Insights

Update on USMCA Dispute Panel Activity

By: Camille Edwards, Associate
Date: 04/25/2023

The United States-Mexico-Canada-Agreement (“USMCA” or the “Agreement”) was formed to promote growth in North American trade in a way that is beneficial to each of the state parties to the Agreement. However, as with any agreement, disputes can and do arise concerning the interpretation of the USMCA and the responsibilities of the state parties. Dispute resolution panels under the USMCA are an important tool for the parties to clarify obligations and trade rules under the Agreement and ensure that the Agreement remains mutually beneficial to all three parties. This article will provide a brief background on the USMCA dispute resolution panels and discuss the four dispute panels that have been established under the USMCA along with relevant updates.

USMCA Dispute Resolution

The USMCA went into force on July 1, 2020, replacing the North American Free Trade Agreement (“NAFTA”). Background on the USMCA’s development and its provisions can be viewed in our previous article on this topic.

Similar to NAFTA, the USMCA contains dispute resolution provisions that dictate how the state parties should resolve disputes that arise under the Agreement. Chapter 31 of the Agreement provides the procedures for the establishment of a dispute resolution panel when there is a dispute regarding 1) the interpretation of the Agreement, 2) when one party implements or proposes measures that are inconsistent with the terms of the Agreement, or 3) when one party has prevented or impaired another’s ability to reap its benefits under the Agreement.

Before a panel is established, the parties first must engage in consultations and attempt to reach a resolution. If no resolution of the issue can be reached in consultations, a dispute resolution panel made up of five panelists may be established to address the dispute. Under Article 31.6, the complaining party will circulate a written notice of its request to form a panel to the other parties that identifies the issues and the legal basis of its complaint. Panelists are then picked from a roster that includes ten individuals from each of the state parties to the Agreement. Dispute resolution panels will generally consist of a mix of five individuals that are nationals of the disputing state parties.

Under article 31.11 of the USMCA, the disputing parties have the right to provide initial written submissions as well as a rebuttal submission. In addition, the parties have the right to at least one hearing before the established panel. The panel is then required to present an initial report no later than 150 days after the appointment of the last panelist, and unless the parties decide otherwise, a final report is required to be issued no later than 30 days after the presentation of the initial report. After a final report is issued, the disputing parties will have 45 days to agree upon a resolution to the dispute, and failure to implement a resolution can result in the suspension of benefits under the Agreement for the non-complying party.

Dairy TRQ Disputes 1 & 2

On January 31, 2023, the USTR announced that the U.S. would be establishing a dispute settlement panel under the USMCA to challenge tariff rate quota measures that Canada utilizes with respect to imports of dairy products. A tariff rate quota (“TRQ”) is a measure that allows a certain quantity of goods to be imported at a reduced duty rate, while quantities of goods in excess of the quota are subject to higher duty rates. Under the USMCA, Canada is allowed to have TRQs on certain dairy products, including milk and milk powders, cream, and cheeses of all types. However, in a report published in January 2022, a USMCA panel found that Canada failed to comply with its USMCA commitments by reserving a large percentage of each dairy TRQ for exclusive use by Canadian processors. This effectively limited the access U.S. exporters had to in-quota quantities, undermining the value of TRQs that were negotiated under the USMCA.

While the Panel’s decision was counted as a win by the U.S, the matter has yet to be fully resolved. After Canada implemented changes to its dairy TRQ measures, the U.S. argued that the new measures were still inconsistent with Canada’s USMCA commitments. The new challenge to the TRQs has now been slightly expanded to address Canada’s “revised dairy TRQ allocation measures that use a market-share approach for determining TRQ allocations, and impose new conditions effectively prohibiting retailers, food service operators, and other types of importers from utilizing TRQ allocations.” Since the U.S. announced the establishment of the Panel in January, Mexico notified the Panel on February 8, 2023, of its intent to participate as a third party to the dispute. In addition, the U.S. provided its initial written submission to the Panel on March 20, 2023.

While a final report by the Panel should be issued later this year, it is unclear whether a Panel decision will completely resolve the matter. As stated by U.S. Secretary of Agriculture Tom Vilsack, Canada has continued to “fall short of their USMCA obligations by denying U.S. dairy producers and exporters fair access to the Canadian market.”1 Meanwhile, Canada has indicated that it considers its TRQ measures a valid exercise of discretion according to its domestic supply management system. In addition, Canadian Minister of International Trade Mary Ng has stated that Canada will continue to “remain firm against attempts to renegotiate agreements during the dispute settlement panel process.”2 Thus, while the U.S. argues that Canada is breaching its obligations, Canada remains steadfast in its position that it is acting in full compliance with the USMCA. The polarized views of the parties suggest that reaching a practical resolution based on a panel decision, whether it is in favor of the U.S. or Canada, will most likely be a lengthy and unpredictable process.

