Internal Trade Provincial Leadership Index – 2021 Edition

Research Paper showing how the removal of internal trade barriers represents an inclusive growth policy for Canada, and ranking the provinces and territories in terms of their openness to internal free trade.

With the vaccine rollout in full swing, the public’s attention is increasingly focused on economic recovery. The authors of this Research Paper propose a very simple solution: a true free trade agreement among the Canadian provinces. This publication includes among other things a ranking of the provinces and territories according to their openness to internal trade. Alberta takes first place, and Quebec comes in last.

Technical Annex

Related Content

Free interprovincial trade once and for all (National Post, March 30, 2021) William Watson: Low-hanging fruit to boost Canada’s economy is left dying on the vine (National Post, March 30, 2021) Le commerce entre les provinces, «qu’ossa donne»? (Le Journal de Montréal, March 30, 2021) Tear down Canada’s interprovincial trade barriers (Sun Media Papers, April 3, 2021) Interprovincial trade barriers are stifling Canada’s economy: MEI report (The Hub, April 20, 2021)	Interview (in French) with Miguel Ouellette (Le café show, Ici Radio-Canada, April 13, 2021) Interview with Krystle Wittevrongel (The Mike Farwell Show, 570 News, April 19, 2021)	Interview with Krystle Wittevrongel (Bloomberg Markets, BNN-TV, March 30, 2021) Discussion with Krystle Wittevrongel (The School of Public Policy, YouTube, November 9, 2021)

This Research Paper was prepared by Olivier Rancourt, Economist at the MEI, and Krystle Wittevrongel, Public Policy Analyst at the MEI, with the collaboration of Miguel Ouellette, Director of Operations and Economist at the MEI.

Highlights

Canada was founded as a country with the vision of creating a single market and eliminating border controls and tariffs between regions. Although there are no internal tariffs as such anymore in this country, each province and territory has over time introduced laws and regulations which hobble the movement of goods and services across borders. Yet Canadians are overwhelmingly in favour of one Canada, one market for goods and services. Burdened with large deficits and weakened growth, the removal of internal trade barriers represents a unique opportunity for an inclusive growth policy.

Chapter 1 – The Wealth of Provinces and Territories

• Specialization and trade are pillars of wealth creation for all nations, regions, provinces, and territories—and less competitive trading partners benefit relatively more from specialization than their more competitive counterparts.
• While it is clear that all the provinces would benefit in terms of GDP per capita from the removal of trade barriers, those that have the most to gain are the poorer ones.
• Some provinces can rely more easily than others upon international trade to compensate for a lack of interprovincial trade, and the most populous provinces, like Ontario and Quebec, have large enough workforces to enjoy a significant level of specialization.
• Using available census data and a recent IMF study, and based on very prudent hypotheses, we calculated the GDP per capita loss due to interprovincial barriers in each province.
• We observed, for example, that if internal trade barriers had disappeared in the year 2000, Prince Edward Island’s GDP per capita in 2018 would be only 14% below Ontario’s, whereas it is actually 24% lower.
• Along the same lines, Manitoba’s GDP per capita would actually have caught up to Ontario’s by 2013 in the absence of internal trade barriers, and would have maintained a GDP per capita very similar to Ontario’s to this day.
• We also estimated the difference in GDP per capita in 2030 between a scenario in which internal barriers had been eliminated in 2020 and one in which they are left in place.
• In the scenario in which barriers to internal trade remain in place, PEI’s GDP per capita in 2030 is more than $10,000 lower, Newfoundland and Labrador’s nearly $9,000 lower, Manitoba’s nearly $5,000 less, and Saskatchewan’s nearly $4,000 less than in the free-trade scenario.
• For the other provinces, the per capita losses are lower, but always over $2,000 per person, demonstrating that the stakes are unmistakably high, especially in a post-COVID world, where harsh choices need to be made to help bolster the economy.

Chapter 2 – Few Are Walking the CFTA Walk

• In the 2021 ranking, Alberta is in first place, followed by Manitoba in second place, and British Columbia and Saskatchewan tied for third. Quebec is in last place, with almost six times as many exceptions to internal free trade as Alberta, and Yukon and New Brunswick are not much better.
• Only three provinces, Alberta, Manitoba, and Ontario, have worked to improve their openness to trade since the signature of the CFTA agreement in 2017.
• In the cases of British Columbia and each of the territories, barriers to internal trade have actually increased since the signing of the original CFTA.
• Some provinces could improve their scores significantly, to the great benefit of their taxpayers, simply by removing their procurement exceptions, which have the effect of increasing the operating costs of the various government departments involved.
• The CFTA was a step in the right direction in that it defined a list of goods and services not included in the agreement—the so-called “negative list” approach—contrary to certain prior free trade agreements that included a “positive list” of goods and services subject to the agreement.

