True North

Canada’s economy loses $200 billion a year through internal trade barriers thrown up by the provinces, a situation the Macdonald-Laurier Institute (MLI) says can be remedied by “mutual recognition.”

The billions of dollars of productivity lost is due to a labyrinth of rules, regulations, and restrictions between provinces, says the think tank.

Solving Canada’s internal trade woes has remained a stubborn problem, however, with federal government after federal government coming up short in how the provinces can ultimately untie this costly trade impasse.

In one of MLI’s latest papers, titled “Liberalizing internal trade through mutual recognition; a legal and economic analysis,” authors Ryan Manucha and Trevor Tombe explore the policy, finding that it may represent an important next step toward liberalizing internal trade between Canada’s provinces.

But what is mutual recognition?

“Simply, it is a policy whereby ‘regulatory requirements’ met for one provincial and territorial government automatically satisfies requirements for another,” write Manucha and Tombe. “No province would have to change to a common set of standards; they would simply agree that the standards of other provinces are recognized as legitimate.”

Why does it matter?

The authors found that internal trade costs imposed by parallel regulatory regimes are quite significant. A web of regulations makes it more difficult for businesses to operate across provincial lines, increasing delays and administrative costs which meaningfully affect productivity.

“Canada’s economy could increase by between 4.4% and 7.9% – a significant gain of between $110 and $200 billion per year – if internal trade barriers were eliminated by mutual recognition policies,” say Manucha and Tombe.

The authors are careful to note that these long-run gains would take many years to realize. Regardless, “the large magnitude of potential gains suggests the increasing effort and attention by policy-makers on this issue is well placed.”

Despite the unambiguous and large economic benefits of mutual recognition, there are trade-offs to consider.

If trade is liberalized, economic disruption will be inevitable, with the authors noting that increased competition and workforce migration may place disproportionate pressures on smaller and lower productivity regions.

Impacts will therefore be felt unequally across provinces or industries. Furthermore, unilateral or partial adoption of mutual recognition between provinces may complicate redistribution and pose political challenges.

Nonetheless, mutual recognition’s benefits are substantial, the risks are generally low, making the policy well worth considering, says MLI.

The two authors argue that the policy could be implemented in select industries where risks are particularly low and benefits are high, such as in finance. Such potential for quick wins would demonstrate why “mutual recognition should be an important part of the policy conversation.”

Ryan Manucha is widely published and a frequent commentator on the topic of Canadian interprovincial trade, while Trevor Tombe is a professor of economics at the University of Calgary and a research fellow at Calgary’s School of Public Policy.

Pursuing mutual recognition policies within specific areas, such as trucking regulations, food safety, or financial services, may be appropriate in the future, say the authors.

Canada’s experiment with domestic political arrangements to liberalize internal trade commenced in 1995 with the Agreement on Internal Trade.

The various agreements among the nation’s provinces and territories that have been spawned since then, and which presently constitute Canada’s ecosystem of domestic trade arrangements, are largely underpinned by the paradigm of national treatment’ reads the report.

Mutual recognition could further domestic liberalization efforts with its more stringent obligation on the part of one province to generally accept the technical regulations of another for goods or services. Arguably, recourse and the adoption of mutual recognition is a natural progression for Canada’s interprovincial trade advancement, say the authors.

Whatever the best route forward, interest among governments to improve economic growth and liberalize trade may be higher today than any point in recent memory, they argue.

And mutual recognition should be an important part of the policy conversation.