New York International Law Review

Summer, 1993

*85 THE RECORD OF THE UNITED STATES-CANADA BINATIONAL DISPUTE RESOLUTION

PANELS

Michael Krauss

Copyright © 1993 by the New York State Bar Association; Michael Krauss

I. Introduction

During the initial talks leading to the Canada-United States Free Trade Agreement [FN1] (CUSFTA), considerable effort was devoted to negotiating common rules for dealing with issues of government subsidies and "dumping" problems. [FN2] Two issues prompted this consideration. The first was a bilateral dismay with the mechanism provided for in the General Agreement on Tariffs and Trade (GATT), [FN3] under which a cumbersome system of committees and rules has evolved for resolution of intergovernmental disputes. [FN4] The second was a generalized Canadian concern that administrative proceedings under U.S. trade laws were unjustifiably influenced by rent-seekers whose surreptitious lobbying threatened U.S. (and, derivatively, Canadian) consumers. [FN5]

One of Canada's major goals during CUSFTA negotiations was to obtain exemption from U.S. emergency (so-called Section 201) [FN6] and countervail (so-called Section 301) [FN7] measures. Penalties have been imposed in thirty percent of the cases in which U.S. producers invoked these procedures, which has caused great difficulty for companies exporting into the United States. [FN8] In many instances, Canadian industries had been swept up in emergency cases even though Canadian exports of the product under investigation represented only a tiny proportion of that product's importation into the United States. [FN9] Partial exemption from emergency actions was achieved in CUSFTA, [FN10] but the more dreaded section 301 cases were not preempted. [FN11] Nor was the United States able to achieve its goal of eliminating ubiquitous Canadian federal and provincial subsidies, which are frequently invoked by nationalists as intrinsic to the "Canadian way of life," the threatened loss of which was a cri de resistance against the entire CUSFTA process. [FN12]

These substantive failures threatened to scuttle the accord, especially in Canada, where the inability to modify or avoid protectionist U.S. trade measures was widely perceived as a major loss of face. [FN13] Negotiators on both sides considered how to save the agreement through *86 alternative, procedural measures. [FN14]

The outcome was a unique binational panel dispute resolution system that provides for each country's input into the other's trade process. [FN15] This Article outlines the basic structure of this system, evaluates its performance, and indicates some challenges to the future application (and to the possible replication of NAFTA) of the CUSFTA dispute resolution system.

It must be emphasized that CUSFTA's dispute resolution system, at least as it addresses dumping and countervail issues, is essentially a temporary measure. Canada and the United States have agreed in CUSFTA to develop and implement, before January 1, 1995, a substitute system of antidumping and countervailing duty laws applicable in both countries. [FN16] This is an important commitment. Many studies, including the final report of the excellent and influential "MacDonald Commission" in Canada, [FN17] have recommended such a measure. [FN18] Under CUSFTA, a joint Working Group has been established to develop the new system of laws. [FN19] If this new system is not implemented before the 1995 deadline, either country may terminate CUSFTA upon six months' notice. [FN20]

In the interim, although extant domestic antidumping and countervail legislation will continue to apply, [FN21] CUSFTA is designed to prevent future protectionist changes to either country's laws from affecting the other country. Such changes will be deemed applicable to the other country only if:

. the amending legislation states specifically that it will apply to the other country;

. there has been prior written notification to the other country; AND

. the amendments are consistent with GATT and with the object and purpose of CUSFTA. [FN22]

In instances when, following notification, one country objects to the other's proposed amendments to antidumping and countervail legislation, government-to- government consultations are to be initiated. [FN23] If these consultations do not achieve a solution, the complaining country may request a declaratory opinion from one of the Chapter 18 binational panels. [FN24] If such a panel recommends changes to the proposed amendments, then the two governments must again consult to reach an agreement (presumably mirroring the panel opinion) within ninety days. [FN25] Motivating the success of these consultations is the draconian result that if they fail and the objectionable amendment is adopted, the complaining country may terminate CUSFTA on a mere sixty days notice [FN26] (instead of the six months' notice mentioned elsewhere in CUSFTA [FN27]).

