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Jun 27 2016

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Strange brew: Governing booze in the Federation

June 27, 2016 | By

Is it time to drink to the Economic Union?

It’s deck and patio season, and at least one New Brunswick household is especially well stocked this year. In 2012, Tracadie, NB resident, Gerard Comeau, drove four hours round-trip to Quebec. He returned with 15 cases of beer, 2 bottles of whiskey, and one bottle of something called Stinger Premixxx. Alcohol is cheaper in Quebec, and the savings are enough to justify cross-border booze runs.

He was snagged in an RCMP sting operation, and fined for violating the New Brunswick Liquor Control Act, which requires that alcohol possessed in the province is purchased from the provincial Liquor Corporation. Rather than pay the $292.50 fine, he enlisted the help of lawyers to argue that the restriction was unconstitutional. In April of this year, a New Brunswick provincial court agreed. The case will be appealed, and it’s early yet – but the impact of that decision could be felt across Canada’s incomplete economic union.

Alcohol-trade-illustration-01

Strange brew: Governing booze in the Federation

The interprovincial alcohol trade is governed by both federal and provincial laws. Until recently, the Federal Importation of Intoxicating Liquors Act effectively prohibited transporting alcohol between provinces – making rumrunners out of many unsuspecting cross-border shoppers. The law was enacted in 1928, at the request of the provinces, as prohibition had drawn mostly to an end.

84 years later, after pressure from a public campaign to “free my grapes!,” the federal government amended the law to permit individuals to bring wine across provincial borders in quantities for personal consumption. The law was amended again in 2014 to permit the same for beer and spirits.

But changes to federal legislation would not have saved M. Comeau, who was not charged for bringing alcohol across the border, but for possession within New Brunswick. Provinces regulate the sale and consumption of alcohol, and so operate parallel regulations that also impact interprovincial trade in alcohol. And the question is complicated by the desire on the part of several provinces, including Ontario, to benefit from the significant revenue generation of provincial liquor sales.

The current regulatory landscape is a cocktail of different laws. British Columbia, Manitoba, and Nova Scotia have changed their liquor laws to align with the federal changes. They now explicitly permit direct purchase – online, for example – of wine from other provinces.

In other provinces, statutes range from ambiguous to prohibitive. Alberta recently pursued stronger beer protectionism, raising the tax on beer produced outside of Alberta, Saskatchewan, and British Columbia (parties to the New West Partnership free trade agreement). Ontarians are allowed to possess alcohol purchased in other provinces if it is brought into Ontario “on their person”. The Liquor Control Board of Ontario also promotes its Private Ordering department, which permits customers to import alcohol not offered by the corporation for personal consumption.

State of the Economic Union

But the bigger question that the Comeau case raises is whether Canada has achieved the economic union originally envisioned for it?  The case hangs on how to interpret Section 121 of the British North America Act (1867):

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.

Until Comeau, courts had interpreted Section 121 to refer only to formal customs or tariffs on cross-border trade. Justice Ronald LeBlanc accepted Comeau’s lawyers’ argument that the liquor prohibitions in fact constituted a kind of trade barrier, and were therefore unconstitutional.

Section 121 reflects what was regarded as an important principle of Confederation: interprovincial free trade. In an 1865 debate, George Brown famously insisted that the creation of Canada was “to throw down all barriers between the provinces – to make a citizen of one, a citizen of the whole.”

To cross-border booze consumers, that sounds pretty good. But it’s complicated. Section 121 also lives inside a constitution that has produced a deeply decentralized federation. And that will bring some costs to accompany the benefits. Empowered provinces with wide decision-making authority mean friction, inevitably, including economic friction that wouldn’t exist in a unitary state. We can accept some of that as simply the cost of doing federalism.

Nonetheless, as international trade grows freer – with the imminent conclusion of the Comprehensive Economic and Trade Agreement with the European Union (CETA), and the Trans-Pacific Partnership – some incongruous barriers to interprovincial trade remain.

