Enforcing International Trade Obligations in USMCA: The State-State Dispute Settlement Mechanism

Enforcing International Trade Obligations in USMCA: The State-State Dispute Settlement Mechanism

January 3, 2020
Enforcing International Trade Obligations in USMCA:
The State-State Dispute Settlement Mechanism
Enforcement of many obligations in the proposed United
Parties designed to provide an informal and early means of
States-Mexico-Canada Agreement (USMCA), which would
resolving a dispute.
replace the existing North American Free Trade Agreement
(NAFTA) if ratified, is covered by the dispute settlement
Establishing a Panel
mechanism in USMCA’s Chapter 31. This mechanism
If consultations do not resolve the matter, then the
would permit any of the three Parties who intend to join the
complaining Party or Parties may request establishment of a
Agreement (i.e., the United States, Mexico, and Canada) to
panel. This request may generally not be made earlier than
bring a claim against another Party that is allegedly
30 days after delivery of the request for consultations for
violating its USMCA obligations. Chapter 31, which draws
matters involving perishable goods or 75 days for any other
substantially on NAFTA’s Chapter 20 mechanism, applies
matter, but the disputing Parties may agree on a different
to a majority of the Parties’ USMCA obligations, but there
timeline.
are exceptions. For instance, article 32.12 exempts certain
investment decisions reviewed under the Investment
Once a request for a panel is delivered, the panel is deemed
Canada Act from Chapter 31. Additionally, USMCA
“established.” As a practical matter, panelists must still be
includes more complex enforcement provisions for some of
selected before the panel process can commence. Panelists
its chapters, including the Environment and Labor
are typically selected from a roster created by the Parties,
Chapters. This InFocus provides an overview of USMCA’s
although the Parties may propose individuals who are not
Chapter 31 process.
on the roster. Non-rostered individuals, however, may be
subject to a “peremptory challenge” that does not apply to
Bases for Invoking Chapter 31
individuals on the roster. Specifically, a Party may reject a
Article 31.2 lists instances when a Party may use the
nonrostered individual without justification unless no one
Chapter 31 dispute settlement process. First, a Party may
on the roster possesses the necessary qualifications to serve
invoke the process if it believes that another Party has
as a panelist.
proposed or adopted a domestic trade-affecting measure
inconsistent with its USMCA obligations or has failed to
To constitute the panel, the disputing Parties must first
carry out an obligation. Second, the Parties may use
attempt to select a panel chair by consensus. Failure to do
Chapter 31 to address disputes over interpretation or
so within a specified timeframe triggers a mechanism
application of the Agreement’s provisions. Finally, for
whereby one Party is chosen by lot to designate the chair. If
specified chapters, Chapter 31 may be invoked when a
the responding Party fails to participate in the selection-by-
Party believes that another Party has “nullified or impaired”
lot process, the complaining Party or Parties may designate
a benefit that the first Party “could reasonably have
the chair, although the chair may not be a citizen of the
expected to accrue to it” under such chapters.
selecting Party or Parties.
Disputes may involve a variety of issues. Some of the
Next, the Parties must select the remaining panelists by
NAFTA disputes that could similarly arise under USMCA
consensus. Generally, panels have five members, but the
might include: a Party’s failure to authorize permits to
Parties may agree to panels of three. In the first case, each
foreign entities to provide cross-border services (e.g., as in
side may select two panelists, and in the latter, one. In both
the NAFTA Cross-Border Trucking Services dispute) or
cases, each Party chooses panelists who are citizens of the
imposition of agricultural tariffs that are not permitted
other Party. Should the disputing Parties fail to select
under the Agreement (e.g., as in the NAFTA Tariffs
panelists, then panelists are chosen by lot from the other
Applied by Canada to Certain U.S.-Origin Agricultural
Party’s roster. If the responding Party fails to participate in
Products dispute).
the choosing of lots, then the other side may select panelists
who are its own citizens.
The Chapter 31 Process
The Panel Process
Consultations
The function of a panel is to facilitate resolution of a
As an initial step, the Party or Parties alleging that another
