How interprovincial trade barriers are hurting Canada’s economy and burdening exporters

21/09/2015

interprovincial trade barriers

interprovincial trade barriers

The Canadian economy is built on a backbone of lucrative trade in our abundant natural resources, manufacturing, innovative products and services with other nations.

This country has eleven free trade agreements, involving dozens of nations, with major agreements such as the TPP and the TTIP in the works to further facilitate international trade.

While we have placed international trade in a position of national importance, making every effort to expand and grow our trading relationships globally, our domestic trade remains limited, blocked by provincial barriers that cost our industries billions of dollars through their inefficiencies.

Canada is handing an unrecognized multibillion dollar invoice to our exporters through barriers to internal trade.

Their products and services are starting at a disadvantage, and all of the inefficiencies of Canada’s internal trade are costing exporters when they go abroad, lowering their competitive advantage.

Why are we doing this?

Provinces are overriding the constitution

In the Canadian Constitution Act of 1867, trade barriers, specifically tariffs, are clearly prohibited.

However, many trade barriers exist between provinces today, based on province-specific rules and regulations, designed to protect the regions’ interests at the cost of distorting the markets. There are also regional programs, which effectively remove competition from other regions for the sake of promoting local industries.

So, how can provinces enact trade tariffs when they are strictly prohibited by Canada’s constitution?

The history of provinces battling the federal government over trade goes all the way back to the founding of the nation.

Individual provinces enforce their constitutional rights through Section 92 of the Constitution Act (also known as the Trade and Commerce Clause) to override provincial policy originating from the federal government when it concerns local issues.

This provincial authority includes regional procurement restrictions that protect local industry, resulting in all different types of trade barriers.

The many ways we restrict interprovincial trade

This ultimately means that the prices and availability of everyday staples like chicken, milk, and eggs aren’t dictated by market demand. They are being controlled by provincial marketing boards whose priority is to protect the interests of producers in their own jurisdiction at the cost of efficiency, free trade and distribution.

Though the boards’ primary focus is on the welfare of local producers, recent studies have shown that they may actually be hurting the farmers in their sectors.

Current trade barriers are limiting agriculture, labour mobility, the energy sector, beer, wine and spirits, and complicating regulations by maintaining differing standards.

The dairy industry has come under criticism for its quota system, not only for restricting price and trade but for controlling production.

The restrictions basically bring interprovincial trade in these goods to a halt, ultimately costing Canadian consumers at the supermarkets. With any thought, it is unequivocally clear that a 300 percent tariff on butter is ridiculous for a free trade nation.

In contrast, New Zealand’s dairy industry provides an example of a flourishing free market. The country produces only 2 percent of the world’s dairy but drives 40 percent of the world’s trade in dairy products.

Is it easier to trade outside of Canada than within?

All of these complicated internal trade hurdles have created an environment where many exporters find it easier to trade with other countries than within Canada.

A popular way to put trade barriers into perspective is through the beer, wine and spirits industry. For example, in Ontario it is often easier to get your hands on a bottle of a Châteauneuf-du-Pape from Southeastern France than it is to acquire a bottle of Cabernet Sauvignon from British Columbia.

Perhaps John Manley, President and CEO of the Canadian Council of Chief Executives said it best last June,

“It makes no sense for Canada to provide greater benefits to our trading partners than to companies, workers and consumers within our country. We urge all levels of government to cooperate in the elimination of all unnecessary barriers.”

Where is the pressure for internal free trade?

Recognizing the need for some reform on internal trade barriers, the Agreement on Internal Trade (AIT) was signed in 1994, with the promise of enabling the removal of any unnecessary barriers to trade within Canada. The agreement proceeded the signing of the NAFTA agreement.

In the intervening twenty years since the agreement was made, it has accomplished marginal changes to labour mobility, increased government procurement transparency, and improved dispute resolution, but has done little else to remove hurdles to trade. In fact, many of the provisions are now out of date and provide few rules that are binding to provincial governments.

And policymakers, they step back. As much as we seem to be moving in the direction of maintaining a momentum for a “free trade environment” world, Canada’s efforts are impeded by our refusal to deal with a large number of domestic issues.

Politically sensitive bodies of influence and privilege have grown up and it’s difficult to adjust that. Consider this well-worn adage:

If a politician tries to solve a real problem and sets out a measure to correct it before the public has identified it as a real problem, then the politician’s solution becomes the problem.

This is true in every country, but the problem for Canadians is, trade makes up two thirds of our GDP.

This begins to paint a picture of why the process to eliminate these recognizably troublesome barriers has been so slow and unproductive, and why the collective consciousness of these realities needs to change in this nation.

Understanding the true cost to Canadians

We will never be a truly successful trading economy until we have a free national labour market, and exports of goods and services.

In Canada, we still protect close to 23 percent of our GDP through trade regulations, and that means that the companies and industries that are largely unprotected have to be even more successful to compensate for the fact that a large chunk of our productive economy is protected. That is an incredible burden to place on companies in other industries that are not protected by provincial controls.

If that sounds strange to you, it is! Canada remains the only G7 country that expects their companies to compete globally, but routinely denies them portions of the domestic market. The result is that Canadian companies are competing with much smaller margins, both in Canada and internationally.

When companies are operating less efficiently than they could be without interprovincial barriers, those inefficiencies are passed down to Canadian consumers.

Additionally, the lack of coordination between different levels of government has led to duplication of effort in bureaucratic administration and compliance, and an overlap in federal expenditure.

When the Canadian economy becomes less competitive than it usually would be, it puts the education system at risk and the healthcare system at risk, because we’re we are working with less capital and resources than we could be with a more efficient system.

There is a direct connection between trade inefficiencies and the lack of ability to build a new hospital.

So if we do not become the most efficient international trade platform that we can be, all Canadians pay the price.

Decades ago, when trade barriers, marketing boards, provincial regulations were originally put into place, there was a real need for them. They were built into the system for a good reason. But as a nation, Canada has moved passed those needs.

What was once helping us is now hurting us.

There is no longer any justification for interprovincial trade barriers, and the sooner we can recognize that as a nation and create free trade in our own country, the sooner we will truly be a great trading nation.

Are there any Canadian industries you think should continue to be protected? How could Canadian companies and consumers benefit from reduced internal trade barriers?

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

John Treleaven, CITP|FIBP

Author: John Treleaven, CITP|FIBP

John Treleaven is Principal and founder of The Treleaven Consulting Group. He has spent 32 years in the Canadian Foreign Service working abroad and in Ottawa in a variety of positions with a trade and economic focus. He is an expert in Canadian international trade and is focused on improving trade in Canada based on business friendly local communities.

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