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Trading down?

How international trade deals could force Canada to drop oversight over a growing number of regulatory issues.


With the Harper Government aggressively pursuing a spate of new trade deals, there’s unease that all of the moving parts will produce some unintended consequences.

Earlier this month, Ottawa grabbed headlines by announcing that negotiators had finalized the text of the Comprehensive Economic and Trade Agreement (CETA) with Europe. It has also just completed an advanced round of negotiations on the Trans-Pacific Partnership (TPP) with a host of countries on the Pacific shelf; it has complied with America’s Foreign Account Tax Compliance Act (FATCA); it is now fully party to the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID); and it is moving forward on the Trade in Services Agreement (TISA) which includes most of the developed world; it is also working on deals with India and the Caribbean countries.

Between those three deals and two conventions, suspicion is abound that Canada’s cultural and information sectors are at risk, namely with respect to data localization, privacy and copyright.


A general assumption from the Harper Government’s foray into his expedited international negotiations is that Ottawa is prioritizing meat-and-potatoes issues — agriculture products and manufacturing, especially — over more technical issues like copyright.

That’s raised concerns over negotiations over the TPP. While the text is still secret, like the other under-lock-and-key deals, leaked drafts suggest that America is taking a hardline stance on dealing with copyright infringement.

Just before the turn of the century, America implemented the Digital Millennium Copyright Act (DMCA). That brought about the notorious notice-and-takedown regime that has plagued copyright infringers by empowering copyright holders to issue takedown notices to web hosting companies and search engines that host and list unauthorized copyright material.

Due to the sheer volume of requests Google has received, the internet giant automated the process, ensuring that the site goes down immediately, and that verification to determine infringement takes place afterwards.

Critics call this a limitation on freedom of speech that corporations can leverage at the expense of internet users.

That’s partially why Canada avoided adopting the system. Grappling with the troubles of striking a balance between a free internet and protecting intellectual property, Ottawa opted for a more nuanced approach, dubbed ‘notice and notice.’ Introduced in Bill C-11, the Conservatives’ Copyright Modernization Act, the regime will finally take effect in January.

The legal framework invites copyright holders to send a notice of infringement to Canadian internet service providers. Those ISPs are then required to turn around and forward the notices to those IP addresses identified by the rights holders. Once that happens, the ISP is required to hang on to that users’ information for at least six months, and up to a year. That data can later be used in court, if the rights holder decides to pursue legal action.

ISPs are already sending out these notices, and there’s been a general optimism about the program. According to Rogers Communications, it is having success with the practice. Most users who receive the notices tend to stop their rule-breaking after the second notice.

Functionally, it allows rights holders to fight back against infringement, while still preserving the privacy rights of users, and respecting the independence of the internet.

But government may have thrown a wrench in their own machine by tabling the Digital Privacy Act, or S-4,, which could allow rights holders to side-step the whole process and go after the infringers themselves.

The real issue, however, is with the TPP.

According to leaked drafts of the deal, America is looking to put pressure on its allies to adopt a version of the DMCA, which could effectively impose the notice-and-takedown regime on the majority of the internet.

“The general understanding is that Canada was pushing back on the issue,” says Michael Geist, Canada Research Chair in Internet and E-Commerce Law at the University of Ottawa. “The concerns on notice-and-takedown have long been that you’re going to get mistakes, where things get taken down inadvertently or just by error, because so much is automated, so there’s a chilling effect.

“I think the Canadian Government recognized that really early on.”

Geist adds that notice-and-takedown isn’t even very effective in fighting copyright infringement, as it can’t go after peer-to-peer file sharing.

“It’s prone to absurd abuse — overzealous copyright holders and censorship. Straight-up censorship,” adds Howard Knopf, counsel at Moffat & Co. and Macera & Jarzyna.

The tax man cometh

One agreement that quietly entered into Canadian law was FATCA, a piece of American legislation designed to go after tax-owing American citizens abroad.

Tucked in the Spring’s budget implementation bill was the Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act, which made the statutory changes required by the Intergovernmental Agreement (IGA) that Ottawa signed with Washington.

