Chipping Away at Canada’s Internal Trade Barriers

The Constitution Act of 1867 committed the four provinces of Canada at that time to unfettered passage of goods and services within the confederation. We all know how that story turned out.

As in many other countries, trade barriers within Canada — in the form of protectionist laws, sector-specific regulations, restrictive occupational licensing and dispiriting piles of paperwork — have held back national prosperity.

Interprovincial trade represents around one-fifth of the country’s gross domestic product. But it has been estimated that full liberalization of interprovincial trade could increase our GDP per capita by four per cent. To make it real for consumers, interprovincial trade barriers add between 7.8 and 14.5 per cent to the price of goods and services we purchase.

Commentators have noted that, in many cases, it’s easier for Canadian companies to do business across national borders than within the country.

Efforts have been made to remove those barriers. In 1995, the federal government and provinces signed the Agreement on Internal Trade. That was followed, in 2017, with the Canadian Free Trade Agreement, which addressed barriers within the service economy.

Provinces have also progressed without Ottawa’s help. The Western provinces have the New West Partnership Trade Agreement (NWPTA), which began in 2010 among B.C., Alberta and Saskatchewan, with Manitoba added in 2017. It recognized standards, lowered thresholds for public sector procurement and opened energy markets, among other provisions. Ontario and Quebec agreed to the Trade and Cooperation Agreement (TCA) in 2009, which focused on financial services, public procurement and labour mobility.

Have these deals made any difference? To find out, Queen’s University economist Daniel Teeter took a deep dive to compare the performance of NWPTA and TCA. Did they enable more productive manufacturing plants and greater trade within the provincial blocs? Were cost savings from greater efficiencies and competition passed on to consumers via lower price markups? Did one trade pact outperform the other? The answers in his study would go some way in assessing whether these types of agreements are worth the parchment they’re written on.

How was the study designed?

Teeter’s study is based on plant-level data from two Statistics Canada data sets: the Annual Survey of Manufactures for industrial-related statistics at the plant level; and the General Index of Financial Information for financial statements. Data includes plant-level interprovincial and international shipments. The study focused on the period between 2004 and 2012.

What did the study find?

• The NWPTA raised the average plant’s productivity by an average of 1.97 per cent across all the years in the study; increased the likelihood that a plant exports interprovincially; and increased the share of output that plants sell to other provinces. It had no significant impact on plant-level markups.
• The TCA had no significant impact on plant-level productivity or export behaviour but was associated with a 1.97 to 2.51 per cent increase in plant-level markups.

What do I need to know?

We should all care about trade frictions within Canada. It’s not just an embarrassment: internal barriers dampen productivity, stifle competition and investment and can make it harder to move across the country for a job. When Atlantic Canada truckers have to reduce their load when travelling through Nova Scotia to meet the province’s lower weight rules, you know something is not right.

But these barriers are not set in stone. As this study shows, when provinces are motivated to work together, real improvements are possible. The NWPTA led to more productive plants, increased the likelihood of an enterprise becoming an interprovincial exporter and boosted the amount of goods sold to other provinces — all better outcomes than the TCA delivered.

The result is not entirely surprising. The Western Canadian provinces are a tighter, more integrated region than Central or Atlantic Canada. But, as the study points out, the NWPTA outperformed the TCA largely because it took a negative-list approach, meaning new barriers are subject to the terms of the agreement unless otherwise excepted. The TCA used a positive-list approach, requiring specific barriers to be identified and written into the agreement (opening the possibility for a long list of exceptions).

As a result, the NWPTA offered broader coverage for reducing barriers to trade and labour mobility. It made greater progress in recognizing worker certifications and business registration, and in harmonizing business standards.

Alas, the alcohol market remains the bugbear of interprovincial trade. Only Manitoba is fully open to alcohol shipments to consumers across Canada. Elsewhere, businesses are forbidden to transport alcoholic beverages across all provincial borders either in-person or via direct-to-consumer shipping. When the booze trade is harmonized across Canada, you’ll know we have truly made it.

Study title: The Impact of Internal Trade Liberalizations on Plant Productivity and Markups

Author: Daniel Teeter (Queen’s University)

Published: Working paper available for download from Queen’s Department of Economics