TILMA and Investor Rights

In this month’s Fraser Forum, Robert Knox attacks the critics of TILMA. Knox, who was one of the folks leading the charge for the Agreement on Internal Trade, mostly takes aim at legal interpretations by Ellen Gould and Steven Shrybman that contemplate areas where TILMA’s broad scope could lead to perverse rulings by trade panels. His counter-argument goes something like “no they won’t”, and he provides little in the way of persuasive reasoning, based on the legal text, that Gould and Shrybman are wrong in their interpretation.

I hope Knox is right in his interpretation, but it should be noted that Knox led the federal defence when Alberta used the AIT to claim that a federal ban on the neurotoxin MMT (a gasoline additive) ran afoul of the agreement. Knox, and his interpretation of the AIT, lost in that arena, setting the stage for the infamous Ethyl NAFTA chapter 11 case, in which the federal government “settled out of court” because it knew it would lose after the AIT loss. So when Knox says TILMA won’t be as bad as his critics say, he does not have a great track record in assessing how dispute panels will interpret these deals.

Nor does he address the matter of regulatory chill, where governments fear implementing laws or regulations. We already have anecdotal evidence that TILMA has been successful on this front: a Vancouver School Board official in conversation with a former BC Minister of Education found out that, at the Cabinet table, it was decided to pursue “voluntary agreements” with vending machine companies in order to achieve the policy objective of eliminating junk food in schools – because regulation or legislation would be in violation of TILMA.

In his article, Knox fails to name any actual trade barriers, and while he distances himself from the Conference Board’s astronomical estimates, he basically takes it as a matter of faith that this will be a good thing for BC and Alberta. Knox does point the finger at Erin Weir and myself briefly, but only to comment that:

The CCPA and the OFL believe that TILMA applies to a very few measures that restrict and impair trade but, paradoxically, they also believe that TILMA’s coverage is so broad and restrictive that it will hobble governments.

I’m guessing he thinks he nailed us there, but his logic needs some rethinking. The trouble with TILMA is that it creates and codifies new investor rights, with access to private enforcement, that go well beyond any stated problems with regard to interprovincial commerce.

Below I’ve posted my paper for the Canadian Economics Association session on The State and The Economy, where I lay out these arguments in more detail. It’s a bit academic (and footnotes were lost in the pasting) but essentially argues that TILMA does not make sense if you try and see it as a solution to the alleged problem of trade barriers. But it totally makes sense, from a corporate perspective, if you see it as creating new investor rights.

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Investor Rights and Canadian Federalism: The Case of TILMA

By Marc Lee, Canadian Centre for Policy Alternatives

Paper for the Canadian Economics Association meetings, June 1-3, 2007
Progressive Economics Forum Session V: The State and the Economy

1. Introduction

On April 1, 2007 the BC-Alberta Trade, Investment and Labour Mobility Agreement (TILMA) came into effect. The deal has been hailed as a major step towards the elimination of allegedly large internal trade barriers in Canada. Some commentators go so far as to claim that it is easier for many Canadian businesses to trade with the US than with other parts of Canada.

Announcing the TILMA, the BC government web page states that:

British Columbia and Alberta businesses and workers will enjoy new market access. This innovative agreement gives businesses and workers in both provinces seamless access to a larger range of opportunities across all sectors including energy, transportation, labour mobility, business registration, and government procurement. According to a recent report by the Conference Board of Canada, lowering non-tariff trade barriers could narrow the Canada-U.S. productivity gap, and make Canada more competitive. According to the Board, the B.C. and Alberta agreement has the potential to add $4.8 billion to real GDP and create 78,000 new jobs in B.C. alone.

While these are some rather astonishing claims – given that $4.8 billion is equivalent to half of BC’s annual exports to Alberta – the TILMA has been greeted as an unambiguously positive development by its proponents in government and the business sector.

Outside of BC and Alberta, the TILMA has sparked a new round of hand-wringing among Canada’s elites about supposedly negative economic costs of internal trade barriers (the last round culminated in the 1995 Agreement on Internal Trade, or AIT). Pressure is on in the backrooms of provincial capitols for other governments to sign on to the TILMA. In Ottawa, the federal government released Advantage Canada, an economic strategy document that reinforces the notion that TILMA is a significant step towards a “stronger economic union.”   And the Senate’s Banking, Trade and Commerce Committee has been holding hearings on the issue, also starting with the assumption that barriers must be huge.

Outside the halls of power, on-line and on the street, activists have raised concerns about potential pitfalls of the agreement, and are mounting an oppositional campaign. They point to the TILMA’s broad scope of coverage, and are concerned in particular about new powers for private enforcement, through trade dispute panels, of the deal’s provisions. They also wonder what the fuss is all about: there would appear to be little in the way of a problem that needs to be solved by such a sweeping legalistic text.

