August 7, 2017 1:47PM

The Debate over NAFTA Chapter 19

Generally speaking, the Washington Post editorial board does a great job on trade issues. They are pro-trade and they see trade agreements as a way to liberalize trade. However, I want to offer a response to something in a recent Post editorial about one particular technical aspect of the NAFTA renegotiation. Here’s the passage:

Alas, the administration also specified that the trade deficit with Mexico and the (smaller) one with Canada be reduced as a result of the talks, which isn’t possible and wouldn’t necessarily be desirable even if it were. Possibly even more counterproductive, Mr. Trump’s goals include the elimination of the so-called Chapter 19 dispute-resolution mechanism, which creates a special NAFTA-based forum to challenge a member country’s claims that another is selling exports below cost (“dumping”). This check against potentially protectionist litigation brought by U.S. industries in U.S. forums was Canada’s precondition for joining the U.S.-Canada free-trade agreement, upon which NAFTA was built; and it’s one reason that exports from Canada and Mexico are far less likely than those of other nations to face penalties in the United States.

Eliminating Chapter 19 probably would be a dealbreaker for Canada. And why would Mr. Trump seeks its elimination? After all, as he said in that call with Mr. Peña Nieto, “Canada is no problem . . . we have had a very fair relationship with Canada. It has been much more balanced and much more fair.” Perhaps he means the proposal as a bargaining chip, to be traded for some other, more valuable concession. Or perhaps he will be willing to finesse it behind closed doors, just as he pleaded with Mr. Peña Nieto to help him wiggle out of his unwise promise to make Mexico pay for a border wall. We certainly hope the administration can be pragmatic on this point, lest it trigger the trade war with our neighbors that Mr. Trump once promised but so far has sidestepped.

Starting with some technical points, let me note that dumping is defined as more than just sales below cost, as it could also mean export sales that are below the price in the home market or a third country market. (It’s a fundamentally arbitrary calculation, which you can read more about here.) Also, Chapter 19 covers countervailing duties (extra tariffs imposed on imports of subsidized goods) as well.

But the main issue is with the Post’s substantive defense of Chapter 19. It’s important to understand how the process works. U.S. agencies—the Department of Commerce (DOC) and the International Trade Commission (ITC)—make decisions about whether anti-dumping and countervailing duties are necessary in particular cases. These decisions, like other administrative decisions, can then be appealed to U.S. federal courts, in this case the Court of International Trade (CIT) in New York. Under NAFTA Chapter 19, however, Canadians and Mexicans have the option to appeal the agency decision to a special NAFTA panel (they can also go to the Court of International Trade, and sometimes do that instead of Chapter 19).

So, when someone says that NAFTA Chapter 19 panels protect against the abuse of antidumping/countervailing duties, in essence this means they think the U.S. courts are not up to the job of reviewing these agency decisions.

Is it possible that U.S. courts are insufficient here? In my opinion, we don’t have enough data on this question yet. What we would need to see in this regard is evidence of the impartiality (or partiality) of U.S. courts. For example, a basic piece of evidence would be how U.S. courts have ruled on these agency decisions. My colleague Dan Ikenson looked at some data on this a while back:

Between January 2004 and June 2005, IA [the Import Administration of the DOC] published 26 redeterminations of antidumping proceedings pursuant to remand orders from the courts. As Table 4 indicates, seven of the remand orders required IA to explain how its decisions were consistent with the law and did not expressly mandate that IA make any changes. But of the 19 remands that did require methodological changes, 14 produced lower antidumping duty rates upon recalculation for at least one of the foreign companies involved.

At first glance, this looks like a functioning judicial review of agency decisions, but we need to expand on this data, and then compare it to the results from NAFTA Chapter 19 panels (that is, compare the results of NAFTA panel decisions to those of CIT decisions; and compare the DOC and ITC responses to each kind of ruling). We have a Cato Trade Policy Center project to gather this data going on right now.

As for the point that “exports from Canada and Mexico are far less likely than those of other nations to face penalties in the United States,” it’s true in a sense. If you compare Canada and Mexico to the rest of the world, fewer of their imports are covered by these special duties. On the other hand, when you compare countries that are similarly situated in terms of development levels, you get a different result. For example, imports from Canada are more likely to be subject to duties than are imports from the United Kingdom and Germany.

And there’s also the question of whether NAFTA Chapter 19 is constitutional—it’s not clear whether this kind of agency decision review can be carried out by anyone other than a U.S. court.

Chapter 19 looks like it might play an outsized role in the NAFTA renegotiation, as people on both sides have latched on to it as a symbol of their cause. The reality is more nuanced, and it’s important to gather some hard evidence in order to assess the real value of the provision.