Twenty years after the fall of the Berlin Wall, arbitrary barriers still stand among political regions, especially in trade. Obstacles continue to undermine trade among Canadian provinces, even though the existence of a common market within a country is something that should go without saying.
With the Ontario-Quebec Trade and Co-operation Agreement coming into force Thursday, trade between the provinces will be facilitated, helping to create wealth and employment. Quebec’s strategy of liberalizing trade with Ontario and Europe could prove to be one of the finest initiatives of the Charest government.
There is a tendency to underestimate the economic relationship between Quebec and Ontario. However, Canada’s two most populous provinces represent a market of 18 million people. Their joint GDP was nearly $890 billion in 2008, making them the fourth- largest economic area in North America, behind California, Texas and New York State. Economic studies tend to focus on comparisons or even competition between Quebec and Ontario, neglecting the close economic links between the provinces. Each is the other’s largest trade partner. According to data from 2005, Ontario was the destination of 61 per cent of Quebec’s exports to the rest of Canada. Quebec received 69 per cent of its Canadian goods from Ontario.
The 1995 Agreement on Internal Trade never lived up to its promise of instituting cross-Canada free trade. A number of irritants still prevent full economic trade between provinces. Also, two recent studies by the OECD and the IMF urge Canada to eliminate obstacles to interprovincial trade to improve our productivity and our image among foreign investors.
The Quebec-Ontario agreement aims to conciliate the provinces’ practices and regulations while eliminating certain obstacles to interprovincial trade, primarily in labour mobility, public procurement, transportation, financial services, agriculture, and on environment rules. The agreement also has a section on economic co-operation and the execution of joint projects.
The goal is to consider Ontario as a major market, rich in opportunities for Quebec companies, rather than as a competitor. The agreement’s main strength lies in preventing new trade obstacles from being erected between the provinces. It includes a dispute-settlement mechanism.
Free trade means a broader selection of goods and services for consumers at lower prices. When trade barriers come down, trade and competition among companies increase. A more competitive environment prompts companies to offer goods and services that offer higher quality and lower prices. Companies generally achieve this by specializing in market niches. This dynamic has been observed in North America since the implementation of the North American Free Trade Agreement.
A competitive environment also raises productivity levels. Once trade barriers are removed, companies become more productive and more innovative, not only because they are exposed to greater competition but also because eliminating barriers reduces the cost of doing business. In particular, companies get access to a broader choice of suppliers, to a larger market and to less expensive inputs. Free trade, whether between countries or provinces, also reduces non-tariff barriers. This helps avoid wasting time and resources in doing business in another province or country. It also builds closer relationships with neighbours, thereby strengthening the country’s unity.
The Ontario-Quebec Trade and Co-operation Agreement is not perfect, given its many exceptions. Despite this, it is especially welcome because of the dynamic of commercial opening that it creates.
This is a courageous approach given the protectionist reflex that often comes to the fore in difficult economic times.
Michel Kelly-Gagnon is president of, and David Descôteaux is an economist at, the Montreal Economic Institute.