February 2007: Inter-Provincial Trade Deal Worse Than NAFTA

TILMA is a radical, regressive experiment in deregulation
February 1, 2007

The Harper government is pressuring provincial governments to adopt the Trade, Investment, and Labour Mobility (TILMA) agreement already signed by the British Columbia and Alberta governments. Governments at both the provincial and municipal levels would be permanently hamstrung by TILMA, vulnerable to challenge even if they were acting within their jurisdiction.

TILMA represents a radical experiment in deregulation. If implemented across Canada, it would tend to make Canada the most deregulated country in the OECD. Getting provinces across Canada to sign on is one element in a federal strategy to cast regulations at all levels of government as barriers to trade and impediments to productivity. The federal government's "deep integration" talks with the United States and advocacy of new WTO restrictions on domestic regulation are other components of this strategy.

Yet, while concrete mechanisms to restrict governments' ability to regulate are being put in place, claims are simultaneously being made by both Conservative and Liberal politicians about how Canada will lead the world in environmental regulation. Prompted perhaps by opinion polls showing the environment is now a key concern of Canadians, the Harper government made a well-publicized announcement on December 8 about its plans to regulate toxins. Prime Minister Harper claimed the plan "will make Canada a world leader in the testing and regulation of chemicals."

Stephane Dion, for his part, ran for the Liberal leadership on the basis that he would achieve air quality regulations that would either "meet or beat the air quality standards of other industrialized nations."

TILMA is completely at odds with the notion that Canada will be able to lead in an area like environmental protection, one that depends so much on what is done at the sub-federal level. Municipal restrictions on pesticide use, for example, are the kind of environmental initiative the agreement jeopardizes.

Among TILMA's most radical provisions is a requirement that governments and their "entities"--which include municipal governments--not maintain obstacles to investment. Government measures of any kind that restrict either the establishment or expansion of commercial enterprises violate the agreement. New regulations cannot be introduced if they restrict investment. Since government regulations and programs inevitably restrict investment, TILMA will significantly narrow what governments can do.

Once the agreement enters into force, private interests can take complaints to independent dispute panels and get awarded up to $5 million in compensation for violations of the agreement. TILMA imposes no limits on the number of complaints that can be taken against the same government measure, so governments could be faced with a choice of having to repeatedly pay for, or waive, their regulations.

TILMA goes far beyond NAFTA in enabling private investors to challenge governments. Under NAFTA, investors have to prove that their investment has been "expropriated" by a government regulation, something NAFTA panels have tended to interpret as meaning a regulation has to substantially interfere with a business. In contrast, TILMA directly targets regulation and gives grounds for complaints simply on the basis that an investment has been restricted or that a regulation in one province is different from that in another.

In giving testimony to the Senate banking committee, federal Industry Minister Maxime Bernier praised TILMA for its approach to regulation--that governments have to mutually recognize each other's regulations. Bernier said the TILMA model enables business to force regulators to "compete." According to Bernier, this competition results in "better" regulation because businesses are freed to choose the regulatory system most suited to their expansion. It was an astonishing statement from a government minister, an unapologetic declaration of support for a regulatory race to the bottom.

Bernier told the Senate committee his party ran on a platform of promoting an economic union in Canada, which he argued involves getting provinces to adopt regulations that do not conflict with trade. Finance Minister Jim Flaherty's economic statement, Advantage Canada, suggests that eliminating regulatory differences across provinces would help to develop a "strong and competitive internal market." He cites TILMA in particular as achieving significant progress in "allowing our internal market to operate as freely as possible."

Canadians might be surprised to know the Harper government believes the federal structure of our country is so onerous to business that provincial governments should eliminate differences in regulation, which B.C. and Alberta are in the process of doing to comply with TILMA.

Todd Hirsch of the Canada West Foundation has said TILMA effectively means "erasing the provincial boundary for all purposes except voting and the colour of the licence plate."

Eliminating the ability of provinces to have different regulations means governments at the provincial and municipal levels will not be able to innovate to address critical problems like climate change.

But the greater shock is that harmonization is only one of the radical changes TILMA will impose. The agreement requires not only that regulations be reconciled, but also that they be eliminated if they restrict investment. So TILMA is not only an erasing of provincial boundaries, but also an erasing of much of provincial and municipal capacity to regulate in the public interest.

The requirement that governments eliminate restrictions on investment gives wide scope for challenges. And, if challenged, governments are given scant grounds to justify themselves. They can claim they were serving legitimate objectives, but their objectives would have to match one of those listed in TILMA's definition of legitimate objectives. In other words, TILMA limits what are acceptable governmental goals, regardless of whether governments have the authority under the Constitution to pursue these goals and of whether they are fulfilling a democratically determined mandate.

