The constant threat of tariffs coming from the United States government since January has led Canadians to question our dependence on our southern neighbour and the way in which we do business in this country.
One thing that has again come under scrutiny is how difficult it can be to trade goods between provinces. Although the Canadian Constitution doesn’t allow provinces to impose tariffs on one another, various provincial regulations make it challenging for businesses to send their goods, services or talent to other parts of the country.
In February, the Canadian government took action to remove some of these barriers. Former Internal Trade Minister Anita Anand announced that more than half of the federal internal trade barriers – mostly related to government procurement – will be axed. Canada’s federal government has cited that removing all internal trade barriers could boost productivity, lower prices by up to 15% and add up to $200 billion to the domestic economy.
Several provinces have also begun the process of removing internal trade barriers.
The Perspectives team sat down with John McNally, Senior Policy Advisor at Scotiabank, to talk about interprovincial trade barriers and just how big of an impact removing them could have on our economy. Watch the video below or scroll down for the text Q&A:
Perspectives: Let’s start with the big question, what are interprovincial trade barriers?
John McNally: They’re basically a lot of these small differences in regulatory standards that just make it that much more difficult to trade internally. When we think about trade barriers, often we think about them as anything that makes trading more difficult. They can be these little unintentional frictions that add up over time.
For example, think of a nurse or an electrician who's working in a particular province, they’re licensed to work in one province. But if they want to move over to another one, their licence doesn't necessarily carry over. These sorts of little technical standards or regulatory changes create extra costs for businesses. None of these laws are created maliciously, the province is implementing what it feels is best for business in that jurisdiction, but they become an issue when regulations are different between provinces.
Another big example is mandatory labeling or prohibitions on selling certain products in certain provinces. Think about these as if you were a company that's trying to enter a foreign market. If there are differences in regulatory standards, if there are differences in technical standards, if you need to label things differently, if there's differences in food safety regulations, then you have to change the way products are made or packaged. All of those add costs for the company looking to sell its products in another province and that cost is generally passed through to consumers.
Perspectives: Companies often say it’s easier and cheaper to send their products across the border to the U.S. or even to the EU than it is to ship them to the province next door. Can you expand a bit more on some of the big problems companies face when choosing how to grow their reach?
John McNally: It can be easier for a Canadian company to ship its goods to the EU for instance because Canada and the European Union have a Comprehensive Economic Trade Agreement, which eliminates tariffs for most Canadian products. Also, once a Canadian company adjusts its export to the EU’s standards, it has access to the majority of the European market with those tweaks.
Some of the big hindrances Canadian companies face when shipping within the country are trucking regulations. The trucking industry also has a lot of different safety inspections, permits, licences, and all that paperwork can add time and that can create additional costs.
Provinces are now seeing just how much of a hindrance all their different guidelines are. Imagine if you’re a company and you’re deciding whether or not you want to expand selling in a different province or selling into the U.S. or EU. Ontario, the biggest Canadian province, has about 16 million people. In comparison, the United States has around 340 million people. If you now go back and invest capital to make changes to your labeling, or ingredients, you’re thinking about return on investment – how much of an additional market share or additional revenues will you have access to by making these changes? If you make changes for the U.S. market, you now have access to the whole thing, not just the 16 million people in Ontario. And if you’re looking to expand into Ontario and Quebec, you might have to make two completely different sets of changes, which can be costly and not give you the same return on investment as making some changes for the U.S. market would.
Perspectives: Canada has already started removing trade barriers. How big of an effect will this have on the Canadian economy? And how much will it help Canadian businesses?
John McNally: If you add up all of the provincial standards and regulations that create extra tariff-equivalent costs and then remove these barriers, you’ll likely see prices decline for consumers.
When it comes to just how much this will help consumers and the economy, some of the high estimates we see is that it would increase GDP by 5 to 7%. This would happen if you aligned all regulatory standards across the country, which is hard to do. A unified set of standards would lower barriers to competition, but markets and firms would still have to step in and offer more competitive products, undertake innovation, and potentially offer lower-cost products.
Creating a unified set of regulations would especially be beneficial for migration within the country. Sections of the population that are working as gas technicians in Ontario may want to pick up and move to Alberta for a slightly higher salary, but can’t because their credentials don’t transfer over. If you remove this barrier, you create more competition.
The question comes up though, is which guidelines do we adapt? If you have a difference in standards in medical fields, for example, and one province is more stringent than the other, which one has the trade barrier? Provinces may have different perspectives on this – B.C., Quebec, and Prince Edward Island are all very different places and may require some different approaches. Provinces may also make money from regulations and licencing, so they may not be willing to give that source of revenue up.
Regardless, removing many of these trade barriers will boost our GDP and will offset some of the effects of the U.S. tariffs and can make products cheaper.
Perspectives: Currently, how much interprovincial trade is happening in Canada?
John McNally: There's actually a fair bit of interprovincial trade in Canada. It was a little over $400 billion in 2023, which is not an insignificant amount. It’s about 13-14 per cent of Canada's GDP.
Interprovincial trade is an important part of our overall trade picture, but it's not as high as international trade and it's growing slower than international trade. A lot of the international trade we do tends to be in goods – think exports of oil, gold, and lumber. Whereas a lot of the interprovincial trade we have is in services, so there really are some extra barriers to break down. Oftentimes when we're talking about aligning regulatory standards, the provinces will make decisions to approach things bilaterally. You might get agreements between two or three different provinces trying to align a technical standard for say nurses.
Perspectives: How much money are Canadian companies losing when it comes to not having access to the full Canadian market?
John McNally: I think that's a hard thing to estimate. Most of the studies that I've seen have taken a look at the ways that the economy might grow if some of these barriers were lowered and the estimates that I've seen basically range between a 1% bump to GDP to a 7% bump to GDP. These are really rosy estimates. You're talking an additional $3,000 to $5,000 in GDP per person. Lowering barriers would allow companies to start providing lower cost, more innovative, and more competitive products.
Perspectives: Can Canada become self-sufficient if we remove trade barriers?
John McNally: No unfortunately. There are still things we don’t and can’t produce like oranges or bananas. Also, we don’t have big tech firms like Google headquartered in our country. But if we continue dismantling the trade barriers within Canada it will help us offset some of the impacts from the tariffs being imposed on us by the United States.
