The Canadian Policy Failure that Adds 10-15% to your Bills
Opinion by Benjamin Beiles. This piece is part of Kroeger Policy Review's fourth issue on taxation and the Canadian economy. The full issue is available here.
What do a bag of milk, LCBO wine, a trucker driving at 9:00 am, unpasteurized cheese made in Quebec, and an Ontario-licensed doctor have in common?
Trade between provinces and territories accounts for 1 in every 5 dollars of economic activity in Canada and is what allows an Ottawa resident to buy British Colombian salmon, Nova Scotian apples, and bread made from Saskatchewan wheat [1].
Even amongst policy wonks and academics, the mere mention of trade barriers can empty a room. In this piece, I implore readers to push aside traumatic memories of undergraduate econ lectures and highschool math problems. Instead, I encourage an open discussion regarding internal trade as it is essential to the development of a unified and robust Canada.
Trade between provinces and territories accounts for 1 in every 5 dollars of economic activity in Canada and is what allows an Ottawa resident to buy British Colombian salmon, Nova Scotian apples, and bread made from Saskatchewan wheat [1]. In most countries, internal trade is rarely measured or heavily debated, rather it is assumed that goods and services move within federal subdivisions without much fuss. In Canada, however, the allocation of certain responsibilities to the provinces and territories creates a complex set of impediments to internal trade.
Although there are no explicit tariffs between provinces, there are a variety of non-tariff barriers that limit the movement of goods and services across the country. To better understand the complexities of these barriers, I spoke with Dr. Trevor Tombe, Associate Professor at the University of Calgary, who has conducted extensive research on the topic of internal trade in Canada. Dr. Tombe estimates that “the effect of these interprovincial barriers could… double, maybe triple the GST, hidden in the price across all the products that we buy” [2]. With a 10-15% increase in prices at stake, internal trade barriers suddenly become a lot more interesting.
What are Internal Trade Barriers?
Barriers to internal trade in Canada do not manifest as explicit tariffs or quotas, rather as non-tariff trade barriers (NTBs). The Canadian Federation of Independent Business labels four categories of NTBs [3].
Geographic barriers are those imposed by distance and topography. For example, the dispersed population and lack of infrastructure in Northern Canada pose a barrier to the import of goods.
Prohibitive barriers occur as a byproduct of provincial legislation that unintentionally limits trade. For example, the provincial monopoly on alcohol distribution limits the sale of alcohol across provinces.
Technical barriers are caused by regulatory inconsistencies that disrupt the movement of goods. For example, there are trucking regulations that differ across provinces, with details like signage, tire width, truck dimensions, and time-of-day restrictions changing at provincial borders.
Regulatory and administrative barriers include regionally specific policies under the mandate of provinces and territories that prevent the exchange of goods and services. For example, a litany of professionals such as doctors, dentists, lawyers, and social workers can only practice in their respective professions if they have specific provincial or territorial authorization.
Individual NTBs are relatively insignificant inconveniences, but, as Dr. Tombe notes, “you add up all these little frictions one after the next, multiply it by thousands and you get a sense of the real magnitude.” A research paper that he co-wrote found that eliminating non-geographical internal trade barriers could increase real GDP per capita by 3.8% [4].
Why has Progress Been so Slow?
Although the math seems to clearly point to the benefits of eliminating internal trade barriers, it is an excruciatingly difficult process. The federal, provincial, and territorial governments share many competencies related to the movement of goods and services. Resolving regulatory barriers is significantly more challenging than eliminating tariffs. A tariff can simply be struck down, but to resolve NTBs, territories and provinces must agree to share or mutually recognize regulatory policies and standards.
The European Union encountered similar challenges when trying to integrate the markets of its member states. However, the commitment of member states to establishing a common market prevailed. The highest court of the EU, the Court of Justice of the EU (CJEU), also played a significant role in expanding the common market and compelling member states to harmonize regulations. Similarly, Australia successfully liberalized internal trade through a combination of federalist collaboration and key judicial decisions [5].
Unfortunately, Canada will struggle to replicate these models. Unlike its Australian and EU counterparts, the Canadian Supreme Court has routinely ruled to strengthen the competencies of provinces, inhibiting the federal capacity to reduce internal barriers (see: Reference re Securities Act, 2011; R. v. Comeau, 2018) [6]. As Dr. Tombe notes, “we don't really have the ability for someone to just snap their fingers and eliminate interprovincial rules that differ, and you know frankly, nor should we. That's just not how Canada has ever operated.” Improvements to internal trade can only occur when the federal, provincial, and territorial administrations work together, thus explaining the glacial pace of progress.
In 2017, Canadian Ministers negotiated the Canadian Free Trade Agreement (CFTA), replacing the 22-year old Agreement on Internal Trade (AIT). The CFTA was a momentous step towards eliminating internal trade barriers and laid out institutions that will facilitate greater integration. It also resolved some critical issues that were limiting Canadian negotiations with the EU regarding the Comprehensive Economic and Trade Agreement (CETA). However, it includes nearly 140 pages of exceptions and leaves room for provinces and territories to delay action [7].
Why Now?
Events in recent years highlight the imperative for elected officials to act decisively to encourage internal trade. Rising anti-trade sentiments like those expressed through Brexit and the US-China Trade war signaled the need for stable avenues of economic activity within national borders. Canada should continue to pursue international trade deals but, if key trade partners succumb to protectionist tendencies, internal trade will be critical.
The COVID-19 pandemic also demonstrates the need for a more robust internal economy, especially as politicians promise to build back better. The lack of domestic vaccine production is a perfect example of the failure to strengthen internally. If Canada wants to be better prepared for the next global crisis, all levels of government must uphold their commitment in the CFTA to “REDUCE AND ELIMINATE, to the extent possible, barriers to the free movement of persons, goods, services, and investments within Canada” [8]. That means mutually recognizing provincial certifications, harmonizing regulations, and actively removing NTBs.
Canadian Ministers. 2017. “Canadian Free Trade Agreement Finalized.”Canadian Free Trade Agreement. Internal Trade Secretariat. https://www.cfta-alec.ca/wp-content/uploads/2017/06/CFTA-news-release-1.pdf
Trevor Tombe in discussion with the author, March 2021.
Canadian Federation of Independent Business. 2015. “Transforming Trade: Reforming Our Economic Union to Remove Barriers to Internal Trade.” https://www.cfib-fcei.ca/sites/default/files/2017-12/rr3356.pdf
Alvarez, Jorge, Ivo Krznar, and Trevor Tombe. 2019. “Internal Trade in Canada: Case for Liberalization.” International Monetary Fund.https://www.imf.org/en/Publications/WP/Issues/2019/07/22/Internal-Trade-in-Canada-Case-for-Liberalization-47100
Ibid.
R. v. Comeau, 2018 SCC 15, [2018] 1 S.C.R. 342; Reference re Pan‑Canadian Securities Regulation, 2018 SCC 48, [2018] 3 S.C.R. 189.
Canadian Ministers. 2017. “Canadian Free Trade Agreement Consolidated Version.” Canadian Free Trade Agreement. Internal Trade Secretariat. https://www.cfta-alec.ca/wp-content/uploads/2021/02/CFTA-Consolidated-Text-Final-English_January-1-2021.pdf
Ibid.