Why Free Trade Within Canada is Not So Simple

Discussions about Canadian internal free trade have a familiar four-part lifecycle. Recent remarks from Bank of Canada Governor Stephen Poloz provide some illustration. This post then moves on to highlight some reasons why liberalizing domestic trade is so difficult.

Learning about Internal Trade Barriers: A Four-Step Process

First, an individual or entity encounters a particular barrier in the course of their life or business. In the case of Mr. Poloz, he was focused the idea of a national securities regulator (currently, Canada is the only G20 country in which the regulation of the securities industry is the job of the provinces and territories rather than the federal government). That thirteen subnational jurisdictions each have authority over securities regulation is said to create inefficiencies and barriers to trade. Another commonly cited set of barriers in public discourse are restrictive liquor rules that prevent the interprovincial flows of favourite adult beverages, such as Albertan rye whiskey or BC wine.

Second, that person next examines the Canadian domestic trading system at large and, in disbelief that there could be such trade frictions within a country, critiques the deficiencies in Canada’s internal trade regime. How can it be that structures prevent the flow of goods and services inside of a single nation? In his remarks, Mr. Poloz argued that the very reason “Confederation happened [was] to create a free-trade area.” In fairness, the cost of these barriers is not insubstantial: a July 2019 IMF working paper pegged the cost of internal trade obstacles at 4% of Canada’s GDP. And beyond foregone economic growth is also the damage to Canada’s sense of unity.

At the third step in the sequence, a person often compares what they’ve discovered about the Canadian internal free trade with that of the international trading system. Many are frustrated when they come to the defensible conclusion that it can be easier to trade internationally than domestically. Mr. Poloz himself noted that “[w]e spend all our energy renegotiating a free-trade agreement with the United States, but we can’t possibly sit down and figure out how to have free trade within Canada?” It is unclear if Mr. Poloz was aware of the existence of the recently re-negotiated Canadian Free Trade Agreement when he made this statement.

As a fourth and final step, after having started the learning process with frustrations about restrictions in a particular domain of policy (i.e. a national securities regulator) the person or entity concludes that the internal trading system as a whole is broken and requires overhaul. The focus of the criticism broadens well beyond the original problem that led the person to learn about Canadian internal trade rules in the first place.

This post was not written to criticize this four-part sequence, or those who engage in it. The typified progression is a rational and logical thought process. Instead, its purpose is to bring to light the hidden complexities that are buried beneath the surface, and to shed light on why resolution of internal trade barriers is not an easy task. There simply are no silver bullets when it comes to internal trade policy.

1. Debates about particular trade barriers can have two defensible sides.

There are trade barriers that have no merit and are clearly self-serving. One such example was a British Columbia measure, which until recently, only allowed local wines to be sold on the shelves of provincial grocery stores. This served no legitimate purpose other than to prevent Ontarian and other imported wines from receiving profitable shelf space.

But on other issues, there can be legitimate policy disagreements, and these disagreements can be complex and highly technocratic. One recent example comes from the obscure domain of hydroponics — a form of agriculture in which products such as lettuce or tomatoes are grown in water, without the use of any soil. In this system, nutrients can either come from natural sources such as fish by-products in a closed-loop system, or instead from chemical fertilizers. The question at issue was whether or not vegetables traditionally grown in soil, such as lettuce, could receive the ‘organic’ designation if they were instead grown in a hydroponic system even if they were not grown with the use of fertilizers. There are arguments for both sides of this issue. On the one hand, consumers at the grocery store may interpret “Organic” labels to imply that the produce was grown in soil. On the other hand, that the produce was grown in a hydroponic system without chemical fertilizers may, for others, satisfy the definition of “Organic.” There has been no guidance on this issue from the applicable international standards committee - the Codex Alimentarius - suggesting that there is no widespread consensus as to the correct answer.

Issues in Canada that create internal trade barriers can be complex and might not have a single ‘correct’ means of resolution. That being said, so long as they exist, they generate frictions and harm domestic trade.

