8. Towards a True Economic Union / Vers une véritable union économique

(Policy papers 2012-2013)

Businesses and individuals who want to take their goods, services, or skills across provincial borders face a veritable obstacle course of differing rules and regulations. Some hurdles just mean more paperwork; others are brick walls. The continuing fragmentation of our economic interests limits job creation and makes it difficult for Canada to present a strong position in international negotiations. We have long needed more vigorous national support of effective economic union, including more modern and practical national standards that will help generate opportunities in the national and global economies.

Les entreprises et les particuliers qui veulent traverser les frontières avec leurs biens, leurs services et leurs compétences font face à une véritable course d’obstacles à cause des règles et règlements qui diffèrent. Certains obstacles ne sont que d’avantage de paperasse ; d’autres sont des murs. La fragmentation continue de nos intérêts économiques limite la création d’emplois et empêche le Canada d’avoir une position forte dans les négociations internationales. Cela fait longtemps que nous avons besoin que la nation défende vivement une union économique efficace incluant des standards nationaux plus modernes et applicables, qui aideraient à générer des possibilités dans les économies nationales et mondiales.



Our internal economic union — the rules that govern business transactions and the movement of workers between provinces — is extraordinarily disconnected and inefficient. Despite some recent progress, Canada still has more internal barriers to trade than the 27 countries of the European Union. In one absurd example, since 1928 it has been a federal offence to bring wine across provincial borders. The federal law is about to be wiped out, but some provincial restrictions remain. The Canadian Chamber of Commerce says internal barriers to trade are among the top 10 barriers to improving Canada’s international competitiveness.

The Agreement on Internal Trade (AIT), which came into force in 1995, was a first step in breaking down barriers in certain sectors of the Canadian economy. It was signed by all governments and set out some principles and goals. But a succession of federal governments took so little interest in the AIT that not much was accomplished. The AIT was generally considered cumbersome and ineffectual. More recently some provinces have worked effectively in pairs to reduce barriers. Alberta and British Columbia concluded the bilateral Trade, Investment and Labour Mobility Agreement (TILMA), which came into effect in 2007. Ontario and Quebec finally worked out arrangements to allow construction workers to work on both sides of the Ontario-Quebec border in 2006, and concluded the Ontario-Québec Trade and Cooperation Agreement in September 2009.

As with the AIT, federal governments of various stripes have generally failed to facilitate intergovernmental collaboration to build a true economic union. Often they have made the situation worse by playing one provincial government against the other, paternalistically doling out localized incentives and special deals. This is why we still have no consistency in the structure of sales taxes. British Columbia (until April 2013), Ontario, Nova Scotia, New Brunswick, and Newfoundland and Labrador have the HST: a harmonized federal-provincial sales tax; Prince Edward Island, Saskatchewan, and Manitoba collect separate provincial sales taxes and the federal goods and services tax (GST). Alberta collects federal GST only, and Quebec has a sales tax (QST) that applies on top of the federal tax.

The economic crisis of 2008 provided the incentive for a brief flash of federal leadership to strengthen the economic union. Prime Minister Harper hosted a rare First Ministers’ Conference in January 2009, and the leaders agreed to “enhance full labour mobility by recognizing, across all jurisdictions, any worker certified for an occupation by a regulatory authority of one province or territory.” This initiative led to a burst of activity by the provinces that has resulted in some progress in synchronizing the standards of nine professions, with six more in the works. But so much remains to be done (more than 440 bodies regulate 51 professions in Canada), not just for Canadians who want to expand their businesses across the country but also for the many immigrants whose ability to work is stalled by complications in recognizing their foreign professional credentials. (The First Ministers made a commitment — still unfulfilled — to develop a common framework to recognize foreign credentials by September 2009.)

The urge to favour the home team can hobble our chances in the international arena as well. When our local governments give preference to local suppliers in procuring goods and services, our trading partners, notably the United States, respond in kind and prohibit our businesses from bidding on contracts to work in their local markets. Although procurement preferences look like a sensible way to boost local businesses or employment, the fact is that we all benefit from broader approaches that open up international trade and can reduce costs.

Our national leaders have sidestepped the issues of provincial procurement policies over the years. When other countries agreed to open up procurement by their sub-federal governments (those below the national level) under the World Trade Organization agreements in the early 1990s, Canada held onto the right to protect its provincial and local projects. We did the same thing with NAFTA. But in 2009, we felt the pinch when the U.S. began some lucrative infrastructure projects and Canadians were excluded from bidding for the work by the program’s “Buy American” provisions. Prime Minister Harper worked out an ad hoc arrangement with President Obama to allow some Canadian companies to get in on the U.S. infrastructure program. Both countries agreed to work towards the kind of long-term, permanent, sub-federal procurement deal that could have been included in NAFTA in 1994, but progress again has stalled.

Similarly, supply management — the system of quotas, marketing boards, and tariffs that protects poultry, egg and dairy producers — is an obstacle to more trade deals with other countries, as well as to the implementation of a true Canadian economic union. The distribution of production quotas across Canada benefits a select few and is widely regarded as inequitable and inefficient. Equally important, supply management seriously inflates the prices we pay for milk and other affected products. And the higher prices for dairy ingredients prevent Canadian foodmakers like McCain Foods Ltd. from expanding into the huge Asian markets.

My conversations with farmers and producers in supply-managed sectors across the country have made it clear to me that there would be complex issues associated with a phase-out of the federal role in supply management.