What is striking about the pro-TILMA communications effort is that few examples are ever provided of the trade barriers that are alleged to be such an economic burden. In fact, once the rhetoric is swept aside, there is essentially no persuasive evidence that there are internal trade barriers in Canada. Barriers to internal trade are essentially banned by the Constitution, and this basic fact is reflected in the absence of customs inspection stations at provincial borders, and the use of a common currency. This is classic case of an assertion that has been repeated so often that intelligent people who have not studied the issue assume it must be true.

To the extent that there are real issues at stake in Canadian federalism, they are not trade barriers. There are some differences in public interest regulation among provinces due to the federal nature of Canada’s government, and there are some minor labour mobility issues arising from certification standards of professional organizations. But these are not bona fide trade barriers, and in any event, the available economic evidence suggests that any inconsistent practices across jurisidictions that do exist have only a negligible effect on interprovincial commerce.

This paper argues that TILMA, like its predecessor, the 1995 Agreement on Internal Trade, cannot be explained as a solution to “barriers to trade” because, by and large, they do not exist. Instead, TILMA is better explained in terms of the creation and codification of investor rights , and legal mechanisms for their enforcement. Indeed, the AIT is widely perceived as a failure by business elites precisely because it did not provide the requisite powers of enforcement.

In developing legal frameworks of investor rights, TILMA is replicating, at the interprovincial level, investor rights provisions in the North American Free Trade Agreement, and thousands of Bilateral Investment Treaties (BITs). Public interest advocates have condemned such investor rights agreements on the grounds that they are anti-democratic: they artificially constrain the ability of governments to expand public services and to regulate in the public interest, in particular with regard to environmental protection, labour standards and consumer protection.  They do this in two fundamental ways: first, by opening up areas of democratic decision-making to challenges through external reviews outside domestic legal systems; and, second, by casting a chill over the process of regulatory decision-making itself, thereby reducing the likelihood of new measures being introduced.

In the next section, the evidence on internal trade barriers is reviewed, with a fuller discussion of what the real issues are, and why the top-down approach in TILMA seems misplaced. Then, we take a step back to review the NAFTA as a prototype in the development of investor rights in trade agreements. Some linkages between the NAFTA and the AIT are considered. In the final section, TILMA is used to demonstrate how the establishment of investor rights may undermine public policy objectives.

2. The Fiction of Interprovincial Trade Barriers

Almost everyone agrees that interprovincial barriers to trade are astonishingly large, undermine our productivity performance, and prevent Canada from being a true economic union. Everyone, that is, except economists who have studied the issue. In fact, none of those assertions are substantiated by the available economic evidence. At the broadest level of abstraction we find substantial rhetoric about barriers based on the logic of free trade. There are also some anecdotes, though not too many. In between the rhetoric and the anecdotes, there are no data one can really point to that could be considered persuasive evidence of a fundamental problem.

The notion that there exist substantial trade barriers has become a point of mythology among business advocates and right-wing think tanks, so much so that their discourse typically flies straight from this assumption to policy recommendations in support of TILMA-like agreements, without stopping to present evidence of actual barriers that may be causing harm, and whose removal would be a net benefit to the nation.

In several hours of testimony over the past year before the Senate Banking, Trade and Commerce Committee , only two items were presented that could be considered bona fide barriers to trade. The first, meat products, is considered a barrier due to independent provincial inspection practices, but it is also acknowledged that there is federal inspection, which if complied with, eliminate this so-called barrier.  The second, vegetable oil products, is at the heart of the Quebec margarine issue, in which Quebec restricts the colouring of margarine to appear the same colour as butter.  This may well be a classic barrier, though testimony by the relevant industry association put their costs of the barrier at roughly 0.2% of their total revenues, and since removal of the barrier would mean a loss elsewhere in the existing marketplace, the net benefit is likely to be rather small.

Two discredited reports have been repeatedly used to state a high cost to interprovincial trade barriers. A report by the Canadian Manufacturers’ Association (Rutley 1991) argued that barriers cost 1% of Canada’s GDP. However, the CMA made only a crude estimate of some costs, without considering any of the benefits of existing policies. More than three-quarters of the CMA estimate stemmed from government procurement policies, based on the assumption that liberalization would reduce procurement costs. In only one area did the CMA cite a classic barrier to trade: restrictions on alcoholic beverages. In both of these areas the vast majority of gains have already be reaped through the AIT, although the ability of consumers in BC to buy Moosehead beer from the Maritimes is surely of dubious social benefit.

