International law and domestic institutions: reconciling North American "unfair" trade laws.

Whereas much has been written about how international institutions may facilitate cooperative behavior among nations, less attention has been paid to such institutions' domestic political purposes. This essay focuses on the purposes international organizations serve for policymakers at home. It concentrates on the less studied side of two-level games analysis, thereby developing a domestic logic for membership in international institutions.(1) Instead of envisioning domestic politics as a constraint upon those nations that enter into international agreements, signing an agreement is suggested to be a strategy whereby domestic actors further their own interests. Here, the answer to a commonly asked question of why nations would agree to specific rules of international conduct is that these rules present a solution to a domestic problem.

The empirical portion of this article centers on the dispute-settlement procedures that appear in the North American Free Trade Agreement (NAFTA) but date initially to the 1988 Canadian-U.S. Free Trade Agreement (FTA). In this initial treaty Canada and the United States agreed to establish rotating binational boards to hear appeals on particular trade matters. The resultant autonomy these boards displayed is theoretically counterintuitive, given the relative power of the two nations and the boards' limited mandate. The boards not only ruled repeatedly in a pro-Canadian manner but also significantly changed the way the U.S. bureaucracy responded to petitions for protection against Canadian products, even in the absence of a change in domestic law. (As of this writing, only two trade panels have been organized under NAFTA rules. The logic here applies as well to these cases.) Below I argue that the explanation for anomalous U.S. behavior resides in the structural relationship between the President and Congress and in presidential interests in international oversight of his own bureaucracy.

This inquiry is organized around two general questions stemming from the empirical case study. First, how did a weak international institution with no sanctioning power lead to a significant change in the behavior of the U.S. bureaucracy, even without a change in domestic law? Second, assuming rational behavior, why would the United States bind itself to an international agreement in which the distribution of gains went to the weaker party? After a brief review of the history of the FTA, I examine each of these questions in turn.

FTA and administered protection

Canada and the United States have long been each other's best trading partner. In 1991, trade between the two countries reached $176 billion, $91 billion in exports from Canada and $85 billion in exports from the United States. The relative importance of this trade, however, is not symmetric. The United States accounts for almost 80 percent of all Canadian exports, while Canada buys only 25 percent of total U.S. exports. By one estimate, the bilateral trading relationship is fifteen times as important to Canada as it is to the United States.(2)

Given the magnitude of this dyadic relationship, the conclusion of the FTA in 1989 was no surprise. The agreement eliminated all tariffs on bilateral trade over ten years, opened up government contracts to competitive bidding, and barred many border restraints on bilateral energy trade. Most innovative, however, was the creation of a dispute-settlement procedure regarding the adjudication of domestic trade law in each country. For the first time, each nation agreed to international arbitration of trade disputes.

In large part, Canada originally envisioned the FTA as a mechanism to reform aspects of existing U.S. trade law. The origins of this idea can be traced to the Macdonald Report. The Macdonald commission, formally named the Royal Commission on the Economic Union and Development Prospects for Canada, was assembled in late November 1982 by Liberal Prime Minister Pierre Elliott Trudeau. Its chair, Donald Macdonald, was charged with devising an agenda for economic and regional policy in Canada. The commission conducted hearings, commissioned reports, and received written and oral testimony on Canada's economic future. The final report covered a wide breadth of issues from electoral reform to labor relations. But of all issues covered, that of trade with the United States gained the most attention. The report recommended an agreement with the United States so as to both extricate Canada from the threat of U.S. protectionism and create an incentive for Canadian industries to be more competitive. In Macdonald's words:

Although the U.S. is already our largest trading partner . . . we cannot count on continued growth. Tariff barriers between the two countries have been sharply reduced. . . . [But] a greater threat to us are non-tariff barriers against Canadian goods. Existing U.S. trade legislation already allows U.S. companies to harass their foreign competition constantly. The provisions include countervailing duties against subsidized imports, anti-dumping duties, emergency relief from seriously injurious imports, retaliations against "unfair" trade practices and reliefs from imports deemed prejudicial to U.S. national security. . . . Only by negotiating a free trade deal with the U.S. can we assure our future as a trading nation.(3)

Even before the release of the final commission's report in September 1985, Conservative Prime Minister Brian Mulroney initiated discussions with President Reagan on bilateral trade issues. The first meeting between the two, the Shamrock Summit, took place in Quebec City in March 1985. The goal of that engagement was "to establish a climate of greater predictability and confidence for Canadians and Americans alike to plan, invest, grow and compete more effectively with one another and in the global market."(4) As a result, both sides commissioned reports, to be completed within six months, on how to eliminate existing trade barriers and resolve bilateral trade disputes.

In 1985, public support in Canada for a formal trade agreement was widespread. In May, Canada's Conference of Western Premiers called for bilateral negotiations to liberalize trade over the next ten years. In August, premiers of the ten provinces met at their regular Premiers' Conference, and nine of the ten endorsed the notion of an agreement. In September, the Macdonald Report was issued along with seventy-two volumes of research studies. When Mulroney opened Parliament and announced that he would approach the United States to begin negotiations on a free trade accord, he was echoing the sentiment of the majority of Canadian leaders.

Long a defender of free trade, President Reagan announced his intention to conclude a trade agreement under fast-track procedures on 10 December. (Fast-track authority delimits congressional involvement to a veto within sixty days of a President's announcement that he will conclude an agreement and is a promise to bring the treaty's implementation legislation to a vote under a closed rule.) Of all the items of concern to the agreement negotiators, the reconciliation of Canadian and U.S. unfair trade laws was the most difficult. Although a senior and experienced negotiator, Simon Reisman found his U.S. counterpart, Peter Murphy, both uninterested and unwilling to put U.S. trade law on the agenda.(5)

The continuing problems posed by unilateral U.S. protectionism were apparent to Canadian negotiators from the start. FTA discussions began in May 1986 on the eve of the announcement of raised duties on wood shakes and shingles. The duties were partially a response to pressure mounted by the Senate Finance Committee, whose 10 to 10 vote on fast-track authority indicated organized resistance to a treaty. This was followed two months later by Congress's agreement to subsidies for U.S. wheat farmers on a proposed sale to the People's Republic of China and the Soviet Union - two of Canada's largest customers. Then in October, the U.S. Commerce Department ordered a 15 percent tariff hike on Canadian lumber to compensate for low Canadian stumpage fees. As the U.S. Commerce Department noted in defending its assessment of still another countervailing duty, this one against Canadian exporters of groundfish, U.S. actions were not oriented toward undercutting efforts at achieving an agreement but toward creating a "level playing field" in the American market.(6)

Eighteen months after negotiations began, the two sides came to an agreement.(7) In the preceding months, Canadian frustration had been great, leading Reisman to break off the talks shortly before the October 1987 deadline - only ninety days before the expiration of U.S. fast-track authority. A final agreement was concluded only after the intercession of U.S. Secretary of State James Baker and Special Trade Representative Clayton Yeutter. In terms of redress from unfair trade laws, the FTA provided Canada with some protections against tariffs in cases in which it was the tertiary supplier. Only if imports from Canada were substantial and constituted a serious threat to domestic producers would Canada be affected by a decision rendered against the primary exporter. The two countries also agreed to consult before imposition of emergency trade remedies and to allow either side to ask a new bilateral trade commission to resolve disputes over the interpretation of the agreement.

More unusual in the agreement was the provision of binational panels to decide whether an administrative decision in an antidumping (AD) or countervailing duty (CVD) case …