Introduction

Given that Canada’s agriculture and agri-food sector produces more than the Canadian population can consume, the sector naturally seeks enhanced access to international markets in order to expand. However, the domestic market is vital to a large number of agricultural and agri-food products. Consumers’ growing interest in local products and the increasing demand for new foods offer market opportunities for some segments of the sector. There is also growing recognition that a more integrated domestic market can help the sector expand internationally; a company’s competitiveness and its export prospects may improve if domestic rules allow it to target the entire Canadian market rather than just one province.

Given the recent trade negotiations with South Korea and the European Union, there is a perception that domestic trade is lagging behind international trade liberalization. The Canadian market does not seem to be as open to Canadian producers as it is to our international trading partners. In June 2014, the Industry Minister called for the modernization of the Agreement on Internal Trade (AIT), which came into effect in 1995 in order to govern interprovincial trade. On 29 August 2014, the provincial and territorial premiers agreed to continue efforts to strengthen and update the AIT, with the goal of concluding negotiations with the federal government by March 2016 at the latest.

It is within this context that the Standing Committee on Agriculture and Agri-Food (“the Committee”) held eight public hearings between 17 February and 28 April 2015, with representatives from various industries within the Canadian agriculture and agri-food sector to examine interprovincial barriers to the trade in agricultural and agri-food products. The report will present a brief description of domestic trade, review the barriers identified by witnesses, particularly at the federal and provincial levels, and then address stakeholders’ proposed changes to the AIT.

A. Overview and issues

The volume of goods and services that are traded on the domestic market is significant. In 2011, interprovincial exports were valued at $358 billion, including $41.2 billion in agricultural and agri-food products.^[1] As a comparison, Canadian exports of agri-food products were valued at $40.3 billion that same year.^[2] According to the Council of the Federation, internal trade has grown by approximately 60% in 10 years.^[3]

The domestic trade in agricultural and agri-food products is affected by the fact that the federal, provincial and territorial governments share jurisdiction over agriculture. The federal government is responsible for interprovincial and international trade, while the provinces are responsible for the production and domestic marketing of agricultural and agri-food products. For example, certain products such as meat must comply with federal standards to be traded between the provinces or internationally. In addition to the federal standards, the provinces may have their own rules and regulations regarding the foods produced and sold within their borders.

Depending on the product, some industries must comply with a patchwork of rules, which can impede the free movement of products from one province to another. Examples of this situation will follow in the next section. These barriers can lead to losses or shortfalls for some segments of the agri-food sector. For example, the distilled spirits industry anticipates an annual shortfall of close to $150 million in gross earnings due to an inability to seize certain domestic market opportunities. This shortfall prevents the industry from making critical investments that would allow it to grow, innovate, make its facilities modern and competitive, and expand its export markets.

There are specific mechanisms for the provinces and territories to cooperate and coordinate their activities in areas that affect the agriculture and agri-food sectors: the internal trade in agricultural and agri-food products is largely governed by the AIT, which came into effect on 1 July 1995. The purpose of the AIT is to eliminate interprovincial barriers that impede the free movement of workers, goods, services and investments. Chapter 9 of the AIT covers agricultural and food goods, and Chapter 10 concerns alcoholic beverages. The AIT has been amended 13 times since it was signed in 1995. The last update was made in December 2012, and as stated previously, the federal, provincial and territorial governments made a commitment in 2014 to renew the AIT.

Certain provinces have also taken steps to promote free trade. The New West Partnership Trade Agreement, which came into effect in 2010, liberalized interprovincial trade between British Columbia, Alberta and Saskatchewan. In September 2009, Ontario and Quebec concluded the Ontario-Québec Trade and Cooperation Agreement, designed to liberalize trade and reduce barriers between the two provinces.

Recommendation 1:

The Committee recommends that Agriculture and Agri-Food Canada (AAFC), working in conjunction with other federal departments and agencies, establish a list of interprovincial trade barriers for agricultural commodities that exists as a result of federal legislation and policy requirements; that AAFC provide that list to the Committee; and that AAFC develop a strategy to eliminate these trade barriers and begin implementation of that strategy no later than January 1^st, 2016.

B. Barriers to interprovincial trade^[4]

1. Provincial and territorial regulations

The lack of regulatory consistency represents a major barrier to interprovincial trade in Canada. On the subject of plant health, for example, some witnesses criticized the fact that the provinces have disregarded federal regulatory procedures and introduced measures that are not science-based.

