Nova Scotia Premier Tim Houston and Ontario Premier Doug Ford and spoke last month about reducing interprovincial trade barriers in response to U.S. tariffs. Economists say politicians might be too optimistic about the benefits of the idea.Chris Young/The Canadian Press
Canada’s ambition to knock down interprovincial trade barriers has been lauded amid the threat of U.S. tariffs, but governments still have to deliver on their bold promises of reform and the resulting economic boost may be smaller than anticipated.
Federal and provincial governments have taken several steps since U.S. President Donald Trump’s inauguration to tackle regulatory differences between jurisdictions that make it hard for businesses to sell their products and services, and for Canadians to work, in other parts of the country.
Nova Scotia introduced legislation last month that would remove red tape on goods and workers coming from jurisdictions that pass a similar law – prompting Ontario and the federal government to pledge to do the same.
The federal, provincial and territorial governments launched negotiations earlier this month to recognize each other’s regulatory standards for all consumer goods, with the exception of food, and come up with a process to recognize labour credentials by June 1.
Canadians in most regions have also been promised that they’ll soon be able to buy alcohol directly from producers in other jurisdictions.
Prime Minister Mark Carney has argued removing internal trade barriers could more than offset the effects of U.S. tariffs on the economy, and said doing so would increase the size of the economy by $250-billion – or more than $6,000 for every Canadian. Premiers have shared similarly large estimates.
However, some economists are now questioning those figures, and Trevor Tombe, the author of influential research on interprovincial trade, says politicians are cherry-picking his work to promote the most optimistic scenario.
Canadian Imperial Bank of Commerce chief economist Avery Shenfeld, who co-authored a study critiquing Prof. Tombe’s work, said “there’s no harm in championing the cause of removing these interprovincial barriers, because there will be some economic gain realized from more trade.”
“The only hazard is getting too confident about our ability to replace the U.S. market with domestic demand,” Mr. Shenfeld said in an interview.
The CIBC report says that after reviewing research that estimates large economic gains from removing internal barriers, the authors “find reasons to be skeptical over claims about the size of the pot of gold waiting to be found at the end of the interprovincial trade rainbow.”
Because internal trade costs are difficult to observe, researchers have attempted to measure them indirectly with economic modelling used in international trade research. However, reports from CIBC and the Canadian Centre of Policy Alternatives take issue with the methodology of those studies, arguing that the assumptions underpinning the research lead to exaggerated findings on the economic cost of interjurisdictional barriers.
Marc Lee, a senior economist at the CCPA, said in an interview the renewed push to tackle internal trade barriers amounts to “political theatre” prompted by the trade war with the U.S.
“This is politicians needing to respond to the Trump tariffs and finding basically a zombie issue that’s been floating around for years and sort of wrapping themselves in the flag and making it look to Canadians like they’re doing something when, in many cases, they’re not doing a whole lot,” he said.
Trevor Tombe, an economics professor at the University of Calgary, said that he welcomes critiques of his work. However, he urged those with criticisms to present their own research to improve on his.Todd Korol/The Globe and Mail
Prof. Tombe, an economics professor at the University of Calgary, said in an interview that he welcomes critiques of his work. However, he urged those with criticisms to present their own research to improve on his.
He maintains there are large gains to make from dismantling internal trade barriers, but noted that his research offers a range of estimates on those gains.
Meanwhile, public commentary on internal trade, including from politicians, has focused on his high-end estimates, Prof. Tombe said.
Mr. Carney’s claim that removing internal trade barriers could add $250-billion to the economy appears to be based on Prof. Tombe’s research, but the low-end of his estimates suggest the economy may grow by about half of that amount.
“And that’s putting aside any critiques that one might have about how I arrive at those estimates,” Prof. Tombe added.
Moreover, some internal trade barriers, such as French language laws in Quebec, are expected to stay in place, even if governments follow through with their ambitious promises.
That means even if Canada could add up to $250-billion to the economy by eliminating internal trade barriers, governments are unlikely to get all the way there because some barriers would remain, and the process would be stretched out over time.
“As long as we have provinces, we will almost surely have some internal trade frictions. Because the ultimate reason for these frictions is that provinces do things differently, and that makes it hard for a business to navigate as they move across these boundaries,” Prof. Tombe said.
While it’s unclear exactly how much internal trade barriers hold back the Canadian economy, the renewed effort to unite the country on an economic standpoint has been well-received by business groups and policy analysts.
“I think that the outlook for actually getting these barriers – either completely or in very major part – removed has never been stronger,” said Jean Philippe Fournier, a former policy adviser to the Quebec finance minister.
Mr. Fournier said something such as liberalizing alcohol sales wouldn’t bear much economic benefit on its own, but would be noticed by Canadians. Meanwhile, he’s cautiously optimistic about the negotiations the federal and provincial governments committed to earlier this month.
Martha Hall Findlay, director of the University of Calgary’s School of Public Policy, said removing barriers will in some cases require officials from across the country to work together on an appropriate level of regulation. That process, she said, will take time. Nevertheless, Ms. Hall Findlay is encouraged to see internal trade on the agenda for governments.
“If we don’t take Trump’s threats as a huge opportunity to do what we need to do at home for ourselves, then shame on us,” she said.