Second, and more recently, the Conference Board of Canada claimed in a report commissioned by the BC government that the TILMA would add 3.8% to BC’s GDP. This report is deeply flawed. It made no attempt to list or estimate the cost of barriers. Upon close examination, the Conference Board essentially made up its numbers after looking at a small sample of results from a survey of business organizations and government ministries. Its estimate was doubled through a simple arithmetic error.  In a review of a similar contract with the Saskatchewan government, Helliwell (2007) likened the Conference Board exercise to “estimating national GDP by asking households how they think everyone else is doing these days”, and concluded that the Conference Board esimtates had “no empirical support”.  Even the CD Howe Institute, in its testimony to the Senate Committee, while supporting the abstract case for trade barriers, claimed the Conference Board estimates to be “widely exaggerated.”

In contrast, the best available economic evidence suggests that any barriers to trade in Canada are miniscule. Over 20 years ago, the MacDonald Commission, based on a study by Whalley and Trela (1986), found that barriers amounted to about one-twentieth of one percent of Canada’s GDP. Since then, the 1995 Agreement on Internal Trade has likely reduced that number even further.

While this evidence is now quite dated, the finding that interprovincial barriers must be incredibly small is corroborated by research that Canadian provinces are much more likely to trade with each other than with US states, after adjusting for population size and distance to market.  That number has fallen in recent years but still amounts to a factor of 12 for goods and 30 for services. Moreover, in recent years, interprovincial trade has grown faster than international trade: between 2000 and 2005, interprovincial trade grew by 25%, compared to 9% for international imports and 6% for international exports.

Thus there is no prima facie evidence that Canada is suffering from internal trade barriers, or to the extent that they exist, they must be an order of magnitude less than barriers between Canada and the US. The notion that barriers are smaller between Canada and the US than among Canadian provinces is simply wrong.

None of this means that in those isolated cases where barriers exist and are causing measurable economic harm, Canadian governments should not act to ameliorate the situation. As long as the public interest – whether protecting the environment, ensuring decent labour standards or adequate consumer protection – is not compromised, this need not be controversial. But governments should not falsely convince themselves that this is a magic bullet to solve our productivity problems.

Clarity of language would also advance the debate. This issue is incorrectly framed as “barriers to trade”, when really concerns are related to some differences in provincial regulation due to the federal nature of our government, different business registration and reporting requirements, and differences in professional certification standards. In all these cases, there exists a tension between expediency for corporate interests and legitimate and democratic decision-making.

First, there are regulatory differences among the provinces, but by and large these are not trade barriers per se, though they may pose some costs to business. Canada’s Constitution gives provinces the ability to make regulations based on their local needs, so the should not be thought of as trade barriers. Any attempts to harmonize regulations must consider the loss of local decision-making capacity as a cost netted out of any benefit arising from harmonization. Along the same lines, the call for a national securities regulator to replace separate provincial bodies is not particularly controversial (the opposition seems to be limited to the Government of Alberta), but neither is it a barrier to trade.

Second, restrictions on investment have also been cited as barriers, though on closer inspection, these are limited to requirements that companies doing business in another province register there, maintain an address for the purposes of communications, and file the standard reports. This would appear to be little more than the cost of doing business – and in all likelihood less than the costs associated with filing taxes or ensuring legal compliance in the normal course of operations. The move to single filing, as in the case of the BC-Alberta TILMA, if anything, raises concerns about the absence of clear legal points of contact with regard to provincial judicial systems, a point raised in commentary by public officials in the Conference Board study for BC.

A final issue area is labour mobility. While historically there have been concerns related to differences in certification requirements by professional self-regulating bodies (trade unions are often invoked as the cause of labour mobility issues but this largely reflects a knee-jerk antipathy to unions), most observers would agree that much progress has been made in resolving such issues. The few remaining areas that need attention are being looked at through an interprovincial process through the AIT. These largely constitute delays in being able to practice, rather than barriers to mobility per se. In some cases, however, such delays are warranted as laws and local conditions differ from one province to the next.

Thus, even if we are generous and accept the sweeping definition of “trade barriers” presupposed by proponents of TILMA, we still do not end up with much in terms of hard economic costs dragging down the Canadian economy as a result of federalism. Interestingly, this decentalization of decision-making is often defended vigorously by corporate Canada in the name of subsidiarity, usually when opposing the development of pan-Canadian public services or national regulations and standards. Indeed, differences in the level and quality of public services among the provinces, and the need for more coherent pan-Canadian approaches, are topics that are much more relevant to a “strong economic union” and to the day-to-day lives of Canadians.

