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September 4 2019

Dive Deeper – What are Canada’s challenges with interprovincial trade?

Access to markets, internationally and within our borders, is a necessity for growth for businesses across the country no matter their size. This issue has been especially prominent for our energy industry. Canadian producers have been forced to accept deep discounts on our energy products due to a lack of market access. However, there are other factors that limit access to markets for Canadian business. Interprovincial non-tariff trade barriers limit the growth for businesses in our country geographically, often forcing small to medium sized business owners to operate in smaller and more saturated markets. In this month’s Dive Deeper, we investigate the effects of these interprovincial barriers, what has been done and how they impact business.

What are Interprovincial non-tariff trade barriers?

If we are to follow it to the letter, Section 121 of the Constitution Act states that all goods from one province that is being moved to another must be admitted into those provinces for free. However, as many business owners know, that has not been the case in practise. Regulatory misalignments between provinces from professional licensing to trucking requirements, maple syrup grading standards to the ban of sales on Quebec’s unpasteurized cheeses outside the province, and the ever so frequently mentioned limitations on the mobility of alcohol across provincial borders, make it difficult for producers to expand beyond their provincial borders. Doing so requires businesses to be well versed in multiple sets of requirements between provinces and to be prepared to deal with differences across jurisdictions.

These non-tariff internal trade barriers can be split into four categories:

  1. Natural: geographical factors such as distance.
  2. Prohibitive: provincial or territorial laws that unintentionally deter internal trade such as the distribution and sales of alcohol to customers in other provinces
  3. Technical: differences in regulations between provinces such as weight limits on commercial vehicles, and
  4. Regulatory or Administrative: barriers that stem from provincial or territorial governments that limit trade. This can include permits, licensing, and paperwork requirements.

These barriers are especially problematic for Small to Medium-sized Enterprises (SMEs) who often lack the resources and the man power to remain compliant across multiple jurisdictions. This leaves a large portion of our economy untapped, as SMEs represent over 99 per cent of all businesses in Canada and nearly 71 per cent of all private sector jobs. Barriers to internal trade limit labour mobility, limit consumer choice, physically divides markets, limits competition, and shrinks the scale of production for businesses, limiting growth.

What do trade barriers cost Canada?

Economists estimate that these internal trade barriers could be costing the Canadian economy between $50 to $130 billion each year in economic activity. If we take $100 billion as a marker, this would translate to roughly $7,000 per household that Canadians are losing in economic activity due to these barriers. In a study earlier this year, the International Monetary Fund (IMF) found that if internal trade barriers were removed, Canada’s GDP could grow as much as 4 per cent. In addition to the economic benefits that we sacrifice, Statistics Canada reported that these barriers are placing the equivalent of a 6.9 per cent tariff on goods flowing between provinces, adding increased costs to forfeited revenue. This is more than twice the size of the average world tariff on goods which now sits at roughly 2.9 per cent.

What has been done so far?

There has been a myriad of trade agreements that have been signed between provinces. The most recent, the Canadian Free Trade Agreement (CFTA) replaced the Agreement in Internal trade (AIT) on June 1, 2017. The expressed objective of the agreement was to reduce and/or eliminate free movement of persons, goods, services, and investments within Canada. All of which are to be stepping stones to an “open, efficient and stable” market within the country. Despite the objectives of the Agreement, the exceptions continue to cost Canada’s economy. Exceptions were put forward by all parties and make up 140 of the 353 pages of the agreement, allowing trade barriers to remain. However, the CFTA introduced some measures, such as easing access to government contractors for businesses. The CFTA also introduced the Regulatory Reconciliation and Cooperation Table (RCT) to ease these barriers.

The RCT is a cooperative body, made of federal, provincial, and territorial representatives. The Table exists to identify and eliminate diverging or duplicative regulations that create trade barriers. The RCT has ambitious work plans for 2019-2020 and casts a wide policy net. Despite being in place since 2018, the table has only managed to reach two agreements, one on Organic labelling for Aquaculture Products and the other on Inspection Requirements for Produce. This has led some to critique its effectiveness in resolving these issues.

In addition to the RCT, there has also been action taken by government bodies to eliminate trade barriers. On June 10, 2019 the Government of Alberta announced that it would voluntarily remove 13 of the 27 exceptions under the CFTA and will launch a review of the other 14 in an effort to boost free trade within Canada. Manitoba and Nova Scotia have also taken steps to eliminate the exceptions. However, swift action has not followed from all provinces or territories. The federal government introduced also legislation that removed requirements for alcohol moving from one province to another to move through a provincial liquor authority. The move was the first step in allowing direct-to-consumer shipping across Canada for liquor. However, provincial limitations are still in place.

Past Transitions

Australia and the European Union (EU) have transitioned to a common market and can offer direction for Canada. The approaches taken by the two examples were drastically different. The European Union took an aggressive approach by prohibiting measures that are “capable of hindering, directly or indirectly, actually or potentially, intra-Community trade” through directive in the Treaty of Rome. This forced national governments to adapt their own regulations or face consequences. Combining the harmonization of laws between member states with the Mutual Recognition Regulation that came into force in 2008, to facilitate free movement of goods and services within the EU led to a relatively quick transition to common market.

Australia took a more collaborative approach to create a common market across the country by removing internal trade barriers. The process of collaboration, complimented by court decisions, started in the early 1990s. In 1992, the country reached the Mutual Recognitions Accord, which removed all regulatory barriers to free flow of goods and labour between Australian states and territories. This was followed by the creation of the Productivity Commission in 1997 which was given the resources to study and make recommendations to ease internal trade. These actions allowed Australia to slowly change to regulations that transferred power to their federal government.

Australia’s courts played a more prominent role in facilitating this change than what we have seen in Canada so far. Australian courts often used Section 92 (similar to Canada’s Section 121) to invalidate any rules or regulations that limited internal free trade. In Canada, Section 121 has been upheld in key cases, such as R. v. Comeau, where provincial regulations were not found to be in violation of the law, upholding provincial practices.

Moving forward

Governments in Canada, both at the provincial and federal levels, have taken some initial steps in eliminating internal trade barriers. However, there is still a long way to go if we want to achieve a common market within our borders. There are some lessons that can be extracted from the EU and Australia examples, but must be adapted to meet Canada’s unique situation. Alberta’s lead must be followed across the country and up to the federal level while next steps are taken to come to an agreement on mutual recognitions and eliminate unnecessary burdens to growth that continue to cost the Canadian economy dearly.