This creates unpredictability…potentially leading to both a patchwork of regulatory approaches across provinces, unnecessary and costly duplication between the federal and provincial governments, and regulatory approaches by some provinces that appear to be grounded in perception rather than science. ^[5]

The Ontario government recently limited the use of neonicotinoid seed treatments based on a concern over the health of pollinators. However, the Pest Management Regulatory Agency (PMRA) is conducting a review of these products. Mr. Cam Dahl, President of Cereals Canada, emphasized that local decisions to enact legislation should not override the PMRA’s science-based regulatory decisions. Any decisions regarding local legislation should be delayed until the results of the PMRA review are released. The lack of federal-provincial coordination puts all Canadian farmers at a disadvantage. Formulating workable regulations will be key to ensuring that farmers have the tools needed to remain competitive.

In addition to sanitary and phytosanitary measures, the provinces and territories provide support for some industries that can penalize producers in other provinces.

Those are some of the challenges, especially when it comes to some provinces getting subsidized for transportation or in one way or another for that product. It creates an unfair competitive playing field….We would really like to see restrictions on that, especially when we're going interprovincially. I don't think one province should be subsidizing transportation when another province doesn't. It doesn't show competitiveness as a nation. ^[6]

According to Mr. Jan Westcott, President and Chief Executive Officer of Spirits Canada, provincial protectionism over the sale and distribution of alcohol has increased since the AIT was implemented. A large number of provincial measures are designed to support local production. However, these measures often discriminate against producers from other provinces, leading to a reduction in the sale of alcoholic beverages domestically.

The damage to the economy from these measures is enormous, with the misallocation of financial resources, market inefficiencies, reduced consumer choice, depressed international exports, and frankly, missed growth opportunities.^[7]

Moreover, Mr. Dan Paszkowski of the Canadian Vintners Association indicated that only products made entirely from Canadian grapes are exempt from excise tax, while blended wines containing various percentages of Canadian grapes are not exempt. This situation does not support the growth of the wine industry.

In 2012, the federal government amended the Importation of Intoxicating Liquors Act with regard to wine, and in 2014, with regard to beer and spirits. These amendments allowed for the interprovincial import of alcoholic beverages for personal use. Although there are no longer any federal impediments to the interprovincial trade in alcoholic beverages, some provinces still do not allow these products to move freely. Some, such as British Columbia and Manitoba, allow direct shipping under certain conditions. For example, British Columbia limits direct shipping to wines made from 100% locally produced fruits.^[8] Industry representatives believe that provincial concerns are unjustified:

The provinces are concerned that allowing direct-to-consumer delivery will displace sales at their stores and they'll receive no revenue, so there will be a revenue loss. We believe that the amount of wine that will be shipped will be relatively small. I think we're looking at something like 60,000 litres per year that will be direct delivered. These are going to be our most premium wines. The average price of wine being shipped in the United States is $38.00 per bottle, so it's a very unique clientele who would be purchasing these wines. However, that provides a very important sales channel for some of the smaller producers to enter into, and they're going to be the major beneficiaries of direct consumer delivery…. If you put in place a direct-to-consumer system, taxes can be paid. Provincial taxes should be paid, as well as the levies on that direct-to-consumer shipment.^[9]

Some witnesses suggested following the example set by the United States in regulating wine shipments, developing policies and collecting taxes.^[10] Several agreed that the provinces need to introduce measures similar to those of the federal government to liberalize the trade in alcoholic beverages.

The Committee was also told that one way to encourage the provinces to accept greater trade liberalization is to increase consumer demand for Canadian products. Raising consumer awareness through marketing will increase the demand for Canadian products and encourage the provinces and territories, and especially their liquor control boards, to changes their practices. The wine industry, for example, is attempting to launch an initiative through the AgriMarketing Program to access some of the funding once allocated solely to export development but now available for domestic promotion.

Recommendation 2:

The Committee recommends that Agriculture and Agri-food Canada maintain contribution programs that promote Canadian products domestically.

2. Federal regulations

In addition to the patchwork of provincial regulations, some federal laws governing agricultural products are now out of date and no longer reflect the current environment, a situation which hampers domestic trade. In the case of the fruit and vegetable industry, witnesses stated that regulations on standard container size affect the free movement of these products. Some products are covered by the standard container provisions in the Fresh Fruit and Vegetable Regulations. According to officials from Agriculture and Agri-food Canada, ministerial exemptions are frequently used to allow products to be transported in non-standard containers under certain conditions. The regulations on standard container size are under review.^[11]

The Committee also heard about the Agricultural Products and Marketing Act (APMA) and its use by the provinces.

