.

In the context of the WTO negotiations on trade rules, Canada has raised, among other issues, the possibility of further expanding the conditions under which sales made at a loss would not be excluded from the calculation of the margin of dumping. Earlier in 2005, the issue of cyclical industries was discussed in a smaller WTO working group which examines specific issues in more detail. It would be premature to speculate on the prospects on such a proposal generating sufficient support among our trading partners to be established in the accepted definition of dumping.

RECOMMENDATION 11

That the federal government actively consider using Article 1903 in instances where its NAFTA partners change their laws with the goal of negating their NAFTA obligations.

The Government agrees with this recommendation and will consider using Article 1903 in instances where its NAFTA partners change their laws with the goal of negating their NAFTA obligations.

RECOMMENDATION 12

That the federal government immediately trigger Chapter 20 consultations with the United States regarding the Chapter 19 concerns raised by witnesses in this report.

As was indicated in the response to Recommendation 1, the Government agrees that the original intent of NAFTA Chapter 19 should be respected. To that end, Canada has engaged the United States at the highest level to press for the improved functioning of and a commitment to Chapter 19. In this context, the Prime Minister and the President have instructed officials to review the operation of Chapter 19 and provide advice for areas of improvement. However, regarding the possible use of NAFTA Chapter 20 to enforce Chapter 19 obligations, NAFTA Article 2004 explicitly discounts that option. Please refer to the response to Recommendation 1.

RECOMMENDATION 13

That, should the United States lose a Chapter 20 case and fail to implement its NAFTA obligations, the federal government give serious consideration to withdrawing NAFTA benefits in conformity with NAFTA Article 2019 from the U.S. until such time as it complies with its NAFTA obligations.

While this question is purely speculative in nature, it should be emphasized that should such a case arise, Canada would examine all its options.

RECOMMENDATION 14

That the Government of Canada develop a long-term, consistent policy of legal-aid support for Canadian softwood lumber associations until such time as the dispute is ended, in recognition of their high legal costs. Furthermore, we recommend that the government devote more of its own resources to the prosecution of the softwood lumber dispute. As a general rule, the federal government should provide financial support (e.g., assistance for the payment of legal fees and provision of loan guarantees) to those industries adversely affected by NAFTA trade remedy cases.

There is little doubt that the softwood lumber issue, given its complexity, its history, and both its political and economic impacts, has been the most significant trade remedy issue that the Government of Canada has ever encountered. Accordingly, the Government has devoted an unprecedented level of attention, funding and resources to the resolution of the softwood lumber dispute. In this context, therefore, and in light of the extraordinary nature of the softwood lumber dispute, the Government of Canada has provided financial assistance to softwood lumber industry associations to help defray legal costs. It is noted, however, that it is the Government's longstanding position that it does not provide financial assistance to those industries adversely affected by trade remedy cases.

RECOMMENDATION 15

That the federal government increase its use of parliamentarians as advocates in trade disputes, and that Parliament broaden the use of members' travel points beyond Washington, D.C., to travel throughout the United States on official parliamentary business.

The Government agrees with the recommendation to increase the use of parliamentarians as advocates in trade disputes. Canada's advocacy efforts in the United States are supported by the active involvement of parliamentarians. The Government is coordinating and supporting, through the Executive Secretariat of the Canada-U.S. Inter-Parliamentary Group, the participation of parliamentarians in advocating Canadian interests in regions outside Washington. Discussions are ongoing to seek out new opportunities for parliamentarians to support advocacy efforts in the United States. In this context, International Trade Minister Jim Peterson led a Canada-U.S. trade advocacy day to Washington on March 1, 2005 to engage new representatives and senators of the 109th Congressional Session. Among others joining Minister Peterson was the Canada-U.S. Inter-Parliamentary Group. The House of Commons is however responsible for policies related to travel by Members, and the issue of broadening the use of travel points is therefore one for the House of Commons.

RECOMMENDATION 16

That the federal government increase support to programs that build coalitions with interested American groups and sensitize Americans, especially American state and national politicians, to the benefits of trading with Canada.

