[Recorded by Electronic Apparatus]
Wednesday, April 16, 1997
.1609 
[English]
The Chairman (Mr. Michel Dupuy (Laval West, Lib.)): We have a quorum now. Our colleague from the Bloc will not be able to attend. He has good reasons for not being one of us this afternoon.
Today we are looking at dispute settlement in the World Trade Organization. We have three witnesses who are all most familiar to us by now. They are Professor Winham of Dalhousie University, Greg Tereposky of the law firm Thomas and Davis,
[Translation]
and from the Department of Foreign Affairs and International Trade, Serge Fréchette.
[English]
Professor Winham, would you take the floor?
.1610
Professor Gilbert Winham (Department of Political Science, Dalhousie University): Thank you very much, Mr. Chairman and gentlemen. I will read from a document I prepared which gives a background on WTO dispute settlement. I'll leave it to my colleagues to follow from there.
Provisions for dispute settlement in the World Trade Organization are contained in the Understanding on Rules and Procedures Governing the Settlement of Disputes, one of a number of agreements reached during the Uruguay Round negotiation. It is included in the structure of the WTO agreements of April 1994. The dispute settlement understanding, or DSU, constituted a wholesale reform of the dispute settlement practices that had evolved in the GATT since 1947.
GATT dispute settlement flowed from articles XXII and XXIII. It was based on the assumption that the GATT was a contract which, if nullified or impaired by the actions of one contracting party, would give rights of consultation and possible retaliation to other contracting parties so affected.
Article XXIII provided that the contracting parties could investigate matters relating to disputes and could authorize a contracting party to suspend benefits to another party as appropriate to the circumstances.
The basis of GATT dispute settlement was to reach a mutually acceptable solution between the parties, consistent with the General Agreement on Tariffs and Trade. This usually meant pressure would be placed on a contracting party to rescind or remove any measures that were inconsistent with the GATT. Over time, the GATT evolved the practice of employing panels of experts to investigate disputes and to report findings to the GATT council. GATT practice required that panel reports be adopted by a consensus decision of all contracting parties, including the losing party, before it would become legally binding on the parties to the dispute.
Early GATT dispute settlement procedures were diplomatic and political, but became more formal and legal with the passage of time. Over the past ten to fifteen years, a larger proportion of disputes arising under the GATT led to the establishment of a panel. Panel reports themselves were increasingly characterized by careful arguments based on the rights and obligations of parties under the agreement.
The resulting judicialization of GATT dispute settlement, which was an evolutionary process under GATT, received further encouragement in the WTO dispute settlement understanding, the DSU. The DSU constitutes a fundamental, non-incremental, negotiated reform of the GATT dispute settlement system. It introduced five important changes to previous GATT practice.
First, the DSU, in article 6, guarantees the right of WTO members to a panel. It provides for near automatic adoption of panel reports by the relevant body of the WTO, that is, the dispute settlement board or DSB. The previous GATT requirement for consensus had meant that a losing party could block a report from going forward. This, of course, was consistent with national sovereignty and with a pragmatic approach that saw GATT law as an instrument of diplomacy.
The DSU reversed the consensus principle by requiring in article 16 that a panel report be adopted unless ``the Dispute Settlement Board decides by consensus not to adopt the report''. This means that dispute settlement decisions will be legally binding on WTO members unless the winner of the case can be convinced to vote against its own victory, which of course would be unlikely to occur.
Article 16 has been criticized as reducing the sovereignty of WTO members. It does not do this, because although the WTO can authorize retaliation - and of course the GATT could do that as well - it cannot force a member to change its trade practices. What article 16 does accomplish is the creation of a legal obligation for countries to follow in the future the rules that they have negotiated in the past. This represents a further shift from the pragmatic and diplomatic conception of GATT/WTO law towards a legalistic conception. It is probably one of the most far-reaching of the various changes introduced by the WTO system.
.1615
Second, the DSU established a standing appellate body within the WTO and provided for formal appeals from panel cases under article 17. The appellate body is a permanent commercial court consisting of seven members who will oversee dispute settlement arising in any of the various agreements under the WTO system. According to article 17.6, the scope of appeal of the appellate body is to be ``limited to issues of law covered in the panel report and legal interpretations developed by the panel'', but this standard will give the body wide-ranging authority to apply agreements that in many cases are imprecise and leave a lot to subsequent interpretation.
The creation of the appellate body is yet another example of the increasing legalism of GATT/WTO dispute settlement practice. With the obligation under the DSU to adopt and comply with panel reports, governments became more concerned about the possibility that an individual panel might produce an erroneous decision, therefore leaving non-compliance as the only recourse to a losing party. The appellate body can be seen as a safeguard against legal error as well as an opportunity to build case law that might further promote the development of a rules-based trade regime.
Third, article 1 of the DSU states that the understanding will apply to all disputes arising under the package of Uruguay Round agreements. The issue of coverage of the DSU was a difficult problem in the Uruguay Round negotiation. At issue was whether the dispute settlement system would be integrated and thus apply to all the agreements contained in the Uruguay Round package or whether a separate system would be constructed for disputes in goods, services, intellectual property, anti-dumping, agriculture, and so forth.
On the one hand, Uruguay Round negotiators sought to avoid the problem of fragmentation and inconsistency raised under the old Tokyo Round codes, which had separate dispute settlement rules and different bodies to adjudicate those rules.
On the other hand, an integrated system would allow for cross-retaliation. That means compensation for non-compliance with a panel's report in one area, for example, intellectual property, which would be awarded in another area, such as textiles, let's say.
Cross-retaliation was resisted by the developing countries because it would arguably allow developed countries to put increased pressure on developing countries in new trade areas by threatening to remove concessions on traditional goods where developing countries had a comparative advantage, for example, in textiles.
This issue was resolved in favour of establishing an integrated system - article 1 - which will have a unifying effect on the overall WTO system and will eliminate the tendency to ``forum-shop'' that is present when multiple avenues to dispute settlement are available.
