A beginner’s guide to understanding a Canadian free trade zone

July 14, 2014

Chamber policy analyst Jaspreet Singh is taking a look at a Canadian free trade zone. Are you passionate about policy? You might be interested in joining one of our committees and you can always join the conversation on Twitter at @Calgarychamber.

On July 9 the premiers of British Columbia, Alberta, and Saskatchewan sent a letter to their provincial counterparts calling for the creation of a Canadian free trade zone (FTZ) by dismantling interprovincial trade barriers. The letter comes on the heels of Federal Industry Minister, James Moore, stating in May that a new internal trade deal was his “number one priority.” An internal trade agreement is a big deal for businesses across Canada and will alter the business environment we operate in while creating a true domestic market. Here are some of the most important facts about Canadian domestic trade and proposals for a Canadian FTZ to help prime you on the issue.

Canada’s domestic market today: Barriers to trade between provinces

Trade in Canada is a story of irony: despite historic efforts by the Federal Government to secure international free-trade agreements, there remain significant trade barriers which limit the movement of people, goods, and services between provinces. Such interprovincial trade barriers often result in businesses finding it easier to export to foreign markets than trade with other provinces. This is especially troubling because Canada’s constitution strictly prohibits tariffs between the provinces. Despite this ban against formal trade barriers, minor differences in regulations, standards, licensing programs, regional programs, and some direct market distortions result in indirect trade barriers.

For example, the refusal of Quebec and Ontario to recognize each other’s food-safety laws results in Ontario food producers being unable to export to Quebec and vice versa. The rules in the provinces for small-scale food production are relatively similar, but they are not required to recognize each other’s regulations. Big food companies can get federal licenses to ship across provincial borders but these federal regulations are not designed for smaller producers. And the red tape involved in expanding to other provinces makes it an unattractive option for businesses.

Here are some more examples of interprovincial trade barriers:

• A lack of harmonized rules for ethanol gas means fuel companies produce separate, more costly batches for each province
• Dairy marketing boards inhibit farmers from exporting across provincial boundaries
• Corporations face separate, unharmonized registration requirements in different provinces

The consequences of internal trade barriers: An unfavourable business environment

It is estimated that internal trade barriers cost the Canadian economy $50 billion a year. Canada is a small market and imposing indirect trade barriers limits growth and innovation. Business owners directly feel the impact as they seek to expand to provinces across the country. Because of indirect trade barriers, trading with other provinces is complex and increases the cost-burden to businesses often leading them to expand to international markets only or not expand at all.

Efforts to eliminate these barriers could bring about significant change for businesses seeking to trade with other jurisdictions within the country and build a stronger, more resilient national economy.

With so much to gain from a Canada FTZ, the following points should help frame the debate

1. There already is a national Agreement on Internal Trade (AIT)

Eliminating internal trade barriers has a long history in Canada characterized by on-again, off-again efforts. In 1994 the provincial, territorial, and federal governments signed the Agreement on Internal Trade (AIT). Still in force, the AIT is designed to eliminate internal barriers to trade, investment, and labour mobility with the goal of creating a more open and efficient domestic market. Unfortunately, the AIT fails to eliminate a wide range of obstacles and the pace of progress under the AIT is too slow while the efficiency of the dispute resolution mechanism needs improvement. Furthermore, there continue to be areas where the AIT could be expanded, such as a chapter on technical barriers to trade and energy.

Disillusioned with the ineffectiveness of the AIT, the governments of British Columbia, Alberta, and Saskatchewan signed the New West Partnership Trade Agreement (NWPTA) which came into effect in 2012. The NWPTA extends trade liberalization across western Canada, creating a regional trading bloc. Renewed calls for trade liberalization would see the AIT modernized and overhauled or superseded by a new agreement.

2. The new calls for trade liberalization in Canada are based on a model that works

It is reasonable to ask, if national trade liberalization was attempted previously through the AIT and is ineffective, why are we putting resources towards trying again? Well, the NWPTA is often referenced as a successful example of dismantling interprovincial trade barriers. And it is this NWPTA model that is being advocated for national adoption by the western premiers.

According to Alberta Premier Dave Hancock, the NWPTA is working well for the western participants and they are looking to introduce this model of trade agreement at the Council of the Federation meeting later this summer. While the regional approach is a good short-term response to the AIT, a long-term approach that creates a truly national economy requires all provincial, territorial, and federal governments. Given the success of the NWPTA in the west, it provides an evidence-based model that is viable for implementation across the country.

What Canada’s FTZ would look like under the NWPTA model:

A “negative list” approach

The NWPTA uses a negative list approach which is as broad as possible. This means that provinces negotiate what is out of the agreement, not what is included. This would see all sectors fall under a new free-trade deal, subject to clauses that effectively eliminate indirect barriers, unless specifically carved out. Thus, everything is granted free flow between provinces with the exception of some products or services that may still be subject to barriers.

Scope of the agreement

While details of what will be excluded from the Canada FTZ will not be known until negotiations between the provinces are complete, it can be assumed that the scope of the agreement will be similar to the NWPTA. This means a future agreement will likely be as comprehensive as possible including the removal of barriers to trade of goods, including energy and agriculture, investment, transportation, government procurement, and labour mobility.

The free movement of labour inter-provincially would provide relief to the labour shortage that Alberta employers continue to face. This is an area the Calgary Chamber’s membership has identified as a significant barrier to growth and we remain active in pursuing policy solutions. A study by the Bank of Canada finds barriers to labour mobility continue to be impediments for professionals looking to relocate within Canada. Removing these barriers could increase overall internal migration by 60%, allowing us to better match skills with regional needs.

Enforcement and dispute resolution

One of the biggest problems with the AIT is the failure to include significant enforcement measures and an effective dispute resolution mechanism. But in their letter, the premiers insist on ensuring any agreement includes a strong enforcement mechanism to ensure everyone plays by the rules. The NWPTA has an enforceable dispute resolution mechanism that can impose penalties of $5 million on non-compliant governments. However, the letter did not provide specific proposals on dispute resolution.

3. There will be obstacles during negotiation: Opposition to eliminating trade barriers

Although trade liberalization within our borders seems like a no-brainer, in the past there has been a significant lack of political will to address the issue. While there is now commitment and leadership from a number of governments, there are other considerations that may play a role in lengthening or derailing negotiations:

• The letter did not discuss how a new free-trade agreement would function within the framework of existing agricultural marketing boards. Such marketing boards in poultry and dairy set limits on production to boost prices and it is not clear how these products will be incorporated into free-trade provisions. It is possible that these products may fall under exemptions.
• Some provinces are committed to protecting local sectors from domestic competition and may prove non-negotiable. For example, after Ontario’s Finance Minister agreed in principle to eliminating interprovincial trade barriers, he noted a number of sectors in the province are strong because they are protected. Such sectors may be successful in lobbying provinces to maintain trade barriers:
  
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Negotiating a deal is never easy

Although the idea will be introduced to the Council of the Federation meeting later this year, it is unlikely that an agreement will be reached at that time. The Industry Minister’s announcement and the letter from the western premiers is just the beginning of what will be a long and indefinite process towards trade liberalization in Canada. The Calgary Chamber will continue to monitor developments on this issue and advocate for the needs of Calgary’s business community from any possible agreement that is reached.

Let us know if you are impacted by trade barriers when trying to trade with another province. What does your business need from an agreement creating a Canadian FTZ? Send us an email at jsingh@calgarychamber.com or tweet us @CalgaryChamber.

Jaspreet Singh is a Policy Analyst for the Calgary Chamber.