dispute by creating a panel report that includes findings of
Party is violating USMCA may request consultations. The
fact, determinations of whether a Party has violated its
disputing Parties must hold these consultations within 15
USMCA obligations, and, if the Parties so request,
days after delivery of the request if the issue concerns
recommendations as to how to resolve the dispute.
perishable goods or within 30 days for any other matter.
Consultations are confidential discussions between the
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Enforcing International Trade Obligations in USMCA: The State-State Dispute Settlement Mechanism
To prepare a panel report, a panel may receive written and
the panel finds that the violation has not been cured, then
oral submissions from the disputing Parties, any
the complaining Party may suspend benefits up to the level
nonparticipating State-Party, and experts. The panel must
determined by the panel.
offer the Parties at least one hearing and an opportunity to
present their views orally. After receiving all submissions, a
Consequences of Using Chapter 31
panel must prepare, by consensus or majority vote, a draft
Once a Party requests establishment of a panel under
report. The panel must typically present the report to the
USMCA, it may not raise the same issue under another
Parties within 150 days after appointment of the final
trade agreement or in another forum such as the World
panelist, although the panel may extend the deadline by up
Trade Organization (WTO). Thus, using USMCA limits the
to 30 days, or for a different period if the Parties so agree.
Parties to the panel process and remedies set forth in the
The disputing Parties may comment on the draft report.
agreement. When deciding whether to rely on USMCA or
After considering such comments, the panel may request
to invoke another agreement, a Party may consider whether
additional submissions or order further examination before
it prefers an agreement with an appellate mechanism, which
issuing a final report.
USMCA lacks, or whether the substantive provisions of
other agreements more directly address its concerns.
Resolving a Dispute
When a final report determines that the responding Party
Considerations for Congress
has violated its USMCA obligations, the Parties must seek
Over the past few decades, Congress has shown an interest
to resolve the dispute within 45 days after receipt of such
in the effectiveness of NAFTA’s panel system by asking
report. Even if a report contains recommendations for how
questions (e.g., about the panel selection process) and
to resolve the dispute, the Parties are not bound by them.
proposing reforms (e.g., requiring any renegotiated
Instead, they may negotiate their own terms, such as by
agreement to “meet or exceed” prior dispute settlement
requiring amendment of a USMCA-inconsistent law or
objectives, as in H.R. 7014 (110th Congress), or to subject
providing compensation.
labor and environment commitments to dispute settlement,
as in H.Res. 132 (115th Congress)).
If a resolution is not reached within 45 days, then the
complaining Party or Parties may suspend benefits to the
Congress could consider whether USMCA’s revised dispute
responding Party (e.g., impose higher tariffs than allowed
settlement mechanism resolves any concerns about its
under USMCA) to the extent that such suspension has an
effectiveness and whether it should be replicated in future
“equivalent effect” as the measure or conduct found to be
free trade agreements or used as a template in formulating
USMCA-inconsistent. The suspended benefit should be in
negotiating objectives in any future Trade Promotion
the same sector as the subject of the dispute, unless this
Authority legislation. For instance, Congress may seek to
would be ineffective or impracticable.
address specific aspects of the mechanism, such as whether
certain provisions that are not subject to Chapter 31 should
If the responding Party believes the suspension of benefits
be, or whether the panel process ensures timely resolution
is manifestly excessive or that it has cured the violation, it
of disputes.
may request that the original panel consider the issue.
Should the panel conclude that the suspension is manifestly
Nina M. Hart, Legislative Attorney
excessive, it must “provide its views as to the level of
benefits it considers to be of equivalent effect.” Further, if
IF11399

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Enforcing International Trade Obligations in USMCA: The State-State Dispute Settlement Mechanism

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https://crsreports.congress.gov | IF11399 · VERSION 1 · NEW