Pellet Protectionism

Ontario depends on exports. In fact, exports are so important to the province that it has a government agency, Ontario Exports, dedicated to “Selling Ontario to the World”. According to Ontario Exports, the province exported $126-billion worth of manufactured goods in 2009.  Without exports, Ontario wouldn’t have an economy.  That is why it is so difficult to understand its protectionist policy banning wood pellet imports for use by Ontario Power Generation (OPG), a provincial Crown corporation.

OPG is planning to re-power its Atikokan Generating Station by replacing coal with biomass and has chosen wood pellets as the preferred fuel. In early 2009, OPG issued a request for indicative prices for 90,000 tonnes/year of dry wood pellets. But there was a catch. The pellets must be Ontario sourced and processed. No pellets are allowed from other Canadian provinces or foreign suppliers.

Many people are unaware that Canada has had an Internal Trade Agreement (ITA) since 1995.  The ITA was signed by all provinces and is intended to promote an open, efficient, and stable domestic market for long-term job creation, economic growth, and stability.  All provincial governments and Crown corporations are bound by the ITA.

According to Industry Canada (www.ic.gc.ca), some key provisions of the ITA state that governments:

• Must ensure their policies and practices do not create obstacles to trade;
• Are not permitted to discriminate against suppliers of another province through means such as local price preferences, biasing technical specification or importing, unfair registration requirement, or unreasonable time constraints;
• Are prohibited from using policies that favour local suppliers of goods, services, and construction;
• Cannot restrict bids to in-province firms or direct contracts to local suppliers;
• Are restricted from using local content, purchasing, and sourcing requirements;
• Are prohibited from introducing new trade barriers relating to the processing of forestry (e.g., wood pellets), fisheries, and mineral resources.

Evidence is showing that Ontario is failing to meet its ITA commitments. In May 2009, the province adopted a new Green Energy Act to reduce greenhouse gas emissions in the electricity sector and create jobs in emerging technologies.  Under the Green Energy Act, developers must buy goods and services from local suppliers to qualify for feed-in tariffs.  The provincial government says this will create manufacturing jobs in Ontario, but it is a clear example of protectionist trade policy. Consequently, Japan, the United States, and the European Union have joined in a complaint to the World Trade Organization (WTO), saying that Ontario’s Green Energy Act and its local procurement requirements are a prohibited subsidy and violate international trade agreements.  Under WTO rules, the complaint could lead to trade sanctions against Canada.

Currently, Canada and the EU are negotiating a comprehensive trade agreement. This type of protectionist policy weakens Canada’s bargaining position.  How will Canada justify Ontario’s trade barriers while simultaneously arguing for improved access for Canadian products into Europe?  It is not inconceivable that in retaliation, the EU, which is Canada’s largest market for wood pellet exports, could impose restrictions on imports of Canadian wood pellets and thereby devastate the nation’s wood pellet industry.

Remember the “Buy American” policy of 2009 in which U.S. Congress insisted that only Americans were eligible to bid on projects under the American Stimulus Plan?  An outraged Ontario Premier Dalton McGuinty called on Ontario municipal governments to fight this U.S. protectionism alongside the federal government.  Now, a year later, McGuinty has implemented the very type of policy he was protesting.

One of the reasons for Canadian Confederation in 1867 was cancellation by the United States of the Canadian-American Reciprocity Treaty, which allowed products into the United States free of taxes or tariffs.  Canada’s founders intended for Confederation to open unrestricted markets within Canada.  A national railway was built to facilitate this unrestricted trade.  Now, Ontario has re-implemented the protectionism that Canada was supposed to have overcome a century and a half ago.

Protectionism leads to inefficiency because suppliers do not have to face competition.  This results in higher costs to consumers.  Ontario’s green energy industry, including its wood pellet industry, will never be competitive if it is not required to face open competition. It is time for Ontario to end its export hypocrisy and harmful protectionism.