Opinion: Ottawa needs to close trade loopholes hurting independent businesses

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Vass Bednar is Executive Director of McMaster University’s Master of Public Policy in Digital Society program and Associate Professor of Political Science. Denise Hearn is a Senior Fellow at the American Economic Freedom Project.

The House of Commons Standing Committee on Industry and Technology is conducting a study on the productivity of our small and medium-sized enterprises, with a focus on competitiveness and competition law reform.

As Ottawa looks ahead to deliberation on a modernized law, it must reconsider the unfair trading conditions that currently favor dominant companies and commit to closing a number of loopholes in both digital and traditional markets that are hurting consumers and independent businesses.

To this end, political decision-makers should learn from current case studies. Consider the US, where PayPal-owned mobile payment service Venmo is introducing mandatory arbitration clauses into its consumer contract. This contractual clause requires the parties to resolve their disputes through arbitration rather than going to court. Enforced arbitration procedures have been criticized for being secretive, limiting the complainant’s legal rights and often requiring high up-front fees for filing a complaint.

In the case of Venmo, the only way to opt out of mandatory arbitration is to send the company a written notice by mail. And if Venmo changes the terms of the contract in the future, the opt-out will not apply. At this point, customers have one final option: accept our terms or close your account.

While Venmo is only available in the US, Canadians are similarly at the mercy of the bank’s proprietary payments system, INTERAC e-Transfer, which, like many major Canadian companies, mandates arbitration to resolve disputes. Such take-it-or-leave-it contract clauses are known as “liability contracts” and are becoming increasingly common in business.

These terms illustrate how stakeholders such as consumers, workers and businesses are increasingly at the wrong end of an asymmetric bargaining position in the markets. And while many provinces have used their consumer protection laws to protect consumers from binding arbitration clauses, those protections do not extend to businesses and commercial transactions.

Independent companies often deal largely alone with coercive, unfair or unclear contract terms with dominant buyers – some of which are anti-competitive. These unilateral contractual terms can be used to silence interest groups (such as with non-disclosure or non-disparagement clauses), limit legal options or rights (with mandatory arbitration or a class action waiver), hamper fair dealing (with exclusive trade agreements or tied sale), restrict the freedom to set prices (without price competition clauses) and to extract profits or information (with mandatory disclosure of sensitive business information).

But it’s not just contracts – dominant players are now dictating trading terms in supposedly “free markets”. Currently, entrepreneurs face a number of competitive issues imposed by digital gatekeepers that are nearly invisible to the consumer.

For example, independent companies selling on a technology platform-based marketplace work with gatekeepers who continually increase the “toll” they charge sellers and suppliers. Etsy sellers recently went on strike and closed online shops in protest at rising transaction fees. Meta recently announced that it will take a 47.5 percent cut of all digital assets sold on its Metaverse platform — a staggering percentage that leaves artists, developers, and creatives far less. And Amazon now makes most of its revenue from seller fees, which have been rising steadily every year and recently hit sellers with a 5 percent “fuel and inflation” surcharge.

These tolls act like private taxes in the markets, and in the absence of proper competition legislation and enforcement, smaller players have little power to oppose them.

But despite rising fees, platforms aren’t taking responsibility for challenges companies have consistently complained about, such as: B. Imitation, fake products and fake reviews. Not to mention platforms like Google and Amazon that favor their own products themselves, making it all but impossible for smaller companies to compete. Platforms are not neutral trading spaces; they are markets shaped by rules. These rules are now set by private regulators.

And tech platforms aren’t the only ones. Entrepreneurs and business people across all industries do not have fair and equal access to the markets because dominant gatekeepers stand between companies and their customers or artists and their fans.

If you’re a musician, the Live Nation/Ticketmaster vertical integration has created a stranglehold on venues and ticket sales. If you’re a grocery supplier, you have to contend with the grocery retail oligopoly of Loblaws, Empire and Metro, which have imposed “compliance fees” on smaller companies for late shipments that are beyond their control due to supply chain constraints. If you’re a restaurant owner, high tolls and manipulative behavior from dominant delivery platforms like GrubHub, Uber Eats, and DoorDash nearly bankrupted your business during the pandemic. Many entrepreneurs are rightly afraid to speak up for fear of retaliation.

As competition regulators have mostly stood by in the past few decades, the competitive environment has shifted from selling in open markets to gatekeeping through markets. Innovation, business dynamics and start-up rates suffer as a result. That means companies are no longer competing on the basis of producing quality goods and services, but by concentrating market power through endless mergers and acquisitions – which hit a record high in Canada in 2021.

Even when dominant companies do seemingly useful things for companies, it can still serve their interests. For example, the largest companies also regularly participate in entrepreneurial ecosystems and may offer cash grant equivalents of their products and services. While this undoubtedly benefits small businesses, it also locks them into the incumbent’s services and prevents other providers from competing. As one entrepreneur told the Access to Markets initiative, “I’d love to offer startups thousands of dollars worth of free cloud storage credits, but that would ruin my business.”

Because of such threats to startups in Canada, achieving a vibrant, fair and resilient economy requires a state-level commitment to clarifying the terms of trade for companies of all sizes. The government needs to consult directly with small business owners and entrepreneurs to understand the various ways in which their access to markets can be restricted. In addition, the competition authority should conduct a market study on liability agreements and the impact of clauses such as mandatory arbitration on independent companies.

Given the complex and changing nature of commercial transactions, reviewing, updating and expanding Canada’s competitive approach to accurately reflect the needs of small and medium-sized businesses is a necessary step to reduce transaction costs and provide better affordability for Canadian consumers and entrepreneurs alike reach.

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