June 12, 2019 11:05AM

Enforcement in the USMCA: The Draft SAA and the Trump Administration’s Elevation of Section 301

Enforcement of the U.S.-Mexico-Canada Agreement (USMCA) has proven to be an important stumbling block to its ratification in the United States. Democratic law makers have demanded that enforcement provisions be strengthened, particularly with regard to labor and environment provisions. Specifically, some have asked for the correction of a major flaw in the NAFTA state-to-state dispute settlement chapter, under which the appointment of dispute panels had been blocked (in part due to the absence of a roster of panelists to draw from). U.S. Trade Representative Lighthizer stated in congressional testimony that this issue had been addressed in the renegotiated text. In a response to a question from Sen. Ron Wyden (D-OR), asking “Would you be opposed to clarifying that the text of Chapter 31 of the revised NAFTA is not meant to allow panel blocking?,” Lighthizer said:

The text of Chapter 31 of the United States – Mexico – Canada Agreement (USMCA) is not meant to allow panel blocking. Indeed, panels have been successfully formed under Chapter 20 of the NAFTA (its precursor). As we move forward with Congressional consideration of the USMCA, we look forward to discussing this and any other issues related to enforcement with you and your colleagues.

However, as we have pointed out on multiple occasions, it’s not clear that the problem of panel blocking has been resolved by the new USMCA text. Notably, Lighthizer did not say it has been, instead emphasizing that the agreement “is not meant to allow panel blocking,” which is vague enough to suggest it does not preclude it.

To add another healthy dose of skepticism to Lighthizer’s claim, a draft [$] of the Statement of Administrative Action, which was submitted on May 30th (the final version of which will be part of the implementing legislation), seems to suggest he has something else in mind when it comes to enforcement.  Two relevant aspects are as follows.

First, on the problem of the roster, the draft SAA states:

b. Dispute Settlement: Nominations for Dispute Settlement Roster

Article 31.8 of the USMCA requires that by the date of entry into force of the USMCA the Parties establish a roster of up to 30 individual[sic] who are willing to serve as panelists. USTR will consult with the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate (“Trade Committees”) as it considers nominees for the roster of panelists and will provide the Trade Committees with the names of the experts it is considering, and detailed background information on each, at least 30 days before submitting the names of any nominees.

On its face, this appears to suggest that a roster will be established by the date of entry into force of the USMCA. However, there may be a problem ensuring that this happens. The problem is, there is nothing that guarantees that USTR will submit the names of nominees. Furthermore, even if they are submitted and a roster is established, there is no guarantee that the roster will be maintained.

In comments to the House Ways and Means Committee on enforcement of the agreement, we suggested two options for Congress to address this problem. First, they can call on the U.S. Trade Representative to reopen the USMCA and introduce new language to Chapter 31 that addresses the three principles we highlighted in a recent paper: the roster should not be a hurdle to appointing panelists; an independent third party can act as a facilitator in the panel appointments; and, in the absence of an independent third party, the complainant should have the power itself to appoint, in order to prevent the respondent from delaying panel formation. And second, Congress could call on the U.S. Trade Representative to work with Canada and Mexico to establish a roster of panelists right now, thus ensuring a roster is in place upon entry into force of the agreement.

Second, on the issue of enforcement more generally, the SAA devotes substantial attention to the use of Section 301 of the Trade Act of 1974 as an enforcement tool. The document states, at length:

c. Enforcement of U.S. Rights

Legislative authority currently exists for the Executive Branch fully to enforce U.S. rights under Chapter 31. Section 301 of the Trade Act of 1974, as amended, authorizes the United States Trade Representative (“USTR”) to take specific action, subject to the President’s direction, and to take all “appropriate and feasible action” in the President’s power that the President directs the USTR to take to enforce U.S. rights under trade agreements such as the USMCA.

The United States shall enforce its rights under the USMCA through consultations and the dispute settlement mechanism provided for in Chapter 31 when possible. However, a decision by Canada or Mexico to prevent or unreasonably delay formation of a dispute settlement panel would not prevent the Executive Branch from enforcing U.S. rights. In this circumstance, the USTR’s determination on whether the USMCA partner breached USMCA obligations or impaired U.S. rights under the USMCA would be based on the USTR’s evaluation of the relevant legal and factual issues, including the fact that the USMCA partner failed to cooperate in the dispute settlement process.

Once the USMCA enters into force, an interested person may file a petition with the USTR requesting section 301 action in any case in which the person considers that another USMCA government has failed to honor a provision of the Agreement or has caused the nullification or impairment of benefits that the United States could reasonably have anticipated under the Agreement. Alternatively, the USTR may, on his or her own initiative, institute a section 301 proceeding.

If the USTR decides to initiate an investigation under section 301 with respect to alleged Canadian or Mexican practices, section 303(a) of the Trade Act requires the USTR initially to attempt consultations with the government of the relevant USMCA country to resolve the matter. If the case involved a possible breach of the USMCA or impairment of U.S. rights under the USMCA, and if consultations have failed to produce a mutually acceptable solution, then section 303(a) requires that the matter be submitted to the formal dispute resolution procedures of the Agreement, or to the applicable dispute settlement procedures of another trade agreement to which the United States and the other USMCA country are parties. The USTR will seek information and advice from the private sector, including form the petitioner, if any, in preparing U.S. presentations for consultations and formal dispute resolution procedures.

Section 301 provides the USTR with authority to take appropriate retaliatory action in the event that a panel report upholds a U.S. allegation that another USMCA government has breached the Agreement or nullified or impaired U.S. benefits and the other government does not take satisfactory remedial action or provide satisfactory compensation.

There are few things worth highlighting here. First in its description of enforcement under the USMCA, USTR seems to be emphasizing and prioritizing the use of unilateral enforcement tools, as it tries to make the case that enforcement authority exists even without a functioning state-to-state dispute settlement mechanism. The contrast with the draft SAA for the Trans Pacific Partnership (TPP) is interesting, as the TPP SAA did not mention Section 301 in the context of dispute settlement at all.

Second, it is interesting that “a decision by Canada or Mexico to prevent or unreasonably delay formation of a dispute settlement panel” is singled out as the problem. As far as we know, these countries have never done this. Instead, it was the United States that prevented a panel being appointed. Thus, the key question to ask here is, what happens if the United States takes a decision to delay the formation of a panel? If the United States were to do so again, perhaps Canada or Mexico would retaliate by doing the same thing. But the real concern here is whether USTR will allow panels to be appointed.

Third, and most troubling, is the statement that a breach of the obligations “would be based on the USTR’s evaluation of the relevant legal and factual issues, including the fact that the USMCA partner failed to cooperate in the dispute settlement process.” At the core of all this, it seems as though Lighthizer is looking to create a shift away from neutral adjudication, and towards unilateral determinations and enforcement.  That would be a major step backwards for the rule of law in international trade agreements.

There is still time to address these issues before USMCA is ratified. Members of Congress are working with the administration to address these enforcement issues.  Ideally, they will be able to fix the flaws in NAFTA so that the USMCA actually works the way that it was intended: The three parties will be held to account for the obligations they have agreed to.