Some critics have complained that CUSFTA has avoided providing substantive solutions to problems of state subsidies and "dumping," and have recommended that NAFTA solve these problems preemptively instead of using the procedural "Band-Aid" of dispute resolution mechanisms. [FN28] These critics are oblivious to the political realities at hand. CUSFTA establishes an initial structure of freer trade and then makes the continued existence of this structure ride on the medium-term elimination (and short-term nonaggravation) of state-imposed trade distortions. In this way, the ante has been raised. In the future, rent- seeking lobbyists wishing to enact laws averse to U.S.-Canada trade will be lobbying for legislation with potentially cataclysmic effects (i.e., a sixty- day or six-month termination of the treaty). The more acutely felt the costs of these cataclysmic effects, the more furious the counterlobbying will be. [FN29] In this way, CUSFTA's use of procedural "Band-Aids" as a substitute for an ex ante elimination of trade distortions makes an ex post elimination of these distortions more likely.

*87 II. The Structure of CUSFTA'S Dispute Resolution System

CUSFTA provides a rather traditional general dispute resolution process in Chapter 18 of the Agreement, as well as specific and more innovative rules in Chapter 19 for antidumping and countervailing duty cases. [FN30]

A. The Chapter 18 Dispute Resolution Procedure

Chapter 18 of CUSFTA provides a structure applicable to disputes regarding the interpretation or application of the Agreement. [FN31] Chapter 18 dispute resolution is optional in all cases in which it applies, except that it is compulsory for "emergency measures" that cannot be resolved by consultation. [FN32] Chapter 18 governs any action or proposed action of one government that might be inconsistent with the Agreement's text [FN33] or with the benefits reasonably expected to follow from the Agreement. [FN34] CUSFTA permits Canada and the United States to use Chapter 18's structure of notice, consultation, negotiation, and report or arbitration as a general substitute for the GATT dispute resolution process. [FN35]

Chapter 18 requires prompt written notice to the other government of any measure or proposed measure which might affect the operation of the agreement. [FN36] The parties then commit themselves to consult each other, upon request of the potentially affected government, regarding this measure (or any other matter of which a complaining government has been apprised and which it feels affects the Agreement). [FN37] Should these consultations fail to produce a mutually satisfactory result within thirty days, either government may refer the question to the Canada-U.S. Trade Commission. [FN38] The Commission has great flexibility in negotiating a resolution of the dispute. If it is unable to do so within thirty days of the referral by the complaining government, it may refer the question to arbitration by a binational panel. [FN39]

As an alternative to arbitration, [FN40] either government complaining under Chapter 18 may request the establishment of a panel of experts to consider and to report on the complained of matter. [FN41]

Members of both arbitration panels and panels of experts are generally (but not necessarily) selected from a roster maintained by the Commission. A panel is composed of five members, with at least two Canadian citizens and two U.S. citizens selected by their respective governments. The fifth and chairing member may be a citizen of a third country, and is chosen either by agreement of the two countries or, if no agreement is reached, by lot from the roster. [FN42]

The panel of experts produces an initial report (which includes recommendations for the resolution of the dispute) within three months of its constitution. [FN43] Each government may file a statement disagreeing with this initial report within fourteen days of its issuance; the panel is then free to reconsider the initial report. [FN44] The final report is due within thirty days of the issuance of the initial report. [FN45]

Except for final reports dealing with "emergency measures," Chapter 18 panel reports can be overridden by the Commission. [FN46] However, "normally" the Commission "shall agree" to resolve the dispute in the fashion indicated by a Chapter 18 arbitration panel. [FN47] Similarly, in a case of a final report by a Chapter 18 panel of experts, the Commission must try to resolve the dispute in a manner "which normally shall conform with the recommendation of the panel." [FN48] At *88 the very least, the panel report seems to carry great moral weight. If the Commission (which, as noted, is composed of Cabinet members) agrees with the report, then, of course, the matter is de facto resolved. If the Commission cannot reach an agreement on the report within thirty days [FN49] (presumably because the governments remained opposed), the party harmed may "suspend the application to the other Party of benefits of equivalent effect until such time as the Parties have reached agreement on a resolution of the dispute." [FN50]

Any decision made by a binational arbitration panel concerning an "emergency action" measure is final and binding on both countries and their agencies. [FN51] The ability of a binational panel to review and make binding recommendations concerning a country's application of "emergency action" measures under Article XIX of the GATT is unprecedented in GATT or any other international trade agreements.

Apart from the "emergency action" procedure, however, the Chapter 18 approach is not novel. It follows closely the structure of the Israel-U.S. Free Trade Agreement, [FN52] and is similar to that of other Canada-U.S. accords, including treaties of commerce, navigation, air transport, and investment. The idea is to encourage amicable resolutions of disputes and, as a worst-case scenario, to use panels to increase political pressure on the recalcitrant party. This scenario increases the likelihood that a resolution will be found to the dispute, in light of the facts that both governments share a historic respect for the rule of law and that an unbiased panel's recommendation possess substantial moral force. Nevertheless, these provisions recognize that exceptional cases might prevent any agreement. In such instances, the provisions expressly permit measures of retaliation that have the potential of unraveling CUSFTA. Of course, the specter of unraveling gives more teeth to the panel recommendations.

