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Date: 1980-07-09
By: Government of Canada
Citation: Meeting of the Continuing Committee of Ministers on the Constitution, Powers over the Economy: Securing the Canadian Economic Union in the Constitution, Doc 830-81/036 (Montreal: 8-11 July 1980).
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DOCUMENT: 830-81/036

POWERS OVER THE ECONOMY:
SECURING THE CANADIAN ECONOMIC UNION IN THE CONSTITUTION

DISCUSSION PAPER SUBMITTED BY
THE GOVERNMENT OF CANADA

July 9, 1980

POWERS OVER THE ECONOMY:
SECURING THE CANADIAN ECONOMIC UNION IN THE CONSTITUTION

TABLE OF CONTENTS

Page

1. Introduction 1
2. Arrangements Between States 5

2.1 The International Trading System (GATT) 6
2.2 An Economic Community of Sovereign States (EEC) 8

3. Other Federations 10

3.1 United States 10
3.2 Australia 11
3.3 The Federal Republic of Germany 13
3.4 Switzerland 13
3.5 India 14

4. The Canadian Federation 15

4.1 Ambit of Section 121 16
4.2 Federal and Provincial Legislative Jurisdiction 17
4.3 Implications for the Operation of the Economic Union 18
4.4 An Institutional Perspective 21
4.5 Constitutional Proposals Related to the Canadian Economic Union 23

5. General Approach 24

6. Conclusion 27

ANNEXES

A. Illustrative Survey of Actual or Potential Restrictions on the
Interprovincial Mobility of Goods, Services, Labour and Capital within Canada
28

B. Summary of Constitutional Proposals Directly Related to Economic Mobility
within Canada 43

POWERS OVER THE ECONOMY:

SECURING THE CANADIAN ECONOMIC UNION IN THE CONSTITUTION

1. Introduction

The purpose of this document is to consider the means whereby the Canadian
economic union could be better secured in the Constitution.

An economic union is an entity within which goods, services, labour, capital
and enterprise can move freely, that is, without being subject to fiscal and
other institutional barriers, and which is endowed with institutions capable
of harmonizing the broad internal policies which affect economic development
and of implementing common policies with regard to the entity’s external
economic relations. Moreover, the form which the political institutions of our
economic union should take is determined since Canada is, and is destined to
remain, a federal state. Accordingly, new constitutional provisions to
safeguard and strengthen the Canadian market must take into account the other
goals of the Federation, such as the preservation of its linguistic and
cultural diversity, and the sharing of income and wealth among citizens and
regions.

Canada has achieved a high degree of economic integration over the past
century, but the existence and operation of a common market within its
territory is not adequately safeguarded in its basic law. The two orders of
government have the constitutional authority to restrict in numerous ways the
free movement of persons, goods, services, capital and enterprise within the
country.

Although the B.N.A. Act does not contain an explicit economic definition of
the federation, the following description can be drawn from a number of
provisions, as interpreted so far by the courts:

– a customs union, since provincial legislatures are prohibited from levying
internal border taxes and Parliament is empowered to establish a common
external tariff;

– an imperfect common market for goods — imperfect because Section 121
probably does not prohibit non-tariff barriers to interprovincial trade, and
because judicial interpretation has limited the federal trade and commerce
power;

– an imperfectly safeguarded common market for capital and enterprise, since
provinces can impede the movement of some financial assets and business
establishments of some financial assets and business establishments across
interprovincial borders;

– distinct and “protectable” provincial markets for labour and most other
services, except in federally regulated industries;

– a highly integrated economic union nonetheless, by virtue of federal
jurisdiction over taxation, money and banking, interprovincial trade, commerce
and transportation, agriculture, communications, weights and measures, etc.

The Government of Canada is of the view that, of the five broad functional
categories suggested in Powers over The Economy: A Framework for Discussion,
the securing of the economic union should receive priority attention in the
process of constitutional renewal. This view is founded on two basic
realities.

The first reality is political. To be a citizen of Canada must be a dynamic
reality rather than a static abstraction, a reality that extends beyond the
realm of political and legal institutions to the vital aspects of one’s
material existence. As the Government of Quebec argued twelve years ago in a
proposal on the general aims of the Constitution, “all Canadians must be full
citizens, having in principle the same rights, the same responsibilities and
the same opportunities for self-fulfillment”. To the extent compatible with
federalism, this basic equality of all citizens must apply to economic
affairs, under provincial law as well as under federal law. Wherever they may
have been born or have chosen to reside in the country, Canadians should be
free to take up residence, to acquire and hold property, to gain a livelihood,
to invest their savings, to sell their products and purchase their supplies in
any province or territory of Canada, provided they abide by the laws of
general application of that province or territory.

