Werner's Blog — Opinion, Analysis, Commentary
Internal trade barriers continue to stifle commerce in Canada

We think of trade barriers mostly in terms of international borders. Anyone crossing the border between Canada and the United States can tell from the line-ups of trucks at the border that trade barriers are costly and cumbersome. Yet, many of us are not aware that many trade barriers remain between many Canadian provinces. Unlike their international counterparts, internal trade barriers are mostly invisible. But they are costly too. So what exactly is the problem with internal trade in Canada? Here are some questions and answers.

What are examples of internal trade barriers?

Internal trade barriers restrict the free movement of goods, services, and people. Some goods are restricted because of provincial monopolies in agricultural goods. Restrictions in trade of wine and beer are remnants of the days of prohibition nearly a century ago. Sales of liquor remains a monopoly in most provinces. Restrictions in selling dairy and poultry products across provincial borders are the result of quota systems and provincial marketing boards. Some provinces also maintain different rules for packaging and labelling of food products. Rules for licensing skills and professions differ across provinces. Some provinces do not accept credentials acquired in a different province, thus preventing skilled workers from moving between provinces to find jobs. There are also rules in place that prevent out-of-province companies from bidding for public projects. Preference is given to local companies even if they are more expensive than competing companies from other provinces. Last not least, Canada lacks a single securities regulator; there is no equivalent to the Securities Exchange Commission in the United States.

Have internal trade barriers changed over time?

The Canadian constitution is quite clear on the topic. Section 121 of the Constitution Act of 1867 reads:

“All Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.”

So it may be surprising to learn that the reality looks rather different. Since a 1921 court ruling this section was interpreted narrowly to apply only to customs duties. Legal scholars challenge this interpretation and suggest that this is not what the authors of the constitution intended. In 1995, the Agreement on Internal Trade (AIT) was concluded with the aim to dismantle and eliminate remaining interprovincial trade barriers. While this agreement introduced a much-needed rules-based approach and helped make considerable progress in some areas such as labour mobility, it still falls well short of the target of creating a full economic union in Canada. Provinces often flout the rules, and some chapters (on energy) in the treaty have remained blank. In recent years, British Columbia, Alberta and Saskatchewan formed the New West Partnership that tried to go further than the existing Internal Trade Agreement. It is the first real attempt in Canada to create a true economic union without internal trade barriers.

Has internal trade changed as a result of the AIT?

As the chart below shows, internal trade has barely budged since 1995. The blue line hovers around 40% of GDP. By comparison external trade (the red line) has increased tremendously, in part due to NAFTA, reached a peak of over 80% in 2000 and currently hovers around the 65% mark. Since about 1990, external trade has become increasingly more important than internal trade. As is evident from the stagnant level of internal trade in Canada, there is no indication that the Agreement on Internal Trade has boosted internal trade since 1995.

[Chart of Canada's internal and external trade]
Statistics Canada CANSIM Table 384-0038, Gross Domestic Product, expenditure-based, provincial.

What are the benefits of lowering internal trade barriers?

There is no consensus about the cost of the existing internal trade barriers. The Canadian Manufacturers Association puts it at 1% of Gross Domestic Product, but this view was challenged by UBC economist Brian Copeland in 1998. He puts the cost closer to 0.1% of GDP. Even 0.1% of GDP amounts to an economic loss of about two billion dollars per year. However, federal Industry Minister James Moore claims an economic cost of $50 billion per year. What can be said with confidence, however, is that interprovincial trade has grown much slower than international trade. It is quite likely that existing internal trade barriers, combined with trade liberalization through NAFTA, have reoriented commerce increasingly from an east-west to a north-south direction.

Some of the costs of internal trade barriers may be less obvious. Internal trade barriers stifle productivity, as two researchers at the University of Calgary, professors Trevor Tombe and Jennifer Winter, have concluded in an empirical study. They find that eliminating internal trade barriers can boost productivity by as much as 15% for the median province, and also help level interprovincial income inequalities.

What is needed to advance Canada's internal trade?

While some have argued that the costs of internal trade barriers are negligible and that heterogeneity in provincial policy approaches is desirable, the remaining internal trade barriers in Canada are looking increasingly outdated in an increasingly integrated world economy. It is ridiculous that certain items can be traded across our international borders but not across provincial borders. If we are serious about dismantling these remaining barriers, tinkering with incremental improvements is not enough. For example, the federal government has tried to make progress on forming a national securities regulator by encouraging the two largest in the country, in Ontario and British Columbia, to merge. However, Alberta steadfastly refuses to join. The failure to create a national securities regulator is a case in point. Vested interests in various provinces are extremely resistant to change. Therefore, cajoling provinces to make piecemeal improvements and enter into patchworks of bilateral agreements (e.g., Alberta's and British Columbia's Trade, Investment, and Labour Mobility Agreement, joined by Saskatchewan to evolve into the New West Partnership Trade Agreement) may not be enough. As the Macdonald-Laurier Institute has argued, perhaps a bolder vision is needed. They argue that the federal government should develop a new ‘Economic Charter of Rights’ for Canadians that courts can enforce and that would fulfill the promise of section 121 of our Constitution.

Posted on Wednesday, August 6, 2014 at 11:00 — #Trade
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