With its stricter time limitations, the inability of a government to block the issuance of panel reports, [FN53] and more practically effective remedies, Chapter 18 can be said to provide "GATT-plus" procedures. [FN54]

Thus far, only two Chapter 18 panels have publicly reported their completed decisions. [FN55] A third Chapter 18 panel determination was reached in June 1992. [FN56] Many other simmering (and some boiling) disputes between Canada and the United States seem amenable to Chapter 18 procedures. [FN57] However, one decidedly litigious subject, beer, was expressly excluded from CUSFTA, [FN58] so each government has attacked the other's protectionist policies [FN59] in the GATT forum. [FN60]

B. The Chapter 19 Dispute Resolution Process

In a true "free trade area," even assuming that "dumping" exists and must be stopped, there is no need for an "antidumping" law. [FN61] Also, only suboptimally, need there be agreement on what constitutes a countervailable subsidy. [FN62] To repeat, CUSFTA does not at this time include provisions on government subsidies and "unfair pricing." GATT and subsequent codes elaborated in the "Tokyo Round" cover these matters multilaterally. [FN63] GATT authorizes *89 its signatories to adopt antidumping and countervailing duty legislation, and both Canada and the United States have done so. [FN64]

Under GATT, an antidumping duty also applies when foreign goods are sold below their cost of production or at less than "fair value." [FN65] A countervailing duty may then be applied on the affected foreign goods. [FN66] Before these duties can be applied, however, GATT requires that the importing country determine that "material injury" has been suffered. [FN67] In the United States and Canada, the existence of dumping or subsidy is calculated by government departments: the International Trade Administration (ITA) of the Department of Commerce, and Revenue Canada, respectively. [FN68] Whether the dumping or subsidization has resulted in material injury is determined by quasi-judicial administrative agencies: the U.S. International Trade Commission (ITC) [FN69] and the Canadian International Trade Tribunal (CITT). [FN70]

While the existence of the countervailing duty legislation and antidumping legislation is condoned in most circles, [FN71] the application of these laws in the United States has been subject to intense criticism. [FN72] The MacDonald Commission [FN73] diplomatically described application of the U.S. trade law as follows:

U.S. trade policy is created and applied through political and legal processes which decentralize decision-making power and enhance the political influence of relatively small and narrowly based interest groups . . . . [N] otable examples . . . are the legal mechanisms that afford producers contingent protection from import competition. These mechanisms usually involve countervailing duties [and] antidumping duties . . . . U.S. legislation gives domestic producers the right to launch costly lawsuits against foreign rivals, with little risk of loss if the claims of unfair and injurious competition are proved groundless. Since the U.S. lawsuits are initiated by private law firms, it is seldom possible to predict when they will be launched. Thus the threat of harassment they pose deters Canadian investment in new plants and equipment when the future profitability of such facilities depends on uninterrupted access to the North American market.

A former Commissioner of the International Trade Commission has admitted that many ITC Commissioners (whose role it is under U.S. trade law to determine whether a "dumped" or subsidized product has "materially injured" a U.S. producer) tend to use political, not legal or economic, considerations in making their decisions. [FN74] Not all ITC commissioners are equally culpable in this matter. The remarkable variance in values they employ, ranging from economic rationality to crass mercantilism, is highlighted in the infamous (3- 3) ITC decision condemning the importation of Canadian cedar shingles. [FN75]

Canada has also complained about the length of time required for the U.S. Court of International Trade (CIT) (before which appeals from ITA and ITC decisions are heard) to decide cases. [FN76] On average, this court requires almost two years to evaluate antidumping and countervail appeals. [FN77] Almost half of this court's decisions resulted in a remand of the final determination to the appropriate agency, and the median length of time for the court's disposition of this remand was another six months. [FN78] Subsequent*90 appeal of a CIT judgment [FN79] is also possible. [FN80] These delays, coupled with the vagueness of U.S. trade legislation, [FN81] permit domestic producers to "hold up" Canadian competitors through complaints, which discourage marketing of Canadian goods in the United States.

