By Germain Belzile, Senior Associate Researcher at the MEI
The recent G7 Summit in Charlevoix, Que. ended on a sour note for Canada as U.S. President Donald Trump denounced Canadian protectionism, particularly in agriculture. On top of this, the renegotiation of the North American Free Trade Agreement (NAFTA) does not seem to be going well, and certain commentators are speaking openly about the possibility of failure and the end of the Agreement.
The American government has imposed special tariffs on Canadian steel and aluminum, and is now speaking of imposing a 25 per cent tariff on vehicles produced in Canada.
Why is this so serious? The answer is simple: because free trade enriches us all.
Free trade increases competition, since the number of companies in a single market increases. This leads to better products, increases consumer choice, increases the size of markets and hence allows for economies of scale and forces companies to become more productive. These phenomena reduce prices and raise salaries.
This is the key: the purchasing power of households goes up, because they have more to spend and also because each dollar spent allows them to buy more. Higher tariffs and the chance that NAFTA might end therefore threaten Canadian standards of living, since the United States is by far our biggest trading partner.
It is often easier to export toward another country than toward another Canadian province.
Free trade... at home!
The problems surrounding the renegotiation of NAFTA and U.S. tariffs on Canadian products are serious, but there are limits to what Canada can do by itself in the matter. However, there is a way to improve trade without waiting for help from our external partners. All we need to do is work to create genuine free trade within Canada.
Canadian provinces do not practice free trade among themselves. According to Statistics Canada, the many restrictions on internal Canadian trade correspond to an average customs duty of 6.9 per cent on goods exchanged between the provinces. This rate is much higher than the average Canadian tariff on international imports (0.8 per cent), and higher even than the average world tariff (2.9 per cent). Indeed, it is often easier to export toward another country than toward another Canadian province.
These barriers to interprovincial trade are due to explicit prohibitions, but also to differences in the laws and regulations of the different provinces, which are a drag on trade. Among many examples, there is the transport of goods, the sale of alcohol, agricultural policies, the accreditations required to practise certain occupations, business registration, and access to capital markets.
Absurd and costly barriers
Two years ago, the Senate, which promotes the abolition of these barriers, prepared a list of the "10 most absurd internal barriers." One example: in British Columbia, certain truck configurations are only allowed to roll at night, whereas they're only allowed to roll in the daytime in the neighbouring province of Alberta.
The artificial obstacles that exist between the provinces slow down business investment and cost consumers billions of dollars every year. A recent study published in the Canadian Journal of Economics puts the annual cost of the absence of internal free trade at between $50 billion and $130 billion.
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A new agreement on internal trade between the provinces was signed last year. While it envisions the harmonization of rules in the fields of trucking and construction, as well as the opening of markets, obstacles to trade between the provinces remain numerous. As an indicator of their scope, of the deal's 345 pages, almost 140 are filled with exemptions. Unfortunately, the Supreme Court's recent decision in the Comeau case closed the door to trade liberalization through the court system, even though the Constitution guarantees the free flow of goods.
Given the tensions surrounding Canada's international trade, it is more important than ever to liberalize interprovincial trade. Our politicians must stop tearing their hair out about our American partners and get to work opening up the Canadian market. It won't solve everything, but at least we don't have to depend on the whim of a foreign leader to get it done.
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