It could be argued that what matters is the perceptions of trade barriers, and it is these perceptions are behind the BC-Alberta TILMA. I argue instead that a more compelling rationale is in the desire by business interests to secure new investor rights and mechanisms for their expedient resolution. We turn to this question in the next section, with a look at the origins of investor rights in international trade agreements.

3. International Trade Agreements and the Concept of Investor Rights

The post-war period, over numerous negotiating rounds under the GATT, culminating in the 1995 WTO, engendered a radical shift in the nature of trade liberalization. By expanding the purview of “trade” well beyond border measures to include new areas, such as services and agriculture, and traditionally non-trade issues, such as investment, intellectual property rights, and government procurement, they grew to cover a variety of restrictions on governments with regard to the treatment of foreign commercial interests. In the early days of the GATT, reductions in border measures on a most-favoured nation basis meant minimal intrusion into domestic political space. By the time of the NAFTA and WTO Agreements many concerns emerged about the relationship between international “trade” agreements and the capacity for democratic decision-making.

Modern trade agreements thus go well beyond trade and embody policies known in academia as “neoliberalism” and in policy circles as “the Washington consensus”. They serve as “conditioning frameworks” that increasingly bind national governments’ policy choices. Stephen Gill calls this a “new constitutionalism” that serves to lock in changes that are favourable to capital:

The World Trade Organization and other organizations of governance such as the international financial institutions are attempting to create a set of long-term economic and political reforms that gain constitutional status, thus underpinning the extension of the disciplinary power of capital on a world scale. . . . The goal is to create an “enabling state”, that is one that will deliver an improved long-term investment climate, better protection of private property rights, and inter alia, higher levels of profit flow in the future. (Gill, 2000)

In comparative terms, the NAFTA goes beyond the levels and scope of liberalization enshrined in the WTO Agreements. Key provisions of the NAFTA are about conferring new rights to investors:

•    National treatment and most-favoured nation treatment of foreign investors, which combined mean that a government must extend the best type of treatment they provide to any investor, domestic or foreign, to all investors;
•    Very broad definition of “investment,” covering virtually all types of ownership interests. Because the definition is so broad, the NAFTA contains a provision that states what investment does not mean;
•    Preventing governments from regulating in and out flows of capital; and,
•    Limiting governments’ ability to use performance requirements – such as requirements for investors to purchase inputs from local sources, to meet minimum levels of domestic content, to transfer technology, or to meet employment targets.

Perhaps the most controversial NAFTA feature is investor-to-state dispute resolution, a “privatization” of arbitration formerly confined to a state-to-state level. Investor-to-state dispute resolution has been criticized for giving foreign corporations the unprecedented right to directly challenge soveriegn governments for alleged breaches of investment rules, and to seek compensation. These claims bypass domestic judicial systems, and are adjudicated by commercial arbitration panels who can award substantial monetary damages.

The NAFTA investment guarantees go far beyond traditional concepts of expropriation—such as when the government must pay fair compensation to a property owner when seizing land to build a highway. In the NAFTA context, any measure by government that reduces the future profitability of a corporation could be deemed to be “tantamount to expropriation.” This includes laws and regulations, at all levels of government, regardless of the public interest issues they are intended to address.

This sets out a huge potential conflict between the provisions of the Investment chapter and public interest regulation. The US legal concept of “regulatory takings”, where government actions that affect private interests are liable for compensation, has essentially been written into the NAFTA Investment chapter. Mann and von Moltke (2002) comment that language of the NAFTA Investment chapter changes the terrain from one where the principal concern was egregious acts of expropriation by Southern governments into something more nefarious:

Like most bilateral investment agreements, Chapter 11 contains provisions requiring host countries to treat foreign investors in a way that meets minimum international standards. This requirement is expressed in very general language as “treatment in accordance with international law, including fair and equitable treatment and full protection and security.” Exactly what this means is not spelled out in NAFTA, or in other investment agreements. Still, when investment provisions were used only as a shield against egregious acts this created little controversy; it was understood that the intention was to provide a floor of minimum standards of fair treatment, regardless of whether domestic firms were being treated equally badly. But with the change in the use of the provisions from a defensive shield into a sword to attack government measures, the lack of precision simply invites new scope for claims under this discipline, often coming from different areas of law.

Investment provisions may be used to challenge public interest regulations, but they also cast a large shadow due to the “regulatory chill” effect for governments contemplating new measures. For fear of being liable for large sums in compensation to foreign investors, governments may be inclined to take such measures off the table entirely. Thus, while the Investment chapter provides more certainty to investors, it provides less certainty to governments and citizens concerned about protecting the public interest. This uncertainty is reinforced by a general lack of adherence to precedent in dispute panel proceedings.

