Internal Trade in Focus: Ten Ways to Improve the Canadian Free Trade Agreement

The Study In Brief

The recent pandemic has highlighted just how economically interdependent Canadians are with one another, and the extent of the nation’s intertwined domestic supply chains. As the economy re-opens, and with global protectionism looming, interprovincial trade barriers take on heightened significance.

Modern barriers to trade often consist of minor variations in regulations and processes that amount to a tyranny of small differences – different rules for truck weights, construction, health and safety, upholstered goods, drug scheduling or food labeling, to name a few. Some progress has been made. For instance, by way of the CFTA, Canada’s governments are close to a ground-breaking provisional agreement on harmonized construction codes.

Economic estimates suggest that Canada’s GDP would grow 4 percent by eliminating internal trade barriers, and that the patchwork-nature of the Canadian regulatory landscape imposes the equivalent of a near 7 percent tariff on goods crossing provincial boundaries. That being said, some trade barriers are an incidental result of legitimate and worthwhile government regulation.

The main focus of this Commentary is on improving access to justice under the CFTA through reforms to the dispute resolution mechanism. Adversarial litigation plays an important role in domestic trade liberalization efforts, even if the heavy lifting is done chiefly through extensive and exhaustive inter-governmental reconciliation.

First, a loser-pays principle for allocating dispute panel operational costs in a successful claim would significantly improve access to the dispute mechanism for individuals and small businesses. Second, the text of the CFTA leaves ambiguous whether monetary penalties awarded to private parties are enforceable in domestic courts. Any such funds go to an Internal Trade Advancement Fund, rather than to successful private parties themselves: making these awards enforceable would further ensure that member governments comply with their CFTA obligations. Third, successful private complainants at the panel and appellate stages should be able to tap into the Internal Trade Advancement Fund to defray the cost of launching their claims. The benefits of a successful CFTA adjudicatory outcome are a public good, meaning a sub-optimal number of claims will be launched. Companies, persons and other governments who did not participate in the litigation (and thus did not bear any cost) stand to reap the benefits stemming from the removal of CFTA-infringing measures. To further mitigate this, CFTA policymakers should consider an opt-in scheme whereby mutually agreeable governments consent to allowing complainants to themselves keep any monetary penalties awarded.

In the same vein, the study argues for reforms that expand the role of the CFTA Secretariat, and identifies best practices for the CFTA’s novel Regulatory Reconciliation and Cooperation process. This study also offers reforms drawn from the examination of one regional trade agreement, the New West Partnership Trade Agreement (NWPTA), which has certain features that are superior to the CFTA. This study proposes 10 reforms to the CFTA that would enhance its effectiveness in promoting internal trade in Canada.

Introduction

When railroad financier Donald Smith drove the last spike into the Canadian Pacific Railway in 1885, he may have helped establish the physical means of commercial interconnectivity, but true realization of national economic unity would remain elusive.

Now, 135 years later, the recent pandemic has highlighted just how economically interdependent Canadians are with one another, and the extent of the nation’s intertwined domestic supply chains. As the economy re-opens after COVID-19, interprovincial trade barriers take on heightened significance.

Frustrated with the prevalence of internal trade barriers, Canadian politicians had tried to achieve greater economic integration by way of constitutional reform in 1992 through the Charlottetown Accord. When this effort failed, politicians passed the proverbial baton to a dedicated group of government officials, who negotiated and implemented the Agreement on Internal Trade (AIT), which came into effect on July 1, 1995. Every Canadian government agreed to a comprehensive set of trade obligations covering practices that included many that fell within provincial spheres of competence, along with a dispute settlement mechanism. Arguably, intergovernmental consensus on this scale in Canada was unheard of at the time.

The AIT helped Canadians make genuine progress in accessing procurement markets and having their qualifications more easily recognized in provinces other than their own. Still, it left many barriers unaddressed, despite early promises and 14 rounds of amendments. Meanwhile, in some ways Canada’s international trade agreements left the AIT in the dust, hampered as it was by a relatively weak institutional structure, including its muted dispute settlement mechanism, and coverage limited to a fairly static “positive list” of what was liberalized. The latter increasingly contrasted with the more dynamic negative list approach (wherein everything is liberalized that is not expressly excluded from the negative list) that had become the norm in Canada’s international trade agreements.

