The fate of a NAFTA deal between the U.S. and Canada could hinge on the same issue that almost killed the countries’ first trade pact a generation ago -- dispute panels that the Trump administration wants to eliminate.

Canada restarted talks in Washington this week by trying to preserve the so-called Chapter 19 anti-dumping panels in the North American Free Trade Agreement, three Canadian officials familiar with talks said, speaking on condition of anonymity because discussions are private. Canada cited its ongoing disagreement with the U.S. over allegations it dumps lumber into America as a reason to keep the panels, they said.

Dispute panels are one of Canada’s biggest sticking points left in talks to modernize the 24-year-old deal. The U.S. and Mexico on Monday agreed on terms of their own, including changes to rules for carmakers, and Canada has rejoined face-to-face discussions to preserve NAFTA as a three-country deal after sitting more than a month on the sidelines.

One U.S. official said it’s not certain whether America will budge on its demand to end the panels. But leaders on both sides, including President Donald Trump, have expressed optimism over the general direction of talks since Canada rejoined this week.

Trade-Off Time

A breakthrough may require a tradeoff between the two nations. The U.S. wants concessions on Canada’s protected dairy market and Canada is prepared to offer some, two officials said. While other hurdles remain, an agreement where America softens its demands on dispute panels in return for access to Canada’s dairy market may resolve two of NAFTA’s core remaining issues and pave the way for a deal. Another key issue is U.S. tariffs on steel and aluminum imports, though it’s unclear whether relief from those will be included.

NAFTA currently contains three chapters with so-called dispute-resolution mechanisms in a range of cases, such as company complaints or anti-dumping disputes. The U.S. wants to preserve one category, weaken a second and eliminate the third -- the so-called Chapter 19 that addresses anti-dumping and countervailing duty cases. It often deals with disagreements over lumber and other forestry products, as well as pork and steel.

Mixed Views

The U.S. says the panel overrides the American court system and its sovereignty. Ottawa sees it as a crucial independent protection from having disputes mired in U.S. courts.

Canadian views are mixed on how widely needed the panels are. Derek Burney, a former Canadian ambassador to Washington who was involved in trade talks with the U.S. a generation ago, said the provision is crucial.

“It’s the only check we have, the only brake we have on arbitrary, capricious actions by the U.S. system,” he said in an interview. “When you’re dealing with a country 10 times your size, you don’t have a lot of leverage.”

Peter Clark, a trade consultant and president of Ottawa-based Grey, Clark, Shih & Associates, said Chapter 19 is worth a lot to Canadian exporters, but that recent trade victories through other channels “are examples of how the system can work.”

‘Very Intense’

For example, the U.S. International Trade Commission, an independent federal agency, this week scrapped the Commerce Department’s duties on uncoated groundwood paper from Canada, saying the shipments don’t threaten American producers.

Canada’s Foreign Affairs Minister Chrystia Freeland, who is leading negotiations for her country, has declined to get into details of talks. “We’ll come back and review and just keep on working,” Freeland said in Washington Thursday. “This is a very, very intense set of conversations and I continue to feel that there is a lot of good will on all sides.”

Despite citing it in defense of Chapter 19, Canada is not seeking to resolve the softwood dispute or U.S. tariffs on Canadian lumber shipments as part of NAFTA talks this week, the Canadian officials said. The disagreement is seen as a separate issue, they said.

Canada is the world’s largest softwood lumber exporter and the U.S. is its biggest market. The spat reignited in November 2016 when the U.S. lumber industry filed a petition asking for duties, alleging Canadian wood is heavily subsidized and imports were harming American mills and workers. The U.S. applied tariffs to Canadian shipments in 2017.

--With assistance from Jen Skerritt and Debra Mao