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Five things to know about the Canadian Free Trade Agreement

April 11, 2017

7-minute read

Late last week, federal, provincial and territorial governments jointly celebrated the conclusion of a new internal trade deal they’re calling the Canadian Free Trade Agreement. The CFTA replaces the Agreement on Internal Trade (AIT), which was completed in 1995 and updated a half-dozen times since to respond to business complaints about its usefulness (to them).

On a basic level, then, you could say the CFTA is simply the latest update to the AIT—the result of a process initiated by the former Conservative government a couple of years before the last election. But this makeover is pretty far-reaching and things have never been as simple as the media or business groups imply when they talk about Canada’s so-called internal trade barriers (there are so few it’s almost comical) and how we should get rid of them (in dubious ways that are not that funny at all).

Here’s a five-point crash course in the CFTA.

  1. The alleged costs of internal trade barriers are frequently exaggerated.
Actual examples of significant internal trade barriers are few and far between. Business lobby groups use to trot out instances like Quebec's ban (since removed) on yellow colouring in margarine. Nowadays it’s Quebec’s unpasteurized cheese, which apparently can’t be sold outside la belle province, and apocryphal-sounding stories about “some” truckers having to change their tires when they cross provincial borders.

Because such examples are pretty trivial, lobbyists and libertarians try to come up with big numbers to create a sense of urgency. The media, who also like big headline numbers, are often only too happy to oblige. Back in 2006, a Conservative senator on the banking committee came up with a widely cited estimate that internal trade barriers cost up to $50 billion annually. But when the Canadian Press ran that number through its “Baloney Meter” it found that, on a scale from "no baloney" to "full of baloney," the $50-billion estimate was full of baloney, meaning “the statement is completely inaccurate.”

But the big numbers have resurfaced in a much-quoted report from the very same Senate banking committee. This time they’ve upped the ante by claiming that internal trade barriers cost the Canadian economy between $50 billion and $130 billion a year.

In a more sober appraisal, the Bank of Canada noted last September that “conservative estimates suggest that removing interprovincial trade barriers could add one- or two-tenths of a percentage point to Canada’s potential output annually.” For the record, that’s a one-time boost of between $1.6 and $3.2 billion.

In fact, over the years, most empirical studies have found that the costs of internal trade barriers were small, ranging from 0.05% to 0.10% of GDP. One outlier, a 1991 Canadian Manufacturers’ Association study, suggested that the costs of internal trade barriers were as high as 1% of GDP. While many of these studies date from the 1980s and 1990s, internal trade barriers have presumably been reduced since that time, so the current costs to the economy will be even lower.

A good argument can be made that the CFTA has less to do with reducing internal trade barriers than with implementing international trade obligations. Under Canadian constitutional law, the federal government can negotiate international trade treaties but can’t implement them in areas of provincial jurisdiction. The CFTA solves that problem by getting the provinces to voluntarily bind themselves to the terms of the international deals and making their obligations enforceable within Canada. NAFTA gave us the AIT, and now CETA has given us the CFTA.

  1. Local food policies are toast
In line with CETA, the new CFTA effectively eliminates the ability of provincial, municipal or broader public sector institutions such as schools, universities and hospitals to use their procurement to favour local suppliers or to encourage any kind of local economic development. Public purchasers can still give preferences (of up to 10%) for Canadian suppliers so long as this is consistent with international trade agreements, but they can’t use, or even consider, any conditions in their tenders to increase local economic benefits.

So how does that affect local food purchasing polices? In all provinces except Alberta, New Brunswick and PEI, which have exempted local food, favouring local food in any tender over the $100,000 threshold is forbidden. This is a sad case of overkill and a setback for the budding local food movement, which has been encouraging public bodies to use their purchasing power to give local food and local growers a boost. One wonders if municipalities such as Toronto and Vancouver, which already have such local food policies in place, were asked for their views.

  1. Yes, you can take that nice bottle of B.C. wine home with you
There has been considerable hand-wringing over the exclusion of alcohol and agricultural supply management from the deal. No question, restrictions on taking alcohol across provincial boundaries are annoying. But in most provinces there are pretty liberal personal exemptions. For example, a resident of Ontario can bring home up to three litres of spirits, nine litres of wine and 24.6 litres of beer. If you live in Alberta or Manitoba there are no limits.