With this backdrop, and in light of the inability to reach agreement on substantive matters in the short time permitted by the "fast track" [FN82] negotiation of CUSFTA, Chapter 19's restriction on each country's ability to apply its domestic legislation is extremely significant. [FN83] Chapter 19's unique feature is its displacement of judicial review of the national antidumping and countervail determinations [FN84] with binding review by a binational panel. [FN85] Either government and any principally interested private party (such as a foreign producer or exporter, or a domestic importer of the impugned product) [FN86] may require the formation of such a panel to review a "final determination" by the relevant bureaucratic or quasi-judicial agency. [FN87] Five-person panels are to be drawn from binational rosters of U.S. and Canadian trade experts. [FN88] A majority of each panel must be lawyers. [FN89] Objectivity is ensured by allowing each country four peremptory challenges to the other country's nominees. [FN90]

CUSFTA requires these binational panels to apply the importing Party's antidumping or countervail laws, [FN91] and to employ the same standard of judicial review as would the court that would otherwise have heard the appeal. [FN92] Under U.S. standards, for example, antidumping or countervailing duty determinations must be held unlawful upon review if applicable laws have been misapplied, or if the laws have been correctly applied but the duty imposed was "unsupported by substantial evidence on the record." [FN93]

CUSFTA also sets forth a detailed schedule of deadlines for each step of the panel review process, culminating in a decision by the panel within 315 days of the initial request for panel review, and in any case within ninety days after the panel has received the parties' briefs and heard oral arguments on the issue. [FN94] The panel's final decision may uphold the antidumping or countervailing duty determination, [FN95] or may remand it to the relevant administrative agency for action not inconsistent with the panel's decision. [FN96]

Chapter 19 panel decisions, unlike those of non-emergency action Chapter 18 panels, are binding. [FN97] The only "appeal" provided by CUSFTA from a panel decision is an extraordinary challenge before three sitting or former judges, [FN98] which may not assert mere error by the panel but must establish misconduct, bias, serious conflict of interest, violation of fundamental rule of procedure, or ultra vires action. [FN99] Only governments, and not private appellants, may file an extraordinary challenge, [FN100] whereas prior to CUSFTA any losing party could appeal a CIT judgement.

Chapter 19 cases, unlike government-to-government Chapter 18 disputes, typically involve appeals by private interests. [FN101] These private interests now have the option of *91 appealing trade cases to a Chapter panel rather than using the courts in the country where the case was initiated. [FN102] Some have asserted that this jurisdictional option is insignificant. [FN103] But this critique ignores both the text of CUSFTA and public choice concerns. As to the Agreement's text, it surely is true that what is "substantial evidence" [FN104] supporting the administrative or quasi-judicial decision is a matter of expert opinion. The five-member panels can thus truly redirect substantive trade law under CUSFTA. To say that panelists will not affect the direction of the law is to say that appellate judges have no such effect: both assertions are naive if not nonsensical. And if "justice delayed is justice denied," the expedited Chapter 19 process and the very limited subsequent appeal via extraordinary challenge are in and of themselves likely to encourage trade.

As regards public choice doctrine, note that even independent members of the judiciary tend to be products of the local practicing bar and are subject to professional and political pressures of which few arguably emanate from foreign producers (for reasons of dispersion of interests) or the mass of domestic consumers. [FN105] The part-time binational composition of this new "court of final appeal" obliges rent-seeking domestic producers to state their cases before a floating board of judges, half of whom live in a foreign country and none of whom is (likely) beholden to these producers for their livelihoods. Clearly, even if the law applied by this court of final appeal is itself suboptimal, [FN106] the increased cost of institutional capture by anticonsumer interests is reason enough to applaud this structural change. [FN107]

Chapter 19 binational panel review and, to a lesser extent, Chapter 18 review, have the potential to make inefficient rent-seeking more onerous. The next section of the Article explores selected cases taken under Chapters 18 and 19 in order to see if this potential has been realized.

III. Performance of the Binational Panels

Close examination of four selected Chapter 18 and Chapter 19 disputes reveals that the binational dispute resolution panel process has functioned well, and is an encouragement to international trade.

A. The Red Raspberries Case

In July 1984, growers and packers of raspberries in the Pacific Northwest of the United States filed petitions with the ITC and the ITA, alleging that British Columbia farmers were "dumping" raspberries onto the U.S. market and causing material injury to the domestic industry. [FN108] The ITC, basing its opinion solely on the fact that U.S. production was declining while Canadian exports were increasing, issued a preliminary ruling that "less than fair value imports of manufacturing grade raspberries packed in bulk from Canada threaten to cause material injury to a domestic industry." [FN109] In 1985, the ITA published a final determination that Canadian exporters were selling their raspberries at less than "fair market value." [FN110] The latter was determined, not by reference to the sale price of the raspberries in Canada, but rather through the use of a "constructed value" that assumed that Canadian firms were spending ten percent of total costs on administrative fees and earned a minimum eight percent profit. [FN111] The ITA refused to consider Canadian market prices for red raspberries because Canadian sales were "minimal" compared with the amount exported to the United States. [FN112] Pending final ITC determination of material injury, the ITA imposed duties on various Canadian producers. [FN113] Final ITC finding of harm promptly followed. [FN114] A second series of reviews in February 1989, covering the 1986-87 growing season, confirmed the dumping while varying the duties. [FN115]

