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Newfoundland and Labrador Premier Paul Davis rushes back to the Confederation Building following the 25th Council of Atlantic Premiers in St. John's, Monday, Jan.19, 2015. If Stephen Harper does not settle a seething fishery dispute in Atlantic Canada, it could unsettle the transatlantic trade deal he counts as one of his biggest accomplishments.

Paul Daly/THE CANADIAN PRESS

Stephen Harper's much-touted trade deal with Europe is being threatened by a dispute with Newfoundland over a fisheries fund, and some of Canada's biggest business groups are getting nervous.

Last week, two provincial cabinet ministers from Newfoundland were in Ottawa telling European diplomats that unless the federal government settles the dispute, their province will not enforce the EU trade deal in its jurisdiction. On Monday, they announced the province is suspending co-operation with Ottawa on all trade agreements.

It is more than a toothless threat. The Comprehensive Economic and Trade Agreement is not in tatters yet, but the president of the Canadian Council of Chief Executives, John Manley, warns that infighting in Canada will help critics in Europe who want to prevent the agreement from being ratified.

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"If our family is dysfunctional, then it makes it easier for their family to be dysfunctional," Mr. Manley said in a recent interview.

He said that if the EU agreement fails, other trading partners will doubt Canada can cut a deal that binds the provinces – a must in modern trade. "If it doesn't get done, then the day for trade is over."

Why the gloomy warning over a signed deal? Because Newfoundland really does have the power to ensure that parts of it do not apply in the province. And the EU, whose member states have yet to ratify the agreement, really cares.

Since the start of talks, the EU's main goal has been guarantees that European firms could bid on provincial contracts. And the Europeans' biggest fear was that there is no way to ensure provinces stick to a deal Ottawa signs. This dispute is reviving the issue.

It all stems from a side deal struck during the negotiations. Ottawa wanted to make it easier to sell Canadian fish in Europe. The EU insisted Canada – mainly Newfoundland – give up minimum processing requirements, or MPRs, which require a certain amount of fish caught with Newfoundland licences to be processed in the province.

But Newfoundland's government did not want to take the controversial step of waiving them. So Ottawa bought Newfoundland's acceptance. After some back and forth – detailed in correspondence Newfoundland later made public – Trade Minister Ed Fast agreed Ottawa would pay $280-million into a $400-million fund to upgrade Newfoundland's fishing industry.

The problems came months later, when Ottawa set new conditions – notably, that federal money would compensate only for demonstrated losses of the fishery, which means little would be paid out.

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Why did Ottawa renege? There were rumblings in other Atlantic provinces about an unfair advantage for Newfoundland. Quebec raised it with Ottawa, according to industry insiders.

"I think what happened is there was extreme pressure from other Maritime provinces to federal cabinet ministers as to why Newfoundland got a fund," said Darin King, Newfoundland's Minister of Business, Tourism, Culture and Rural Development, who, with Intergovernmental Affairs Minister Keith Hutchings, visited Ottawa to talk to EU diplomats last week.

Now, Newfoundland says it will not join in other trade deals. And Mr. King noted the province will not just ignore the parts the EU agreement that deal with fish, but will ensure any part touching Newfoundland's jurisdiction does not apply.

For the Europeans, this is a danger sign. Ottawa can do nothing about provinces that will not play along. Canada's Constitution gives Ottawa the exclusive jurisdiction to sign a trade treaty, but gives provinces exclusive jurisdictions, too.

If the EU ratifies the agreement, its companies could use investor-state clauses to sue every time Newfoundland violates it. But here's the catch: they would sue Canada, not Newfoundland. And importantly, the EU will not want to ratify a treaty it would have to litigate over and over. It is a point European critics can use to argue against ratification.

And Mr. Harper now has to worry that if he does not settle a seething fishery dispute in Atlantic Canada, it could unsettle the transatlantic trade deal he counts as one of his biggest accomplishments.

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