Fourth, the DSU included a provision in article 23.2(a) that members shall:
- not make a determination to the effect that a violation [of WTO obligations by another member]
has occurred, except through recourse to dispute settlement in accordance with the rules and
procedures of this Understanding.
In this trade-off, the two economic superpowers of the WTO both accepted constraints on unilateral action in favour of a more effective system of multilateral agreement and compliance. This is a major advantage for Canada and other middle powers in the WTO.
.1620
Fifth, the DSU incorporated a number of technical measures designed to improve and expedite dispute settlement procedures. These include explicit procedures for consultations, including opportunities for multiple complainants to confer with the defending party; provisions ensuring expeditious and impartial composition of panels, including the establishment of standard terms of reference; and provision of strict timeframes for every step of the process. Admittedly, these changes are not headline-grabbers, but together they will improve the efficiency and usability of the system. At rock bottom, the test of a commercial dispute settlement system is whether it works fairly and efficiently. If it works, it will be used. Otherwise, it won't be.
The experience of the first two years of the WTO is that dispute settlement procedures have been used heavily. In ``Update on WTO Disputes'' of March 17, 1997, the WTO secretariat stated that 47 matters were currently under consideration, on which there were formal consultation requests from 71 countries. There were 3 completed cases - now 4, in fact - that have proceeded through the appellate body, and 14 other active cases. Another 17 cases were listed as settled or inactive. The complainants in these cases ranged from the quad countries - the U.S., the European Union, Japan and Canada - through to developing countries such as Brazil, India, Thailand, Singapore and Costa Rica. As noted by Debra Steger, of the WTO's appellate division - and a Canadian, as I'm sure you'll know -
- The large number of cases and the diversity of participants is a healthy sign that governments
are determined to ensure compliance with the WTO obligations and to work within the system.
Thank you.
The Chairman: Thank you, Professor Winham.
Mr. Tereposky.
Mr. Greg Tereposky (Lawyer, Thomas & Davis): Actually, Monsieur Dupuy, it may be better if I wait till after Mr. Fréchette has completed. I just have a few general comments to make on the participation of the private sector in the dispute settlement process.
The Chairman: Very good.
Mr. Fréchette.
[Translation]
Mr. Serge Fréchette (Counsel, International Trade Law Division, Department of Foreign Affairs and International Trade): Thank you, Mr. Chairman.
Members of the committee, to follow up on the general presentation made by Professor Winham, which dealt with the major facets of the dispute settlement mechanism, I would just like to make a few general comments on the Canadian government's experience thus far with the actual application of the dispute settlement mechanism.
I will be making two types of comments: the first will be general comments on the philosophy and policy behind the dispute settlement mechanism, and the second will be more specific comments on the procedural and practical aspects of applying the dispute settlement mechanism.
As Professor Winham said, the government thinks that its experience so far with the dispute settlement mechanism has been very positive. A number of countries who, in the past, had not been able to use such a mechanism have had recourse to it. Other countries who did very little trade had not thought it would be in their interest or simply did not have the means to resort to that mechanism. All that has now changed.
A number of developing countries have asked to use the dispute settlement mechanism or have sent requests for consultation. The same applies to countries with a growing economy and countries who had been completely outside the system up until now.
.1625
Most of the consultations were fruitful: the parties generally followed through by trying to explain the existing measures, by amending some of them or by using other means to eliminate any irritants.
For a number of years, during the Uruguay Round negotiations, a number of important matters were simply put on hold pending the final outcome of the negotiations. Once the dispute settlement mechanism was in place, the dispute settlement panel received a huge number of requests, which explains our current overload.
A number of questions were raised and a number of conclusions drawn about the way the mechanism has worked so far. As I said earlier, the first issues are philosophical in nature: what are the major issues, now that we know how the dispute settlement mechanism works? Some of those issues were raised when the mechanism was used in a particular way to settle some very specific cases.
One of the basic issues is the following: should governments have access to what are called provisional recourses or remedies, as they do under domestic law? The way the dispute settlement mechanism works right now is that you can only win your case, when there is proof that the measure violates the obligations, if the entire dispute settlement mechanism has been used, in other words, you only win when the final decision can be enforced and the party decides to follow through or to ensure its implementation.
But in some cases, between the time when the questionable measure is implemented and the moment the dispute settlement mechanism is used in such a way as to make the decision final, the economy and trade interests of the plaintiff country may have suffered considerable damage.
This raises a fundamental issue: in some cases, would certain countries be able to get immediate relief through a temporary measure such as an injunction that exists in domestic law, for instance?
The matter arose after a very specific incident I am sure you are familiar with. You do recall that very shortly after the coming into force of the agreement on the World Trade Organization, the United States and Japan were involved in a fairly major trade dispute involving the automobile industry. The Americans were complaining about their trade deficit with the Japanese in the automobile sector, and about the fact that some of the Japanese government's trade practices, that were protected by some government measures for the Japanese industry, were adversely affecting American exports to Japan.
The Americans decided to put pressure on Japan to change its practices and just decided to unilaterally impose sanctions against Japan. For all intents and purposes, once those sanctions were implemented, they basically closed off the American market to Japanese car exports.
It is not surprising that Japan decided to contest the American measure. If it had gone all out, in other words for a year, Japanese car sales on the American market could have been completely wiped out.
Those who were studying the way the dispute settlement mechanism worked, asked themselves the following theoretical question: during negotiations, should we have provided that a country could use the dispute settlement mechanism to obtain an order to prevent the United States from implementing their measure until the final decision was made?
Obviously, this raises some purely practical matters, as well as the whole issue of the legitimacy of the measures in terms of national sovereignty until the final decision is made.
.1630
That is one example of the fundamental issues being examined. There is another one that arose recently every time a major decision was made through the dispute settlement mechanism, and that is the issue of confidentiality of decisions before they become final.
