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April 12, 2018 Articles

How the U.S.’s Stance Towards the WTO May Have Complicated Its NAFTA Negotiations

By Maria Puppo Martinez

Recently, the United States has made it clear that it has some reservations regarding the functioning of the World Trade Organization (WTO). Specifically, the U.S. has blocked the appointments to the Appellate Body of the WTO—the organism in charge of resolving international trade disputes brought forth by member states—and has also imposed tariffs on a number of imported products. This, in turn, may have compromised the U.S's ability to negotiate the elimination of Chapter 19 with Canada, which is one of the three dispute resolution provisions contained in NAFTA.

U.S. Blocking of WTO Appellate Body Appointments
The WTO is the only global international organization that deals with the rules of trade between nations. The WTO, World Trade Organization. Its goal is to ensure that trade flows "as smoothly, predictably and freely as possible." Id.

The Appellate Body is a standing body composed of seven members, which was established in 1995 under Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). The Appellate Body hears appeals from disputes brought by WTO Members. It has the authority to uphold, modify, or reverse those decisions. Id.

In recent months, the Appellate Body has been at the center of a crisis, which resulted from an inability to fill vacant seats. As of last December, three seats became vacant after Mr. Ricardo Ramírez-Hernández of Mexico and Mr. Peter Van den Bossche of Belgium had their terms come to an end, and Mr. Kim Hyun-chong of South Korea left his post to become his country's trade minister. Consequently, a traditionally seven-member panel was reduced to four members.

Although it did not immediately intervene in negotiations regarding the appointment of new members to the Appellate Body, the U.S. has blocked recent attempts to fill in the vacancies. In this regard, the current U.S. administration noted that reform was needed to address "systematic problems" within the Dispute Settlement Body (DSB). However, the statements made by the U.S. at the Meeting of the WTO Dispute Settlement Body on August 31, 2017, refer only to an issue concerning appointments—as it will be discussed infra—and make no reference to any "systematic problems" or concerns.

The only concern raised by the U.S. during a DSB meeting held on August 31, 2017, was Messrs. Ramírez's and Van den Bossche's continued service on the Appellate Body beyond the expiration of their terms. Id. p. 6–7. The U.S. stated that such conduct was "against DSU rules, and members need to ask whether [it] is reasonable or appropriate." See Appellate Body Members, WTO;Alex Lawson, "WTO Dispute Roundup: U.S. Keeps Appellate Body Languishing," Law360, Jan. 22, 2018 (citing U.S. Trade Representative Robert Lighthizer).

It is worth noting, however, that on several prior occasions, members of the Appellate Body have continued to serve on pending cases after their terms have expired. In a background note—a document that explores a specific topic, prepared upon request by the Secretariat of the WTO— the Appellate Body clarified that as per Rule 15 of the Working Procedures for the Appellate Review "[a] person who ceases to be a Member of the Appellate Body may [. . .] complete the disposition of any appeal to which that person was assigned while a Member, and that person shall, for that purpose only, be deemed to continue to be a Member of the Appellate Body." The Appellate Body noted the need for such flexibility, stating that "[i]n order to maintain the stability of the dispute settlement system, to deal with the unprecedented workload of appeals, and to preserve the rights of participants and third participants in pending appeals, the Appellate Body is left with no option but to apply Rule 15." See supra WTO Appellate Body Defends Actions.

But the U.S.'s criticism of the DSU and the Appellate Body comes at an interesting time. Recently, the U.S. has been hit with numerous claims by member states for alleged violations of WTO rules in anti-dumping and countervailing duty probes. Some of the affected member states that have already decided to seek redress before the WTO panel are Argentina, Canada, India, Indonesia, Japan, Russia, South Korea, and Vietnam.

Furthermore, the U.S. imposed sweeping tariffs on steel and aluminum, citing "security risks" as the purported reason for imposing them and granting exceptions to a handful of countries and only on a temporary basis. Alex Lawson, "U.S. Allies Get Tariff Reprieve as China Prepares Retaliation," Law360, Mar. 23, 2018. However, among the states that have not been granted an exception is China. China's ministry has stated that the measures do not qualify under the security exception and constitute a serious violation of the WTO. Id.

Historically, the security exception rule when imposing tariffs on trade has only been used in extraordinary circumstances. For instance, President John F. Kennedy invoked it during the trade embargo against Cuba in 1962, and President Ronald Reagan invoked it in the mid-1980s to justify the ban on U.S. trade with Nicaragua. Citing sovereignty reasons, the current administration claimed that the WTO has no authority to rule on matters of national security.

