Tear down Canada’s interprovincial trade barriers

The Canadian Free Trade Agreement, which was supposed to liberalize trade between provinces, entered into force in 2017. Over the past four years, however, most provinces have made no progress in reducing interprovincial trade barriers, which unfairly restrict the economic freedom of Canadians and significantly impede economic growth.

A trio of economists with the Montreal Economic Institute (MEI) report in a recent study that since the agreement was signed, Alberta has significantly reduced its interprovincial trade barriers while Manitoba and Ontario have made modest progress. But in the rest of the country, internal trade barriers have either increased or been maintained.

Citing an International Monetary Fund paper by economists Jorge Alvarez, Ivo Krznar, and Trevor Tombe, the MEI study points out that the estimated economic cost of interprovincial trade barriers to Canadians is about 3.8% of GDP. That’s 3.8% of income, every year.

For context, the Canadian economy shrank by 5.4% in 2020, so the GDP cost of interprovincial trade barriers is over two-thirds of the cost of nearly a year of living with the pandemic and related lockdowns.

What makes the continued existence of trade barriers so frustrating is that the economic case for free trade has been long established. The consensus in the economics profession on the desirability of free trade is nearly unanimous.

The economic case for free trade is built on three pillars. The first is the simplest. Suppose John has an apple and Julia has an orange, but John wants to eat an orange and Julia an apple. Allowing John and Julia to freely trade their fruits makes them both better off. More generally, allowing people to freely trade enriches all involved parties, even before total production goes up.

Second, free trade allows for specialization and the division of labour, which is the principle on which the modern economy is built – and it does increase economic production. Nobody makes everything they consume by themselves. Everybody makes a living specializing in one task – such as driving a taxi, or preparing tax returns, or fixing automobiles – and then uses their income to buy most of what they need.

In other words, everyone specializes in producing a single good or service, and then trades with everyone else for other goods and services. Importantly, this ability to benefit from the productivity gains of specialization is limited by people’s ability to freely trade with one another; as Adam Smith famously wrote in The Wealth of Nations, “the division of labour is limited by the extent of the market.”

The third pillar in the case for free trade is that it allows for increased productivity through comparative advantage. Some people are relatively better than other people at producing certain things. If everybody focuses on what they are relatively more skilled at producing, economic productivity will rise. But again, the ability to benefit from these productivity gains relies on people’s ability to freely trade with each other.

The case for free trade, it is important to note, is not affected by national or provincial borders, and it is a unilateral case – meaning that people or jurisdictions that reduce trade barriers are better off even if those they trade with do not reciprocate by reducing their own barriers.

It is long past time that politicians caught up to economists on the free trade issue and eliminated interprovincial (and international) trade barriers. Every day these trade barriers continue to exist, they cause undue economic harm.

Matthew Lau is a fellow at the MEI. The views reflected in this op-ed are his own.

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