Right now, the dispute settlement mechanism has an interim stage during which the original panel must provide an interim decision to the parties involved in the process, a decision that is supposed to be confidential and given to the parties for comment. Under current rules, that interim decision is to be considered confidential. It is not to be disclosed to anyone other than those involved in the case.
So far, it seems no one has kept the decision confidential. It is now nearly automatic that as soon as interim decisions are made, somehow or other, the governments involved find it is to their advantage - a domestic political advantage that is easy to imagine - to secretly disclose the content of the decision, so that once it is made public indirectly, that decision can also affect the comments that may be made by the other party as well as the grounds or recourse used in appeal once the decision is final.
It is much more difficult psychologically for members of a panel to change the meaning or scope of an interim decision once its content is made public. But in some cases, and a number of parties are guilty of this, because they made the decisions public during the interim period, it became clear that the comments that could be made on the interim report were much more limited in scope and could ultimately affect the scope of the right to appeal by the party at fault. That is a second fundamental issue.
There is another fundamental question, given that the more developed commercial rules are, the more complicated they become and the more difficult it is for government to introduce mechanisms and policies insuring that international rules are respected in every case.
In some cases, it might be beneficial for governments to obtain prior notice from the dispute settlement body with respect to the kind of mechanisms or even trade policies the government intends to introduce, so as to determine whether they are consistent with the international obligations of the government concerned.
At the present time, the dispute settlement mechanism does not allow a government to seek a ruling or declaratory judgment from the dispute settlement body on the legal aspect or validity of certain programs in the light of the international obligations of the government concerned. The practical result of this is that far more stress is placed on the overall use of the settlement mechanism when dealing with a dispute, rather than on seeking to settle disputes by obtaining a prior legal opinion from the dispute settlement body.
Obviously, the point here is to ensure that such an opinion may ultimately be obtained from an entity possessing sufficient jurisdiction over the rights and obligations of the parties concerned to ensure that its opinions would be highly respected.
One possible approach would be for the appeal body to ultimately serve as the judicial body through which such an application for a legal opinion would be submitted. The fact that the appeal body would be a permanent legal body would ensure that its legal opinions would merit the highest respect.
At the present time those are the three major policy issues in the area of dispute settlement. There are many others of lesser significance, but basically those are the three most important ones most countries have to deal with.
As regards procedural issues, Professor Winham mentioned that there is enormous pressure on the dispute settlement mechanism, simply because of the number of cases submitted.
.1635
Obviously, in that context, since we are dealing with issues of law and international obligations, it is important that the dispute settlement mechanism operate in a methodical and predictable manner. One way of generally ensuring that tribunals ruling on laws and obligations are able to operate methodically is to introduce rules governing the procedures to be followed before such tribunals.
One of the shortcomings in the current system, which we and a number of other people have noted, concerns the lack of rules of procedure at the panel level, which is the first level for seeking to settle disputes: here, there are no rules of procedure, as there are at the appeal level, and as a result the procedures used are often decided upon on an ad hoc basis by the person chairing the panel. Very often a different procedure is used each time you appear before a dispute settlement panel, thus frequently affecting those concepts with which we are familiar in the area of domestic law, concepts of equity and justice used when ruling on rights and obligations.
For example, very often the order in which briefs and arguments are submitted varies depending on the person chairing the panel and the procedure he or she decides to follow. As I stated, the problem at the present time is that rules of procedure must be developed for those bodies dealing with disputes at the first level.
Obviously, together with these issues there is also the problem of the time required. One of the main objectives in the Uruguay Round negotiations on dispute settlement was to ensure the speedy adoption of rulings handed down. A very specific time frame was developed to ensure that rulings would become definitive within a maximum period of one year, including appeals.
Currently, experience shows that in some cases Canada is suffering as a result of the situation, because very often one year is not enough to deal with legal questions which are sometimes very complex and require the preparation and submission of very complex evidence.
In the very near future a decision will have to be taken on the type of compromises that can be made. We will have to try and ensure that cases submitted to dispute settlement mechanisms receive careful and adequate consideration and are not restricted to tight deadlines which can adversely affect the rights and obligations of the parties concerned.
There is of course a clause in the dispute settlement mechanism under which the parties can relieve the panel of the obligation to hand down a decision within a one-year period, but the practice to date has been that the plaintiff tends not to support such a request simply because it is not to its political advantage to do so. The less time the plaintiff has to prepare its case, to compile and submit evidence adequately, the better it is for the defendant, who from a strategic viewpoint will find it far easier to develop a defence.
There is also a question of equity here which must be considered. To date, we have been quite lucky; there have been no challenges yet to an export subsidy program. As you no doubt know, the procedure used for challenges to export subsidy programs is divided into two parts. Often, these programs are very complex, as is the evidence submitted from both the plaintiff's and the defendant's side.
I imagine that the first time a party makes a complaint or has to defend such a program, there will be a lot of work involved in determining the timeframe within which the case must be submitted or defended, because there are other stages in addition to those generally heard in dispute settlement cases not dealing with export subsidies.
.1640
Therefore, the experience over the past two years, since the dispute settlement mechanism came into effect, has been basically very positive, but obviously as with any new mechanism, there is room for improvement. The parties concerned, the members of the WTO, are aware of this and have developed mechanisms to review and possibly improve general rules after a given time period.
Obviously, some of the issues I raised will have to be the subject of consultations between the major members of the WTO, and there will have to be a consensus before the dispute settlement mechanism can be changed. Clearly, the more the basic rules become consistent with judicial practice and with domestic law, the more the dispute settlement mechanism will come to resemble what we have in our domestic law. Very definitive and firm rules will have to be developed on the submission of evidence and treatment of the parties involved in dispute settlement cases, and steps will have to be taken to ensure that the parties have available to them very effective methods of recourse enabling them to protect their commercial interests.
I shall conclude my observations on that point. I imagine that there will be questions, and I will be pleased to answer any you may have.