The Government of Canada agrees with this recommendation. A strong presence in the United States enables the Government to emphasize to a broad range of U.S. opinion-makers. The Government has been working with a strategic network of missions and Canadian allies to educate and mobilize large constituencies and interest groups that can underscore to U.S. politicians and Administration officials that disputes hurt both economies and erode North American competitiveness (e.g. softwood, BSE, the Byrd Amendment). With respect to softwood lumber in particular, the Government is proposing a targeted advocacy plan that focuses on the political and economic costs to the United States of continuing not to comply with its NAFTA obligations. This would involve private messaging, paid advertising as well as public and private government relations.

RECOMMENDATION 17

That the Government of Canada, with the active participation of parliamentarians, engage formally with Mexico to address joint concerns about the American treatment of NAFTA Chapter 19.

The Government agrees with the recommendation and will discuss with interested parliamentarians ways to work with Mexico in pursuing shared concerns about NAFTA Chapter 19.

RECOMMENDATION 18

That in the event the United States is unsuccessful in its extraordinary challenge, the federal government pursue to the full extent of its abilities the return of Canadian softwood lumber duties and that the return of 100% of these duties, with interest, be a fundamental condition of any negotiated softwood lumber settlement.

Canada continues to pursue a long term resolution of the softwood lumber dispute that includes the full refund of the duties collected by the United States. On August 10, in a unanimous decision, the Extraordinary Challenge Committee agreed with Canada and concluded that the U.S. allegations in the EEC were unfounded. This decision, which affirmed the original NAFTA panel ruling on the ITC threat of injury finding, effectively removes the basis for the anti-dumping and countervailing duties on Canadian softwood lumber products. The Government considers that the United States has an obligation under U.S. law and international trade agreements to revoke the duty orders and refund the deposits paid to date with interest. In every previous FTA and NAFTA case, the United States has refunded duties when the order has been found to be illegal. Canada is continuing to pursue all legal avenues, particularly a challenge of the U.S. refusal to refund the duties in the U.S. Court of International Trade. An advocacy campaign as well as a possible return to negotiations when they are in Canada's interest are also elements of Canada's approach.

RECOMMENDATION 19

That Canada work with Mexico to (a) conclude an understanding with the United States that explicitly provides for the return of duties collected in cases where the application of trade remedies is found to violate the NAFTA and (b) discontinue the Byrd Amendment's application to Canada and Mexico.

Canada is looking at ways to work with Mexico in addressing shared concerns about NAFTA Chapter 19. Canada maintains that duties found by a NAFTA Chapter 19 Panel to be collected improperly under domestic law should be returned. This position has been confirmed by a recent NAFTA Panel decision with respect to the anti-dumping duty determination on softwood lumber from Canada. Regarding the Byrd Amendment, on April 29, 2005, the Government, in concert with the Canadian softwood lumber and the Canadian Wheat Board, filed a complaint in the U.S. Court of International Trade against the Byrd Amendment as it applies to imports from Canada. Mexico is participating in this Court challenge as amicus. Canada's position is that the application of the Byrd Amendment to Canada is inconsistent with the U.S. law implementing NAFTA.

RECOMMENDATION 20

That the federal government continue to pursue all avenues open to it, including retaliation under the World Trade Organization, the U.S. Court of International Trade and the NAFTA, in response to the illegal Byrd Amendment.

In light of the United States' continued failure to comply with the WTO ruling that found the Byrd Amendment to be inconsistent with the WTO, Canada, Brazil, Chile, India, Japan, Korea, Mexico and the European Union were authorized to retaliate against the United States. In this context, on May 1 2005, Canada implemented a 15 percent retaliatory surtax on imports of live swine, cigarettes, oysters, and certain specialty fish originating in the United States. As noted, on April 29, 2005, the Government, in concert with the Canadian softwood lumber industry and the Canadian Wheat Board, filed a complaint in the U.S. Court of International Trade against the Byrd Amendment as it applies to imports from Canada. Mexico is participating as amicus in this court challenge. Canada, the European Union, Mexico and Japan have already taken retaliatory action against the United States.