Three Canadian "boutique" growers initiated bilateral panel review in March 1989. (Note that it is extremely unlikely that these small growers would have complained under pre-CUSFTA judicial review because of long lag times and high expenses. [FN116]) They argued essentially that the ITA did not have legal authority to ignore Canadian prices in determining the "fair market value" of raspberries, and that had home market prices been used to calculate this value no actionable dumping would have been found. They pointed out that the ITA had requested authority from Congress to ignore home market prices when the home *92 market is comparatively small, but that the requested legislative amendments had never been enacted. The ITA responded by repeating that home market sales were "inadequate" in this case. When pressed for the legal rationale, the ITA representative opined that the "ITA knows inadequacy when we see it." [FN117] The chairman of the panel later said that this statement sent "a shock of electricity quickly through the room." [FN118]

The binational panel, applying U.S. law, [FN119] followed the U.S. precedent of giving great deference to the administrative interpretation of the relevant statute. [FN120] Although it rejected the producers' argument that the ITA was required by the statute in question (§ 773 of the Tariff Act) to use home market sales as a yardstick against which to compare export prices in the United States, [FN121] it noted that the ITA had failed to provide an adequate explanation for its failure to do so and remanded the case. [FN122] On subsequent review, the Panel found the ITA's justifications to be legally insufficient and again remanded, directing the ITA to base its calculations for two of the producers on home market sales. [FN123] The ITA complied, and dumping margins vanished when home market sale were used. [FN124]

The Red Raspberry case never would have been brought under pre-CUSFTA procedures. It set the tone for a nationally impartial, [FN125] expedited, [FN126] cheap, [FN127] restrained (as evidenced by the approval of duties against one hapless producer who, having elected to export all of its production, had no "home market sales"), [FN128] and competent [FN129] application of domestic law. The full oral exchange, which unveiled the underlying problem of ITA arbitrariness, was significantly different than would have been possible under the U.S. judicial process, which places heavy reliance on written briefs. This case also highlights (in its exposure of the ITA's failed attempt to modify the Tariff Act to allow it to ignore home market sales and construct a "fair market value") the extent to which domestic institutions tend to be captured by inefficient producers.

B. The Pork Case

This dispute began with a U.S. countervailing duty investigation of imports of fresh, refrigerated and frozen pork from Canada. [FN130] As in the Red Raspberries case, the ITC found that subsidized pork imports were threatening the U.S. industry with material injury, [FN131] and the ITA dutifully determined that the pork was indeed subsidized. [FN132] The Canadian Pork Council, Canada Packers Inc., the Government of Alberta and the Government of Quebec challenged the ITC ruling under Chapter 19. The panel decision, delivered on August 24, 1990, found that several ITC findings "rely heavily or flow directly from faulty use of statistics," notably the questionable finding that Canadian pork production had recently increased. [FN133] It remanded the case to the ITC for reconsideration.

*93 In September 1990, the ITC reopened its investigation. Realizing the weakness of its earlier position, the Commission reopened the record entirely. [FN134] On October 23, it reissued, by majority vote, the same finding after consideration of "new evidence." [FN135] The above-named parties again demanded the constitution of a Chapter 19 panel. A second panel decision was rendered on January 22, 1991. [FN136] The panel curtly noted that "the ITC's record has been combed not once but twice in search of substantial evidence of material injury." [FN137] The panel concluded that the ITC had, on remand, explored new questions not open to it during its first investigation and, thus, not legitimately the subject of investigation on remand. [FN138] The panel remanded again to the ITC, directing it to consider no additional information beyond the original record and no issues beyond those directed by the first remand order. [FN139]

Two weeks later, in its second remand determination, the ITC determined that U.S. industry was not materially injured or threatened by Canadian pork. [FN140] However, it stated expressly that it was making this determination only because of the terms of the second remand. [FN141] It called the panel's directive "counterintuitive, counterfactual, and illogical, but legally binding." [FN142] It stated that the second panel decision "violates fundamental principles of the United States-Canada Free Trade Agreement . . . and contains egregious errors under U.S. law." [FN143] Commissioners Rohr and Newquist (among the most mercantilist ITC commissioners) [FN144] went so far as to repeatedly warn that their finding of "no material injury" in the pork case would not affect their disposition of other proceedings. [FN145]