The Chairman: Thank you very much, Mr. Fréchette.
[English]
Mr. Tereposky, Do you have some comments to make on this presentation?
Mr. Tereposky: Yes, I have a few brief comments, Mr. Chairman. I would like to describe how the WTO dispute settlement process operates from the perspective of the private sector. What I mean by ``the private sector'' is Canadian industry affected by a violation by another WTO member of the obligations under the WTO agreements.
As you're well aware, WTO dispute settlement is government-to-government dispute settlement, so if a Canadian industry encounters a problem because a WTO member is violating its WTO obligations, that industry cannot directly invoke the dispute settlement mechanism. Rather, the Canadian industry must approach the Canadian government and the government will consider whether or not to invoke its WTO rights. In this context, the role of the private industry is indirect. It can assist the Government of Canada in initiating and conducting the WTO case.
In general this assistance can take two forms. The first is assistance in gathering evidence. In almost all cases the industry is much more knowledgeable about factual evidence relevant to a case, and it is very clear the industry can assist the government in this area.
The second area is assistance in analysing the applicable WTO obligations. These obligations are becoming more and more complex. Quite often how the obligations will apply will depend on the facts and circumstances surrounding the industry and the conduct of the market. Insofar as this is relevant in a case the industry can significantly assist the government. For industry to participate in WTO cases is almost essential because of the importance of this factual evidence and because of the importance of accurately reflecting the interests of the industry when bringing a case.
A number of things specifically, though, are beneficial. One of them is if the industry is involved in the process from the beginning the entire analytical process and the conduct of the case can be accelerated. Given the tight timeframes imposed on WTO dispute settlement, this is very important.
Second, as I've already mentioned, it's almost essential to have a full understanding of the facts and circumstances. If a case proceeds and it is proceeding on an erroneous assumption of fact or circumstance, that could be very problematic down the road, and that can be completely avoided by keeping the industry completely involved in the dispute settlement process as it proceeds.
.1645
Finally, the last point is that in this time of resource cutbacks, additional assistance by the industry is always helpful. Both Professor Winham and Mr. Fréchette discussed the complexity of this process and the complexity of the rights and obligations under the agreements. I think these factors further emphasize the importance of keeping domestic industry involved at all stages in the process. My experience to date is that the Canadian government is doing a very good job of doing so, and it is something that should be embedded in the process for the future.
That concludes my comments.
The Chairman: Thank you very much.
Mr. Penson.
Mr. Charlie Penson (Peace River, Ref.): There are quite a few things that I've jotted down, arising out of the presentations. First of all, I understand the caseload has been fairly heavy for the first while. Isn't it a welcome thing to build some case history and establish the process? Won't that in fact start to drop off as more member countries see how this thing works and what's involved?
Prof. Winham: Yes, I think it's welcome, and yes, I think the caseload probably will drop off. You can look at chapter 19 in the free trade agreement and NAFTA for a generalization that would be consistent with that.
Mr. Charlie Penson: I guess this process has been evolving over a long period of time. I hope it continues to evolve, because the other area I have a problem with is the retaliation portion, the fact that an affected member country doesn't necessarily have to abide by the ruling but can in fact just retaliate. Because it may not necessarily be the same industry that is affected, I think it does scare some industries out of bringing forward a complaint. Their argument is that they think they have a good case, but it doesn't necessarily stop that process even if they win.
I'm just wondering what your views are. Will we move eventually to the point at which, if a case can be won, the offending party would have to discontinue that practice? Are we a long way away from that at this stage, or are we still going to be into retaliation as the only option if that party chooses not to stop? Is that what we'll have for a long period of time?
Mr. Fréchette: If you want my humble opinion, I think the likelihood of retaliation being taken by a party at this point is next to nil. The experience so far is that recourse to retaliation is not taking place. I've given the example of the United States. It's an isolated case and it's not a situation that took place in the context of an actual dispute, i.e. a dispute having been raised under the DSU, which is what should have been done. Immediately after the entering into force of the WTO, it was the United States that tried to use the same old tactic that it was using prior to the WTO entering into force. That's the one case in which it did happen. But so far, the experience has been that all WTO panel decisions have been implemented or are on the way to being implemented - those decisions that are final, that is.
Remember, retaliation is the tool of last resort. It's the very final action that a party can take in order to compensate for its losses, if you want. It must be authorized to do so by the dispute settlement body, and there is a determination that must be made of how much retaliation there can be in terms of value.
Mr. Charlie Penson: But the party you're talking about is the country.
Mr. Fréchette: I'm talking about the country.
Mr. Charlie Penson: Yes, which may not do an industry that's affected very much good.
Mr. Fréchette: You're right in that sense, but countries or governments in general are very much aware of the interests of the industries that they do represent in a given case - either representing in the sense that they're taking a case to the WTO on the industry's behalf, or defending the interests of that industry through the defence of the measure that is contested and is sometimes there to protect that industry. Governments involved in the disputes are always aware of what the possible consequences are, and cross-retaliation is something that only takes place if a country cannot actually find enough compensation in the sector that is concerned by the dispute. Cross-retaliation will not be authorized unless the party complaining or the party who seeks retaliation in another sector can demonstrate that it cannot get compensation in that same sector.
.1650
Mr. Charlie Penson: Okay.
Mr. Tereposky: I would just like to add one point. There's a real danger to the party not implementing the WTO decision to allow cross-retaliation to occur, because quite often very sensitive sectors will be chosen - or it will at least be attempted - for countermeasures. That is a big disincentive. And the country not implementing the decision does not know which sector could be challenged, so there is a big disincentive to allow it to go that far.
Mr. Charlie Penson: Okay. And you've stated that to date not many countries have chosen not to honour the decision that's been rendered. Is that right?
Mr. Tereposky: In the case of the WTO, so far all of the final decisions have been or will be implemented.
Mr. Charlie Penson: I have one further question.
