NAFTA has not only progressively eliminated tariff and non-tariff barriers to trade in goods; it has also improved access for trade in services, established rules regarding foreign investment; strengthened protection of intellectual property rights; and created an effective series of dispute settlement mechanisms. The trade pact set up binding arbitration panels, where investors can bypass the courts with complaints that government regulation unfairly affects their businesses.
The complaints are often against natural resource management or environmental rules. Mexico and Canada have paid out about $350 million in damages to foreign investors, while the United States hasn’t paid any. “The (arbitration) process is not like the domestic court system, it’s not fair and open,” said Scott Sinclair of the Canadian Centre for Policy Alternatives. The U.S. government is pushing to include the same system in the TPP. And agricultural openings, as in NAFTA, are proving controversial; in developing countries, farms are culturally sensitive.
There are five formal NAFTA mechanisms for resolving disputes:
1. NAFTA consultations: Under Chapter 19, parties consult annually, notify interested parties of investigations, and provide an opportunity for them to present information. Under Chapter 20, parties attempt to reach a mutually satisfactory outcome during consultations. If they fail, they may request of the NAFTA Commission.
2. NAFTA meeting of Commission (Chapter 20 only): If the (above-mentioned) consultations are unsuccessful, the Commission makes recommendations that may assist parties in reach a mutually satisfactory resolution. If this fails, the parties can request arbitral panels.
3. NAFTA arbitral panels: Under Chapters 19, parties may request a NAFTA panel review within 30 days of the publication of a national [Canadian, Mexican or U.S.] final determination that dumping, or subsidization or injury has occurred. If the subsequent NAFTA arbitral panel finds that one party has been in contravention of the NAFTA treaty, that party must bring its measures into conformity with the arbitration panel report, or be subject to compensation or retaliatory suspension of NAFTA benefits.
4. World Trade Organization panels: Members must try to resolve dispute through bilateral consultations at the WTO. If successful within 60 days, the complainant may request that the Dispute Settlement Body of the WTO establish a panel, which delivers are report within 60 days. The party found to be in contravention must submit a plan to implement that panel’s report or become subject to legal retaliation.
5. National countervailing or anti-dumping actions: Domestic industry in a NAFTA state files a petition with its own government, alleging unfair foreign competition. In the U.S., the Commerce Department investigates the allegations, and the U.S. International Trade Commission also investigates whether U.S. industries are likely to be harmed. If so, Commerce calculates the proper dumping or countervailing margins, then directs U.S. Customs to collect cash deposits on imports, if there is a positive determination that a violation has occurred.
A few notable examples of NAFTA dispute cases follow below:
In 2002, a NAFTA tribunal dismissed several claims made by United Parcel Service of America, Inc. against the government of Canada under the rules of UNCITRAL (the United Nations Commission on International Trade Law). UPS claimed that Canada Post, which UPS alleged was a letter mail monopoly, engaged in anti-competitive practices; unfairly using its postal monopoly infrastructure to reduce the costs of delivering its non-monopoly services. UPS alleged that Canada breached its obligations under the NAFTA to supervise a “government monopoly” and “state entity,” but accord treatment to foreign investors that is no less favorable than it accords to investors from its own country.
In 2013, Eli Lilly and Co., incorporated in state of Indiana, filed a claim against the Government of Canada relating to the Canadian courts’ invalidation of patents for two pharmaceutical products, Strattera and Zyprexa. The claimant alleges that Canada has violated NAFTA Articles 1110 (“Expropriation and Compensation”) and 1105 (“Minimum Standard of Treatment”).
In 2012, the United States and Canada signed an agreement to extend the 2006 Softwood Lumber Agreement (SLA) for an additional two years, until October 13, 2015. The 2006 SLA settled extensive litigation and resulted in the revocation of U.S. antidumping and countervailing duty orders on softwood lumber from Canada. The SLA is designed to create a downward adjustment in Canadian softwood lumber exports to the United States through the imposition of Canadian export measures when U.S. demand is low. The SLA also provides for binding arbitration to resolve disputes regarding interpretation and implementation of the agreement. Under the SLA, arbitration is conducted under the rules of the LCIA (formerly the London Court of International Arbitration). On July, 18, 2012, a tribunal issued its finding in an SLA dispute regarding the apparent underpricing of timber in the interior of British Columbia. At issue was whether British Columbia was justified in selling increasing amounts of publicly-owned timber in its interior – most of which was used to make softwood lumber products – at salvage rates.