A month ago, Canada’s federal, provincial and territorial governments volunteered to be directly sued by investors under the Agreement on Internal Trade. This quiet announcement from Brudenell, Prince Edward Island, seems to have gone almost unnoticed.

But it is a huge step toward imposing the Trade, Investment and Labour Mobility Agreement (TILMA) on all Canadian jurisdictions and inserting investor-state provisions into Canada’s proposed Comprehensive Economic and Trade Agreement with the European Union.

Alberta and B.C. unveiled TILMA in April 2006 as an arrangement that other provinces would join. Following public debate, all other provinces and territories explicitly rejected the deal or quietly decided not to sign on.

The most important objection to TILMA is that it allows business to sue provincial and local governments for up to $5 million over laws, regulations and policies that allegedly have negative side effects on economic activity or investment that happens to cross a provincial border. These challenges are adjudicated behind closed doors by commercial tribunals, rather than through the normal court system.

This sweeping “solution” is rather extreme compared to the supposed “problem” of interprovincial trade barriers. Very few such barriers have been identified and governments have a good track record of resolving them on a case-by-case basis. The Royal Commission on the Economic Union and Development Prospects for Canada estimated that interprovincial barriers cost under 0.05% of GDP in the 1980s and most have since been removed.

After failing to convince any other provinces or territories to join TILMA, its supporters have been implementing it through the back door. In July 2008, premiers added financial penalties of up to $5 million to the Agreement on Internal Trade, which covers all provinces and territories.

As I noted at the time, these fines applied only to intergovernmental disputes. To fine a government under the Agreement on Internal Trade, a business would first have to convince another government to make the complaint.

Last month’s decision was to allow business to directly sue governments over public policy. According to the press release:

Ministers agreed to undertake a more effective enforcement mechanism under the Agreement on Internal Trade for disputes brought by “persons” (individuals, businesses and other organizations) against a government… The changes agreed to today include monetary penalties… These are largely based on the new process applicable to disputes between governments which was put in place in 2009 [i.e. the fines of up to $5 million announced in July 2008].

The Canadian government is simultaneously trying to negotiate similar provisions with much larger fines for investor-state disputes involving the European Union. Since the proposed Canada-Europe deal would include provincial governments, creating an investor-state dispute process encompassing provinces may help pave the way. The press release even notes “the importance of linkages between the Agreement on Internal Trade and international trade agreements.”

And in case the provenance of this approach is in doubt, check out the third-last paragraph: “Ministers expressed their appreciation to the Atlantic Institute for Market Studies for its presentation.”

The good news is that these changes are still just general proposals. The Committee of Ministers on Internal Trade plans to actually amend the Agreement on Internal Trade at its June 2012 meeting. So, we have a year to stop it.

The adoption of investor-state provisions is by no means inevitable. As Scott Sinclair brought to my attention, Australia’s recent Trade Policy Statement (page 14) rejects this approach:

Some countries have sought to insert investor-state dispute resolution clauses into trade agreements. Typically these clauses empower businesses from one country to take international legal action against the government of another country for alleged breaches of the agreement…

The Gillard Government supports the principle of national treatment — that foreign and domestic businesses are treated equally under the law. However, the Government does not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses. Nor will the Government support provisions that would constrain the ability of Australian governments to make laws on social, environmental and economic matters…

In the past, Australian Governments have sought the inclusion of investor-state dispute resolution procedures in trade agreements with developing countries at the behest of Australian businesses. The Gillard Government will discontinue this practice.

This article was first posted on The Progressive Economics Forum.