Responding to Trump Part 2: Reducing Interprovincial Trade Barriers

Two key long-term responses have been frequently advocated in the face of a potentially very damaging US-Canada tariff war. These responses are trade diversification and internal trade reform.

I dusted off some reports on these topics that I authored to share some key thoughts. I discussed Part 1 on international trade diversification last week. Part 2 is a brief primer on interprovincial trade barriers and some thoughts, advice and caution as political leaders promise bold action.

We should pursue interprovincial trade reform to strengthen our economy, not because we think exporters to the US can just sell to other Canadians to avoid any loss of jobs or output in the face of a tariff war with the US. Internal Canadian markets cannot replace external markets. Many exporters are viable only because of the US market. The Canadian market is too small.

Part 2: Internal (interprovincial) trade reform

People often have a limited understanding of what is commonly referred to as interprovincial trade barriers. Their policy prescriptions are accordingly too simplistic. Our 2016 report provides lots of details and examples of these barriers. Here are some highlights.

There are three dimensions to what are commonly referred to as interprovincial trade barriers, all arising from multiple requirements in each province or differences in regulations, standards or other requirements among provinces:

1.????? Barriers affecting interprovincial trade in goods and services such as

o?? Local economic preferences, such as in government procurement, local content rules, requirements for local natural resource processing or local ownership rules that impose higher burdens on non-residents.

o?? Different regulations (e.g., sanitary and phyto-sanitary requirements, technical regulations such as different dimensions for oversize or overweight vehicles, and non-technical regulations such as different rates of tax that impede the transfer of commercial vehicles from one province to another

2.????? Barriers affecting multi-jurisdiction firms, who account for almost half of business sector employment in Atlantic Canada. These firms must navigate:

o?? Different labour standards, occupational health and safety regimes, ?environmental standards, provincial registrations (separate, different), which can be a material barrier for small firms especially who are looking to expand into another province.

3.????? Barriers affecting the interprovincial mobility of workers, such as

o?? Differences in provincial licensing through regulatory bodies), and different standards or requirements for occupational health and safety training

There are three main challenges to interprovincial trade reform. It may:

1. Hurt local businesses who are no longer competitive
2. Hurt provincial tax/license revenues, affecting provinces, provincial regulators and provincial liquor corporations
3. Require investments in IT and/or staff to manage changes to regulations and standards

There are multiple options for internal trade reform:

1. Mutual recognition is often seen as a quick solution. However, it does not address all issues such as differences in labour standards like minimum wages, overtime rates or severance. Mutual recognition is easier if standards are similar and may not work well if there are lots of exemptions or different standards lead to “shopping and hopping” for the easiest place to get certificates/permits. A commitment to harmonize over say a five-year window (sooner if possible) may help address this.
2. Harmonization, where provinces agree on one standard. This can be relatively quick if provinces agree to adopt an existing national standard or one provincial standard. Overriding legislation could help if time is needed to update provincial legislation in specific areas.
3. National permits
4. National regulatory bodies

Our 2018 analysis of the literature shows that agreements are most effective when they are:

• comprehensive (i.e., a negative list approach with few exemptions)
• are quick to negotiate and implement
• have an effective dispute mechanism
• where the effectiveness and scope improve over time

Our 2018 analysis of the literature also shows that internal trade reforms benefit from several factors include:

• a precipitating event/crisis
• being embedded as part of broader economic reforms
• have an institutional champion
• use a creative approach to decision making
• enshrine reforms in legislation.

?In our light of our current situation:

1.???? We now have a major precipitating event that is often key to initiating significant internal trade reform. However, the window could close quickly. Interest in internal trade reform quickly fades and new initiatives peter out. An agreement before mid March would be ideal.

2.???? It is important to position regulatory reform as part of a broader and deeper economic policy agenda. This should be possible, given the broader need to improve Canada’s economic performance, particularly in light of the Trump shock. But it would be helpful to announce and agree on some of these other initiatives (e.g., tax reform, improved approval times for resource projects).

3.???? An institutional champion can be key to sustaining reform, as has been seen in the EU and Australia. This seems to be a major gap in Canada at this time and should be addressed (e.g., perhaps an internal trade czar, with the independence to conduct research, to provide advice, and power to monitor and ideally to facilitate or enforce compliance).

4.???? A creative approach to decision making – such as moving forward with a coalition of the willing and using federal dollars to incentivize and facilitate change – can be very helpful. We should use both options at the present time.

5.???? Enshrining reforms in legislation should be strongly considered to ensure reforms are credible and have teeth. Some overriding legislation to facilitate change, while provincial legislation catches up would be helpful.