Prof. Winham: Mr. Penson, if I could, let me just add that I quite agree with my colleagues on what the practice is. Retaliation doesn't happen very often. In fact, usually it's worked out. But since I am a professor, of course, let me speak to the theory of it.
The theory is that if a country has an offending measure and after a procedure refuses to remove the offending measure, who or what is going to come along and make them do it? In the tuna-dolphin case, the United States was wrong, but the United States did not change its regulations. It did not withdraw the offending measure, which was the Marine Mammal Protection Act, and Mexico and the entire GATT was powerless to do anything about it.
So I think the retaliation is there in theory because it at least allows some recompense, although it's not appropriate sometimes, as you've correctly pointed out, but that's because we still live in a world of sovereign countries.
Mr. Charlie Penson: Okay.
There is just one other area, Mr. Chairman. Mention has been made of the fact that Canadian industry asks the Canadian government to take a case forward. The difficulty I have is this. I understand the process, but I think it's difficult sometimes to speak for the Canadian industry that is speaking for all parties involved, and it seems to me that's a weakness in the WTO that we don't have in NAFTA. In NAFTA, an individual company can take a case forward, but it can't in the WTO.
The softwood lumber industry is a case in point, where there's ownership of Canadian companies - I think about 40% of the Canadian industry is owned by American interests - and it might not be in their interests to take a case forward because their parent company might be doing very well as a result of that particular policy. What are your comments on how the individual companies are looked after when it may not be in a Canadian industry's interest to take it forward?
Mr. Tereposky: I'll give you the private sector perspective on that issue. Quite often that is the case. Even within an industry association there are different interests, and one of the important things recognized in government-to-government dispute resolution is that the government bringing the case - in these cases, the Government of Canada - can attempt to balance these interests, and it's not always an easy thing to do. But it's clearly the case that when a NAFTA chapter 20 case is initiated, that is, a general dispute settlement under the NAFTA, or when a WTO dispute is initiated, the Government of Canada will look at a broad range of interests before it decides to initiate or not.
Softwood lumber is a little bit different because it involves a chapter 19 type of scenario where you have a countervailing duty action, and in anti-dumping and countervailing duty cases there's actually a legal threshold for industry participation, for the industry wanting to take action.
In the case of how that dispute was ultimately resolved, it was resolved on a country-to-country basis under the memorandum of understanding, and when that MOU was signed between the Government of Canada and the Government of the United States, this interest balancing would have taken place within the government where all interests would have been looked at.
Mr. Charlie Penson: Is it the same case with the WTO process?
Mr. Fréchette: Maybe I can address that one. No, it's not necessarily the same case in the sense that there's no way for a private party to actually have recourse to the WTO dispute settlement mechanism.
But the practice for the government is the same, in that whenever a party or private party comes to the government trying to get the government to initiate action in the WTO, the government will try to balance the interests of the entire industry to find out exactly what the situation is and what the merit of the case is. In many ways, the interests of the entire industry are thus preserved. Not allowing individual companies in the industry to have direct access to dispute settlement mechanisms is one weakness, if you like, of the system, but we're not there yet.
.1655
One of the other questions that may come up in the future during the next phase of negotiations might concern exactly that: the ability of private parties or of interest groups other than governments to intervene in front of the WTO system. The issue will be in which area. Should it be in the investment area if we do have an investment agreement pretty much similar to what we have in chapter 11 of the NAFTA, for instance, or should we allow the same kind of possibility for private interests to intervene in other areas as well?
We're not there yet in the WTO context, but in general, the government does take into account the interests of the industry in addition to looking at the interests of a particular private party.
Mr. Charlie Penson: One would certainly hope so. I don't know if it always happens that way.
The Chairman: Mr. Cullen.
Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chair.
Thank you, gentlemen. I have a couple of questions on a tack similar to that of Mr. Penson, but with perhaps a slightly different orientation.
First, Mr. Tereposky, what is the recourse of an industry in Canada...let's say there is consensus within the industry that there's some violation of the WTO agreement and the industry goes to the Canadian government, which says that there might be merits in the case but it doesn't want to take it forward, or that it thinks the merits are weak, or for whatever reason...so it's not going to take it to the WTO. Does the industry have any recourse? Has that happened? Could you comment on that?
Mr. Tereposky: Formally, no, the industry would not have any recourse. The only recourse they would effectively have is to create a stronger lobbying effort to convince the government to move on their particular issue.
At least in my experience with these cases, in both the GATT context and now in the WTO context, there is full consultation, and wherever the government can help you it will go forward. However, if the government does run into situations where the balancing of Canadian interests as a whole does not support the case going forward, barriers may be encountered, and in some cases they may be insurmountable.
Mr. Roy Cullen: Would anyone else like to expand on that?
What about in situations where...balancing the Pareto optimality or whatever is difficult, but you could even have the one sector that in terms of the public interest could be neutral, but in terms of one sector of the industrial economy versus another sector of the industrial economy there could be counterpoints to that.
What would the government do in a case like that, Mr. Fréchette?
Mr. Fréchette: Each case must be studied on its own merits, of course, but again, it comes back to the comments I made earlier. The government will have to make a very tough assessment of what action it should take in that very particular situation. It does happen from time to time that interests of importers are not the same as the interests of the exporters with respect to the same issue, in which case it's a tough call for governments.
Usually the government tries to build consensus before taking a decision, but sometimes the government is called upon to make a tough call that must be based on what it perceives to be in the best interests of the industry and the sector in general.
Mr. Roy Cullen: Have there been any examples to date where our government has declined to support an industry request to take a significant issue to the WTO?
Mr. Fréchette: You understand that I'm not at liberty to discuss particular cases, but there have been situations where the Government of Canada studied the merits of a case and studied the merits of all interests concerned and decided that it was not in the interests of the Canadian government and in the interest of all those concerned to move forward with an action in the WTO. But in cases like that it always takes place in the context of full consultation with all those concerned.