Immediately thereafter, the National Pork Producers' Council presented a petition to the Office of U.S. Trade Representative Carla Hills, requesting the formation of an Extraordinary Challenge Committee under Art. 1904, para. 13 of CUSFTA. This request drew a strong response from Canada, whose Trade Minister (Ambassador Hills' counterpart on the Free Trade Commission) stated that if the extraordinary challenge succeeded, Canada would have to question whether or not CUSFTA was worthwhile. [FN146] As it happened, the Pork Producers' pressures were timely; the deadline for its disposition by Ambassador Hills fell at the same time that Congress was deciding whether to extend fast-track legislation authorizing, inter alia, NAFTA talks. [FN147] Ninety members of Congress sent letters to Ambassador Hills "encouraging" her to accede to the Pork Producers' Council's request. [FN148] The Ambassador was on record as stating that the extraordinary challenge procedure was aimed at improprieties (of which none were alleged), but a promise of Senate votes in favor of fast-track authorization of the NAFTA treaty convinced her to request the formation of the extraordinary committee on March 29, 1991. [FN149]

Three judges (with a former U.S. Court of Appeals judge presiding) delivered their unanimous report on June 14, 1991. [FN150] It held that the allegations presented by the Trade Representative clearly "did not meet the threshold for an extraordinary challenge that is set forth in Art. 1904. 13." [FN151] This threshold requires, according to the committee, that a violation of Art 1904. 13(a) be present, [FN152] that this violation affect the panel's final decision, and that the violation threaten the integrity of the binational panel process. [FN153] *94 None of the allegations of error met this threshold. [FN154]

The Pork case portends well and ill for the panel process. On the negative side, judgment day was long in coming. A final determination was rendered fully two years after the original countervailing duty determination, and two and one-half years after the case was first initiated. This type of delay is no improvement over the CIT process and is poorly adapted to complainants without staying power. Here two provincial governments and a large corporation (Canada Packers, Inc.) were involved. It is clear that boutique exporters could not have carried this ball.

On the positive side, the Extraordinary Challenge Committee established an extremely narrow standard of review for future challenges, and explicitly stated that the extraordinary challenge process was not a substantive appeal of panel rulings. Its curt decision is almost a reprimand for misuse of the process. In addition, and importantly, the challenge committee rejected the claim that the binational panels' authority was limited. The ITC and the Pork Producers had claimed that panels could only give open- ended remands, and that if the panel was unsatisfied with a subsequent action it could merely remand indefinitely. The committee held that "there are no restrictions on the Panels' power to remand with or without instructions" given CUSFTA's goals of speedy and inexpensive review. [FN155] Finally, the Pork case demonstrated that, under CUSFTA, intense political pressure on the Trade Representative could at most generate a referral to an extraordinary committee that quickly sent the protection-seekers packing (so to speak). Clearly, the Chapter 19 binational dispute resolution panels have given U.S. politicos a safety valve through which they can claim to have done all they could for their rent-seeking constituents, all the while not substantially damaging the trade process.

C. The Lobster Case

Most cases brought to the Chapter 18 Commission and arbitration panels have involved technical or environmental standards of one country that constituted a nontariff barrier to imports from the other country. [FN156] The Lobster case, [FN157] like one of the other two Chapter 18 cases completed, [FN158] was the object of an "advisory opinion," illustrating both governments' reluctance to submit to binding arbitration in Chapter 18 matters.

The Lobster case arose after the United States amended, in December 1989, [FN159] a fisheries law [FN160] to prohibit, among other things, sale or transport into the United States of whole live lobsters smaller than the minimum possession size in effect under U.S. federal law. [FN161] Prior to this amendment, minimum lobster sizes had applied to lobsters harvested in the U.S. waters but not to those harvested in Canadian waters (where Canadian minima apply). [FN162] Lobsters grow more slowly in Canada's (surprisingly warmer) offshore waters. [FN163] Since size requirements are proxies destined to protect young lobsters until they mate, it follows that Canadian lobsters may reach the appropriate age at a smaller size. In fact, up to thirty-four percent of Canada's catch of live lobsters in 1992 would have violated the amended act. [FN164]

Canada protested that the new U.S. requirements ran afoul of Art. 407 of CUSFTA, which incorporated article XI of GATT (banning measures that prohibit or restrict the importation of products). [FN165] Article XI grants an exception for conservation measures. [FN166] The Commission agreed to appoint a panel of experts under Chapter 18 to examine the question. [FN167]

Three members of the panel concluded that the amendments to the Magnuson Act were not in conflict with Article XI of GATT, and that only Article III (prohibiting discrimination against foreign products) was potentially applicable. [FN168] Two members did find that there was such a conflict, but even they felt that the size minimum was as much a conservation measure as a trade restriction. [FN169] None of the members of the panel stepped outside the legal bounds of their mandate to examine the effectiveness of the Magnuson Act amendments in preventing depletion of U.S. lobster *95 stocks.