The APMA allows the Governor in Council to delegate those authorities to individual marketing boards in provinces. So, for example, if the P.E.I. Potato Board has an order, it would have the authority to talk about pricing, marketing modalities, branding, and most importantly it would have the opportunity to collect levies on production that is destined for the province or for interprovincial trade.^[12]

The APMA was described as a well-used-piece of legislation that covers at least 30 different commodity groups across the country. The Act itself dates back to 1949 and the desire to ensure that it reflects Canada’s current agricultural industry was expressed.

The APMA is used as the legal authority for provincial commodity organizations to establish marketing orders through the Farm Products Council of Canada. This is done to control competition in the marketing of that said commodity within provincial boundaries.

Recommendation 3:

The Committee recommends that the Government of Canada undertake a review of the Agricultural Products Marketing Act (APMA) in an effort to reducing internal trade barriers and red tape, and ensure its modern operation.

Other standards contained in the Food and Drug Regulations no longer reflect marketplace realities. For example, the Canadian Food Inspection Agency (CFIA) is reviewing the definition of beer in these regulations, a process that worries many microbreweries.

…because it would have a decisive impact on the scope of the regulations for beer production, labelling, distribution and taxation. Too broad a definition would favour beverages sweetened with refined sugar, which are not really beer. However, too restrictive a definition would hinder the creativity of microbrewers.^[13]

The provinces and industry stakeholders have their own definitions of what constitutes beer. Microbreweries are mainly concerned that it may be difficult to implement policies and regulations unless all industry stakeholders are involved in consultations to develop a common definition. The microbreweries want the various industry stakeholders to reach a consensus before decisions are made on amending regulations.

Food safety regulations are another area that lacks federal-provincial coordination and consistency. Meat-packing plants that sell their products only in the province in which they are located are under provincial jurisdiction. For a plant to be able to sell in another province, it must be registered with the CFIA and meet federal standards under the Meat Inspection Act. The major grocery stores require federal inspections even though some foods are processed and sold in the same province.

The requirement for some establishments to be federally registered before they can engage in interprovincial trade may represent a major irritant for some companies. Provincially registered facilities may not necessarily meet federal requirements, such as provisions on the distance between a drain and a door. These facilities must make significant infrastructure investments if they want to be federally registered. They often do not have the resources to meet federal requirements, never mind the administrative burden they must assume.

Many witnesses stressed that federal registration must remain the standard for interprovincial trade and that any updates to the meat inspection system must not weaken the food safety system. Adopting more flexible, consistent and results-based requirements will enable a large number of establishments to receive federal registration. The federal government is also in the process of streamlining food regulations by grouping several regulations under the Safe Food for Canadians Act.

Recommendation 4:

The Committee recommends that the Government of Canada continue to modernize federal standards, particularly in the areas of standard container size and meat inspection.

C. Renewing the Agreement on Internal Trade

As stated previously, certain federal regulations that may impede interprovincial trade must be modernized. The federal government can also assist in promoting Canadian products in Canada. However, as several witnesses pointed out, most of the levers to facilitate internal trade rest with the provinces and territories.

The federal government has few policy, legal, or regulatory mechanisms at its disposal that can affect internal trade relative to the provinces and territories. ^[14]

Given its jurisdiction over interprovincial trade, the federal government still has an important leadership role to play, particularly with regard to the AIT. Virtually all of the witnesses appearing before the Committee stated that they support the AIT modernization initiative as they believe it is the primary tool for reducing interprovincial barriers and promoting internal trade in agricultural and agri-food products.

The witnesses also agreed that the AIT has not always functioned as effectively as possible, citing the lack of consistency between the AIT and Canada’s international free trade agreements. This situation is due to the manner in which the AIT was drafted, as explained by the Chief Agriculture Negotiator for Agriculture and Agri-Food Canada:

[G]eneral rules apply in our international agreements, with some exceptions. That's what is referred to as a negative list.^[15] [T]he Agreement on Internal Trade is based on a positive list approach. You list the areas or the measures where you're ready to have the obligations applied.^[16]

The witnesses suggested that interprovincial barriers must be treated like international trade barriers. The AIT therefore needs to be modeled on international agreements, as they have proven their effectiveness. The language could be stronger and more like that in the binding commitments Canada makes in its international agreements. For example, the AIT could contain general rules such as non-discriminatory principles applicable to all products and set out specific exceptions, similar to the practice in international trade agreements.