For public services, the important point is that the NAFTA interacts with pro-market domestic reforms, such as privatization in ways that entrench those reforms. The NAFTA does recognize the existing state of public services and provides a patchwork of exemptions and reservations. The Investment chapter Article 1101(4) notes that nothing in the chapter prevents a Party from providing a range of services or functions, but then adds that they be “in a manner that is not inconsistent with this Chapter”, a qualification that essentially removes the effect of the provision.

A reservation in Annex I, which sets out existing non-conforming measures, has been made for any provincial or state non-conforming measures in place at the time of the implementation of the NAFTA. This is significant, as most social services in Canada are delivered by provincial governments. However, this also means that non-conforming measures are “grandfathered” and only acceptable to the extent that they are maintained. Thus, once a government enacts liberalizing or privatizing changes to public services, exposing them to the full disciplines of the NAFTA, the protective shield provided by the reservation shrinks in size.

In Annex II, which sets out reservations for future non-complying measures for Services and Investment, “Canada reserves the right to adopt or maintain any measure with respect to the provision of public law enforcement and correctional services, and the following services to the extent that they are social services established or maintained for a public purpose: income security or insurance, social security or insurance, social welfare, public education, public training, health, and child care.”

This reservation hinges on a two-part test: services must be “social services” and for a “public purpose.” Unfortunately, these terms are not defined in the NAFTA text, and Canada and the US have taken very different interpretations. The US argues a very narrow interpretation that the reservation would not apply to services provided publicly but delivered by a private, for-profit or not-for-profit, entity. Canada argues that “government intent” is the key factor determining whether a service is provided for a “public purpose.” To date, the meaning has not been tested by a dispute panel.

In essence, these provisions privilege the investment rights of foreign corporations over legitimate, democratic decision-making. Ultimate decisions on these matters will, in all likelihood, be made by dispute panels, not by elected representatives. These are the grey areas or uncharted terrain of the NAFTA. In the case of public services reservations, a dispute panel may well side with the US position that any service, if delivered by a private for-profit or not-for-profit corporation, even though publicly funded, falls outside the reservation of Annex II, and thus is open to the full weight of the Investment and Services provisions.

Such concerns are not limited to the NAFTA but numerous Bilateral Investment Treaties (BITs), the US-Central American FTA and other bilaterial “free trade” agreements, with the same essential model of investor rights. Writing for the World Bank on whether BITs are worth the potential “bite”, Hallward-Driemeier (2003) concludes:

Recent and pending cases of international investment disputes covered by investment treaties have raised concerns of the potential costs to host governments – both in terms of the size of potential awards and in the possible reduction of viable choices open to policy makers due to their adverse effects on foreign investors. Critics speculate that these cases will serve to encourage firms to look for ways to exploit the terms of the treaty as a lucrative way of doing business, seeking compensation for risks that they had not previously expected to be protected from. Given the increasing concern about the potential and often unanticipated costs of BITs, it is all the more important to examine whether BITs are delivering their expected benefits. … Analyzing twenty years of bilateral FDI flows from the OECD to developing countries finds little evidence that BITs have stimulated additional investment.

The concerns about an excessively broad scope of the NAFTA investment chapter led to a declaration by NAFTA governments in 2001 to clarify the intent. Case law in both the NAFTA and BITs is evolving, and it can be argued that a more measured reading of the investment provisions occurred in some high-profile cases, such as the Metalclad vs Mexico, which upheld a more conventional definition of expropriation, and Methanax vs the US, which was not successful. Nonetheless, a number of cases are still in the queue. Sinclair (2007) provides and overview of NAFTA cases to date, noting that new claims continue to mount, that a large number of them target environmental regulations, and that beyond specific cases, it is not possible to tell what effect “regulatory chill” has had on decision-making.

4. Importing Investor Rights into Provincial Jurisdiction: the NAFTA, the AIT and the TILMA

The Agreement on Internal Trade came into force on July 1, 1995, shortly after the implementation of the WTO (earlier in 1995) and the NAFTA (1994). Apart from the policy fashion of liberalization, the AIT served a very practical purpose to facilitate the implementation of Canada’s international trade commitments. This was much more important than stated needs to “strengthen the Canadian union.”

NAFTA Article 105 specifies that : “The parties shall ensure that all necessary measures are taken in order to give effect to the provisions of this Agreement, including their observance, except as otherwise provided in this Agreement, by state and provincial governments.”[italics by author] The WTO has a similar clause, although with somewhat weaker language, in GATT Article XXIV:12, which states that WTO Members “…shall take such reasonable measures as may be available to it to ensure such observance by regional and local governments and authorities within its territory.”

