NAFTA talks: thinking creatively on trade remedies

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January 17, 2018

NAFTA talks: thinking creatively on trade remedies

Written by Paul Moen for The Hill Times. Click here to read the original.

Canada’s new case against the United States at the World Trade Organization (WTO) is a bold move. The action not only backstops Canada’s existing softwood lumber litigation under the WTO and NAFTA, but also challenges the whole U.S. trade remedy system on behalf of many other countries. The case will likely fuel more fury between Canada and the United States on dispute settlement. Yet with some creativity, negotiators could still seize an opportunity to help bridge this gap.

Trade remedies like anti-dumping and countervailing duties protect domestic producers from imports that are priced below market or even below the cost of production. If dumping or government subsidies hurt competing businesses, governments may impose duties to offset the injury, with dispute settlement acting as a check and balance on arbitrariness.

But now the United States wants to scrap dispute settlement under NAFTA—and even under the WTO—while Canada has made any backsliding on NAFTA’s Chapter 19 a non-starter. What could be done?

First, Canada and Mexico could seek a trilateral mutual exemption from the application of each other’s anti-dumping and countervailing duty actions. Safeguard action—trade remedy measures for import surges—is already exempted under NAFTA, so extending an exemption to anti-dumping and countervailing duties is a natural step. Just last week, the U.S. exempted Canada and Mexico from safeguard remedies on imports of solar products and washing machines.

Second, given that the United States, Canada, and Mexico all need to address third-country illegal dumping and subsidization, there may be a political incentive for the U.S. to agree on a common approach to manage trade remedies. For example, given the high-profile cases of imports from Asia, including Korea and China, this objective could provide an added incentive for the NAFTA parties to negotiate a common trade remedy regime.

Third, as an interim step to move towards this goal, Canada and Mexico could propose a measure to temper the protectionist impact of trade remedies. One solution is a technical “lesser duty” rule in the application of domestic trade remedy law, which could consider the downstream impact of anti-dumping and countervailing duty action on workers and consumers on both sides of the border.

In the application of trade remedy law, there tends to be a mismatch between the harm and the corresponding penalty. Inevitably, duty levels exceed the extent of the injury—giving domestic producers a windfall of protection, imposing higher costs on users and consumers, and resulting in a net loss to the economy.

A “lesser duty” rule would reduce duties to the level required to offset injury and would help move stakeholders towards understanding that trade remedies are protective measures that impose more costs than benefits. This impact has been highlighted by both Canadian and U.S. domestic interests in disputes on softwood lumber (affecting workers and housing prices, for example), Bombardier C Series aircraft (parts suppliers and plants), and newsprint (large and small newspapers).

Given the uncertainty as parties enter the Montreal round, the highly integrated nature of the NAFTA economy, and our common cause in addressing illegal dumping and subsidies from other regions of the world, Canada, the United States, and Mexico should use this opportunity to pivot to higher ground by proposing bold initiatives that might just work in a Trumpian Art of the Deal world.