Cutting red tape for trade across provinces could save taxpayers much-needed funding.
Canada stands to gain around $32 billion a year worth of savings by eliminating interprovincial trade barriers, according to a new report from the Fraser Institute.
The report, published on Thursday, said that interprovincial trade barriers add between 8% to 14.5% to the prices of goods and services in Canada and contribute to slower economic productivity growth.
“Barriers to trade and labour mobility also contribute to slower productivity growth from foregone economies of scale and scope (among other factors), which roughly doubled the overall cost of those barriers,” reads the report.
The report raised concern about rising protectionist trade measures in the United States and how the upcoming election could heighten such concerns.
Canada’s trade between territories and provinces has been around 18% of GDP in recent years, almost 10% lower than its 27% share in 1981.
Interprovincial trade features numerous agreements, such as the Canadian Free Trade Agreement, which was signed by Canadian ministers and all 13 provinces and territories and came into effect in 2017. The New West Partnership Trade Agreement was implemented in 2013, which features the Western provinces of British Columbia, Alberta, Saskatchewan, and Manitoba.
“Leveraging the CFTA or NWPTA to more closely integrate Canada’s domestic market are not mutually exclusive options,” reads the report.
However, the most lucrative approach to improving the CFTA, according to the report, is through mutual recognition. Mutual recognition would allow goods and services that meet regulatory requirements in one province to be automatically accepted in another, reducing compliance burdens and eliminating duplicative testing.
A previous report conducted by the Macdonald Laurier Institute estimated that mutual recognition could result in increasing Canada’s economy by between 4.4 and 7.9%. This increase would result in an additional $110 to $200 billion annually, or $2,900 to $5,100 per capita, by eliminating trade barriers with mutual recognition policies.
While the benefits of mutual recognition are palpable, there are trade-offs worth considering.
For example, sectors in some provinces that would have to begin struggling with lower-cost imports would pay the price and be forced to shrink. The report also notes that workers may move to different regions in response to changing wages and prices.
The Macdonald Laurier Institute suggested that this change would result in 1.3 to 1.7% of Canada’s workforce migrating to a different province.
“In the long-run, these moves are productivity enhancing for the overall economy but are not costless in the short-run for the individuals involved,” reads the report.
The time to improve interprovincial trade is now, according to the author of the Fraser Institute’s report, Steven Globerman, who warned that the upcoming election south of the border could generate concerns about trade and investment policies.
Former President Donald Trump previously threatened to remove the United States from the North American Free Trade Agreement. He also imposed tariffs on some Canadian imports, such as steel and aluminum. He threatened to impose a 10% across-the-board tariff on manufactured imports if re-elected, according to Globerman.
Tariffs imposed on Canada or Mexico would violate the Canada-United States-Mexico Agreement. A review of the agreement is scheduled for 2026.
Globerman said that while current President Joe Biden has been less protectionist than Trump, he has focused on U.S. trade unions and environmental issues, posing a risk to Canadian energy exports.
“Indeed, one of his first acts after taking office was to revoke the permit needed to build the Keystone XL oil pipeline that would have brought Canadian crude oil to the U.S.,” said Globerman.
Regardless of who’s in power, an “America First” approach seems to be the way forward for the United States. Canadian government and policymakers should focus on enhancing Canada’s trade liberalization to bolster Canada’s economic growth.