There may be circumstances, of course when the pursuit of other political,
social, economic and cultural goals justifies some restriction of the economic
freedom of Canadians. But the freest possible access to the national market
should be inherent to Canadian citizenship, and therefore secured in the
Constitution. Any provincial authority should bear in mind that whenever it
discriminates against residents of other provinces, it exposes its own
residents to retaliatory discrimination by the governments of these other
provinces; and whenever it seeks to retain the ability to restrict the
mobility of other provinces’ residents, it simultaneously argues that the
freedom of its own residents should be subject to curtailment by nine other
governments. As for the federal authority, while it would be imprudent to
limit its ability to meet the varying needs and aspirations of different parts
of the country in a differentiated way, it should always be aware that such
use of its powers can be quite contentious since it inevitably raises
difficult problems of interpersonal and interregional equity.

The second reality is economic. It was admirably expressed in A Future
Together, the main report of the Task Force on Canadian Unity:

“Our analysis indicates that greater economic benefits should result from
increasing levels of integration. Some of those benefits are associated
specifically with the integration of regional economic activities into a
larger market. For example, larger markets provide a greater scope for the
diversification of sectors and specialization, resulting in a better
allocation of the factors of production. Competition is enhanced; industries
can take advantage of economies of scale; and a larger and more efficient
financial sector may be created. Moreover, the availability of a more
diversified and broader natural resource base is an important benefit – when
the market for one commodity is low it may be counter-

balanced by the more favourable position of other commodities.

“Other benefits related to size come into play, particularly when integration
takes the form of federal union. We have in mind a variety of aspects related
to the efficiency and effectiveness of the larger public sector, such as the
economies of scale in the delivery of public goods (for example in national
defence), and a greater scope for interregional policy coordination which
would take into account programs whose impact could not be restricted to a
single region. Also significant is the enhanced capacity of the public sector
to raise funds through external borrowings.

“In a federal union the regions can expect their economies to perform better
as a result of the movement of labour, capital, goods and services. Other
advantages are the greater chance of restraining undue competition among the
regions for development projects and the improved leverage of the regions in
securing international trade advantages. Finally, as we have noted, a
federation allows for interregional transfers of funds through income support
measures and adjustment assistance to the regions.

“While such benefits may be difficult to measure precisely, they are
nevertheless very real, and they are reflected in the standard of living
Canadians have long enjoyed. In a nutshell, integration creates a surplus,
because the whole is greater than its parts. And the surplus, using the
central government as an instrument can be redistributed so that the strong
parts help the weak to the benefit of the whole.”

The Task Force also points out that Canada, given its geography, linguistic
duality and cultural diversity, cannot be single-minded in its pursuit of
economic integration — indeed, no country can afford to be. But it argues that
there is still ample scope to increase the “surplus” or benefits arising from
the Canadian economic union while keeping attendant costs at a reasonable and
acceptable level.

The Federal Government not only shares that view, but considers that there is
some urgency in safeguarding and strengthening our economic union, given
prevailing trends in the world economy. Technological developments, the
internationalization of factors of production, the need to get the benefits of
greater economies of scale and specialization of production facilities have
generated considerable pressure for larger markets. There has been continuing
liberalization of market access among the main industrialized countries through
major tariff reductions. A number of countries have combined their market
power through the creation of free trade areas of common markets. These and
other developments in the world market place, including the constant emergence
of new exporters, have made unavoidable structural adjustments of numerous
individual sectors and lines of production within the Canadian economy. These
adjustments run the risk

of being less effective and costlier if we are unable to exploit fully the
potential strength of our national market.

Of particular concern, in this respect, are signs of economic segmentation
within Canada which run counter to observed trends in other economic entities.
Protectionism among provinces, and weakening of the federal government’s
ability to promote balanced economic development, can involve significant
efficiency losses for Canada as a whole, and hence for each and every one of
its parts:

– higher supply costs, fragmentation and stunted growth for firms, and
diseconomies of scale which enhance import penetration and reduce the
international competitiveness of domestic production;

– diversion of trade to foreign suppliers, when fragmentation results in
neither in-province nor out-of-province suppliers being able to service
provincial markets on a competitive basis;

– lower incomes and lesser employment opportunities for residents of all
provinces;

– higher burdens upon national and provincial taxpayers, due to higher cost of
public procurement and lower tax yields.

The converse, of course, applies. The competitiveness of Canadian industry and
hence the incomes and employment opportunities of Canadians will be
significantly enhanced if we succeed, not only in resisting trends towards
segmentation of our domestic market, but in devising new constitutional
arrangements which would make closer economic integration possible and
compatible with the preservation of our federal system. It should be noted
that any increase in the economic surplus generated by the Canadian economic
union could only improve our ability to reduce regional economic disparities,
provided adequate mechanisms to do so are in place.