2. Provinces must retain their ability to craft legislation that serves the needs of their electorates.

Canada is a massive country with its citizens facing a diverse range of challenges. For this reason, provinces must retain the ability to legislate and regulate in the best interests of their own populations. And on certain issues, the optimal response in Province A might diverge from that of Province B. Not only is this a constitutional reality, but it is also a feature of a country with as large a land mass as Canada. The Canadian Supreme Court recognized this in the case of R v. Comeau, in which the Court provided that complete free trade obligations imposed on provinces could invalidate important public-health driven prohibitions and environmental controls.

As an example: the topography, climates and road-work traditions of Canada’s various regions might mean that spring weight restrictions for trucks might differ from province to province. Provinces may strive to strike a balance between protecting roadways and facilitating trade, but local circumstances may call for greater weight restrictions than elsewhere. Though on its face this may create a trade barrier, these are important limitations that serve the interests of others, especially the safety of local commuters who use those same roadways.

An optimal internal trade regime in Canada focuses on eliminating unjustifiable trade barriers, rather than trade barriers as a whole.

3. The International Trade Order is not Necessarily a Good Comparator to Assess Domestic Trade Liberalization Efforts

It is often suggested that because it is easier to trade amongst countries than provinces, Canadian economic unity is in disrepair. There are two issues with this statement. First, it relies on an overgeneralization: trade between which countries? And what type of trade? But second, comparing the status of international trade and internal trade is like comparing apples to oranges. It is unfair to use the former as the yardstick by which to measure progress on the latter. The conflicting regulations and trade barriers found in the domestic context can be far different from the items of focus in international trade agreements. For example, provinces do not impose tariffs or customs duties on one another unlike countries, and the overlay of federal agencies such as the Canadian Food Inspection Agency does not exist in the international context.

Another important difference sources to the foundational notion of Canadian federalism, which places governmental authority in both the federal government and the provinces. In particular, provinces have certain powers that are constitutionally enshrined at section 92 of the Constitution Act, 1982. These include absolute power over property and civil rights, and all matters of a local or private nature, just to name a few. The Canadian judicial system will uphold these allocated powers, and unless Canada undergoes constitutional amendment, these categorizations will not change. One might even argue that provinces have the responsibility to legislate and regulate in those constitutionally-provided domains of power.

This is in marked contrast with the domain of international trade law, where there exists no equivalent world-wide constitution to serve as the backdrop for agreements such as the GATT. Arguably, it is far easier for governments to make trade agreements with one another when no overarching constitution exists.

4. Canada does have a system to resolve internal trade frictions, and it is constantly improving.

In 1995, Canadian governments got together to negotiate the Agreement on Internal Trade (it was re-named the Canadian Free Trade Agreement in 2017). Inspired by its international equivalents such as a the GATT and NAFTA, it imposes a set of trade obligations meant to reduce the barriers to internal trade inside of Canada. It also has two important features. The first is a special court where a complainant can launch a legal attack against a protectionist measure of another province, which may result in financial compensation for damages. The second is a reconciliation process for government officials to sit down together and harmonize incompatible regulations.

In addition to the CFTA is a set of other internal trade agreements, such as the New West Partnership Trade Agreement between British Columbia, Alberta, Saskatchewan and Manitoba. This is similar to the international context, where in addition to the WTO is a plethora of smaller arrangements amongst subsets of countries (think of CPTPP, CETA, and MERCOSUR, just to name a few).

There are undisputed shortcomings to the CFTA. Its dispute resolution process takes too long, and there are too many exceptions. But it has improved considerably since its birth twenty-five years ago, and will continue to do so with future reform and amendments.

Conclusion

Discussions about internal free trade in Canada generally originate out of a particular obstacle encountered in a particular domain of policy (i.e. a national securities regulator) and subsequently expand to a broader conversation about domestic trade as a whole. This post strives to inform those discussions, and highlight some of the complexities and nuances that slow the path of progress towards liberalized trade within Canada.

Ryan is a Frederick Sheldon Fellow at Harvard University studying interprovincial trade issues in Canada.

Student & scholar of Canadian interprovincial trade law and policy.