This is despite the Agreement on Internal Trade (AIT), which the provinces and federal government committed to more than twenty years ago. The AIT was intended to “reduce and eliminate, to the extent possible, barriers to the free movement of persons, goods, services and investments within Canada”. Most assessments of the AIT converge on the conclusion that its impact has been modest and its objectives unreached. Along with alcohol, other remaining obstacles to a more perfect economic union include:

  • Financial Services
    Unusually, in Canada each province and territory operates its own securities regulator – despite several efforts at establishing one national agency. In 2011, the Supreme Court ruled that a draft federal bill, which would have created a single Canadian securities regulator, was unconstitutional.
  • Supply management boards
    Provincial marketing boards control the sale of some farm products through a variety of mechanisms including quotas, which can interrupt interprovincial commerce.
  • Barriers to labour mobility
    Significant progress has been made, but some remaining barriers exist for workers who wish to relocate to elsewhere in the federation. In some fields, licensing and certification do not travel across provincial borders, for example. In 2015, the premiers committed to a protocol for mutual recognition of apprentice training that has taken place in other provinces.
  • Different regulatory standards
    Businesses have complained about a lack of regulatory harmonization between provinces, which makes doing business in multiple provinces complex and red tape-heavy.
  • Registration redundancy
    Corporations are required to register separately in each province in which they wish to do business. This increases time and money spent on reporting and administration.

In recent years, provinces have taken action to eliminate some of these barriers. In 2006, Alberta and British Columbia signed the Trade, Investment, and Labour Mobility Agreement to permit freer movement of people, goods, and capital. In 2010, Saskatchewan joined Alberta and BC in the New West Partnership Agreement. In 2009, the Ontario and Quebec negotiated a Trade and Cooperation Agreement, which was updated again in 2015.

But there has been little concrete pan-Canadian action to deepen the economic union. Amendments to strengthen the AIT had been promised for March 2016, but did not materialize – though the principal actors insist they are still on the way. Kathleen Wynne did seek to champion economic union in the run-up to the 2015 federal election. She described it as a transformative project to “renew the promise and vision of a great country.”

The bigger question that the Comeau case raises is whether Canada has achieved the economic union originally envisioned for it?

The road to a more perfect economic union

So almost 150 years in, how do we get over the hump? Some recent proposals include:

  • In 2014, Industry Canada released One Canada, One National Economy. It set out two pathways to stronger union: either modernization of the AIT, with improvements in priority areas like governance; or ground-up renegotiation, adopting the more comprehensive and muscular approach of recent free trade agreements like CETA.
  • Industry Canada also contracted Ernst and Young to create an Internal Trade Barrier Index. When it becomes live, it is meant to identify areas of the economy particularly affected by interprovincial barriers.
  • The Council of the Federation has championed several targeted reforms, including a stronger person-to-government dispute settlement Now an individual or business can directly challenge a government over potential violations of the AIT, with the potential for monetary penalties.
  • A 2014 reported by the Public Policy Forum made a number of recommendations, including better data, changes to the Committee on Internal Trade, regulatory harmonization, and pan-Canadian corporate registration.
  • Some policy and industry actors recommend reforming the AIT with a “negative list” Currently, the AIT is positive list: it lists the items that the agreement applies to. CETA, in contrast, uses a negative list – it lists only those items that are exempt from the agreement. So if this change was made, the AIT would apply to all goods and services except those listed. This would arguably make for a more comprehensive and transparent agreement.

Regardless of the specific mechanisms, what should be clear is that more federal-provincial collaboration is required. Both the feds and provinces have taken meaningful strides on this front, but they have not been in lock-step. We see the result, for example, when the federal government liberalizes interprovincial alcohol trade, but provincial rules remain the same. And regional free trade blocs are, by definition, incomplete responses to the problem.

Prime Minister Trudeau has pledged to restore the practice of regular First Ministers’ Meetings and indeed, has convened one already. Strengthening the economic union should be a topic of early priority in future First Ministers’ Meetings.

Retried Supreme Court Justice Morris Fish once wrote that “Liquor has exerted a staggering influence on Canada’s constitution – More staggering (even) than the influence it exerted on the constitution of Canada’s first prime minister”.  The Comeau case may be the next example of just this. M. Comeau’s beer-and-Premixxx run may become an opportunity to scrutinize the state of our economic union against the aspirations of the framers. But politicians should get ahead of this. We’ve waited long enough to complete the economic union, as the plaintiff understands.

“After three years, I’m thirsty” he declared on the courthouse steps. As are we all.

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