Canadian governments once more took up the mantle, and began renegotiating in 2014. In 2017, the AIT was officially terminated, and the Canadian Free Trade Agreement (CFTA) took its place. The CFTA has existed for scarcely three years, and the overall program of internal trade agreements is but a quarter of a century old. Dispute panels have convened only 15 times to resolve legal arguments, all of which came under the AIT – not a single case has been brought under the CFTA. This Commentary recognizes that the national project of internal trade liberalization through trade agreements is still under construction. The new provisions that came online through the CFTA need time to work themselves out and bear their fruit. In a spirit of humility, this Commentary makes a set of recommendations for Canadian policymakers as they continue their nation-building work on behalf of all Canadians.

The chief focus of this Commentary is on improving access to justice under the CFTA through reforms to the dispute resolution mechanism. In the same vein, the study discusses an expanded role for the CFTA Secretariat, and best practices for the CFTA’s novel Regulatory Reconciliation and Cooperation process. This study also identifies insights offered by one regional trade agreement, the New West Partnership Trade Agreement (NWPTA). Over the course of the discussion, the study proposes 10 reforms to the CFTA that would enhance its effectiveness in promoting internal trade in Canada (listed in online Appendix A).

Part I: Framing the Conversation about Canada’s Trade Barriers

Internal trade barriers divert economic resources away from their most efficient uses. Restrictions imposed on the movement of goods, services, people and investments across domestic borders curtail the enterprise of individual Canadians and Canadian businesses. Barriers to trade often consist of minor variations in regulations and processes that amount to a tyranny of small differences,¹1 Term used by the Honourable Perrin Beatty, President and CEO of the Canadian Chamber of Commerce, before a Senate Open Caucus, October 17, 2018. whether it be different rules for truck weights, construction, health and safety, upholstered goods, professional qualifications or food labeling, to name a few.

Some progress has been made. By way of the CFTA, the provinces are close to a provisional agreement on harmonized rules for construction codes. Plus, the federal government has removed a final federal barrier to ease the flow of beer, wine and spirits across provincial and territorial boundaries. However, it’s up to the provinces and territories to enact changes that would allow for direct-to-consumer sales of alcohol across Canada. In Ontario, for example, a consumer would run afoul of the rules by ordering BC wine online, rather than ordering through the Liquor Control Board of Ontario.

Recent economic estimates suggest that Canada’s GDP would grow 4 percent with the elimination of internal trade barriers, and that the patchwork-nature of the Canadian regulatory landscape imposes the equivalent of a near 7 percent tariff on goods crossing provincial boundaries.²2 See Jorge Alvarez, Ivo Krznar and Trevor Tombe. 2019. “Internal Trade in Canada: Case for Liberalization,” Working Paper 19/158, International Monetary Fund. See also B.J. Siekierski, “Interprovincial Trade Barriers Equal 6.7 per cent tariff: StatsCan Report,” iPolitics (Sept 15, 2017) at < https://ipolitics.ca/2017/09/15/interprovincial-trade-barriers-equal-6-7per-cent-tariff-statscan-report/> (accessed Nov 2, 2019).

Other arguments for liberalized domestic trade policy extend beyond the insights of economic models.³3 For empirical economic research, see generally Delina E. Agnosteva, James E. Anderson, and Yoto V. Yotov. 2014. “Intranational trade costs: Measurement and aggregation,” National Bureau of Economic Research No. w19872. Lukas Albrecht & Trevor Tombe. 2016. “Internal trade, productivity and interconnected industries: A quantitative analysis.” Canadian Journal of Economics/Revue canadienne d’économique 49:1: 237. Patrick Grady and Kathleen Macmillan. 2017. “InterProvincial Barriers to Internal Trade in Goods, Services and Flows of Capital: Policy, Knowledge Gaps and Research Issues.” Working Paper, Industry Canada, Ottawa. John Whalley. 1983. “Induced Distortions of Interprovincial Activity: An Overview of Issues” in Michael Trebilcock et al., eds., Federalism and the Canadian Economic Union. Toronto, Ontario Economic Council. Eugene Beaulieu and Mustafa Rafat Zaman. 2019. “Do Subnational Trade Agreements Reduce Trade Barriers? Empirical Evidence from Canadian provinces.” Canadian Pub. Pol. 45(1):1-15. Instead of focusing on the numbers, they invoke Canadian expectations of nationhood, as well as ideals such as equality and autonomy.⁴4 David Schneiderman. 1995. “Economic Citizenship and Deliberative Democracy: An Inquiry into Constitutional Limitations on Economic Regulation.” 21 Queen’s L.J. 125, at p. 128. See also Bryan Schwartz. 2002. “Lessons from Experience: Improving the Agreement on Internal Trade.” 2 Asper Rev. Int’l Bus & Trade L. 273, at 303-04. Support for economic unity is often intertwined with notions of national identity. 

