Finding gains in trading more among ourselves

Opinion

Hey there, time traveller!
This article was published 18/01/2025 (232 days ago), so information in it may no longer be current.

If one of my young and eager graduate students of the past was looking for a good thesis topic, I would suggest that the student take a look at Canada’s interprovincial trade.

The topic provides significant theoretical and empirical research challenges, but the basic modelling principles are established, data of high quality will be readily available, and the policy impact of the research would certainly resonate today.

In 1994, Canada’s first ministers reached the Agreement on Internal Trade, recognizing that there were significant barriers to interprovincial trade. Since then, several trade protocols and interprovincial trade agreements have been passed.

Yet Canada’s trade focus continues to be outward, resulting in 15 international trade agreements, while trade between the provinces continues to be limited by provincial regulations. Moreover, the international trade agreement with the U.S. and Mexico that matters most is jeopardized by incoming U.S. president Donald Trump’s threats to immediately impose unilateral tariffs and renegotiate or cancel the agreement during the term of his presidency.

One of the principal tenets of economics is gains from trade, which allow nations to exploit their comparative advantage (producing the things they excel at) and economies of scale in production (using greater volume to produce things more cheaply). From this standpoint, Trump’s disdain for the free trade agreement with his closest neighbours seems foolhardy, but he does not appear to understand or care.

And he can afford to, in the sense that the impact of his trade protectionism on the vast U.S. economy will be far smaller than its impact on Canada.

The Canadian Chamber of Commerce recently reported that Trump’s 25 per cent tariff plan would shrink Canada’s GDP by 2.6 per cent, or $1,900 per capita. My mythical graduate student could undoubtedly improve on their quick study over the four-year time frame of a PhD thesis, capturing the responses, adjustments, long-term effects and various tariff policies the federal government might pursue.

But no one would dispute that a prolonged tariff, or a tariff war if Canada responds, would hurt the Canadian economy.

Part of the problem, of course, is that the U.S. is our dominant trading partner by virtue of geography. Trade increases the closer a nation is to its trading partner, as well as the size of the trading partner, and our proximity to the U.S. and its gigantic economy makes it very difficult to divert trade to other nations that are farther afield and generally smaller.

The principle of gains from trade, however, also applies to interprovincial trade, where proximity presents significant opportunities to counteract the losses of U.S. trade.

A Senate report in 2016 listed numerous provincial regulations that differ between provinces and present barriers to trade. Trucking regulations differ on when truckers can drive and on what tires. Provincial liquor regulations differ on standard beer bottle size and direct-to-consumer wine shipments. Milk and cream container sizes, organic food standards and maple syrup grading systems differ across provinces. There is no common method of carbon taxation. Companies are often required to undergo a unique registration process in every province in which they do business.

Their list is only illustrative of the problems firms face in doing business in other provinces.

It does not include the differences in professional certifications and apprenticeship rules that restrict labour mobility and dampen trade in services. Provinces also engage in protectionist procurement policies that favour local suppliers and limit competition from suppliers in other provinces.

The Senate concluded that international companies often have easier access to our market than Canadian companies from another province.

Even with these restrictions, interprovincial trade constitutes 20 per cent of GDP, compared to 30 per cent for international trade.

In other words, the potential impact of eliminating unnecessary interprovincial trade restrictions is considerable. The Canadian Federation of Independent Business estimates that removal of interprovincial trade barriers would increase Canadian productivity by about five per cent or $5,000 per capita. I would want my mythical graduate student to critically assess these figures as well, but the starting point is that the impact of interprovincial trade barriers is not trivial in comparison with Trump’s proposed tariffs.

The Agreement on Internal Trade was superseded by the Canadian Free Trade Agreement in 2017. In 2010, British Columbia, Alberta and Saskatchewan entered into the New West Partnership Trade Agreement to reduce barriers to trade, labour mobility and investment. Manitoba joined that Agreement in 2017. Other regional trade agreements between Ontario and Quebec and within the Atlantic Provinces are on the books as well, but clearly much remains to be accomplished.

Free trade negotiations are often impeded by the absence of a mechanism for those benefiting to compensate those losing out. Canada’s constitutional requirement of equalization payments, however, provides a vehicle for sharing the gains from improved interprovincial trade such that provincial governments can provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

An effective equalization program should provide some impetus to realize the wealth gains available from increased trade among ourselves.

Wayne Simpson is a former professor of economics at the University of Manitoba.