The major stumbling block for implementation of international trade agreements is the federal nature of Canadian government. The Constitution sets out a division of legislative powers between federal and provincial governments. Historically, there has been a tension in Canadian federalism between the idea of a strong central government and a cooperative federalism. This tension plays out most significantly where there are blurry lines in the interpretation of federal and provincial powers.

Section 91 of the Constitution gives jurisdiction to the federal government over the “regulation of trade and commerce” with the general provision to “make laws for the peace, order and good government of Canada.” In addition, section 121 states that: “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.” These parts of the Constitution support the idea of a common market within Canada.

Provincial governments, however, have autonomy to act to protect regional diversity and to govern in different ways appropriate to provincial circumstances. Provinces have responsibility over property and civil rights, most areas of labour, education, health care, consumer protection, licensing and investment.

A landmark case related to international agreements and Canadian federalism was the 1936 Labour Conventions case. The federal government at the time wanted to sign onto international labour conventions, but was opposed by the provinces who saw this as an imposition into areas of provincial jurisdiction. The case went to the Privy Council (i.e. the “Supreme Court” at the time), which ruled that the federal government can negotiate international agreements, but cannot implement them in areas of provincial jurisdiction.

The ambiguity around jurisdiction remains to this day, and underlies the desire for an AIT as a political arrangement that parallels international trade agreements. One danger inherent in this is that rights granted through the AIT set the standard for national treatment under Canada’s international agreements. Under the NAFTA and the WTO, foreign traders, service providers and investors are legally entitled to the best treatment Canadian governments give to domestic goods, services and investment. In other words, foreign companies gain additional rights in the NAFTA and under the WTO agreements through the AIT “back door”.

There is an underlying incompatibility between the narrow, largely commercial, aims of the AIT and the broader requirements for a stronger, healthier Canadian union. As previously noted, it is unacceptable to label differences in approach to environmental protection, regional economic development, resource management, or other legitimate policy issues as “internal trade barriers”. Many so-called interprovincial trade barriers result from legitimate public policy choices. It is neither possible nor desirable within a federal system to do away with differences in policy approaches that allow democratically elected governments to respond to local needs and the aspirations of their citizens.

Shortly after its implementation, corporate Canada began to press for a broadening and deepening of the AIT. They were particularly interested in turning the AIT, a political agreement among Canadian governments, into a legally binding document. This includes enforcement, and a stronger capacity for investor-to-state suits. Despite a couple of attempts to relaunch a new round of negotiations, there seemed to be little appetite in doing so, and certainly no compelling case that this was needed.

The TILMA is now shaping up to deliver what the AIT process could not, starting with a bilateral agreement. A full-court press is now on to get other provinces to sign the TILMA, which if successful would make it a de facto expansion of the AIT. Because of the fiction of inter-provincial trade barriers, there is a political gain to be had for provincial governments (and the federal government) by championing their “elimination.” But there are numerous costs and impacts that have been swept aside in the boosterism for the TILMA. We turn to these next.

5. The Trouble with TILMA

In light of the evidence on trade barriers, at best the TILMA is a gimmick that will have little impact on economic growth and inter-provincial trade. More troubling, however, is that the Agreement contains some very broad language that may prove problematic with the passage of time. Two papers, Gould (2007) and Shrybman (2007), have attempted to compare the legal language of the TILMA to the existing structure of public interest regulations, publicly-funded services and Crown corporations. These reviews are also informed by an understanding of how dispute panels have ruled in cases at the WTO, NAFTA and AIT in order to assess the potentials of the TILMA language to uphold commercial interests when pitted against democratic decision-making.

Gould summarizes:

TILMA raises serious questions about the ability of provincial and local governments to act in key areas such as regulation, procurement, and economic development.  To give force to these measures, the agreement enables private individuals to launch complaints against governments, to have an independent panel rule on these complaints, and to be awarded compensation for violations. In fact, TILMA provides broader grounds for such complaints than in the controversial investor-to-state mechanism of NAFTA.

The TILMA’s scope is expansive. As a “top-down” agreement, everything is in unless specifically exempted, which means governments must anticipate the full legal jeopardy of what they have signed onto. The safeguards provided by exemptions and restrictions (permitted measures contrary to the more general legal language) are quite narrow, and even these have their caveats. There are six areas that are specifically exempted from the Agreement – including Aboriginal peoples, water, taxation, regulated rates and “social policy” (not including health care and education) – but these are to be reviewed annually “with a view to reducing their scope” (Article 17.1b). There are also provisions for ten “legitimate objectives” (Article 6), which can be introduced but only if they meet a three-part test. This test includes being “not more restrictive … than necessary”, language from international agreements that has been criticized for giving significant leeway to arbital panels to second-guess whether public interest objectives could have been accomplished differently.