These arguments for the “tearing down” of all trade barriers, however, if taken to their extreme, would destroy the federal fabric of Canada. The elimination of every trade barrier is the elimination of regulatory autonomy and experimentation. Each of Canada’s 13 sub-national jurisdictions are legislative laboratories, where governments test different forms of policy and consider the trials of other jurisdictions to discern its optimal form. Additionally, Canada’s 38 million people are spread across the world’s second-largest country by land mass. They face a diversity of challenges that require locally tailored approaches, and provincial legislation will – and must – manifest these differences.

While trade irritants may be a topic of general concern, policymakers should (and do) focus their attention on a specific subset: unjustifiable trade barriers. This Commentary recognizes the need for provinces and territories to be able to enact laws that address sufficiently important local concerns but which may incidentally create an obstacle to the flow of commerce. The Canadian project demands decentralized policymaking in certain arenas.

Redress of internal trade barriers has been an ongoing initiative since the time of Confederation.⁵5 See P.B. Waite, The Confederation Debates in the Province of Canada, 1865, (Montreal: McGill-Queen’s University Press, 2006) at 44-46 (Hon. George Brown speaking to Parliament on February 8, 1865). Drafted as a part of the Constitution itself in 1867, section 121 ostensibly enshrines complete free trade for goods in Canada.⁶6 Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, s 121. [henceforth “Constitution Act, 1867”]. It provides as follows:

“All Articles of the Growth, Produce, or Manufacture of any one of the provinces shall, from and after the Union, be admitted free into each of the other Provinces.”

However, the Supreme Court’s jurisprudence of section 121 reveals a narrowed interpretation of this constitutional obligation. In the 2018 case of R v. Comeau, the most recent decision of the nation’s highest court on the meaning of section 121, the Supreme Court expanded the scope of section 121, but still stopped short of making it equivalent to unfettered free trade.⁷7 R. v. Comeau, 2018 SCC 15. The Court provided that a trade barrier does not violate section 121 so long as it carries a primary purpose of something other than the restriction of trade.⁸8 Comeau, at para 111.

The Supreme Court had good reasons to refrain from interpreting section 121 as a call for complete and unfettered free trade. An absolute free trade constitutional obligation would make impossible the ability of governments to regulate and legislate in the best interests of their electorates. Provincial public-health driven prohibitions and environmental controls would have faced immediate invalidation if section 121 carried such a firm meaning.⁹9 Comeau, at para 3. Comeau echoes a long-standing reluctance of the Supreme Court to accord section 121 broad powers.¹⁰10 See Gold Seal Ltd. V. Dominion Express Co., 62 S.C.R. 424 (whether the amendments to the Canada Temperance Act were violative of section 121); Atlantic Smoke Shops Ltd. v. Conlon and Attorney-General for Quebec, [1941] S.C.R. 670 (whether a retail sales tax on tobacco sold within the province violated s. 121); Murphy v. C.P.R., [1958] SCR 626 (whether restrictions on the shipment of wheat out-of-province violated s. 121); Reference Re Agricultural Products Marketing, [1978] 2 S.C.R. 1198 (whether certain restrictions on the interprovincial movement of eggs violated section 121).

In 1992, aware of the limited power of section 121 to liberalize internal trade, Canadian governments tried to strengthen that provision as part of the Constitutional reform attempt of the Charlottetown Accord.¹¹11 See Christopher P. Manfredi and Michael Lusztig. 1998.“Why Do Formal Amendments Fail? An Institutional Design Analysis.” World Politics 50:3: 377–400 at p.386. When this failed, politicians shifted to an internal trade agreement to help achieve the same ends. Canadian governments came together and implemented the Agreement on Internal Trade (AIT) in 1995, which would tackle those obstacles to interprovincial trade that might otherwise survive constitutional challenge, but which nonetheless injured interprovincial trade flows.¹²12 Agreement on Internal Trade – Consolidated Version, online: Agreement on Internal Trade < https://www.cfta-alec.ca/wpcontent/uploads/2017/06/Consolidated-with-14th-Protocol-final-draft.pdf> (accessed 1 September 2019) [henceforth, “AIT”]. From 2014 to 2016, Canadian governments re-negotiated the AIT, culminating in its termination in 2017, and its replacement by the Canadian Free Trade Agreement (CFTA).¹³13 Canadian Free Trade Agreement - Consolidated Version, online: Canadian Free Trade Agreement < https://www.cfta-alec.ca/ wp-content/uploads/2017/06/CFTA-Consolidated-Text-Final-Print-Text-English.pdf >, (accessed 1 September 2019) [henceforth, “CFTA”]. See also CFTA Art. 1211.