In the dairy sector, for example, some form of fair compensation recognizing the value of capital tied-up in quota purchased by farmers would be required. As well, provinces contemplating the retention of milk marketing boards within their own jurisdictions would need time to study whether or not this would be practical once the delegated regulatory authority in interprovincial and export trade reverts to the federal government.

Given the complexity of untangling decades of supply management structures, it makes sense to me that Canada should take steps to phase out supply management over a reasonable period of time, perhaps in the order of eight to 10 years.

The adjustment mechanism would have to allow for appropriate compensation and transitional support for Canada’s approximately 15,000 poultry, egg and dairy businesses which, we should remember, account for only slightly more than eight percent of all farms in Canada.  More than 90 percent of all farm businesses are not supply-managed.

The sooner we begin to address these transition issues, the better it will be for these farm businesses.  Failure to deal with the issue of supply management proactively could very well result in a period of transition imposed by others outside of Canada under terms less favourable than the industry would deem desirable.  Because, make no mistake about it, our trade partners will require us to cut back on our protectionist policies, just as we will demand that they reduce theirs.

It is important to note that supply management is not a good basis for rural prosperity. Instead, the federal government must vigorously promote sustainable rural prosperity by addressing transportation and infrastructure problems, including internet/broadband penetration, as well as help farmers address environmental issues and sustainable resource use and better cope with risk. In addition, vibrant rural economies can be encouraged through innovation and economic diversification, and activities such as tourism and cultural communities that bring new people, ideas and business to the regions. In this connection, Budget 2012’s dramatic downsizing of the Rural Cooperatives Secretariat has removed a valuable source of research and material support for civil society groups involved in rural development.

Today as we negotiate with the European Union for the Comprehensive Economic and Trade Agreement, Canada has been sitting at the table with our intergovernmental divisions on full display. Our interests are not served by our failure to collaborate sufficiently to maximize our negotiating strength in international forums. What’s more, whenever a provincial government creates a barrier or takes an action that breaches Canada’s obligations under a trade deal, the national government is on the hook for any damages. When Premier Danny Williams expropriated an AbitibiBowater mill that had closed down its operations in Newfoundland and Labrador, the federal government had to settle the complaint under NAFTA out of court. In June 2012, a NAFTA panel held the federal government has to reimburse Exxon Corporation for excess research expenditures required by the Newfoundland government in contravention of the trade pact. This is definitely not an effective way to conduct our trading relations.

Priority areas for strengthening the Canadian economic union also include the long-overdue establishment of a national securities regulator. Although the Supreme Court of Canada has said clearly that Ottawa cannot take over the day-to-day regulation of securities, it accepted the arguments for a national role in better coordinating information about systemic financial risk to boost prevention of international crime and fraud. The court decision certainly did not endorse the messed-up status quo in which Canada cannot effectively join the countries that belong to the International Organization of Securities Commissions because we have no national regulator.

Further ways to strengthen the economic union and expanding opportunities for Canadians involve implementing national standards or strategies in key areas such as the digital economy, copyright laws, and foreign investment.

Developing a digital economy strategy will require us to set national goals for broadband connectivity, guide investments in networks and digital infrastructure, and establish legal frameworks to provide privacy protection and expand electronic commerce.

Crucial reforms to our outdated copyright rules dragged on far too long — the first legislative reform proposals were introduced in 2005 — and Bill C-11 was only finalized in November 2012. While many reforms were welcome, at least one area remains controversial and will require review. This is the failure to ensure enough flexibility in the digital lock provisions for legitimate use by consumers, as well as for open source software developers.

Important reforms in the closely related area of privacy continue to be stalled. Although Bill C-12, the privacy reform bill, received royal assent in 2010, Ottawa’s failure to finalize regulations means that it is still not yet in effect. The legislation is urgently needed to supplement the social media industry’s weak self-regulation over disclosure of private subscriber information, such as the browsing habits of users.

Another urgent file is development of more coherent Canadian foreign direct investment rules. Canada needs foreign investment to support a dynamic economy that encourages creativity and innovation. For example, we need large amounts of venture capital that is in extremely short supply in Canada, as well as investment to increase competition in our highly concentrated telecommunications sector. But the federal rules and framework governing the national interest in foreign investment lack clarity and coherence.

In the summer of 2010, BHP Billiton proposed to take over Potash Corporation of Saskatchewan, and confusion reigned over whether the sale would meet the test of “net benefit” to Canada under the Investment Canada Act. Ultimately potash was correctly identified as a strategic asset, and the bid was withdrawn. The language of the net-benefit test in the legislation needs to be more precise: specifically, the 2009 amendment that identified foreign acquisitions that jeopardize Canadian “national security.” The government has yet to clarify the law and continues to sidestep Parliament, refusing to initiate the promised review by the House of Commons Industry Committee. Instead, it substantially raised the threshold for intervention from $300,000 to $1 billion. It has also opted to give new powers directly to the industry minister to disclose more information about takeovers and to compel foreign acquirers to put up bonds to backstop commitments to create jobs or investments in Canada, a useful step in response to the lengthy fight between the Canadian government and U.S. Steel Corporation over the commitments it made after acquiring Stelco in Hamilton.

Certainty and consistency in application of the law is required more than ever in light of the growing investments in the mineral, energy, and communications sectors by Chinese companies such as PetroChina, Sinopec, Chinese National Overseas Oil Corporation, and the China Investment Corp. Until the proposed takeover of Nexen by CNOOC, most of the Chinese energy investments had been for equity, not a controlling stake, and most help diversify supply and increase competition. But because the Chinese companies are subject to state direction, a cautious approach is fully justified in defining the national interest served by the operation of state-owned enterprises in Canada.