A solution to Canada’s internal trade barriers?

“That’s free money, lying there on the sidewalk and everybody is refusing to pick it up.”  —Former Bank of Canada Governor Stephen Poloz

This quote from Stephen Poloz dates back to early 2020. Poloz, always good with metaphors, was talking about the need to tear down barriers to internal trade in Canada, and the large benefits that would accrue to Canadians.

There is even greater urgency today. With the U.S. tariff threat looming, Canadians are rightly asking why there are barriers to trade within Canada? If we can’t always count on the U.S., surely we can count on each other?

Internal trade barriers are a case of ‘death by a thousand cuts’. The individual barriers may not seem like much, but they add up. IMF research shows a boost of about 4% in real GDP per person through the removal of trade barriers.

Everyone has their examples of irritants. For some, it’s not being able to easily sell liquor in different provinces. For others its different commercial trucking standards, or the time it takes to recognize credentials from another province.

Like many things in life, it’s easier to identify the problem than come up with a solution. There are tradeoffs involved, and yes, political considerations. After all, there are reasons why these barriers were created in the first place.

Right now, internal trade is managed through the Canada Free Trade Agreement (CFTA). This agreement sets guidelines to ensure provinces and territories trade freely. But it also has a list of exemptions where the rules don’t apply.

One solution is for the provinces to continue to chip away at eliminating these exemptions (Alberta and Manitoba have the fewest). Another is to expand the more open New West Partnership Trade Agreement (between Alberta, B.C., Saskatchewan and Manitoba) to other provinces.

But is there a better way?

One idea is mutual recognition. Instead of trying to harmonize everything, mutual recognition says: if a good or service can be sold in province A, it can be sold in province B without meeting additional requirements. The same would apply to professional credentials.

In 2022, the McDonald Laurier Institute put out a paper on how this could work and the associated benefits. It argues that “of all the approaches to internal trade liberalization, mutual recognition may go furthest towards easing policy-relevant trade barriers.”

The study found that removing internal trade through mutual recognition could add 4.4 to 7.9% to Canada’s economy over the long-term, or up to $5,100 per person. There are some short-run transition costs, but the overall impacts are large.

Sounds great, but will this ever happen? With the Trump tariff threats, there seems to be a new appetite to move. As for mutual recognition, it is something the Committee on Internal Trade recently announced that it is exploring.

Internal trade barriers have long been an irritant. Now it’s become a national emergency. Breakthroughs are borne out of crises. There’s never been a better time to solve this long-standing issue.

Interesting Fact: What is covered in Canada’s phase 1 retaliatory tariffs?

On Feb 1, the Government of Canada announced that it would move forward with a 25% tariff on $155 billion worth of U.S. goods “in response to the unjustified and unreasonable tariffs imposed by the United States on Canadian goods.” The counter tariff would initially apply to $30 billion worth of goods (phase 1) with more products added after a “public comment period” (phase 2).

On Feb 3, 2025, the two countries agreed to delay the imposition of their respective tariffs. But what if the tariffs are back on? What U.S. products are included in the $155 billion worth of goods?

The federal government published a list of the many goods included in phase one of the counter tariff. It’s a long list, but  CTV News has prepared a helpful overview of the key sectors that would affected under phase one:

• Cosmetics and body care: $3.5 billion
• Appliances and other household items: $3.4 billion
• Pulp and paper products: $3 billion
• Tires: $2 billion
• Plastic products: $1.8 billion
• Precious gems and metals: $1.7 billion
• Furniture $1.6 billion
• Wood products: $875 million
• Coffee: $714 million
• Grains: $600 million
• Wine grape, spirits and other products: $589 million
• Cocoa products: $569 million
• Tools and cutlery: $560 million
• Dairy: $555 million
• Sugar and sugar containing products: $542 million
• Sauces and dressings $517 million; and
• Fruits: $512 million

Chart of the Week:  Asian-bound oil shipments surge in 2024 due to TMX

A U.S. tariff on energy products from Canada, set at 10% in the paused Executive Order, would result in higher fuel prices for Americans and wider discounts on Canadian oil.

The tariff threat has left many asking: why do we depend so much on one market for our oil? The main reason is most of the oil pipeline network currently in place sends oil to the U.S., where refineries are equipped to process Canada’s heavy oil.

If we want to send more oil to other countries or to eastern Canada, we need new pipelines. Recall that two major projects aimed at doing just that (Northern Gateway and Energy East) did not proceed.

Now there is growing interest in pipelines that would enable sales to countries other than the U.S.  A new Angus Reid poll found that 79% of Canadians agree the country needs to “ensure it has oil and gas pipelines running from sea to sea across the country.”

The Trans Mountain Expansion (TMX) project shows what can happen when major pipeline projects get built to alternate markets. In 2024, Canadian crude oil exports to Asia surged from $49 million in 2023 to $3.6 billion as shown in our Chart of the Week.

Answer to the previous trivia question: Armenia was Alberta’s smallest customer last year, importing less than $1,192 worth of plastic.

Today’s trivia question: In what year did Alberta and B.C. sign the ground-breaking free trade agreement known as The Trade, Investment and Labour Mobility Agreement (TILMA)?