Trade Barriers Between Provinces Cost You More Than You Think

One of the motivations behind the founding of the Canadian federation was that, with the United States rejecting free-trade deals, there needed to be a unified market between the future provinces of Canada. Since then, Canadians have been free to move and live anywhere in the country, and it is impossible for provincial governments to impose domestic tariffs on goods within this combined market.

However, it would be incorrect to say that Canada is a completely unified market. In fact, there exist many barriers contradicting the spirit of the Constitution that are much costlier than one may think at first sight.

This was highlighted recently in a case involving New Brunswick resident Gérard Comeau, set to be heard by the Supreme Court of Canada in early December 2017. Mr. Comeau was caught returning home from Quebec with 354 bottles of beer and a few bottles of spirits. Because of limits in New Brunswick law on how much alcohol he could “import” from another province, he was fined by the police. Comeau contested the fine and won, a decision that was challenged by the government and that will be settled in the Supreme Court.

Bear in mind that sales of alcoholic beverages, at slightly more than $22 billion annually, account for roughly one per cent of the total Canadian economy. That is one per cent of the economy where there exist significant barriers to trade between provinces. Back in the 1980s, it was estimated that, for breweries alone, the benefits of removing barriers between provinces would reduce costs by as much as 15 per cent. We are talking here about only one subsector of the economy, where there seem to be significant costs created by existing barriers. And this is by no means the only sector that is heavily affected.

In fact, provincial governments impose multiple barriers on trade between provinces. The list, which can be found in a recent Senate report, is dizzying.

Regulations that vary from province to province prevent some goods that comply with regulations in one province from being sold in another. The milk sector, for example, is heavily regulated: packaging for creamers and milk cups differs by province, and unpasteurized cheese cannot be shipped outside Quebec. Another example is provided by the many sets of differing regulations that cover the trucking industry, limiting the ability to use certain types of trucks based on the time of day. This limits trade in goods and services.

Since occupational licensing comes under provincial jurisdiction, each province has its own sets of barriers to certain jobs. This is also accompanied by apprenticeship regulations. In the construction industry, different criteria for accreditation of workers mean that a qualified welder in one province is not considered suitable for work in another province without further training. This limits the mobility of workers.

There are also limits to interprovincial trade for government procurement contracts. Indeed, some provinces limit competition for public contracts by favouring local providers over providers from other provinces. Projects end up costing more than they would otherwise, giving taxpayers a raw deal.

And finally, there are also differing sets of business regulations that create a Kafkaesque maze in which entrepreneurs have to fork out considerable resources. For example, regulations on corporate registration that vary by province force businesses to duplicate their filings — something that comes at a cost. Another example is the differing sets of environmental regulations affecting the energy sector, which make investment in infrastructure projects more difficult and prevent the emergence of a unified national energy market. These regulatory incoherencies impose substantial cost increases on businesses.

Taken individually, each of these barriers may not account for much when compared with the size of Canada’s economy. However, the sum of these barriers is huge, given that interprovincial trade is equal to more than half of Canada’s total international exports and imports. In fact, the Senate report points out that for some Canadian businesses, international trade barriers are less problematic than interprovincial ones.

Taken together, benefits from removing these barriers would be considerable. Industry Canada has estimated that increasing interprovincial trade by 10 per cent would increase Canadians’ incomes by 5.1 per cent. Canadian economists have calculated that internal trade liberalization could add $50 billion to $130 billion to Canada’s overall GDP. Using a mid-range estimate of $100 billion, these economic gains represent close to $2,700 in additional income for each Canadian. In sheer magnitude, these gains rival those suggested by economists for the North American Free Trade Agreement (NAFTA).

It is not as if this was a recent discovery: the high cost of these barriers has been highlighted for decades. In the 1980s, the Macdonald commission on economic union produced a comprehensive list of the numerous barriers that existed between provinces. The Agreement on Internal Trade between the provincial and territorial governments and the federal government, signed in 1994, was meant to address these barriers. However, little has come of this agreement, largely because of its complex nature and the difficulty of actually enforcing it.

One former federal official who was in charge of internal trade policy between 1986 and 1995, Robert Knox, frequently complained about the need to keep pushing for reforms. Every now and then, the need to push forward on the elimination of these barriers comes up for discussion, but this seldom leads to genuine progress even if these barriers violate the spirit under which Canada was founded.

If the Supreme Court sides with Mr. Comeau, many barriers — notably those on alcohol — would have to be revisited, to the benefit of Canadians. At the very least, we should be grateful that the Comeau case has brought this topic back into the limelight, as we can once again be reminded of the heavy costs for Canadians.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this op-ed are his own.

Read more articles on the themes of "Liberalization of Markets" and "Regulations."

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