Automotive Rules of Origin Dispute

On January 11, 2023, the Final Report of the Dispute Settlement Panel on automotive rules of origin was made available to the public. This dispute centered on a disagreement about the interpretation of USMCA provisions regarding rules of origin for vehicles and light trucks set forth in Articles 3 and 4.5 of the Agreement. Under the USMCA, a vehicle or light truck must meet certain Regional Value Content (“RVC”) requirements to qualify for preferential tariff treatment. To calculate the RVC of a finished vehicle, Mexico and Canada argued that non-originating materials used in vehicle parts that were considered “originating” under USMCA rules did not need to be factored in as a percentage when calculating the overall RVC of the final product. In contrast, the United States argued that the USMCA rules required that the non-originating percentage of parts should be considered in the RVC calculation of the final good. As such, the U.S. interpreted the USMCA rules of origin in a much stricter way compared to Canada and Mexico, making it more difficult for automakers to qualify for preferential tariff treatment.

The Panel rejected the U.S. interpretation, siding in favor of Canada and Mexico. Accordingly, auto-groups and officials from Canada and Mexico have characterized the Panel’s decision as a win for the automotive industry and an indication that the USMCA’s dispute resolution mechanisms work properly.3 However, while the U.S. has acknowledged its loss in the dispute, it has made no formal announcement about measures it will take to comply with the Panel’s decision. If the U.S. fails to reach a resolution with Canada and Mexico and appropriately comply with such resolution, it could face a suspension of benefits under the USMCA. Like Canada in the dairy TRQ dispute, if the U.S. fails to resolve the issue in a manner satisfactory to the other USMCA parties, the United States could be subject to further dispute resolution processes.

Solar Safeguard Dispute

A Final Panel Report was issued on February 1, 2022 on a dispute between Canada and the United States over U.S. tariffs imposed on Canadian solar products. Although the United States implemented the solar tariffs at issue while NAFTA was still in effect, Canada argued that its claims could be heard by the USMCA Panel because the tariffs constituted on-going conduct by the U.S. that violated the provisions of the USMCA when it came into effect. While the USMCA allows for safeguard measures to be implemented in certain circumstances, Canada argued that the solar product imports did not contribute to any serious economic injury to the U.S. and thus could not be subjected to the safeguard measures employed by the U.S.

The Panel decided in favor of Canada by finding that it did have jurisdiction over Canada’s claim even though the tariffs at issue were initially implemented under NAFTA. In addition, the Panel found that the tariffs imposed on Canadian imports by the U.S. were not proper safeguard measures and constituted an increase in tariffs on Canada that was impermissible under the USMCA.

Unlike the dairy TRQ disputes and the dispute on automotive rules of origin, the Solar Safeguard Dispute did result in a formal resolution between the parties. On July 8, 2022, Canada and the U.S. issued a Joint Memorandum of Understanding detailing their agreement on solar product tariffs in light of the Dispute Settlement Panel’s Final Report. Under the signed agreement, the U.S. lifted its tariffs on Canadian solar product imports, but retained the right to impose the tariffs again if Canadian imports rose to levels that undermined the effectiveness of U.S. safeguard measures for solar products.

The Solar Safeguard Dispute demonstrates that the USMCA dispute panel mechanism can be useful in efficiently and effectively resolving disputes that arise under the USMCA. However, it also displays a sharp contrast to the three other dispute panel cases that have not involved timely resolution agreements. The most recent dairy TRQ and automotive rules of origin disputes demonstrate that the power of the dispute resolution panels under the USMCA may be curbed when state parties fail to agree on lasting resolutions after a panel decision. The U.S. heavily depends on trade with Canada and Mexico, and measures taken under the Agreement, or a party’s failed compliance with the Agreement, can have serious impacts on exporters, producers, farmers, and workers. Thus, it will be important to not only monitor the decisions of dispute resolution panels established under the Agreement but to continually monitor how the state parties react to the decisions and work together to implement practical resolutions.


 

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Torres Trade Law will continue monitoring the on-going USMCA disputes and related actions that are taken by the U.S., Canada, and Mexico. If you have any questions on the USMCA or the disputes discussed above please feel free to contact the attorneys at Torres Trade Law, PLLC.

1 U.S. Establishes Second USMCA Dispute Panel on Canada Dairy TRQ Policies, Fas.USDA.gov: Newsroom (January 31, 2023), https://www.fas.usda.gov/newsroom/us-establishes-second-usmca-dispute-panel-canada-dairy-trq-policies.

2 Statement by Minister Ng on U.S. Request for Dispute Settlement Panel On Tariff Rate Quotas for Canadian Dairy Products Under Canada-United States-Mexico Agreement, Global Affairs Canada (January 31, 2023), https://www.canada.ca/en/global-affairs/news/2023/01/statement-by-minister-ng-on-us-request-for-dispute-settlement-panel-on-tariff-rate-quotas-for-canadian-dairy-products-under-canada-united-states-me.html.

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