Pushing for free trade within Canada
The disparity between interprovincial and international trade is stark. As of 2013, Ontario exported 1.6 times more goods and services to its international trade partners than it did with the rest of Canada’s provinces. While the size of the world market is responsible for some of this disparity, many regulations still exist that limit the ability for businesses to operate and sell products across provincial borders. These regulations often focus on protecting goods-producing sectors such as agriculture and food, alcohol, transportation, and utilities. These barriers prevent companies from easily scaling beyond their provincial borders, causing them to stay small and requiring them to export outside of Canada, creating a tremendous untapped market for many companies.
The ratio of internal trade to external trade for specific product categories can highlight areas where there is potentially unrealized interprovincial trade. The ten products with the lowest interprovincial to international trade multiples are as follows:
Transportation equipment and motor vehicle parts have low interprovincial trade multiples due to Ontario’s significant role in the cross-border automotive manufacturing supply chain. Other products, such as grains and other crop products, appear to be suffering simply from the exorbitant barriers to protect their domestic provincial businesses. This is evident, as Ontario’s firms have found disproportionately more success internationally than in their own country.
Alcohol is prime example of a restricted industry in which each province’s liquor monopoly is free to control and profit from the protection of its domestic beverages. In some cases, alcoholic beverages such as wine and beer from another province can be treated – and taxed - as a foreign import.
In a step to improve the state of trade within Canada, the provincial trade ministers recently negotiated the Canadian Free Trade Agreement (CFTA) to replace the Agreement on Internal Trade (AIT). This agreement aims to lower barriers to interprovincial trade to levels equivalent to or lower than the Canada-EU trade deal – the Comprehensive Economic and Trade Agreement (CETA). The CFTA will now operate on an exception basis, where trade barriers are removed across all sectors unless otherwise specified. This signifies a critical paradigm shift from the AIT, which only explicitly covered a limited number of sectors.
However, it is unclear if the CFTA will go far enough. The 353-page document contains at least 148 pages of exceptions. These exceptions are a compliance nightmare for small businesses who continue to face multiple sets of standards, restrictions, and red tape as they attempt to expand their businesses. This is accompanied by an open-ended provision allowing provincial governments to apply their own rules in the name of the public interest along with an opt-out clause. While acknowledging the differences between the provinces is important, there are likely few relevant differences in safety or consumer standards across jurisdictions. Seemingly small inconsistencies across provinces such as different food labeling requirements mean that exports destined for other provinces must be packaged, stored, and tracked separately. The inventory management requirements for a uniform product adds unnecessary compliance costs for Canadian businesses. The CFTA leaves opens the possibility that provinces will continue to discriminate against each other more than international trade partners.
The benefits of getting internal trade right are substantial. The Bank of Canada has estimated that removing 10 percent of interprovincial trade barriers (more than the impact of the CFTA) could add 0.2 percent to Gross Domestic Product (GDP). To frame the magnitude of the potential gains, this reduction in interprovincial trade barriers is estimated to be similar or greater in magnitude than CETA or the Trans-Pacific Partnership trade deal. These one-time increases in GDP will compound over time as the economy grows, generating substantial additional value to the Canadian economy.
The CFTA will require complete buy-in from the provinces as Canada strives to be a true economic union.