Time to rethink internal trade in Canada
January 14, 2020
Focus Area—Canadian Economics
A few years ago, a delegation from Australia paid a visit to the Conference Board of Canada to discuss and compare the performance of our two economies. When we mentioned that Canada’s provinces had implemented a free trade agreement, the Australians were perplexed. Why would you need a free trade agreement within Canada they asked?
While most Canadian policymakers seem to embrace the benefits of open international trade, our success at removing barriers to internal trade has been slow, to date.
Australia’s economy is much like our own. It’s a relatively small, open economy, dependent on trade, with a similar industrial structure weighted to resources and agriculture. A concerning difference is that Australia is well ahead on some key economic measures such as productivity and income per capita.
The Organization for Economic Co-operation and Development (OECD) compiles numerous cross-country comparisons of productivity and income. Up until the early 1990s, Canada outperformed Australia on measures of GDP per capita or GDP per hour worked (labour productivity).
Over the period since 1994, Australia’s productivity growth has steadily outpaced our own. Australians now benefit from higher per capita incomes and productivity that, depending on the measures, are 6 to 13 per cent above ours. If we matched Australia’s labour productivity, Canada’s GDP could be $228 billion higher in 2019.
Over the last few decades, both Canada and Australia have aggressively pursued open international trade policies, but Australia has been much more effective at opening internal trade. In 1993, Australia introduced mutual recognition regulation to help remove barriers to the free flow of goods, services and labour between Australian states and territories; this involves mutual acknowledgment of regulations across jurisdictions. The legislation has proven successful in helping create a single market by aligning regulations and occupational qualifications (for registered occupations) and lowering the cost of doing business for companies operating in the Commonwealth.
In Canada, our constitution assigns regulatory powers to federal, provincial and territorial jurisdictions. Over the years, governments at all levels have created policies to protect the environment, establish workforce standards, and achieve other consumer protection goals. In many instances, regulations are needed but can be costly for firms if they differ across jurisdictions or go beyond what is required and are unnecessary barriers to competition.
There is no comprehensive list of internal trade barriers, but there are many examples of barriers found across all sectors of the economy. From transportation truck weight requirements, to food inspection, to occupational health and safety rules; when rules vary by province or territory, they add costs to businesses that operate in more than one jurisdiction.
In 1995, Canadian first ministers signed the Agreement on Internal Trade (AIT) to reduce barriers to the movement of people, goods, services and investments within Canada. Various policy efforts have been made over the years since the AIT, the most recent version being the Canadian Free Trade Agreement (CFTA). Under the CFTA, barriers are identified, and governments work to establish a reconciliation agreement, although governments can opt out of negotiations if they wish. These agreements have helped make good progress in some areas, but the sheer number of internal trade barriers makes it difficult to make significant gains on an economy-wide basis.
The International Monetary Fund (IMF) recently issued post-mission reports on Canada—touching on several themes for improvement. While Canada’s economy is in relatively good shape, the IMF suggests more can be done to remove barriers to internal trade and labour mobility; they mention that doing so could provide a 4 per cent boost to GDP—a much larger economic gain than recently signed international trade agreements. These potential gains, equivalent to just over $90 billion in 2019, are not out of line with results from other research studies on this topic.
Given the complexity and number of internal trade barriers, even compiling a list is a daunting task. Understandably, assessing the economic impact of their removal is difficult. Still, there is convincing evidence, both in theory and in numbers that reducing costs on over $400 billion in interprovincial exports will undoubtedly help Canadian firms gain market share at home and abroad.
Canada needs to accelerate the move to a unified internal market, especially at a time when trade with our largest international export markets seems so challenging.