On the subject of general rules, a number of witnesses wanted the federal and provincial governments to make a genuine commitment to eliminate all discriminatory measures that provide support and protection to producers in a given province. Others emphasized the need for investor protection standards that are at least equivalent to those available to foreign companies under the North American Free Trade Agreement and the Canada-European Union Comprehensive Economic and Trade Agreement.

Most of the witnesses supported the idea that the AIT must create a level playing field for all Canadian producers. By changing the AIT’s structure to include general principles that apply to everyone, the Agreement would promote greater trade liberalization for agricultural and agri-food products.

Recommendation 5:

The Committee recommends that the federal government work with the provinces and territories to modernize the Agreement on Internal Trade in accordance with international trade agreements, specifically to include general free trade principles that would apply to all sectors and stipulate the measures or sectors that would not be subject to the Agreement.

With regard to the patchwork of provincial regulations on agricultural and agri-food products and the potential trade difficulties they pose (see the preceding section), the witnesses suggested that the AIT include provisions to discipline specific regulatory practices like phytosanitary measures and subsidies for certain sectors like transport.

One witness pointed out that the World Trade Organization (WTO) has established a series of agreements related to regulatory measures. These agreements cover such subjects as the rules for sanitary and phytosanitary measures, technical barriers to trade, subsidies, anti-dumping measures and countervailing duties.^[17] They encourage governments not to create barriers that hinder trade unless there are legitimate reasons to regulate a sector and they provide a level playing field for all participants.

The inclusion of regulatory and support provisions in the AIT would enable governments across the country to agree on certain parameters, in particular a science-based approach for sanitary regulations, and would facilitate the introduction of a national approach without depriving the provinces of their right to develop their own laws and regulations.

This provision would allow the review of regulations on agricultural products, specifically crop protection products and seed, to ensure these regulations conform to the national standards and fit within Canada’s science-based regulatory framework. ^[18]

Recommendation 6:

The Committee recommends that the federal government work with the provinces and territories to ensure the Agreement on Internal Trade includes provisions to discipline certain regulatory and support measures so that these measures to not create barriers to interprovincial trade.

Lastly, certain witnesses stated that the AIT dispute resolution mechanism is too lengthy and has no means of imposing penalties.

The case involving Quebec’s Food Products Act that was brought forward under the agreement by the Government of Saskatchewan and supported by Manitoba, Alberta, and British Columbia, is a case in point….The timeline between when the case was brought and until it was resolved was long. Together with a similar dispute and ruling in Ontario in 2011, it took close to five years to secure access for western Canadian vegetable oils in Ontario and Quebec. That timeline is too long to provide industry participants with incentive to invest and innovate. A dispute settlement mechanism and compliance mechanism similar to those in the WTO or NAFTA should be considered as a key part of a modern AIT.^[19]

The witnesses were unanimous in their opinion that the AIT must provide for a faster resolution process that offers binding resolutions. The process should include set timelines for dispute resolution and penalties for parties that do not comply with the AIT. One witness even suggested that the process take the form of a “permanent tribunal” that would lead to greater expertise, functionality and predictability regarding the dispute resolution process.

Recommendation 7:

The Committee recommends that the federal government work with the provinces and territories so that the Agreement on Internal Trade provides for a dispute resolution system that is prompt, predictable and binding for the parties that fail to comply with the Agreement.

Conclusion

The domestic market presents a vital opportunity for Canada’s agriculture and agri-food sector. As the number of international free trade agreements has increased, improving the way in which the Canadian market functions has received less attention than increasing access to foreign markets. The patchwork of regulations or obsolete rules does not facilitate trade and sometimes create undue barriers to trade. The free movement of products between provinces and territories has suffered, and industry stakeholders often say that it is easier to export outside Canada than to another province. The AIT has demonstrated its limitations over the past 20 years, and a thorough review of the Agreement is needed. The Committee firmly believes that its recommendations to update the AIT in accordance with international agreements will make it easier to consolidate and thus facilitate the trade in agricultural and agri-food products between the provinces and territories.