That agreement, which came into force in June, codifies what the Americans have been trying to do for years — getting citizens paying their taxes, even if they don’t live in America.

“The U.S. is one of only two countries in the world who taxes based on citizenship,” points out Veronika Chang, a tax lawyer at Morris Kepes Winters — the other country, of course, being Eritrea.

As such, there’s a slew of Americans living abroad — including those who inherited American citizenship from their parents and those who were born in America and never returned — and they all have to file their returns.

“They can no longer say that ‘oh, I didn’t know I had to file,’” says Chang.

To address the issue, America pressured her allies to sign onto FATCA.  The law requires every bank in the world to transmit data, through their host state, to the IRS. That means Canadian banks will have to hand over the financial data of all of their customers they suspect of having American citizenship to the Canada Revenue Agency, which will then pass it on to the IRS. Any bank or individual that refuses could face a 30 per cent “withholding tax” which could apply to virtually any transaction originating in the United States.

Had Canada refused, Washington would have applied significant financial pressure on its banks, which have been falling over themselves to appease the regime for some time now.

“Because the US is such a great market, they have no choice but to comply,” says Chang.

While Ottawa managed to leverage some exemptions — notably, small credit unions won’t be affected, and certain funds like Tax Free Savings Accounts won’t be reported — there are concerns with how this agreement came about.

Notably, the automated nature by which the banks send the data — a complicated task, which still has to be thought through, says Chang — could result in a wholesale exporting of Canadian citizens’ personal financial data, simply because they’re also U.S. citizens.

“Yes, there are privacy concerns. I think that’s why Canada entered into the IGA,” says Chang. “But it’s a fact of life, unless the U.S. Congress changes the U.S. tax codes to decide that they are no longer going to tax based on citizenship.”

Meanwhile, some Americans in Canada are vowing to fight the regime. Applications have been filed in both the Federal Court and to the Human Rights Tribunal, as well as the United Nations. The group has retained noted human rights lawyer Joseph Arvay to pursue the claim.

A good home for data

One clause of the TPP agreement, that America has advertised as a freeing ‘cross-border data flows’ of any obstructions, would seek to limit the ability of states to implement data localization requirements. Similar language popped up in a leaked draft of TiSA.

Since data localization has become in vogue of late, especially in light of surveillance revelations from ex-NSA contractor Edward Snowden, there’s some push-back on the Americans insistence that it can be trusted to look after the world’s sensitive data.

The agreement could force two Canadian provinces to change their laws designed specifically to avoid American control over their data.

Both Nova Scotia and British Columbia require that private data held or outsourced by the government be stored in a server on Canadian soil. While the Americans and others have brushed it off as antiquated protectionism, advocates have cited it as an important safeguard in an increasingly porous digital world.

“The strong growth of cross-border data flows resulting from widespread adoption of broadband-based services in Canada and the United States has refocused attention on the restrictive effects of privacy rules in two Canadian provinces, British Columbia and Nova Scotia,” reads a report from the American trade commissioner.

On the federal level, Ottawa often adds a national security exemption to many of its procurement tenders, in order to require that all sensitive data be firmly located and treated within Canada. That, too, has drawn the ire of the Americans.

In an access to information request filed by the B.C. Freedom of Information and Privacy Association, American trade officials appear furious over Canada’s procurement restrictions.

In the access request, one American industry organization attempted to address Canada’s concerns with allowing a non-Canadian company to host and run the federal government’s email server.

"The [Government of Canada] has an objective to minimize the risk of a security or privacy breach due to vendor negligence and due to a vendor being compelled by a foreign nation to hand over email information owned by the Government of Canada. What are your thoughts on unlimited liability to achieve this objective?” writes a representative from Shared Services, which deals with hosting for the Canadian Government.

The Information Technology Industry Council rejects the idea entirely, in replying: “Liability must be commensurate to some degree with the value of the contract.”

