Can Canada live without NAFTA’s Chapter 19?

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WATCH ABOVE: Round 6 of NAFTA negotiations began in Montreal on Monday, with quotas and subsidies high on the list of priorities to be tackled. Global's Elysia Bryan-Baynes has more – Jan 22, 2018

With the sixth round of negotiations for the North American Free Trade Agreement underway in Quebec, Canada’s trade minister says the talks are focusing on some major sticking points, including the dispute resolution system: Chapter 19.

READ MORE: Canada will be ‘creative’ but ‘firm’ at NAFTA talks: International trade minister

“The things that are difficult were difficult at the time of Brian Mulroney, so we’re talking about Chapter 19,” Trade Minister Francois-Phillipe Champagne said on Monday. He also mentioned the sunset clause and procurement as other important sticking points.

Canada invoked Chapter 19 as recently as Friday, saying the hefty tariffs on future Bombardier C Series aircraft and softwood lumber should be reviewed.

READ MORE: Canada triggers NAFTA Chapter 19 over hefty Bombardier tariffs

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During the negotiations, the U.S. has requested to remove this system entirely from the agreement, but the Trudeau government has signaled that they intend to keep it.

Avery Shenfeld, an economist at CIBC, called the dispute process “the jewel in the crown of NAFTA.”

“The dispute process is key because, as we have seen with aircraft, lumber and paper, the U.S. can impose very high tariffs on Canadian goods even within a free trade deal if they deem them to be subsidized or sold at below market prices,” Shenfeld explained in an email.

“Without an independent appeal process to overturn them, free trade doesn’t end up being very free at all.”

So what is Chapter 19?

In simple terms, the process allows for an appeal to be heard by a third party made up of trade experts from both disputing countries, instead of leaving it to U.S. or Canadian courts presiding over a trade dispute involving native products and vice versa.

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It allows Canadian companies from having to fight U.S. anti-dumping or countervailing duties in the courts, rather, a panel of experts will arbitrate the dispute.

“NAFTA is the only trade agreement that the U.S. provides for a mechanism such as Chapter 19,” Riyaz Dattu, a lawyer at Osler International who has been involved in several Chapter 19 review cases, explained.

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Who does it benefit?

NAFTA’s Chapter 19 dispute panel has heavily favoured Canada in past rulings, including the ongoing softwood lumber dispute.

But the system takes trade experts from both countries named in the dispute, and as Dattu explained, “These specialists are experts on trade law and record shows that the decisions are unbiased.”

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READ MORE: One request by Trump threatens both NAFTA negotiations and the softwood lumber dispute

What happens if it disappears?

NAFTA can go on without the specific dispute process, Dattu explained, because Chapter 20 provides for a general dispute resolution mechanism.

But getting rid of the arbitration process would leave Canadian companies vulnerable, RBC analysts said in a report on Monday.

“Heavily trade-intensive Canadian industries that largely export to the U.S. would be relatively more vulnerable without Chapter 19,” RBC experts say.

That includes automotive, oil and gas, and household appliance industries, the report explained.

READ MORE: NAFTA: Donald Trump’s wish list and closing the book on Chapter 19

And while there is another option: companies or countries can go to the World Trade Organization for dispute settlement, but economists say that can take years.

“As we’ve seen of late, the U.S. Commerce Department can impose massive anti-dumping and countervailing duties in a capricious manner, and the WTO isn’t able to review or reverse these in a reasonable timeframe,” Avery Shenfeld, CIBC economist, wrote in a report on Monday.

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— With files from Global News reporter Erica Alini.

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