The legalistic tone contrasts greatly with that of Salmon and Herring, one of the only two other Chapter 18 opinions, in which the panel recommended a pragmatic compromise between Canadian fisheries legislation and U.S. fishermen's claims. [FN170] The impact of the advisory opinion is that the U.S. restriction remains untouched. Its likely commercial consequence is that small Canadian lobsters will now be processed in Canada and the lobster meat sold in the United States, resulting in a loss of value added for the United States. [FN171] The binational panel expressed no interest in these economic questions. [FN172]

It is noteworthy that both the United States and Canada exercised peremptory challenges to veto a number of panelists nominated by the other party in this case, perhaps precisely in order to preclude the sort of wide-ranging policy statements that are indeed possible in Chapter 18 opinions. [FN173] An explanation for these peremptory challenges bears on Salmon and Herring, where the compromise recommendation [FN174] was made public (and created political furor) before the Commission could achieve a diplomatic compromise. Clearly, this points to a problem in the Chapter 18 procedures: the publication of a preliminary opinion is likely to set off political fireworks forcing the "losing" side to counterattack.

Lobster, which is the latest published Chapter 18 panel report, may therefore bode ill for the future utility of these proceedings. [FN175] As in Salmon and Herring, the Lobster panel was asked whether an act adopted for purportedly environmental reasons by one of the parties was inconsistent with Article 407 of CUSFTA and as such could be excluded. [FN176] In Salmon and Herring, the panel looked clearly to the spirit of CUSFTA and recommended compromise, while in Lobster the panel narrowed its question to one of discrimination [FN177] and was thus prevented from addressing the larger issue.

IV. Conclusion: Challenges to and Potential of the Binational Panel System

A. Chapter 19 Panels

Clearly, an agreement abolishing "dumping" rules and restricting (or, in the alternative, agreeing to tolerate the gift of) taxpayer subsidies of exported products is the best hope of any free trade agreement. That the negotiators of CUSFTA allotted seven years to achieve this goal speaks eloquently to the impossibility of attaining it in the short time frame allowed by U.S. fast- track approval procedures for CUSFTA or NAFTA. [FN178]

Does the failure to attain this first-best goal make CUSFTA's innovations worthless? One economist at a Canadian left-wing think tank recently evaluated the dispute resolution provisions of CUSFTA in a gloomy light:

What Mulroney really wanted was exemption from countervail, and he didn't get it. All he got was a mechanism that replaced the judicial review in both countries, something that was never really acknowledged to be a real problem anyway. The new mechanism speeds up the process a little but that's about it. To view the binational panel as a guarantee to market access is just a flight of fancy. Unless competition laws are harmonized and unless there is a common code on subsidies, countervail and anti-dumping are going to continue to be a protectionist vehicle for U.S. producers who feel threatened. [FN179]

Contrary to this claim, theoretical considerations and studies of panel cases support the assertion that the Chapter 19 binational review procedure lowers the expected benefit of protectionist measures. It provides a *96 distinct cost advantage for small and medium-sized businesses, which can resort to a relatively expeditious legal forum to neutralize protection that powerful lobbies may have spent much time and effort to obtain. It has produced timely, [FN180] judicious, and nonpartisan opinions. When the political legitimacy of the panel process was challenged, in Pork, a unanimous confirmation of the process resulted. That is certain to cheer prospective Chapter 19 complainants and should embolden future Chapter 19 panels.

The Chapter 19 process has worked smoothly with roster members who share the same language, [FN181] the same basic legal culture (the majority of Chapter 19 roster members must be lawyers), [FN182] and (roughly) the same idea of the appropriate roles of the state and of private initiative in ordering economic behavior. Transplantation of Chapter 19 in a NAFTA context would, it seems, necessitate that an oversight of roster selection be undertaken to ensure that these three characteristics be equally present. This challenge seems difficult but not impossible.