Gould’s review of the areas of public interest regulation that are exposed by the TILMA finds many areas that are exposed to challenge, including most areas of municipal planning, major areas of environmental regulation, private schools, and efforts to restrict private health care.

In this context, we can consider the investor rights granted by the TILMA. The Agreement includes a broad definition of investment, including “a) an enterprise; b) financial assets, including money, shares, bonds, debentures, partnership rights,   receivables, inventories, capital assets, options and goodwill; c) the acquisition of financial assets; or d) the establishment, acquisition or expansion of an enterprise.” This definition, although not as expansive as the NAFTA, is cause for concern when mapped together with two key blanket provisions of the Agreement:

Article 3 – No Obstacles. Each Party shall ensure that its measures do not operate to restrict or impair trade between or through the territory of the Parties, or investment or labour mobility between the Parties.

Article 5.3 – Standards and Regulation. Parties shall not establish new standards or regulations that operate to restrict or impair trade, investment or labour mobility.

The terms “restrict” and “impair” are not defined in the text of the Agreement and have no parallel in international trade law. Thus, they could be open to a plain language reading that privileges investor rights over the ability of legislatures to pass laws or regulations in the public interest, where they are not explicitly excluded from the agreement (and even this latter point has significant grey areas with regard to interpretation).

Moreover, the TILMA enshrines the right of investors to directly challenge public interest regulation. This measure is ostensibly capped at $5 million per case, but this may not be a true upper bound if a government measure offends multiple sections of the TILMA, or if other investors in a similar situation avail themselves of the same legal challenge. Nonetheless, it is problematic to have trade panels second-guessing democratic decision-making. And as noted above, the presence of such language creates a chill over the creation of new regulation. Indeed, there is anecdotal evidence that this has already happened, as it was reported by a former BC Minister of Education that the provincial government would be pursuing voluntary agreements with vendors to achieve a policy goal of eliminating junk food from schools, as a discussion at the Cabinet table considered that legislation or regulation would run afoul of the TILMA.

Others have presented a more sanguine opinion of TILMA’s impacts and potentials to undermine the public interest. Ultimately, whether particular measures will be challenged, and whether those challenges succeed, remains to be seen. But it is of concern that decisions on interpretation will be made by trade panels outside the domestic legal system, not by the architects or proponents of TILMA. In international disputes, there may be some rationale for a neutral dispute settlement arena. In the Canadian context, this is bizarre, and if anything usurps the jurisdiction of the Canadian courts. One important concern with this is the lack of requirement to follow precedent in commercial arbitration proceedings. Another is the lack of right to appeal and review by a higher court.

An additional complication suggested by Shrybman is the implication of TILMA investor rights for NAFTA parties, similar to the issues raised in the previous section in regards to the AIT. Shrybman cautions that:

TILMA also expands the scope of foreign investor rights that can be asserted under NAFTA. Moreover, these rights are bestowed on US and Mexican investors without any reciprocal gains for BC or Alberta investors in the US or Mexico. TILMA establishes a new high-water mark of investor entitlement that can now also be claimed by US and Mexican investors in consequence of NAFTA guarantees of National Treatment.

In sum, the TILMA is a solution in search of a problem when viewed through the lens of trade barriers. But if the objective of the exercise the creation and codification of investor rights, the legalistic framework makes commercial sense (though not making sense from a public interest perspective).

6. Conclusion

If bona fide barriers to trade were a real issue in the Canadian context, resolving it would be fairly straightforward: a list of top ten or twenty irritants in interprovincial commerce could be developed, and vetted to make sure they do not violate any public interest concerns. The federal government could press for action in those areas and the vast majority of benefits, to the extent that any exist, would be captured (the federal government has constitutional authority to to resolve internal trade issues if necessary). In some areas, the changing nature of the Canadian economy and its trade and investment relationships with the US and others may require new approaches that would upload some responsibilities to the federal government in order to create national standards and regulatory frameworks. As long as such a process achieved a high standard, and avoided lowest common denominator approaches, such as mutual recognition, there would likely be few concerns. This would be a better approach that seeking sweeping legalistic approaches like the BC-Alberta TILMA.

The legalistic approach, however, seems to appeal to those who are wedded to the abstraction that barriers exist, and that they can only be resolved by creating investor rights to challenge public policy. This approach is one that views all public interest regulation with suspicion. Regulations are trade barriers until proven innocent. Thus, what is of concern to activists in regards to investor rights is in fact the intention: to foster confidence of investors outside the principal jurisdiction (both foreign and rest-of-Canada investors), even though it is empirically unproven that doing so actually enhances such investment, nor that such investment is always desirable.