.1700
Mr. Tereposky: I would like to add just one comment. I think the important thing in dealing with this issue is adequate consultation, because the worst case scenario is to have an interest that is left out of the consultations and that can be affected adversely by a case. Maybe that's one mechanism that can be put in place to improve the overall efficiency: a formal process for these complaints prior to the dispute settlement mechanism being invoked, so that within Canada it would be a formal process, an open process.
Maybe not all the conversations would be public, but it could be open at least in the sense that all interested parties are aware that a particular issue is being discussed and that considerations are being made regarding that case.
Mr. Fréchette: Without any kind of difficulty I can say that in most cases I've been involved in, the government does everything it can to make sure it consults fully with all interests concerned. Whether they come forward or whether the government has to seek out the interests of those sectors, consultation takes place. We're talking about industry interests, provincial interests or other groups that are interested in the issues. It would be totally irresponsible for the government not to do that. We do that.
Prof. Winham: Mr. Cullen, there are a couple of points I might make here, especially on the desirability of private interests being able to represent their own concerns at the WTO, let's say. You have to keep in mind, first of all, that the WTO is an agreement between nation states and that it's in Canada's interest to make sure its trading partners follow the rules, even more than it is in the interest of private sector groups to make sure they follow rules.
If you were to move to a situation where a private sector interest in Canada could bring a case against the United States, let's say, in its dispute settlement system, you would really quite radically advance the concept of dispute settlement. You would need to have provision for a vastly increased procedural capacity beyond what we now have.
Second, one tends to use the NAFTA as an example of where this happens. But that really only happens in chapter 19, and that's only on anti-dumping and countervail to begin with. That's much more an extension of judicial review than it is a classic notion of dispute settlement as developed in GATT historically, or even as applied in chapter 20 of NAFTA, which is more a state-to-state kind of dispute settlement.
I think it's possible that in the future we would have greater representation of private interests, but I think it will have to be thought out very thoroughly. The biggest downside, as far as I can see, is that there would be a vastly increased potential for frivolous cases to come forward, which sometimes, I would argue, might even be the case with the NAFTA procedures under chapter 19.
Mr. Roy Cullen: I'm involved in an issue that's NAFTA-related. It's the sugar refiners. The manufacturers are using sugar-containing products under the U.S. re-export program. There are going to be winners in one industry and losers in another. And as far as the public is concerned, it's going to be fairly neutral. I can see where the consultation is excellent and has to be done, but there can be cases where there's no easy answer, and there's certainly not an easy answer on this one.
Mr. Tereposky: Mr. Cullen, I'll just briefly comment on that, but before I do, I will let you know that I do act for the sugar industry on that one so I am fairly biased on this issue.
Voices: Oh, oh!
Mr. Tereposky: There's another underlying principle in some cases, that is, the long-term interest of Canada in enforcing its rights and obligations under trade agreements. In cases where you may have a balancing issue, I think you always have to weigh that one underlying principle. If Canada chooses not to enforce its rights and obligations, it's not something that's good for Canada's interests in the long term.
Mr. Roy Cullen: Okay. You're obviously working for the sugar refiners, and I have a whole bunch of manufacturers in my riding.
Voices: Oh, oh!
Mr. Roy Cullen: But can we leave that point just for a moment because I may run out of time -
The Chairman: Mr. Cullen, on that point, Mr. Fréchette wanted to add something.
.1705
Mr. Fréchette: I was just going to add to what Mr. Winham has said. There's another sector in NAFTA that allows for private parties to intervene. It's part B of chapter 11, dealing with investor state dispute settlement, and whereby the investor can actually have basic obligations of national treatments and other obligations enforced in the investor state dispute settlement mechanism. So it's one area in which we've moved forward, if you want, opening to private parties traditional areas of dispute settlement between governments. That's why I was referring -
Mr. Charlie Penson: [Inaudible - Editor] corporations move? Would that be an example of it?
Mr. Fréchette: Private party investors can actually take an action against the government for not respecting national treatment obligations or expropriations, depending on the situation. But it's one sector in which we've created that precedent again.
The Chairman: Mr. Cullen.
Mr. Roy Cullen: I would just like to pick up my old favourite topic, softwood lumber. I haven't kept quite as current on it, but at one point there was some thought in the industry about taking the softwood lumber issue to the WTO. Of course, it then went to the panel and the panel ruled in our favour, but it didn't end there. The MOU was signed for five years of trade peace and quotas.
If you're familiar with that file, can you tell me if is there a move now to still take it to the WTO, or if that would be inconsistent? If you've done an MOU, perhaps it would not be consistent to take it to the WTO now. If that was the case, if you backed it all up, if the industry had decided to go to government and had said to forget about cutting a deal and to go ahead and take it to the WTO, what sorts of remedies or possibilities might have been available in general terms - and I realize this is a hypothetical question - to that industry through the WTO that it wasn't able to get through the NAFTA process?
Mr. Tereposky: I would like to just briefly comment on that. I won't deal with it in full other than to say what would not have been available under the WTO, under U.S. law. When they implemented their WTO obligations, the Americans put into place a rule that effectively says determinations of WTO panels will not be retroactively implemented. In the case of the softwood lumber agreement, the duties would therefore not have been refunded, whereas the MOU was able to resolve that issue and we saw huge refunds of duties. But the WTO would not have governed that case because it had begun before the WTO came into force.
That's the limit of my comment on that.
Mr. Roy Cullen: When did the WTO come into force, then?
Mr. Fréchette: January 1, 1995.
Mr. Roy Cullen: 1995.
Mr. Tereposky: It would only apply to countervailing duty cases initiated by the United States after January 1, 1995, and that case arose prior to that time.
Mr. Roy Cullen: My memory is fading on this, but it seems to me that in the industry there was some discussion at some point that we should take softwood lumber to the WTO. Let's look at it in the sense of the process, or from a process or evidentiary point of view of the remedies or possibilities. Would there have been or could there have been remedies or possibilities under the WTO that might not have been available to the industry through NAFTA, forgetting the deal that has currently been struck?
