Seven years ago, when the provinces, territories and Ottawa signed the Canadian Free Trade Agreement, the British magazine The Economist wasn’t going to let the moment pass without inserting a bit of wry English humour. “Canada agrees on free trade with itself,” read the headline on its report about the 2017 deal.
How nice it would have been were that true. Instead, 157 years after Confederation, Canadians remain trapped in an economy that is handcuffed by interprovincial trade barriers that hinder labour mobility, raise prices on goods and services, take a huge bite out of the country’s productivity every year and reduce government revenues.
The CFTA itself has provided little relief. It is noted more for the number of exemptions it allows than for the number of barriers it actually eliminates; of the deal’s 340 pages, 133 were needed to list those exemptions.
The Prosperity Problem
This is part of a series on Canada’s economic challenges. Follow our editorials page to see more instalments as they are published.
The challenge: How Canada can build a better future
Labour: Don’t fight the crunch
Regulation: Measure the cost of red tape first, then cut to fit
Provincial governments, focused as they are on their own interests rather than the broader economic health of the country, simply have no motivation to do away with nakedly protectionist liquor laws, professional certification regulations and product standards that close their boundaries to Canadian goods and services.
Which means Ottawa needs to find a way bribe or otherwise cajole the provinces into doing the right thing. Of all the issues that are throttling Canada’s prosperity that this space discussed this week – counterproductive immigration trends, red tape, poorly designed tax incentives and outdated intellectual property policies – interprovincial trade barriers have the most direct impact on productivity and the cost of goods in this country.
In 2017, the Bank of Canada said a 10-per-cent reduction in those barriers would reap a 0.6 per cent increase in GDP over three years. The International Monetary Fund said in 2019 that removing all the barriers would produce a 3.8-per-cent increase in GDP, equivalent to $90-billion per year at that time.
The loss of all that economic activity costs the federal government $15-billion a year in lost revenue, according to a 2022 estimate by Scotiabank.
Meanwhile, a 2016 study published in the Canadian Journal of Economics found that interprovincial trade barriers add between 7.8 and 14.5 per cent to the cost of goods and services in Canada; a 2017 study by Statistics Canada said the barriers add 7 per cent to the cost of goods alone.
These barriers run contrary to the plain wording of Section 121 of the Constitution Act: “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.” But in 2018 the Supreme Court ruled (overbroadly, in the opinion of many critics) that provinces can erect trade barriers as long as their primary purpose isn’t to restrict trade, perish the thought, but are instead done to pursue some other stated policy goal.
So, if the federal government can’t get any help from the Constitution and the courts, but it wanted to encourage the provinces to actually let Canadian goods and services across their boundaries, how would it go about it?
The 2022 Scotiabank report recommended that Ottawa create a fund worth $15-billion (the estimated amount of annual lost revenue caused by trade barriers) and hand it out to provinces that lower some or all of their trade barriers. Provinces love extra cash; this might well be one way of bribing, sorry, encouraging them to act.
Ottawa is already doing some version of that in a notable provincial jurisdiction – health care. The Trudeau government has been offering billions in additional funding in exchange for more mental-health and long-term care, and to get provinces to start collecting and sharing more health data. It’s worked in some provinces; others have balked at what they see as federal interference.
What is known for certain is that interprovincial trade barriers are a self-defeating tax on Canada’s growth and productivity. Getting rid of them is absolutely necessary. Since the provinces won’t act on their own, they are fair game for a realpolitik approach that puts Canada’s prosperity first.