The course of Canada’s economic development as well as international
experience, particularly in the past three decades, should give governments
the confidence and the foresight to proceed in this direction, with due care
of course, but also with boldness and imagination. Canadians owe much of their
current prosperity to the economic union, however, imperfect, established 113
years ago by the Fathers of Confederation. Also, the general post-war
movements towards freer trade, which is now enshrined in international law,
has resulted in enormous productivity and income gains for Canada, regional
markets like the European Economic Community, and the world economy as a
whole. Economic history and theory points to the benefits that would flow from
strengthening and better safeguarding of the Canadian economic union.

In this regard, a survey of relevant provisions of the General Agreement of
Tariffs and Trade (GATT), the Treaty of Rome, the constitutions of other
federal states and that of Canada may help bring out some of the deficiencies
in the main operating rules of the Canadian economic union. There are, of
course, basic differences between the nature, aims and institutions of the
Canadian federation and that of a multilateral trade agreement like the GATT,
which is based on reciprocity of benefits and a mutual balance of
international rights and obligations, or a common market like the EEC,
established by a treaty creating a community of sovereign states, and even
other federations

like the United States, Australia, the Federal Republic of Germany,
Switzerland and India, which have their own particular history, geography,
social make-up and political traditions. Nevertheless, such comparisons may
provide us with useful background and broad perspective.

2. Arrangements Between States

The aspects of multilateral and regional economic arrangements of greatest
interest of Canadian constitutional renewal are their fundamental principles
and objectives. In addition, it is useful to review how major issues are
dealt with, such as government aids and incentives, government procurement,
technical regulations, public enterprises, commodity trade and the mobility of
labour, capital and enterprise.

Government assistance, either through the fiscal system or direct or indirect
subsidies, is widely used for the promotion of social and economic policy
objectives such as regional development, sectoral adaptation, enhancement of
industrial innovation and revenue stabilization. The legitimacy of such
programs is recognized in international economic agreements, but concern about
costly competitive subsidization between national treasuries and the effects
which government subsidies may have on the trade interests of other countries
have led to the negotiation of international rules to deal with them.

Government contracting for goods and services now represents a substantial
portion of the markets available to many industrial sectors, particularly high
technology industries, and this market power is considerably increased if
agencies and entities directly or indirectly controlled by governments are
included. Concerns about restrictive government purchasing practices and their
impact on the efficiency of world trade and production patterns have led to
the development of disciplinary provisions in international law.

In modern society, technical regulations are essential to protect human and
animal life and health; to ensure that products offered to the consumer meet
the necessary levels of quality, purity, technical efficiency and performance;
to protect the environment; and for reasons connected with safety, national
security, and the prevention of deceptive practices. Technical regulations are
adopted by governments at all levels: central, provincial and municipal.
However, such regulations can create significant distortions or obstacles to
trade.

Governments often choose to engage directly through various institutions, in
production and trade, including the retail level. A technique often used to
regulate the purchase and sale of certain goods and services is the
establishment of public enterprises, with or without monopoly control. As
yet, governments have shown little inclination to bring these governmental
activities under common international discipline, but they do receive some
specific attention in both the GATT and the EEC.

International commodity trade has become important for most national economies
and for international development. Indeed, commodity trade issues have come to
play a substantial role in the management of the international economy and
have contributed to a heightened awareness of the degree of economic
interdependence in the international community.

Finally, some international economic arrangements, notably common markets,
attempt to go beyond the benefits of increased trade in products to capture
efficiency gains arising from free movement of factors of production —
labour, capital and enterprise. Accordingly, the EEC is a useful reference
for this more advanced form of economic integration.

In reviewing international arrangements, one must keep in mind that these
systems experience many operational problems which examination of their legal
foundations does not necessarily reveal. The GATT, for example, does not
require adherence of member countries to its more than one hundred subsidiary
agreements, and its effectiveness in stemming the recent resurgence of
protectionism is open to question. Similarly, there are many weaknesses in the
actual operation of the European Economic Community, notably its continuing
inability to develop efficient agricultural policies, remove non-tariff
barriers to the mobility of factors of production, and harmonize broad
economic policies. Many of these weaknesses may be attributed to the limited
effectiveness of institutions established to implement such international
arrangements. Notable, in the case of the EEC, are the delays, lengthy
consultations and protracted negotiations resulting from the quasi-confederal
nature of its decision-making (e.g., legislative and regulatory) processes and
the very limited authority of its executive organs. Nevertheless, the overall
effect of these arrangements has unquestionably been to facilitate the
expansion and to enhance the efficiency of trade and production, both at world
level and within the broad areas more immediately affected by the GATT and
Western Europe in the case of the Treaty of Rome.