Despite the good intentions shown by Canadian provinces and territories in signing the 2017 Canadian Free Trade Agreement, only three have actually walked the walk and reduced their exceptions to internal free trade in the interim. This situation is particularly unfortunate for the less prosperous provinces, which would benefit the most from a true single market from coast to coast to coast. But even the wealthier provinces would see their GDP per capita increase compared to the status quo scenario. In short, the whole country would benefit.

The process of liberalizing internal trade began with Confederation and the elimination of a variety of customs duties between the provinces. The elimination of the CFTA’s remaining exceptions is a unique opportunity to embrace a policy of inclusive economic growth for all of Canada. Given the need to plan for a post-COVID economic recovery in a context of international uncertainty and large deficits, this is an opportunity we cannot afford to ignore.

Introduction

An Inclusive Growth Opportunity for Canada

The MEI’s first Internal Trade Provincial Leadership Index was published in 2019,(1) two years after Canada’s provinces and territories renewed their commitment to internal free trade through the Canadian Free Trade Agreement (CFTA).(2) This was indeed a renewal, since Canada was founded as a country with the vision of creating a single market and eliminating border controls and tariffs between regions.(3) Since the original intergovernmental trade agreement entered into force in 2017, two additional versions have been released, the most recent in January 2021.(4)

One of the primary purposes of Confederation was to create one single market following the end of the Reciprocity Treaty with the United States in 1866,(5) which had allowed the free movement of certain goods between the colonies of British North America and the United States.(6) By uniting to form a confederation, the British colonies created between themselves a stable internal market sheltered from the vagaries of international politics. This provided economic protection from the disengagement of the British, who wanted to reduce their economic obligations in the colonies.(7)

Although there are no internal tariffs as such anymore in this country, each province and territory has over time introduced laws and regulations which hobble the movement of goods and services across borders. Ironically, as international and interregional trade agreements have removed barriers between countries, and Canada has enjoyed fruitful exchanges with trading partners around the world,(8) barriers within Canada have tended either to be raised or maintained. Differing safety standards, technical standards, occupational licensing, and residential obligations—and even outright protectionism—have created artificial costs for Canadians as producers, consumers, and taxpayers, thereby reducing their standard of living.

For example, the only way to work on a Quebec construction site with qualifications from another province is via a complex administrative process to obtain recognition of your qualifications, despite the fact that the Commission de la Construction du Québec recognizes work experience acquired in the other provinces as valid for the purposes of obtaining the equivalent Quebec qualifications.(9) Each province in the country has similar rules and standards that prevent the free movement of goods and services, including labour. These are very costly in terms of time and money for companies that want to do business in several provinces, and they also indirectly penalize taxpayers.

There has also been a great loss of opportunity for communities within Canada that would most benefit from the elimination of trade barriers. Indeed, provinces and territories are not equal in terms of the impediment that trade barriers represent to their productivity and wealth. For example, we found that while all provinces would benefit from interprovincial free trade to some extent, provinces such as Manitoba and Prince Edward Island would benefit much more than Ontario, Alberta, British Columbia, and Quebec.

Canadians Want Internal Free Trade

In line with the vision that first united the country, Canadians are overwhelmingly in favour of one Canada, one market for goods and services. According to a 2020 MBA Recherche poll:(10)

• Nine in ten Canadians (89%) believe interprovincial free trade is important.
• The vast majority (84%) think they should be able to exchange goods and services anywhere within Canada without restrictions.
• 82% think we should be able to take alcohol freely from one province to the next.
• 82% of Canadians would feel comfortable being treated by a nurse practitioner trained in a different province.
• The large majority (84%) believe Canadian-trained tradespeople such as welders should be allowed to work in any province if it helps to drive down the cost of building roads, schools, and housing.
• Four in five Canadians (81%) support harmonized national regulations for truckers if this results in more affordable products.
• After being exposed to information about interprovincial free trade, most Canadians (79%) support reducing interprovincial trade barriers.

Comparing Provinces: The Internal Trade Provincial Leadership Index

In this Index, the provinces and territories are given an overall score based on the total number of exceptions to free trade they maintain, broken down by category, as per the CFTA’s typology. In general, the progress of the signatories to the 2017 CFTA has been disappointing. Only three provinces, Alberta, Manitoba, and Ontario, have progressed in the spirit of the agreement and reduced the number of barriers they maintain, while British Columbia and the territories have actually increased barriers to trade since the signing in 2017.

Given the substantial gains stemming from the opening up of interprovincial trade for the economic growth of all parts of the country, this second edition of our internal trade ranking should serve as a wake-up call for those provinces and territories not working to reduce and eliminate the different barriers that exist.

In a post-COVID age, burdened with large deficits and weakened growth, the removal of internal trade barriers represents a unique opportunity for an inclusive growth policy that is fully under Canadians’ control. Given geopolitical and international trade uncertainty, the ability to take advantage of our own internal growth potential becomes all the more important.

Read the Internal Trade Provincial Leadership Index – 2021 Edition in PDF format