This suggests that the U.S. has been blocking nominations to the Appellate Body as a strategy to (1) get other states to agree to its trade goals—i.e., softening substantive trade discipline and the overall rules of the WTO judicial procedure, which the U.S. sees as an invasion of upon sovereignty—and (2) clog up the DSB so that no cases can be heard. See supra WTO Appellate Body Defends Actions.

Canada and NAFTA 2.0
Chapter 19 is one of the twenty-two chapters that compose the trilateral trade agreement and one of the three that relates to dispute settlement. It establishes a mechanism to provide an alternative to judicial review by domestic courts on final determinations in antidumping and countervailing duty cases, with review by independent binational panels, and has become a particularly contentious point between the U.S. and Canada.

Since the 1980s, Canada has viewed Chapter 19 as a safeguard against the U.S.'s countervailing and anti-dumping duties, which usually have been imposed on solar panels, aluminum, steel, and softwood lumber.

The U.S., on the other hand, has expressed strong disapproval of Chapter 19, pointing out the sovereignty issues raised by it. Critics of Chapter 19 have raised concerns about the constitutionality of the provision. Specifically, critics contend that Chapter 19 violates (i) the Appointments Clause, (ii) Article III, and (iii) the Due Process Clause of the U.S. Constitution. U.S. Const. art. II, § 2, cl. 2; art. III § 1; amend. V; see e.g., Am. Coalition for Competitive Tr. v. Clinton, 128 F.3d 761 (D.C. Cir. 1997). The U.S. Supreme Court has yet to hear a case on these issues.

Canada is currently seeking redress before both NAFTA, under Chapter 19, and the WTO for alleged anti-dumping and countervailing duties imposed on its softwood lumber going back over two decades. See "U.S.—Certain Systemic Trade Remedies Measures, Request for Consultations by Canada," WTO, Jan. 10, 2018. Canada's decision to fight a two-front war is no coincidence and may serve as a strategic decision to push its agenda to preserve Chapter 19 in NAFTA's future.

Canada's approach has put the U.S.'s logic to the test. To understand Canada's motive for filing the same claim before the WTO andChapter 19 of NAFTA, it is important to remember that both mechanisms provide for the review of countervailing and anti-dumping duties; in that regard, the tribunals serve the same function but at different levels—one international and one regional.

As mentioned, the U.S. wants to eliminate Chapter 19, while Canada wishes to preserve it. Canada contends, among other things, that Chapter 19 is necessary as it is a non-politicized system where its claims can be heard. See Stephen J. Powell, "Expanding the NAFTA Chapter 19 Dispute Settlement System: A Way to Declaw Trade Remedy Laws in a Free Trade Area of the Americas?," 16 L. & Bus. Rev. Am. 217 (2010). In contrast, the U.S. argues that Chapter 19 is no longer necessary as it was created before the WTO existed and that, even if the parties did not submit its claims to the WTO, the U.S. system can provide a non-biased forum for claims to be heard. Patrick Leblond, "The U.S. Can't Have Its WTO and Disregard It Too," The Star, Jan. 11, 2018.

By filing its claim before both the WTO and NAFTA, Canada has obliged the U.S. to put its logic to the test. If the U.S. continues to undermine the WTO as it has been—describing it as having "systematic problems," blocking the appointments for the new Appellate Body members, and imposing hefty tariffs and countervailing duties on other Member States—then Canada will have a strong argument that NAFTA 2.0 should preserve Chapter 19, given that the WTO's dispute settlement system (as the U.S. itself has described) would not be functioning properly.

On the other hand, if the U.S.'s stance regarding the WTO changes but Canada's softwood lumber claim (in the WTO) succeeds, then this might constitute proof that the U.S. may not be as unbiased towards foreign companies as it says it is. Id. If that were the case, it could serve as ammunition for Canada to argue for the preservation of Chapter 19 in NAFTA 2.0.

Ideally, Canada would want to preserve Chapter 19 and have the U.S. cooperate with the WTO. The next NAFTA negotiations are tentatively scheduled for April 8, but it is unclear whether Chapter 19 will be discussed. Until then, Canada will have to wait and see how events regarding the WTO unfold. "Next NAFTA Talks 'Tentatively' Set for April 8: Mexican Minister," Reuters, Mar. 13, 2018.

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