Thus, the TILMA replicates at the interprovincial level the trend in modern “free trade” agreements to go well beyond traditional notions of free trade, or restrictions at the border such bans, tariffs or quotas. Like the NAFTA, the TILMA is better thought of as an investor rights agreement, providing rights backed by legal recourse to arbital panels if corporate entities feel that these rights have been “restricted” or “impaired”.

Fortunately, while the TILMA was essentially negotiated in secret, since being revealed to the public, concerns have arisen about its implications, from trade unions, activist groups and municipal councils, while other provinces have been wary of signing on in spite of corporate pressures to do so. Hopefully, the tide stops at the Alberta-Saskatchewan border then recedes with repeal of the TILMA by a future BC or Alberta government, so that Canadians can get on with the real pressing economic and social issues facing the nation.

References

Baughen, Simon. 2001. “Investor Rights and Environmental Obligations: Reconciling the Irreconcilable?” in Journal of Environmental Law, 13(2), 199-220.

Conference Board of Canada.  2005. An Impact Assessment of the BC/Alberta Trade, Investment and Labour Mobility Agreement. Available at: http://www.gov.bc.ca/ecdev/down/conf_board_impact_assessment_2005.pdf

Copeland, Brian.  1998.  Interprovincial Barriers to Trade: An Updated Review of the Evidence. Prepared for the BC Ministry of Employment and Investment.

Gill, Stephen. 2000. The Constitution of Global Capitalism. Paper presented to the International Studies Association Annual Convention.

Gould, Ellen. 2007.  Asking for Trouble – The Trade, Investment, and Labour Mobility Agreement. Vancouver: Canadian Centre for Policy Alternatives.

Government of British Columbia. 2006. Trade, Investment and Labour Mobility Agreement Between British Columbia and Alberta.  Available at:
http://www.gov.bc.ca/ecdev/down/BC-AB_TILMA_Agreement-signed.pdf

Government of Canada. 2006a. Advantage Canada: Building a Strong Economy for Canadians. Ottawa: Department of Finance.

Government of Canada. 2006b. Restoring Fiscal Balance in Canada.  Ottawa: Department of Finance.

Government of Canada. 1985.  Report of the Royal Commission on the Economic Union and Development Prospects for Canada: Volume Three.  Ottawa: Department of Supply and Services.

Hallward-Driemeier, Mary. 2003. Do Bilateral Investment Treaties Attract FDI? Only a bit…and they could bite. Policy Research Working Paper 3121. Washington, DC: World Bank.

Helliwell, John. 1999. “Canada’s National Economy: There’s More to It Than You Thought.”  In Canada: The State of the Federation 1998/99 – How Canadians Connect, edited by Harvey Lazar and Tom Mcintosh. Montreal & Kingston: McGill-Queen’s University Press.

__________. 2007 Assessing the Impact of Saskatchewan joining the BC-Alberta Trade, Investment and Labour Mobility Agreement. Paper commissioned by the Government of Saskatchewan.

Lee, Marc. 2000. In Search of a Problem: The Agreement on Internal Trade and the Future of Canadian Federalism. Ottawa: Canadian Centre for Policy Alternatives.

Mann, Howard and Konrad von Moltke. 2002. Protecting Investor Rights and the Public Good: Assessing NAFTA’s Chapter 11. Background paper to the ILSD Tri-National Policy Workshops, March-April 2002. Winnipeg: International Institute for Sustainable Development.

McCallum, John. 1995. “National Borders Matter: Canada-US Regional Trade Patters” in American Economic Review, 85(3), 615-23.

Rutley, Todd. 1991. Canada 1993: A Plan for the Creation of a Single Economic Market. Toronto: Canadian Manufacturers Association.

Sinclair, Scott. 2007. NAFTA Chapter 11 Investor-State Disputes (to March 1, 2007). Ottawa: Canadian Centre for Policy Alternatives.

Shrybman, Steven. 2007. Guide to the Trade, Investment and Labour Mobility Agreement (TILMA). Legal Opinion for the Ontario Federation of Labour, February.

Whalley, John and Irene Trela. 1986. Regional Aspects of Confederation, vol 68 in the research studies of the MacDonald Commission, University of Toronto Press.

One comment

  • Thanks for this overview.

    I also believe that TILMA is the “key” to the success of the push by corporate ‘black suits’ for the North American Union.

    If provincial regulations are not sufficiently ‘haromonized’ through TILMA, the NAFTA Highway isn’t going to work. Without it, cheap imports from China will not find their way into the heart of the continent, nor will our resources find their ways to China and India for cheap labour in off-shore factories!

    Check it out: http://www.ciscorport.com/

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