Canadian Free Trade Agreement

Agreement on Internal Trade

The British North America Act (now, Constitution Act, 1867) set the rules for internal trade in the newly created Dominion of Canada. Section 121 declares that “All articles of the Growth, Produce or Manufacture of any of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.” However, Section 122 declares that “The Customs and Excise Laws of each Province shall, subject to the Provisions of this Act, continue in force until altered by the Parliament of Canada.”

In 1994, Canada’s provincial and territorial leaders updated the rules with the Agreement on Internal Trade (AIT). The AIT took force 1 July 1995, with the aim of eliminating barriers to trade and improving investment and mobility within Canada. The agreement prevented provincial governments and territorial governments from erecting new trade barriers and required them to reduce existing rules affecting goods covered by the AIT. It also called for ongoing negotiations and adjustments to further liberalize trade in the country.

At the time, Canada had two international free-trade agreements — with Mexico and the United States (see North American Free Trade Agreement).

The federal government subsequently signed free-trade agreements with 13 countries (see International Trade). The AIT did not change and when Canada’s Standing Senate Committee on Banking, Trade and Commerce examined it in 2016, it found that “unnecessary regulatory and legislative differences” created walls stopping the free flow of people, goods, services, and investments among the provinces and territories. It said the barriers increased the cost of doing business in Canada. That meant that in some cases, it would be easier for a non-Canadian business to trade with Canada than it would be for businesses in some provinces and territories to trade within Canada.

Barriers to Internal Trade

The main problems the committee identified were internal trade barriers and variations in regulatory requirements across the country. While the barriers affected a “wide range of areas,” the worst hit were transportation, alcoholic beverages, and pharmaceutical drugs.

The senators urged the government of Canada to update the AIT, arguing that the new deal should take a negative-list approach, meaning it would cover everything not explicitly listed as exempt. That would compel governments to identify laws, regulations, and policies that go counter to the AIT and change the rules or seek an exemption. It would also mean any newly invented technologies and services would automatically be covered by the agreement.

The committee said that the agreement should also help trade across jurisdictions through mutual recognition. It praised the 2010 New West Partnership Trade Agreement between British Columbia, Alberta, and Saskatchewan for removing more internal barriers than the AIT had. It did so through mutual recognition, which means a person, good, service, or investment that meets the standards in one province or territory is automatically acceptable in any other province or territory.

Regulatory harmonization would mean the federal government worked with provincial and territorial governments to align different standards so Canada would maintain a high regulatory standard that didn’t interrupt trade.

“As a fundamental right, Canadians should be able to practise their profession or trade, operate a business whose goods and services can cross provincial/territorial borders, and purchase goods and services both freely and without penalty anywhere in this great country,” the committee wrote.

Cost of Barriers

At the Senate committee, a Statistics Canada official reported that between 1981 and 2014, the value of interprovincial trade in Canada grew by 4.2 per cent and that GDP had grown by 5.3 per cent over that time. As well, international imports grew by 6.2 per cent and international exports by 6.1 per cent.

Internally, the biggest gains went to Newfoundland and Labrador, British Columbia, Saskatchewan and Alberta. The gains came mostly from internal trade of natural resources such as crude petroleum, potash, and other minerals. Statistics Canada reported the lowest gains went to Quebec and Ontario, which relied more on manufactured goods and on services.

The Canadian Federation of Independent Businesses reported that by 2014, 46 per cent of small businesses had sales in another province or territory in the previous three years; 73 per cent had made purchases in another province or territory.

CFIB said the barriers came under three main categories: prohibitive barriers, technical barriers, and regulatory or administrative barriers. That meant, for example, that businesses were prohibited from shipping alcohol directly to consumers (prohibitive barriers); struggled to meet differing regulations in different jurisdictions (technical barriers); and had to complete extra paperwork to show companies meet standards in each jurisdiction (administrative barriers).

Alcohol and Internal Trade Barriers

Canada’s federal, provincial, and territorial government leaders created the Canadian Free Trade Agreement, which took effect on Canada Day, 2017. The new deal includes all areas of economic activity in the country, except for areas explicitly listed in the agreement. The exceptions are listed in part seven of the deal. The full list of exceptions takes up 135 pages of the agreement. CFTA does not affect existing Indigenous or treaty rights of any Indigenous people, including land-claims agreements. It also exempts sectors including taxation, water, and tobacco control.

The federal government said the deal covers “most” of the service economy, which provides about 70 per cent of Canada’s GDP. It also includes the energy sector.

CFTA does not address inter-governmental barriers to trading alcohol, but established a working group to study the issue and make recommendations to enhance its trade within Canada. Companies cannot ship alcoholic beverages directly to customers in other provinces or territories and each jurisdiction limits how much alcohol individuals can import from another province or territory.

In 2012, a New Brunswick man was charged with bringing too much alcohol from Quebec into his home province. He was acquitted when a provincial court found such limits to violate Section 121 of the 1867 constitution. The case was brought to the Supreme Court of Canada. (see Court System of Canada). In April 2018, the court ruled unanimously that provinces and territories have the constitutional right to restrict the importation of goods across provincial and territorial borders, so long as the restriction does not impede trade.

CFTA also established a working group to consider trade in fish and fish products. Both groups must report back in 2018, after which time the signatories will decide on any more changes.

The signatories also agreed to further study rules covering financial services and the territorial food sector, with any further changes coming in 2018.

The government says internal trade accounts for about 20 per cent of Canada’s yearly GDP, adding up to $385 billion annually. It also represents about 40 per cent of provincial and territorial exports. The Bank of Canada projected that removing internal trade barriers would have a similar economic impact to Canada’s signing of CETA.

CFTA made it easier for Canadian companies to bid on government contracts in other provinces or territories. It lets companies do so on contracts valued at more than $25,000; European countries covered by CETA face higher barriers.

Stiffer Penalties for Infractions

CFTA increased the level of financial penalties that can be imposed in cases where governments act against the agreement. The fines are tied to population, and while the Agreement on Internal Trade’s maximum penalty was $5 million, the new maximum fine is $10 million.

The Canadian Federation of Independent Businesses surveyed its members before the new deal took effect and found that complicated tax rules, high shipping costs and conflicting regulations posed the greatest challenges to internal trade. That includes different trucking rules (transportation regulation), different certification regulations for food, and standards within the construction industry. CFTA will work to align those rules across the country. It also established a regulatory reconciliation and cooperation table to eliminate existing barriers and prevent the creation of new ones.

The provinces and territories must still negotiate common standards to eliminate the barriers. Any province that disagrees with the common standard can opt out.