In a recent high-profile court case, a New Brunswick man was able to have his conviction for bringing back 14 cases of beer struck down in provincial court. This constitutional challenge, which was funded by the Canadian Constitution Foundation (a charity that backs the controversial legal challenge to B.C.’s restrictions on private health care, and considers the recently enshrined Charter right to strike “a dangerous thing”), is now being appealed to the Supreme Court. Depending on the outcome, the future of provincial liquor monopolies and agricultural marketing boards could be at stake.

Most Canadian citizens understand that policies such as agricultural supply management or liquor monopolies are legitimate regulatory choices. While they may result in costs or lost opportunities for some, they also bring significant benefits. Reframing these policies as “internal trade barriers” muddies the water and short-circuits democratic debate about their merits. Hopefully, the Supreme Court will concur and provide a balanced decision.

  1. The CFTA includes a form of investor-state dispute settlement mechanism
Canada has had a very negative experience with investor–state dispute settlement (ISDS) under NAFTA. We’ve been challenged more times than any other NAFTA party, and many of these challenges are against provincial measures, such as Newfoundland’s regional development policies for offshore oil, an environmental assessment that recommended against a Nova Scotia quarry, and Quebec’s ban on fracking. So you’d think that this is one aspect of international trade deals that Canadian governments would want to avoid in a homegrown deal.

Yet the CFTA includes a person-to-government complaint mechanism that bears some similarity to ISDS. To their credit, the provinces have limited the process in some significant ways. Fines are capped at $10 million for the biggest provinces and prorated for the smaller ones. More importantly, the payouts don’t go to the persons or companies bringing the claim, but into a fund to advance internal trade. This limits gold-digging by complainants and their legal counsel. But the process will still be a boon for trade lawyers, whose legal fees will be covered by the losing party.

Despite the improvements over traditional ISDS, the person-to-government complaint mechanism will almost certainly increase the number of disputes by taking the process out of the hands of governments, who tend to be more cautious in pursuing complaints. The far broader scope of the CFTA will also open the door to more aggressive legal arguments.

There is little need for the machinery of international investment arbitration within the Canadian federation, where we already have a common judicial system and extensive federal-provincial and interprovincial consultative bodies. Including person-to-government arbitration in the CFTA will only lead to further downward pressure on public interest regulation.

  1. Differing regulations are not necessarily a bad thing
It is inappropriate, in a federal system such as ours, to label provincial differences in approaches to environmental protection, regional economic development, public services, consumer protection or other policies and regulations as “internal trade barriers.”

Remember that regulations are created for a reason. While protecting the environment, workers or consumers can increase costs for business it also has significant benefits. Framing regulation as a "trade barrier" that needs to be eliminated is an attempt to make deregulation more politically acceptable.

Thankfully, the CFTA stops well short of forbidding different regulations. Article 400 even states: “Parties recognize the importance of continuing to work toward the enhancement of existing regulatory measures such as consumer and worker protection, health and safety, environmental protection, and the effectiveness of related measures.”

Instead, it opts for a reconciliation process that will discourage regulatory innovation. If a party wants to “to adopt or modify a regulation that may have a significant effect on trade or investment within Canada” it has to give at least 30 days' notice, and let other parties and interested persons comment on the proposed regulation. Fair enough, and there are exceptions for urgent matters.

But if any province, territory or the federal government identifies a regulation as a potential barrier to trade, it can compel others to enter into in a regulatory reconciliation process. This process is mandatory and “shall achieve” a reconciliation agreement. At the end of the day, a government can refuse to submit to a reconciliation agreement entered into by others, but its distinctive regulation must then be listed as an exception to the CFTA.

Amazingly, once an agreement is in place, a government can’t change a reconciled measure “in a manner that circumvents the reconciliation agreement.” Talk about a formula for regulatory inaction and gridlock. Canadians are not well-served by a process that undermines their governments’ constitutional right to regulate in areas of their own jurisdiction.

Under the CFTA, governments adopting or maintaining higher standards can be challenged and compelled to justify them. Meanwhile, the CFTA provides no corresponding or equivalent means to compel those with lower or deficient standards to raise them. Much more so than under the AIT, this is a recipe for harmonization to the lowest common denominator.

Will business lobbies, now they’ve gotten most of what they’ve been pushing for in the CFTA, finally stop complaining about internal trade barriers and get on to other issues like boosting their lacklustre productivity? Don’t count on it. It’s such a great hook (Free My Booze!) for justifying deregulation that we can safely assume the complaints will persist.

Griping about internal trade barriers has become a national pastime - a curious, uniquely Canadian form of self-loathing unsupported by the evidence and divorced from common sense.

Scott Sinclair is the director of the CCPA's Trade and Investment Research Project. 

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