2.1 The International Trading System (GATT)

The GATT is the key multilateral instrument that lays down agreed rules for
international trade. As such, it is the primary international safeguard for
the maintenance of an open global trading system. Although the GATT is now a
complex set of agreements incorporating rights, obligations and trade
concessions, the fundamental principles and aims of the Agreement are
comparatively few, namely the reduction of tariffs and other barriers to trade
and the elimination of discriminatory treatment in international commerce. The
two key operating rules are the unconditional non-discriminatory treatment of
like products originating in or destined for the countries of all other
contracting parties (Article I) and the national treatment on internal
taxation and regulations, including the principle that these should not be
applied to imported or domestic products so as to afford protection to
domestic production (Article III).

There is a GATT Agreement on Subsidies/Countervailing Measures aimed at
reducing or eliminating trade restrictions or distortions arising from
government subsidies and of countervailing measures, and establishing a
framework of rights and obligations to deal with these effects. Under it, any
form of subsidies (e.g., government financing of commercial enterprises,
government support services and facilities, R & D fiscal incentives,
government participation in or provision of equity capital, etc.) granted by
any government or any public body within the territory of a signatory is
subject to international rules. Except for export subsidies on non-
agricultural products, which are prohibited, it is not subsidies per se but
their effects which are objectionable, whether the effects are of an import
substituting or of an export stimulating nature.

Concerning public procurement, there is an agreement based on the principles of
non-discrimination and national treatment to be accorded to products and
suppliers of signatory countries. The scope and coverage of the agreement on
government procurement extends to any law, regulations, procedure and practice
regarding the procurement of products and services incidental to the supply of
these products. It applies to a negotiated list of purchasing agencies and
entities of central governments and to contracts of a value of about $220,000
and more. Further negotiations are envisaged to broaden the agreement so that
it might include service contracts and products such as power generating,
telecommunications and transportation 3quiemtnt.

The GATT Agreement on Technical Barriers to Trade prohibits the adoption or
application of technical regulations and related activities with the purpose
of creating “obstacles to international trade” and accords non-discriminatory
and national treatment in this regard to imports of like products. Recognizing
that technical regulations introduced for legitimate domestic purposes may
nevertheless adversely affect imports, the agreement obligates signatories
to ensure that technical regulations and related activities do not have the
“effect of creating unnecessary obstacles to international trade”.

State trading enterprises are subject to the GATYT rules (Article XVII) which
require that public enterprises act in a manner consistent with the principles
of non-discrimination and make purchases or sales solely in accordance with
commercial considerations and afford the enterprises of other countries
adequate opportunity, in accordance with customary business practice, to
compete for participation for such purchases or sales.

Existing GATT rules with respect to commodity trade limit, in the main import
restrictions on agricultural or fishery products to what is “necessary” for
enforcement of governmental measures which operate an effective domestic
supply management program (Article XI) to measures undertaken in pursuance of
obligations under bona fide intergovernmental commodity agreements (Article
XX). As to export controls, existing GATT rules are relatively loose and
permissive.

2.2 An Economic Community of Sovereign States (EEC)

The Treaty of Rome establishing the EEC contains a clear statement of
principles and objectives, including (Article 3):

– elimination as between Member States of customs duties and of quantitative
restrictions in regard to the importation and exportation of goods as well as
“all other measures with equivalent effect”;

– the establishment of a common customs tariff and commercial [policy towards
third countries;

– the abolition, as between Member States, of impediments to the free
movement of goods, persons, services and capital;

– the establishment of common agricultural and transport policies;

– the establishment of a system ensuring that competition shall not be
distorted in the common market;

– the implementation of procedures allowing co-ordination of the economic
policies of Member States and resolution of payments imbalance among them;
and,

– the approximation of their respective laws to the extent necessary for the
functioning of the common market.

In addition, the principle of national treatment is clearly spelled out in
the rules related to fiscal measures (Article 95) and the principle of non-
discrimination is specifically reiterated in numerous sections.

These principles are carried through explicitly in many of the specific
provisions dealing with the classes of activity brought under the discipline
of the Treaty. For example, government aids which distort or threaten to
distort competition by favouring certain enterprises or certain productions
are regarded as incompatible with the development and functioning of the
common market if they adversely affect trade between member states. Even
certain aids which are specifically allowed for, such as consumer subsidies
and regional development grants, must be extended without discrimination by
origin of goods and not be contrary to the common interest.

Although the Treaty of Rome did not contain any explicit reference to the
question of government contracting of goods and services, the Community had
concluded, by 1976, an agreement based on the principle that restrictions to
the free flow of goods contracted by public authorities, whether national,
regional or local, are contrary to the provisions of the treaty prohibiting
quantitative import restrictions and “all measures with equivalent effect”
(Article 30). The scope and coverage of this agreement is still, however,
incomplete as it does not apply to certain sectors such as defence,
transportation, energy and telecommunications, nor to contracts below
approximately $220,000.