TILMA's list of legitimate objectives is an "exhaustive" rather than an "illustrative" one, meaning that the list is not a sub-set of possible objectives governments are allowed to pursue, but the complete list. Among the significant objectives B.C. and Alberta negotiators left off the list are: protecting heritage resources; promoting culture; and providing education. Virtually all municipal objectives are omitted, such as preventing land use conflicts, protecting the quality of neighbourhoods, restricting noise, and curtailing urban sprawl.

Even if governments can demonstrate they have objectives TILMA defines as legitimate, the agreement imposes the added requirement that governments prove any measures inconsistent with the agreement are not more restrictive than "necessary." A Canadian trade panel has already interpreted a similar clause in the Agreement on Internal Trade to mean governments have to demonstrate "no other available option would have met the legitimate objective"--a nearly impossible condition to meet. So TILMA puts governments on the defensive even when they are pursuing legitimate objectives like protecting health or the environment.

Combined with the agreement's private enforcement mechanism, TILMA's necessity provisions give investors new, legally binding rights to have their interests privileged above all other values in public policy.

Justifying such a radical change in Canadian domestic policy will take some big numbers to portray TILMA as the answer to an economic crisis. Alberta's International and Intergovernmental Relations Minister Gary Mar promotes TILMA by saying inter-provincial barriers cost Canada 1% of GDP, and attributes this figure to the Conference Board of Canada.

In articles extolling the benefits of TILMA, the National Post, the Saskatoon Star Phoenix, the Calgary Herald, and the Vancouver Sun have also claimed the Conference Board as their source for the national cost of inter-provincial trade barriers. Paul Darby of the Conference Board, however, denies they ever did such a study. A 1991 report by the Canadian Manufacturers' Association did make the 1%-of-GDP claim, but this was based partly on the elimination of agricultural marketing boards, which TILMA retains, and the removal of barriers to trade in alcohol, which has largely been accomplished.

Under contract with the B.C. government, the Conference Board has done a study of the potential benefits of TILMA specifically for B.C. This study puts the benefits to B.C. at $4.8 billion. This is an astonishing figure, equivalent to B.C.'s annual softwood exports to the U.S., half of the value of B.C.'s current total exports to Alberta, and 3.8% of the province's GDP. But CCPA economist Marc Lee has pointed out: "The scoring of estimated benefits is completely arbitrary. No empirical rationale is provided (i.e., no literature is cited, no data presented, no interviews with companies, no lists of alleged barriers) that would support the large magnitudes assumed."

The Conference Board's $4.8 billion figure is substantially based on potential gains from TILMA in the primary resource sector--forestry, fishing, energy, and mining--even though this sector is exempt under the agreement. Application of TILMA to this sector would mean provinces would have to allow unrestricted exploitation of their natural resources with no government regulations acting to restrict investment in forestry, fishing, energy, or mining. If challenged for having restricted development in the resource sector, provinces would have to prove to the satisfaction of a dispute panel that their restrictions were "necessary."

At the Senate committee hearings into inter-provincial trade barriers, Conference Board chief economist Glen Hodgson declared his organization was an advocate of TILMA. Hodgson said, "We strongly endorse and welcome the agreement between B.C. and Alberta, for example, which hopefully will become a hub or a real focal point for the effort to eliminate barriers between provinces."

Federal civil servants appearing before the committee were urged to extrapolate from the figures the Conference Board came up with for B.C. to the rest of the country. The senators clearly were not satisfied when these senior civil servants reported that most studies had estimated the cost of inter-provincial trade barriers ranged between .2% and .3% of GDP—or just one tenth of what the Conference Board had predicted would be the benefits for B.C. from TILMA. Liberal Senator Wilfred Moore asked the civil servants to come up with a figure that could be used as "ammunition" in the next meeting with provincial ministers.

The chair of the banking committee, Liberal Senator Jerry Grafstein, has made it clear from the outset that his committee already believes inter-provincial barriers "are impeding our growth and productivity," and that provincial governments are not doing enough to eradicate these barriers. Grafstein is in favour of the federal government using whatever powers it has under the constitution to force the provinces to take action.

Liberal Senator Ross Fitzpatrick has said the committee should push the issue hard: "If we can take advantage of our presenter [Glen Hodgson from the Conference Board] and his colleagues to make future presentations, that would help us a lot. We are on the same track and we want to provide... as much incentive and motivation for this to happen as we can.”

The B.C. and Alberta governments, the federal government, the Senate committee, and the Conference Board have never consulted with a single consumer, local government, labour, environmental, or any other non-business organization on the impacts of their deregulatory agenda. This approach is consistent with the primacy TILMA places on the interests of investors above all other considerations.

If this deregulation agenda is to be stopped, civil society groups will have to mobilize their own efforts to expose it to public scrutiny.

(Ellen Gould is a CCPA research associate who specializes in the analysis of trade agreements.)