Mr. Fréchette: Prior to the appellate body decision that clearly determined that with the new WTO dispute, disciplines with respect to subsidies and countervailing duties are only applicable to countervailing duty cases that have started after the entry into force, some segments of the industry were claiming that Canada could make a case to the WTO under the new disciplines that were more precise after the entry into force of the agreement.
Honestly, I do not remember what the debate was all about at that point; it's not a file that I'm very familiar with. But I do remember that shortly after the conclusion of the round in April, 1994 - before we finalized Canadian legislation to bring it into force - and before the entry into force of the agreement on January 1, some segments of the industry were stating that Canada should take such action to the WTO for dispute settlement if not satisfied with the U.S. action. That's all I can comment on.
Mr. Roy Cullen: Right.
Prof. Winham: It might be useful to add the general principle that under NAFTA, one can appeal a procedural concern as to whether or not the United States has put its procedures in place correctly and in accordance with evidence. On the other hand, one can take the substance of the legislation to the WTO in the event that the legislation may subsequently be inconsistent with its WTO obligations. It's on that basis that you might decide whether to go to one forum or the other.
.1710
Mr. Roy Cullen: Yes. The U.S. could still launch a countervail on softwood lumber at any time.
Prof. Winham: Oh yes.
Mr. Roy Cullen: They could argue that the quotas aren't being adhered to or whatever, or they could do it just because they feel like doing it. In a case like that, what you're saying, Mr. Winham, is that the Canadian government could put forward positions as you've suggested and perhaps in the WTO forum have some possibility of making some points on that.
Prof. Winham: Yes. If that action were arguably inconsistent with the United States' obligations under the subsidy countervailing duty code, then the WTO would be the correct place to take it.
Mr. Charlie Penson: I would like to pick up on that. We've talked about the obligation of the Canadian government to consult all the players involved and give the best advice. Shortly after the time when the memorandum of understanding was being put in place, I consulted a lot of the softwood industry people, and I was appalled at how little understanding, whether it was real or not, they seemed to have of the possibility of taking this case to the WTO if in fact we had been hit with a countervail. It seemed to me they were operating under the old GATT understanding of what was available to them in many cases.
Maybe it wasn't in the interests of some of the industry players I talked to to understand it any differently, but it just seems to me that when these industry associations are being consulted it had better be current information that's available to them. Their understanding didn't seem to take into account that the new round of the GATT under the WTO had made a lot of improvements.
I just throw that out to you.
I would like to make a comment on the business of the appeals. I forget who raised the business that once a formal ruling has been made at the WTO, what that ruling is seems to be leaked out and it affects the ability of the group to come up with an appropriate process for appeal. What is the answer to that? Is it to stop the appeal process then and just have the preliminary ruling become the final ruling?
Mr. Fréchette: The simple answer would be for members of the WTO who are involved in the dispute to respect the confidentiality obligation.
Mr. Charlie Penson: Yes, but if that's not going to happen?
Mr. Fréchette: What happens then is for the parties to accept the fact that in each case they will have their rights affected during the comment period they have on those preliminary reports.
What I'm saying is that because the decision becomes public it limits the ability of parties that are involved at that point to find solutions outside the dispute settlement mechanism. Once everything becomes public it makes things much more difficult for governments to try to manage if they are trying to manage the issue.
That's one point. The second point, from a purely legal point of view, is that it's just normal for panel members to react in a protective manner towards a decision they have already made once it's out in the public. So the result is affected by the possibilities of parties involved in the dispute at this point influencing certain elements that they think could be modified or changed as a result of their comments on the preliminary ruling.
Mr. Charlie Penson: I still don't understand how that could be improved. It must be difficult to know who leaks the information.
Mr. Fréchette: It's impossible to know. There's no way you would know who in -
Mr. Charlie Penson: There's lots of suspicion there. So how could we improve that without just ruling out the whole appeal process?
Mr. Fréchette: Certain parties have suggested we should simply eliminate the preliminary report stage -
Mr. Charlie Penson: Oh, I see.
Mr. Fréchette: - and we should make the preliminary report become the final report. But the preliminary stage is important to the extent that some comments could be very positive comments to improve the quality and the reasoning of the decisions. Very often what happens is that the panel may not have considered all of the issues. You may want to say to the panel, would you please consider the following issues we've raised, and the panel may simply resist doing that because of the fact that the decision has already been made.
.1715
Mr. Charlie Penson: Of all of the cases that have come forward, there were three that went through the appeal process. What were the results of those three? Was the original judgment upheld? Maybe it was Professor Winham who referred to that.
Prof. Winham: Yes, it was me. I haven't read those cases, but I have spoken with Debra Steger on this matter. The problem is, of course, that a case might deal with one issue, and the appeal will come on a very narrow sub-issue. Therefore, it may not engage the fundamental issue that was engaged in the basic panel report. But with that caveat, she said that essentially the appellate process has confirmed the cases, and they haven't really overturned anything, as best I can recall. There have been now four cases that have passed through the appeal process.
Mr. Charlie Penson: Once there has been a preliminary ruling, there must be pressure on the group hearing the appeal not to change it. Is that what I understood you to say?
Mr. Fréchette: It's not the appellate body I'm talking about, because the comments on the preliminary report are going back to the original panel, and the original panel gets to finalize its decision in light of those comments.
Mr. Charlie Penson: I see.
Mr. Fréchette: So what I'm saying is that when the party involved in the dispute tries to raise some issues with the panel, that original panel is put in a very awkward position. Ultimately, depending on the outcome of the decision at that point, it may affect that party's ability actually to raise certain issues in the appeal.
Mr. Charlie Penson: So we have the preliminary ruling, the final ruling and the ability to appeal. You're suggesting that as far as the preliminary ruling is concerned, maybe we should look at stopping that as one way of dealing with this.
