Commentary

Will Boeing-Bombardier Trade Row Harden Positions in the NAFTA Renegotiation?

As negotiators wrap up the third round of North American Free Trade Agreement talks in Ottawa today, they face a fresh irritant that will complicate and possibly prevent resolution of matters that are central to the renegotiation.

Last night, the U.S. Department of Commerce issued a preliminary determination in a countervailing duty investigation initiated at the behest of the Boeing Company, finding that Canadian aircraft manufacturer Bombardier is benefiting from unfair subsidies granted by the Canadian government. Commerce estimated that the subsidies enabled Bombardier to offer prices on its aircraft that were so far below market price that it would require duties of 220 percent to extinguish the unfair benefit. Although the details will be included in the agency’s “Decision Memorandum,” which is not yet publicly available, it sounds like some very creative math was deployed in this case.

As if that weren’t a big enough stink bomb, next week the Commerce Department is due to issue its preliminary determination in the companion antidumping case brought by Boeing against Bombardier. The chicanery and methodological hijinks on display in that proceeding—discussed in some detail here—is almost certain to generate exceptionally high antidumping duty assessments from Commerce. The “Enforcement and Compliance” division of the Commerce Department, which administers the AD (and CVD) law, sees its mission as protecting U.S. industry and isn’t especially big on nuance or diplomacy.

Chapter 19 is a solution in search of a problem. In fact, it’s a solution that creates problems.

Ultimately, in both the AD and CVD cases, the question of whether duty orders will be imposed comes down to a determination, expected in early 2018, by the U.S. International Trade Commission. If the ITC finds that the domestic industry (i.e., Boeing) is materially injured or threatened with material injury by reason of subsidized imports from Canada (i.e., by Bombardier’s future sales to Delta), a countervailing duty order will take effect. If such injury or threat of injury is attributable to dumped imports (i.e., by Bombardier’s same future sales to Delta), an antidumping order will take effect. Yes, both AD and CVD orders can be imposed simultaneously.

Here’s where things get complicated on the NAFTA renegotiation front. Naturally, Canadians aren’t pleased with this preliminary outcome (nor is Delta or dozens of other carriers; nor should anyone who buys airline tickets be) and they are likely to vent their spleens over the U.S trade remedies “regime,” broadly speaking, concluding that they can’t get a fair shake in the U.S. system.

That line of thinking underpins Canada’s steadfast support for what is known as NAFTA Chapter 19, which is a set of provisions that permit aggrieved parties in antidumping or countervailing duty cases to appeal administrative actions to a binational NAFTA dispute panel, composed of experts from both countries, as an alternative to adjudication in the domestic courts. The premise behind Chapter 19 (which originated as a Canadian demand in the Canada-U.S. Free Trade Agreement before becoming enshrined in NAFTA) is that the U.S. courts overseeing trade matters are unjust and treat foreign interests unfairly. But that’s just not true.

The U.S. Court of International Trade and the Court of Appeals for the Federal Circuit have been diligent and seemingly objective in their reviews of agency actions over the years. Recent research undertaken at the Cato Institute indicates that the CIT agrees with the plaintiff (the party challenging the agency’s actions) on 46 percent of the issues raised. When the plaintiff is the U.S. industry (objecting to DOC or ITC decisions in the underlying AD or CVD case), the CIT agrees on 43.2 percent of the issues. When the plaintiff is the foreign interest (foreign producer or exporter), the CIT agrees on 47.2 percent of the issues. Those figures, which indicate that foreign industry plaintiffs have a slightly higher success rate than U.S. industry plaintiffs, are based on the most recent 18 months of cases.

The U.S. courts have been a bulwark against administrative overreach in AD and CVD cases. The U.S. courts are not the problem. The problem is with the laws’ administration at Commerce (and to a lesser extent at the U.S. International Trade Commission), which is given way too much discretion for an agency with an overtly protectionist agenda. Accordingly, Chapter 19 is a solution in search of a problem. In fact, it’s a solution that creates problems.

Among many U.S. policymakers and lawyers in the trade bar, Chapter 19 arouses suspicion and raises questions about constitutionality and sovereignty usurpation. There have been a few court challenges arguing that Chapter 19 is unconstitutional, but those cases were dismissed over matters of legal standing. It is only a matter of time before a U.S. court rules on the substance, and it is difficult to conceive how such an arrangement—an end run around the courts, which have explicit authority to check executive branch actions—could ever be found constitutional. The likely result would be that the U.S. law(s) implementing Chapter 19 provisions would have to be repealed or rewritten.

U.S. negotiators are seeking termination of Chapter 19 now, in the NAFTA renegotiation, and this writer—a long-time critic of the trade remedy laws who advocates repeal of the antidumping law—agrees with that position. Not only is it likely unconstitutional, but it energizes critics of trade agreements who claim that they diminish U.S. sovereignty. Certainly, the trade agencies like to play that card when they’re dealt remands from the NAFTA panels. They argue that they are being told how to administer U.S. laws by a panel of unaccountable foreign bureaucrats, intoning that U.S. sovereignty is under assault. Indeed, in the most famous U.S.-Canada trade dispute of all time—Softwood Lumber—both the Commerce Department and the International Trade Commission refused to implement instructions from the panel that would have terminated the antidumping case in 2005. The agencies are likely to be more responsive to U.S. courts than a NAFTA panel.

Nevertheless, even before last night’s ruling, the Canadian negotiators already appeared unwilling to budge over Chapter 19. Their position is likely to harden as a result of the Bombardier decision, even though Chapter 19 would not have prevented this outcome, nor will it deliver justice sooner or more thoroughly. To part with a tool that has both symbolic and political value to Canadian negotiators—like a moose head upon a hunter’s fireplace mantle—would make the Canadians look like they’re capitulating under pressure from the Americans. Frankly, it would be a “concession” that could enable Canada to secure other goals in the NAFTA.

The bottom line is that the trade remedies laws are too accessible and too prone to abuse. What really should be on the table in the NAFTA renegotiations is a proposal to make these laws inapplicable among the member countries. Instead, we are likely to witness greater acrimony and slower progress toward a new NAFTA.

Daniel J. Ikenson is the director of Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.