Frequently Asked Questions

International Trade Agreements and Local Government: A Guide for Canadian Municipalities

  1. Do international trade agreements, including the (North American Free Trade Agreement (NAFTA) and the World Trade Organization Agreement on Government Procurement (GPA), limit the right of municipalities to regulate in the public interest or for the protection of the environment?
  2. Will the Government of Canada demand a permanent exception from international trade agreements, including the General Agreement on Trade in Services (GATS), for local authorities?
  3. What does the NAFTA Chapter 11 decision in Metalclad v. Mexico mean to municipalities’ ability to implement zoning bylaws?
  4. Does NAFTA Chapter 11 affect municipalities’ ability to use P3s for government procurement?
  5. Do Canada’s trade obligations cover bulk water?
  6. Do international trade agreements, including the NAFTA and the GPA, require Canada to allow foreign businesses to provide water distribution services?

1. Do international trade agreements, including the (North American Free Trade Agreement (NAFTA) and the World Trade Organization Agreement on Government Procurement (GPA), limit the right of municipalities to regulate in the public interest or for the protection of the environment?

  • No. Our trade agreements do not impair governments’ ability to adopt non-discriminatory measures necessary to achieve legitimate public policy objectives, such as the protection of health, safety and the environment.

2. Will the Government of Canada demand a permanent exception from international trade agreements, including the General Agreement on Trade in Services (GATS), for local authorities?

  • No. In principle, Canada’s bilateral and multilateral international trade agreements apply to measures taken by Canada that affect trade in services, including measures taken by regional and local governments. However, these agreements contain a number of exceptions and exclusions that are relevant to municipalities. For example, the GATS excludes services supplied in the exercise of governmental authority (services that are supplied neither on a commercial basis, nor in competition with one or more service providers) as well as those services procured by governments and their agencies. Moreover, Canada has not made GATS commitments in connection with services such as health, public education and other social services.
  • This means that Canada’s GATS obligations do not apply to many of the services provided by local authorities nor to the services procured by them.

3. What does the NAFTA Chapter 11 decision in Metalclad v. Mexico mean to municipalities’ ability to implement zoning bylaws?

  • Neither the Tribunal award nor the statutory review of the award undertaken by the BC Supreme Court at the request of Mexico called into question the right of a local government to regulate on environmental or public health grounds.
  • The Metalclad Tribunal found that, after making a significant investment in a landfill site and obtaining all necessary authorizations from the Mexican federal government, a proponent was prohibited from proceeding with its project due to a local municipality’s denial of a construction permit on the basis of grounds that were outside its authority, and a state government’s issuance of an Ecological Decree to respond to local opposition. Moreover, a Chapter 11 investor-state Tribunal may only award monetary damages, costs and interest directly related to a breach of an obligation. A Tribunal cannot order a party to modify or remove existing legislation and it cannot award punitive damages.
  • While the Tribunal found that these measures constituted an indirect expropriation under NAFTA Chapter 11, the Metalclad award does not stand for the proposition that governments cannot regulate in the public interest or for environmental protection. It should also be noted that each Chapter 11 case is fact-specific and does not set a binding precedent for future cases.

4. Does NAFTA Chapter 11 affect municipalities’ ability to use P3s for government procurement?

  • Chapter 11 does not affect municipalities’ ability to use P3s for government procurement. The purchase of goods or services by a government through a public-private partnership may be considered government procurement. Under Canada’s existing international trade agreements, government procurement of goods and services by Canadian municipalities is not covered.
  • Moreover, certain provisions of NAFTA Chapter 11, e.g., Article 1102 (National Treatment) and certain paragraphs of Article 1106 (Performance Requirements), expressly do not apply to government procurement. This means that unless applicable procurement obligations have been taken in accordance with NAFTA’s Chapter on Government Procurement, no level of government is required to provide foreign investors national treatment in government procurement, nor are they prevented from requesting certain local preference requirements in the procurement of goods or services through a public-private partnership. 

5. Do Canada’s trade obligations cover bulk water?

  • Canada’s trade obligations do not preclude Canada’s ability to regulate water as a natural resource including whether it may be extracted and in what quantities. Canada has no trade obligations to allow bulk water extractions.
  • Water in its natural state, such as in lakes, rivers and aquifers, is a natural resource and is not considered a “good” for the purposes of trade agreements. Only when water is removed from its natural state and commercialized does it become a good potentially subject to trade disciplines, as in the case, for example, of bottled water for the commercial market.

6. Do international trade agreements, including the NAFTA and the GPA, require Canada to allow foreign businesses to provide water distribution services?

  • No. Canada’s international trade agreements do not require municipal, regional or provincial governments to allow foreign businesses to provide drinking water or other water distribution services. Governments and government-owned utilities may continue to provide these services themselves.
  • Only if governments do choose to procure water distribution services from private-sector firms, or to privatize water distribution services, may certain trade obligations, such as non-discrimination obligations, apply.