Mr. Fréchette: I'm not suggesting that. All I'm suggesting, basically, is for parties to respect the obligation whether or not -
Mr. Charlie Penson: I know, but what if that doesn't happen?
Mr. Fréchette: If that doesn't happen, then the parties will have to examine how to solve that problem. That problem has not yet been approached from the point of view of trying to solve it except by saying parties should respect the obligation. If in two or three years the experience continues, then we will have to ask ourselves a very serious question: how can we try to stop that from happening?
The Chairman: In the normal course of things, if a panel takes a decision that condemns certain trade measures, the options are either for the condemned party to change the measures to comply or for the aggrieved party to retaliate. The retaliation may be excessive and then lead to another trade dispute, as I understand it. Has there been any effort in panel decisions to indicate what would be considered reasonable retaliation, reasonable compensatory measures?
Mr. Fréchette: There are specific provisions in the dispute settlement understanding that are intended to deal with that, i.e., it must be a retaliation level that is of equivalent commercial effect on the trade interests that have been affected by that measure. There's actually a possibility for the aggrieved party to have that discussed in front of a panel before retaliatory measures are taken if there is a dispute as to what should be the appropriate level of retaliation measures.
The Chairman: I asked the question because we hear from time to time rather blunt threats of retaliation from our American friends. There must be some way of determining to what extent they would be allowed to retaliate in certain circumstances. So I suppose the way open to us if we were not prepared to change measures, on the assumption that some of our measures were not regarded as legitimate...there would be a way of obtaining from the WTO some indication of the scope of retaliation the United States would be authorized to inflict upon us.
.1720
Mr. Fréchette: Absolutely. There would be a way, and they are the ones I've just mentioned. I would like simply to point out that we mostly heard those kinds of allegations in the context of a NAFTA dispute, NAFTA debate, if you will, and mostly in the general area of cultural industries and cultural measures maintained by Canada. Even there there is a specific measure that is intended to control the level of retaliatory measure the United States could take against Canada if it were specifically for equivalent commercial effect.
The Chairman: With a preference given to the same sector; that is, the retaliation should take place in the sector concerned rather than hit other sectors.
Mr. Fréchette: In the context of NAFTA and in the specific context of cultural industries there are no specific provisions limiting the area of retaliation.
[Translation]
The Chairman: On quite a different matter, you referred earlier to the possibility of developing a system under which there could be injunctions, conservatory measures. What is the position of the Canadian government on this? That would certainly require a far most sophisticated, more complex and perhaps more judicial system, but it would have the advantage of avoiding damages and perhaps allowing more time for a final decision.
Mr. Fréchette: The Canadian government does not yet have a set opinion on this very specific question. It is part of the ongoing debate in certain circles in Geneva where different parties comment on the general operation of the dispute resolution mechanism. Some of these parties take as an example the situation to which I referred to claim that we should perhaps have made provision for mechanisms of that kind.
It is still too early for us to say whether such mechanisms will be considered appropriate. As a matter of fact, one of the debates centres on whether it is possible to influence a country's sovereign ability to adopt certain measures provided such measures have not been declared illegal. In the domestic context, the question of sovereignty does not arise. In an international one, the legitimacy of measures adopted by a government or a national parliament within its borders is a fundamental question. This type of concept, that is the idea of remedy for conservatory measures, gives rise to this kind of debate. It's a very important debate because the countries and members of the WTO, as in any international context, are very anxious to protect their national sovereignty.
As I said, it certainly does give rise to fundamental questions which we have not yet had to consider in our development of Canadian government policy. I refer to this kind of question because they do come up when we deal with the basic philosophy but for the time being at a very preliminary level.
The Chairman: I imagine that such a system would not prevent a sovereign country from taking certain measures or adopting legislation, it would simply suspend the application for a provisional period.
Mr. Fréchette: That is what is being considered by those in favour of this kind of approach. We do not want to immediately condemn the measure, but merely ensure that it is not immediately applied. For example, a measure relating to tariff matters could be maintained and would still be legal but from the point of view of its application to trade, the particular measure would not apply. This is the kind of remedy being envisaged by certain parties at the present time.
The Chairman: Our researcher was wondering if the number of challenges would not increase if such a system were available.
.1725
Mr. Fréchette: There is no doubt that adding some type of intermediate remedy would increase the number of challenges made to the dispute settlement body. I think that would be a striking example.
The Chairman: Thank you.
Yes, Mr. Penson.
[English]
Mr. Charlie Penson: I want to get a clarification on one area I'm not quite clear on, Mr. Chairman.
In the case of a country that took a case to the WTO, and if the offending country didn't abide by the ruling and retaliation is authorized, does that mean the retaliation would take place in the same industry to the extent possible and then and only then cross-retaliation would be authorized? Would you clarify that for me?
Prof. Winham: No, not as I understand it. You have to remember that sometimes retaliation in the same industry would be impossible because there is no trade there. Therefore you might necessarily go to cross-retaliation if you are going to retaliate at all.
Mr. Charlie Penson: So who authorizes? Does the WTO authorize retaliation?
Prof. Winham: The WTO would authorize retaliation, but it would be up to the affected member to apply it.
Mr. Charlie Penson: It could be in any industry area. It could be a different industry.
Prof. Winham: Yes. ``Equivalent commercial value'' is the term Mr. Fréchette used earlier.
Mr. Charlie Penson: That's the difficulty I have with this, because some innocent industry can get hit through no fault of their own.
Prof. Winham: Yes, of course it can, and that's a problem with retaliation under this procedure. But there is really no other way to handle it.
Mr. Charlie Penson: I just wanted to be clear on that.
Mr. Fréchette: In many ways that's the pressure that is put on the government to enforce and ultimately to implement the decision of the panel.
The Chairman: We seem to have come to the end of our time and also the end of our questions. Let me thank our three witnesses for this very useful presentation. We hope to meet you again.
The meeting is adjourned.