Some observations and reflections

While I am encouraged to hear the statements and promises by the Minister Anita Indira Anand , The ?Minister of Transportation and Internal Trade, I will wait to see if this initial optimism does indeed translate into real substantive action. I have seen other initiatives come and go before. This time could be different – the external threat is like nothing we have faced since World War II. But its easy to agree to broad principles and statements until you start to get into the details and Premiers begin to realize who may be adversely affected in their own province.

So here are some thoughts, advice and caution as we move forward:

1.????? We just need action. We don’t need any more studies on this topic. Numerous organizations and researchers have written on the need for action and attempted to estimate the potential benefits. We know that there are costs to these barriers and benefits to reducing them. The most recent Statistics Canada | Statistique Canada analysis shows that increasing regulations over the period 2006 to 2021 reduced growth in business sector output (real GDP) by 1.7 percentage points and employment by 1.3 percentage points. It also reduced business sector investment by 9%, with a bigger effect for small firms.

2.????? We need to act now. The window to act will close quickly. This topic has been discussed by premiers for decades with limited progress. There are too many other pressing issues. Internal trade reform will not win votes at election time. If we don’t make substantial progress within weeks, the momentum to act will quickly fade.

3.????? To make progress quickly we need broad, bold initiatives. For example:

a.????? Anyone licensed to work in one province is automatically approved to work in any other (although Quebec’s different legal system may be an exception)

b.????? Any training and safety accepted in one province, must be accepted by every other province.

c.????? Any firm licensed and registered in one province is free to operate in any other.

d.????? All local content requirements for all future procurement contracts are null and void.

e.????? Beer and wine sold in one province can be sold in any other with markups the same for producers from any province.

4.????? Broad bold reforms will run the risk of “mistakes”, some unintended consequences and some short term local economic “pain” or disruption. Given the longstanding and inbuilt inertia on this topic, we probably need to take some risks, be willing to make some smart adjustments after the fact and help or encourage firms to prepare.

5.????? The political economy that has discouraged reform in the past remains in effect. The benefits of free trade are broad and diffuse without well organized and vocal constituents. The benefits, including lower prices, more choice for consumers, and opportunities to increase revenues and employment for exporters are also hard to identify empirically. However, the benefits operate through lower operating costs and increased competition. If a local business is no longer able to compete with new competitors from other provinces, then firms close and jobs are lost. The number of losers from free trade are fewer and are typically more vocal and better organized than the beneficiaries.

6.????? There will be push back. Premiers need to be prepared for this and be willing to uphold the principle of free and open trade, or else their commitment to reform will quickly fade. As I shared in our recent analysis on the Trump tariffs: “If we want secure access to markets in the US then we must also ensure our markets are open to producers from the US. The same arguments apply to trading with other provinces.” If we want easier access to markets in other provinces, we have to also open our own markets.

7.????? Increased competition can promote innovation and improved competitiveness. Larger markets can also help firms scale and benefit from economies of scale. Premiers concerned about local job losses should focus on supporting investment and innovation by local firms. There could be a case made for a short window in some cases (perhaps 180 days or until January 1, 2026) to allow firms to prepare for increased competition in their province. The goal is improved competitiveness and productivity not market disruption or permanent subsidies to low productivity and uncompetitive firms. But the competition authorities should also pay attention to ensure local monopolies are not replaced with a national firm that has a monopoly hold in a provincial market. However, there may be some cases where firms have made substantial investments in long-lasting assets in a particular province on the assumption that their market was protected. They may need a longer window to adjust but, ultimately, we are looking for firms to thrive on the basis of their competitiveness, not on the basis of an artificial barrier to trade.

8.????? The federal government should consider how they can provide time limited financial support to the ease the transition for regulatory bodies or provinces facing a loss of revenue. Payments could be made in select cases or based on transparent criteria to give organizations facing significant revenue loss a year to adjust their business model. This can help ease the transition.

9.????? Federal and provincial governments need to create an internal trade champion, a body with real power to ensure reforms continue to broaden and are not rolled back.

?10. Governments need to commit to work towards greater harmonization to avoid “hopping and shopping” where mutual recognition has been used.

11. Governments should move to embody reforms in legislation.

12. Announced reforms should have clear timelines and accountabilities. Our 2018 regulatory reform model proposed many, research based components to ensure the success of internal trade reform and provincial government cooperation in Atlantic Canada. Many of these could be easily incorporated into a national model for interprovincial regulatory reform.

So now we wait and see if Canadian Premiers will indeed deliver on this once-in-a-lifetime opportunity to move Canada forward.