Does NAFTA (North American Free Trade Agreement) Chapter 19 make a difference? Dispute settlement and the incentive structure of U.S./Canada unfair trade petitions

KENT JONES [*] NAFTA Chapter 19 sets up bilateral review panels to replace the domestic judicial appeals process of resolving disputes among NAFTA members over the enforcement of unfair trade laws. In principle, such panels can change the incentive structure of filing unfair trade law petitions by reducing the likelihood of an affirmative finding of injurious unfair trade. Using data from U.S. and Canadian unfair trade petition filings, empirical tests show support for this hypothesis. However, a more comprehensive settlement of conflicts will require progressive legal integration, including an extension of national treatment measures to alleged "unfair trade" that is not currently envisaged under the NAFTA. (JEL F13, F15) I. INTRODUCTION The use of unfair trade laws has become one of the thorniest issues in trade relations, and has resulted in many acrimonious trade disputes between the United States and Canada in particular. As a result, the resolution of trade disputes based on allegations of dumping and subsidization became an important negotiating issue during the Canada-U.S. Free Trade Association (CUSFTA) negotiations, and later the North American Free Trade Association (NAFTA) negotiations. The negotiations resulted in the establishment of a new dispute settlement system, contained in Chapter 19 of the CUSFTA, later adapted to the NAFTA, for disputes over unfair trade law determinations. Under Chapter 19, a binational panel of experts reviews the decisions of government agencies in such cases and renders judgments on their validity under applicable national laws. The first panel convened in 1989, and since then over 70 panels have reviewed disputed unfair trade law decisions, some of which have forced significant revisions in administ rative determinations. The present study sets out to determine if Chapter 19 has altered the incentive of domestic firms to file unfair trade cases against imports. It is in this effect that some of the important economic consequences of unfair trade laws occur, since the mere initiation of an investigation can have a significantly chilling effect on trade (Prusa 1992). Sections II and III review the elements of unfair trade law enforcement. Section IV then examines the basic operation of Chapter 19 and its impact on the institutional structure of unfair trade law administration. These considerations then lead to the empirical modeling of section V. Section VI offers an outlook for further research and possible policy developments. II. BACKGROUND: UNFAIR TRADE LAW ADMINISTRATION IN THE US AND CANADA Antidumping (AD) and countervailing duty (CVD) laws regulate foreign private pricing and public subsidies as they pertain to imports. The trade policy rules for such domestic laws are contained in the General Agreement on Tariffs and Trade (GATT), Article 6. In an AD case, a domestic petitioner seeks protection from imports that are allegedly priced at "less than fair value" and that injure the domestic industry. A definitive AD order requires evidence that (1) the imports have violated the pricing rule and (2) the dumped goods are a cause of material injury to the domestic industry. A pricing violation occurs when the product is sold at an import market price less than the exporter's domestic price or the price at which the same product was sold in a third market. In other (increasingly frequent) cases, the pricing violation occurs when the product is sold at a price below the constructed average unit cost. A CVD case is based on an allegation that imports enjoy the benefit of a foreign government subsidy and injure the domestic industry. A CVD investigation also typically has two parts: (1) determination of a specific, trade-distorting subsidy margin in the price of the imported good, and (2) a determination of material injury. AD cases can be suspended in exchange for a "price undertaking," that is, an agreement to raise prices sufficiently to eliminate the dumping, and CVD cases can be suspended in exchange for an agreement that eliminates the subsidy benefit on the traded good. …