The USMCA dispute settlement mechanism has been successful

The significance of the USMCA to the economic vitality of the United States, Canada, and Mexico is aptly described elsewhere in this report. How important is enforcement of the USMCA rules through the dispute settlement mechanism? How should we assess the performance of the USMCA state-state dispute settlement mechanism (DSM) to date?

As a preliminary matter, it is important to understand the context for the dispute settlement chapter negotiations. A common objective for the three negotiating parties was to fix a significant procedural problem with the NAFTA DSM—the ease with which panel formation could be blocked. However, for the United States, an important objective was to craft a DSM that avoided some of the problems and excesses that it saw in the World Trade Organization’s DSM.

With respect to panel formation, the USMCA’s DSM is a success, a significant improvement over NAFTA. Indications are that procedurally speaking, the USMCA DSM is working. Panels are being formed and reports are being issued without significant delay. This is in good part due to the work that went into ensuring that the parties finalized the rules of procedures, code of conduct, and rosters by the time of entry into force of the USMCA.¹ It is important to remember that all this work was done under the first Trump administration.

The United States did in fact obtain modifications to the DSM aimed at avoiding panel overreach, in particular the temptation for panelists to create rules beyond those negotiated by the parties. These are issues at the core of U.S. criticism of the WTO’s Appellate Body.² While the United States considers these modifications improvements to the DSM, others view them as dilutions of the DSM. One commentator has described them as “propos[als] to further weaken the role of authoritative panel adjudication.”³

It is useful to look at the objectives and the actual modifications. A key objective for the USMCA dispute settlement chapter negotiation was to: “Establish a dispute settlement mechanism that is effective, timely, and in which panel determinations are based on the provisions of the Agreement and the submissions of the parties and are provided in a reasoned manner.”⁴ This was amplified in the revised objectives to include: “Provide mechanisms for ensuring that the Parties retain control of disputes and can address situations when a panel has clearly erred in its assessment of the facts or the obligations that apply.”⁵

What did these objectives translate into? They are simple instructions to panelists, but admittedly powerful reminders of the limits of what they are tasked to do. In Article 31.13 (Function of Panels), the following two instructions were added:

Paragraph 2: “The findings, determinations, and recommendations of the panel shall not add to or diminish the rights and obligations of the Parties under this Agreement”; and

Paragraph 6: “The panel shall base its report on the relevant provision of this Agreement, the submissions and arguments of the disputing Parties, and on any information or advice put before it under Article 31.15 (Role of Experts).”⁶

The first addition is straight from the WTO’s Dispute Settlement Understanding. Hardly revolutionary, though a significant concept to reiterate for the USMCA DSM given what has developed in the WTO system. The second is a simple instruction to keep the focus on what the agreement actually provides, and what the disputing parties present as arguments.

Why was this so important to the United States and perceived as a watering down of dispute settlement by others? This is the divide between the United States and many others over state-to-state dispute settlement mechanisms.

On the one hand, you have those who view state-to-state mechanism more like an international court. Panel reports must be “binding” and the mechanism needs to be clear that the losing responding party “must” comply with the findings of a panel. This approach, it is argued, provides the predictability and certainty that makes these mechanisms worthwhile.

However, the United States approaches dispute settlement very differently.⁷ The longstanding view of the United States is that, as a sovereign, you retain the right to decide what to do in the case of a loss. From the U.S. perspective, rather than focusing on whether the system is “predictable,” it is more important that the system be structured in such a way as to deliver an outcome that is credible and trustworthy. This is important because, when faced with the possibility of having to remove or modify a law, regulation, or policy to comply with a panel finding, a government must go through complex domestic legal and political dynamics. Reality dictates that parties will comply where compliance is politically achievable, not because the agreement says results are binding. The results of a credible dispute settlement process are a more powerful incentive to eventual compliance than just because a dispute settlement chapter text says that you must comply. In addition, from the U.S. perspective, a DSM should assist the parties in resolving the issue but not dictate a particular outcome.

As we head into the USMCA review, it is important to remember that it was negotiated under the first Trump administration. At the conclusion of the USMCA negotiations, my colleagues and I in the USTR’s office were pleased with the results.⁸

How has the USMCA DSM worked in practice? In the five years that the USMCA has been in force, panels have completed four state-state disputes.⁹ This might seem a small number, yet under the 25 years of NAFTA only three disputes were finalized.¹⁰ In terms of process, indications are that the procedural improvements in the USMCA dispute settlement chapter are working. Panels have been formed fairly expeditiously, and reports have been issued within a reasonable time and are focused.

In terms of substantive results:

• The United States prevailed in the first dispute against Canada over the dairy tariff rate. Canada amended its regime, the United States filed a second dispute, and the panel found Canada had complied, though the report contained a dissenting opinion.¹¹
• Canada successfully sued the United States over the application of the solar safeguard on Canadian exports. The United States amended its measure consistent with the recommendation of the panel.¹²
• The United States successfully sued Mexico over its ban on genetically modified corn. Mexico removed the ban.¹³
• Canada and Mexico successfully sued the United States over its implementation of the autos rules of origin. Resolution is pending.¹⁴

What does this mean for the future?

Out of four completed disputes, two or three depending on where you sit, have been “resolved” and the relevant party complied. That is positive.

On Canada dairy, I have no doubt that the U.S. dairy industry believes it is being denied benefits. And, I would expect this will be raised in the upcoming USMCA review unsurprisingly given the history of this issue. It is a testament to the complexity of domestic dynamics and how they influence perceptions of panel findings.

On United States autos, that resolution is pending predictably. Autos rules of origin was a contentious issue during the USMCA negotiation and is potentially even more so now. Another issue that is likely to be dealt with in the upcoming USMCA review.

To view this as a failure of the DSM is to expect too much of the system. Parties need to accept that certain issues are not going to be completely resolved through dispute settlement. Dispute settlement is merely a tool, and it has its limits. Sometimes it will serve to simply demonstrate where the rules need improvement. Unless there are clear procedural deficiencies identified in the various proceedings to date, the best way forward is to continue using the mechanism. Make the system work to demonstrate what efficient, timely, and credible dispute resolution mechanisms can look like.