Indeed, the American Government, and the industry it represents, appears to be completely unconvinced by the idea that hosting sensitive data in a jurisdiction with fundamentally different privacy legislation could be problematic.

John Boscariol, a partner at McCarthy Tétrault and head of their International Trade & Investment Law Group, says “it’s a bit rich” for the Americans to complain about Canada abusing the national security exemption — they’ve done it for years.

He adds that Canada’s effort to patriate data at home isn’t a ploy to leverage industry, it’s born from security worries.

The spaghetti bowl

Boscariol calls it “the spaghetti bowl.”

The slew of deals are all part of a trend: one where the Western nations have more-or-less dispensed with weaker, international deals, and have moved to more liberalized agreements between a smaller number of allies. That means, essentially, accelerating the rate at which states have to dispense with anti-competitive measures in just about every sector — telecommunications, procurement, intellectual property, sustainability, public services and just about every other area you can think of.

Boscariol says that determining which deal applies, which tribunal or court has jurisdiction, what constitutes a protected service under these agreements, and a raft of other considerations will all come into play. “For a Canadian company that operates internationally, this is going to be a real challenge,” he says.

Whereas for 30 years, trade disputes were largely handled in a multilateral forum — the World Trade Organization — the focus has shifted to bilateral or regional considerations. Complicating matters is the move to more investor-state dispute settlement processes, giving companies the power to go after rules and practices they see as discriminatory.

National reported earlier in the month about what the investor-state dispute settlement processes found in CETA mean for Canada.

In intellectual property matters — governed by the WTO-negotiated Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) — the deals are decades old and largely unreflective of technological advancements.

“This is happening in large part of the failure to negotiate a lot of these issues and commitments under the auspices of the WTO,” Boscariol says.

He says that bilateral deals, like TPP, are like “TRIPS-plus” – meaning that countries are under pressure to enact tougher conditions in their IP laws.

Then there are agreements like TISA, which would limit the ability of ability to regulate and control privatized government or quasi-government services.

That would effectively supplant the General Agreement on Trade in Services (GATS) — “GATS-plus,” as Boscariol puts it.

The language surrounding financial services was also leaked to Wikileaks, while the rest of the deal remains relatively opaque. The general expectation, though, is that it will chip away at the vestiges of state-backed enterprise — unions have expressed concern that it will make it virtually impossible for governments to buy-back privatized services, and that it will spell the death for any effort to establish state auto insurance.

“The proposed deal could make it impossible for future governments to restore public services to public control, even in cases where private service delivery has failed. It would also restrict a government’s ability to regulate key sectors including financial, energy, telecommunications and cross-border data flows,” reads a statement from the Canadian Union of Public Employees.

Boscariol agrees that deals like this would tie the government’s hand from stepping into the private sector.

“Trade agreements don’t typically require governments to privatize,” he says. “It’s only once the government makes that decision to privatize, to take over a sector, that those trade agreement obligations tend to kick in.”

He goes on to say that, in dispensing with the state-to-state dispute resolution that was encouraged under the WTO, states will now be faced with huge challenges under international tribunals like ICSID, and it could have the functional effect of forcing governments to drop regulatory schemes altogether.

“That company doesn’t have to rely on diplomatic or political issues,” he adds.

As this trend continues, with Canada signing on to an increasing number of deals in rapid succession, there is unease that instead of progress, the activity amounts to an overall retreat.

“The problem with this retreat from the multilateral, GATS approach is that it’s never-ending. Each one of these trade deals was supposed to guarantee free trade,” says Knopf. “The Americans keep saying, ‘it’s not really free trade, you have to give us this and this.’”

According to Boscariol the root cause may be China.

“This is all about creating a trading block to deal with idea that… China is a competing economic force,” he says.

Interestingly, Canada could be in a tough spot once it finally decides to ratify its Foreign Investment Promotion and Protection Agreement with China. In an already terse diplomatic scene with the Asian powerhouse, giving Chinese corporations a recourse to us ICSID or other tribunals to go after the Canadian Government could be a slippery slope.

“China, in many ways, is in the centre of all of this,” says Boscariol.