As the threat of tariffs looms over the Canadian economy, businesses, industry associations and policymakers are scrambling to find the right response.
If Donald Trump follows through on his threatened tariffs, economists say Canada’s GDP would fall sharply, unemployment would rise, inflation would soar and the Bank of Canada would be forced to increase interest rates.
But one simple way of offsetting the impact of tariffs has nothing to do with the United States.
Long-standing trade barriers between the provinces and territories act as a drag on economic growth, prevent businesses from expanding into new markets and make it harder on workers to move. Removing those barriers could boost the economy by more than the expected damage from Trump’s tariffs.
“Removing non-geographic internal trade costs increases trade volumes as a share of GDP by roughly 15 percentage points,” wrote University of Calgary economist Trevor Tombe in a 2019 paper for the International Monetary Fund.
That study found real GDP per capita would rise by 3.8 per cent nationally. Smaller provinces would see some of the biggest gains. The authors found real GDP in a province like P.E.I. could increase by as much as 16 per cent.
Graham Sherman started a brewing company in Calgary more than 15 years ago. It’s won awards and been named among Calgary’s top breweries. Tool Shed Brewing Co. now produces as much as two million litres of beer a year.
But for all his success in Alberta, Sherman still can’t sell his beer in Ontario.
“That province almost acts like a cartel. It’s virtually impossible to get our beer into Toronto,” he told CBC News.
For years, Sherman has been trying to crack the biggest market in Canada. But he says the provincial alcohol distributors impose strict control over who can sell to consumers.
He says the enormous Ontario market would be a game-changer for his business.
“In my own country, I don’t have access to the most unbelievable, incredible retailer of alcohol,” he said, referring to the Liquor Control Board of Ontario, that province’s near-monopoly on alcohol sales.
“And I have some of the products that are virtually the best in the country.”
Myriad rules
The list of provincial trade barriers is long.
The biggest and hardest to change, of course, is geography. Canada is a big country and shipping goods across it takes time and money. But geographic trade barriers only make up 57 per cent of the trade barriers faced by Canadian businesses.
Myriad rules and regulations, labelling requirements and shipping procedures stack up and make it difficult to move goods from one jurisdiction to another. Professional licensing standards and trade qualifications vary greatly from province to province. Business registration fees have increased.
Sherman says every time he asks why it’s so hard to make changes, he’s told “that’s how it’s always been done.”
But changes have been made.
In September, the federal government launched a pilot project to “mutually recognize regulatory requirements in the trucking sector.”
That may sound eye-glazingly boring, but transportation remains one of the most important factors in making sure goods move freely through the economy.
One oft-cited example of internal barriers is that Nova Scotia has different weight limits for certain 18-wheel transport trucks. That means a truck loaded to legal capacity in British Columbia would have to off-load or make changes before entering Nova Scotia.
The pilot project doesn’t actually change that rule, but requires provinces to respect regulations from other jurisdictions.
The Canadian Trucking Alliance says that will lead to more opportunities.
“Canada moves by truck, and bringing all levels of government together to identify and eliminate trade barriers is an important step in improving the movement of trucking equipment, drivers and their goods,” said alliance president Stephen Laskowski in a statement.
Big potential boost
In its most recent report card on inter-provincial co-operation, the Canadian Federation of Independent Business (CFIB) says half of its members have reported issues navigating regulatory requirements across different Canadian jurisdictions.
“Due to this, many small businesses report finding it easier to conduct business in the U.S. than within Canada,” reported the CFIB.
The organization says removing internal trade barriers could boost Canada’s economy by as much as $200 billion per year, or $5,100 per person.
Easy, unfettered access to markets is the basic promise of free trade. Canada has spent years pursuing and prioritizing free trade deals with the U.S. and Mexico, but also with Europe and Asia.
Many small- and medium-sized businesses in Canada have said inter-provincial trade is just as important and necessary.
Now, though, anti-free trade sentiment is on the rise. Tariffs are being threatened by the U.S. and other close allies.
So, Tombe, the economist, says there’s an opportunity to make good on years of promise to remove barriers within Canada.
“In a world where so much is increasingly beyond our control, and adverse to the health of the Canadian economy, then the importance of us looking at things that are within our own jurisdiction rises,” he said.
Is there a chance Trump’s threat could finally push Canadian provinces and territories to address those barriers? Tombe says that’s a political question, not an economics issue.
But he says the numbers tell a clear story.
“If this doesn’t prompt governments to think more about it, then it is missing an important opportunity,” said Tombe.