Where Canada should draw a red line with Donald Trump on NAFTA

How the Trudeau government responds to the U.S. demand to scrap Chapter 19, the NAFTA dispute mechanism, will define the success of the trade talks

Vice President Mike Pence laughs as U.S. President Donald Trump holds a baseball bat as they attend a Made in America product showcase event at the White House in Washington, U.S., July 17, 2017. REUTERS/Carlos Barria

When the United States released its NAFTA negotiation priorities, the first name that popped into my mind was Tim Donaghy. Donaghy was a former NBA referee who admitted to betting on NBA games and making money from giving tips to bookies. It was a massive scandal. “I can tell you that this is the most serious situation and worst situation that I have ever experienced either as a fan of the NBA, a lawyer for the NBA or a commissioner of the NBA,” said David Stern, former league commissioner, at a news conference that took place exactly 10 years ago. Donaghy eventually went to prison on felony charges, but Stern instinctively understood that the multi-billion dollar National Basketball Association does not actually rely on stars, who come and go. Instead, the league’s survival depends on integrity, on much less compelling figures than Michael Jordan and LeBron James: the referees. If the refs are not fair, the game is rotten, the stars have nowhere to play, and it all collapses. The same is true for international trade.

That’s why one line, tucked near the end of page 14, just four pages from the end of the list of America’s NAFTA priorities, jumped out: “Eliminate the Chapter 19 dispute settlement mechanism.” Translation: get rid of the referees.

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There are lots of important things the U.S. wants to renegotiate. They want access to Canada’s banking and telecommunications markets, they want to bust open the supply management system for dairy and poultry, and they want to fix the country of origin labelling, which could create havoc for the automotive sector. But all those can be and will be negotiated. Chapter 19 should not be on the table. It is the the hill to die on. “If there is a red line for Canada in the Trump Negotiating Objectives, it is ‎probably Chapter 19,” says Mark Warner, an international trade lawyer. “The key is to figure out if it has really been as effective as we think and what we might trade for it in our own art of the deal.”

MORE: Trump’s plan to overhaul NAFTA goes much deeper than a tweak

Warner’s point is nuanced. He agrees Chapter 19 is the biggest issue, but that also makes it a hugely valuable item to trade. Think of it as the Wayne Gretzky of the NAFTA deal. What could Canada get for it? Maybe a lot, but remember, the Gretzky trade led to whole lot of tears in Canada and Peter Pocklington wasn’t about to win any elections after he pulled the trigger on that deal. Still, Warner has a point. While Chapter 19 is critical, it hasn’t been used as much recently, and even when it has been used, the U.S. doesn’t often abide by it.

“The attack on Chapter 19 is curious since the Yanks tend to ignore rulings they do not like, as with many rulings on softwood,” Derek Burney, the former Canadian ambassador to the U.S., told me. Burney, now a senior strategic advisor at Norton Rose Fulbright, is still working closely with Brian Mulroney in helping the current government on the upcoming NAFTA negotiations. Both men can vividly recall how hard they worked to make sure Chapter 19 was part of the original Free Trade Agreement. Without it there was no mechanism for Canada to resolve disputes around dumping and countervailing duties and so no deal. It is the issue they told the U.S. that Canada needed, or Canada would walk. It was not surprising. The U.S. was not nearly as dependent on trade with Canada as Canada was on trade with the U.S., and still isn’t. The smaller partner needs an independent judge or it’s game over. In the end, Mulroney and Burney and their team got the deal done and with it, a fair way to resolve disputes.

In the intervening decades, Canada has won far more decisions at the proceedings and tribunals than the U.S., and outside of the festering issue of softwood lumber—which is outside of NAFTA, anyway—the decisions have generally led to more and better trade. Now the new Republican administration wants to go back to the pre-Shamrock Summit days and start all over, tilting the playing field in their direction. How the Trudeau government responds to the Chapter 19 issue will define the success of the entire negotiation.

READ: And the biggest economic uncertainty for Canada under Trump is…

Do the Liberals all agree with this view? Hard to tell. They are not saying much now because the negotiations haven’t formally started, but speaking to some trade experts working with the government who did not want to be named, it struck me they are more sanguine about the Chapter 19 issue. Canada has not always won disputes using that tool, the argument goes, and if a good deal on softwood lumber can be struck quickly, outside of NAFTA, maybe Canada could rely on the World Trade Organization mechanism and domestic courts to do the referring. That line of thinking, however, is not widely shared.

Jerry Dias, the President of UNIFOR, a man who openly loathes the NAFTA agreement and is revving his engine to renegotiate, told me that everything is on the table except one thing: Chapter 19. “On that, we have to be prepared to walk away,” he said.

Since the Donaghy scandal of 2007, the NBA has gone on to thrive. One reason? Commissioner Stern took the referee issue as seriously as he took the actual stars. Who would play a sport, who would watch one, when one team gets to pick the referees or cut them out all together? It doesn’t work. The Trudeau government has one Stern challenge: don’t get Donaghy’ed.

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