Finally, a recurrent thesis of this Article is that binational panels, like written constitutions, tie the hands of politicians by taking some subjects out of their purview. This is not to be discouraged, even (perhaps) from the politicians' perspective. Many an elected official has informed an irate citizen that, yes, he too is disgusted by such and such a display of (say) "obscene" art, and really wishes that he could ban it, and he would pass a law against it, but, unfortunately, the Constitution protects the rascals who painted it. Somewhat similarly, if the U.S. administration desires (or wishes to be seen to desire) [FN183] free trade, Chapter 19 panels can "take the heat," which would allow politicians to claim to be protectionist by assuaging domestic producers. However, such "protectionist misdeeds" could be undone by bilateral panels they cannot control. This may be one (possibly optimistic) way to understand recent and obviously politically ordered administrative actions such as ITA's ruling on softwood lumber. [FN184]

Chapter 19 has been useful but it has not been devoid of problems. Some of these problems have already been mentioned. One other frequently encountered obstacle is a direct product of the wise decision to use five part- time trade experts as an alternative to one full time (and thus more easily captured) [FN185] adjudicator. It has been challenging for both sides to find panel nominees who do not have some link to one or the other of the participants in the dispute. As governments are typically among the participants in Chapter 19 panels, and as rules of procedure prohibit representation of a participant by a panelist for one year after sitting on a dispute panel, trade lawyers fear that they (or, perhaps worse yet, their firms) may be precluded from doing any government work for one year. Past associations can have long tails, and as there are relatively few specialists in international trade, this can be a big problem. Christopher Thomas, a Vancouver lawyer asked to sit on the first Pork panel, was disqualified because his firm (not he personally) had once done legal work for Alberta hog producers. [FN186] Chapter 19 disputes are expected to multiply (in part due to the public choice reasons alluded to in the previous paragraph) and the current restrictions may one day make it virtually impossible to find qualified practitioners. One alternative (employed more by Canada than by the United States) is to staff panels with trade-oriented academics who are less likely to have professional relationships with the litigants. [FN187] Another proposal is to agree to a core of full-time appointees, supplemented by rosters of ad hoc adjudicators. [FN188] This solution may be more detrimental than beneficial in that permanent appointees are subject to capture by their respective industrial elites, while their part-time adjuncts risk becoming "rubber stamps" for the full-time appointees on the European model. [FN189]

*97 B. Chapter 18 Panels

Chapter 18 panels, to judge by publicly available information, have proven less effectual. [FN190] This might be expected, as Chapter 18's departure from traditional international dispute resolution is less radical. Confidentiality of bilateral talks and the lack of private party standing in Chapter 18 disputes are substantial obstacles to the defense of consumer interests. [FN191] Nonetheless, Chapter 18 at least provides an outlet for political disputes that might otherwise become so acrimonious as to jeopardize the entire Agreement. One measure of this chapter's success is that no "retaliation" has yet been resorted to by either party.

The Chapter 18 resolution process has recently been used to quell the uproar prompted by the "foreign" classification the United States applied to Canadian- assembled Honda automobiles. [FN192] Future candidates for Chapter 18 resolution include Canadian restrictions on the use of allegedly "substandard" U.S. plywood, [FN193] and arcane U.S. determinations of the sugar content of processed Canadian foods (in order to preserve the "strategic" American sugar beet industry). After the rather insignificant disputes concerning lobsters and salmon, the two governments may at last be ready to put Chapter 18 to a real test with one of these more sensitive subjects. It will be interesting to follow the progress of the nonmortgage interest panel.

C. Implications for NAFTA Ratification

To those of us who accept Adam Smith's vision of freedom and prosperity through specialization and trade, the posture of our adversaries in present NAFTA talks is instructive.

In a letter to Ambassador Carla Hills, U.S. House Majority Leader Richard Gephardt (D-MO) and four other prominent House Democrats [FN194] stressed that, as far as they are concerned, any NAFTA agreement must maintain or even strengthen U.S. trade remedies, including countervailing duty and antidumping laws. They found the progress of the CUSFTA working group on dumping and countervail issues "disturbing," and noted that Canadian developments "cannot help but raise those issues to a greater level of prominence in the [NAFTA] negotiations and increase Mexico's demands for substantive changes to U.S. trade laws." [FN195]

Representative Gephardt can do nothing about the CUSFTA working group, whose work is legally mandated. But if his feelings are shared by his Senate colleagues, then U.S. trade legislation will probably continue to be a prime barrier to the efficient flow of goods and services. [FN196] In this light, a strong dispute resolution mechanism can be an effective means of protecting consumer interests in all three countries.

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