The CFTA, as did the AIT, imposes a set of internal trade rules on Canadian governments. The Agreement also provides for a dispute resolution process, which allows a panel to hear claims that a party has violated its obligations under the Agreement. These obligations do not carry the force of law, and CFTA provisions do not displace constitutional obligations.¹⁴14 CFTA Art. 1200. In addition to this overarching national Agreement, the CFTA also contemplates and provides for the creation of supplemental bilateral or multilateral agreements amongst parties to the CFTA.¹⁵15 CFTA Art. 1203. One such manifestation of a regional trade agreement (RTA) is the New West Partnership Trade Agreement (NWPTA), to which British Columbia, Alberta, Saskatchewan and Manitoba currently belong.¹⁶16 New West Partnership Agreement, online: New West Partnership Agreement < http://www.newwestpartnershiptrade.ca/pdf/ NWPTA_Jan_1_2019.pdf>, (accessed 1 September 2019) [henceforth, “NWPTA”]. The use of a politically negotiated agreement to inculcate further Canadian economic unity came at a time when trade policy and multilateral agreements were in aggressive ascendancy.¹⁷17 G. Bruce Doern and Mark Macdonald. 1999. Free-Trade Federalism: Negotiating the Canadian Agreement on Internal Trade. Toronto: University of Toronto Press, at p. 11. The choice of a political agreement was heavily influenced by the forces of international globalization and the recently completed multilateral trade and investment agreements amongst sovereign states such as the General Agreement on Tariffs and Trade (GATT) in 1994 and the North American Free Trade Agreement (NAFTA) in 1993. 

With the passage of time and 25 years of experience with political agreements as a means to redress internal trade barriers, it is possible to consider some of that regime’s strengths and shortcomings.

This Commentary advances several reforms for the CFTA, mainly in respect of its dispute resolution mechanism. Adversarial litigation plays an important role in domestic trade liberalization efforts, even if the heavy lifting is chiefly done through extensive and exhaustive interprovincial reconciliation. In numerous interviews with internal trade policy specialists, respondents repeatedly stressed that most trade irritants arise from the complex diversity of Canada’s regulatory landscape.¹⁸18 Confidential interviews conducted during 2018, 2019 and 2020. Anonymity was sought by and granted to many interviewees in the course of research for this Commentary. It allowed for fuller, more frank, discussions about internal trade. They will require extensive reconciliation, now facilitated by the institutionalized Regulatory Reconciliation and Cooperation (RCT) procedure.¹⁹19 CFTA Chapter 4.

Notwithstanding the primacy of intergovernment dialogue, the dispute mechanism plays a crucial role in Canada’s internal trade regime. It provides a rules-based process to resolve disputes, giving Canadian governments an outlet other than ugly trade wars. It also helps mitigate the imbalances of stronger and weaker provinces and territories, such that rules – rather than relative power – determine outcomes. Dispute resolution also serves as a backstop for issues that go unresolved at the conclusion of attempted reconciliation. And for private parties accustomed to norms of democratic accountability in the Canadian legal landscape, the dispute resolution mechanism offers an additional means to ‘check’ government regulation against Agreement obligations.

The reforms I propose frame access to the CFTA dispute mechanism as a matter of access to justice, particularly for smaller businesses. The pursuit of fairness and the entrenchment of legal rights drives the recommended reforms. Later on, this Commentary also engages in a comparison of the CFTA with the NWPTA, which points the way to possible further reforms for the CFTA’s dispute resolution mechanism.

Part II: Improving Access to Justice under the CFTA

Proposed Reforms for the CFTA Dispute Resolution Mechanism

i Impediments Created by Cost Rules and Practices

The cost of launching a claim under the CFTA is substantial. When small business owners cannot afford to pay a lawyer the hundreds of thousands of dollars20 required to launch a claim against a barrier that violates a provision of the CFTA, those barriers go unaddressed, and that small business owner never gets her day in court. Compared to the WTO dispute process, the CFTA goes farther in allowing private parties to launch their own cases without needing the approval of a home government. However, certain procedural restraints and protocols impose a hindrance on access to justice.