Canadian provinces’ deal to slash internal trade barriers is likely to fall short

theglobeandmail.com
Jan. 29, 2017
By Barrie McKenna

It’s heartening that Ottawa and the provinces will put in place a new deal to slash internal trade barriers in time for Canada’s 150th birthday bash on July 1.

This is long overdue. The deal will replace the weak and ineffective Agreement on Internal Trade, which for more than two decades has largely failed to dismantle the economic walls that still divide the country.

Don’t hold your breath for trade glasnost.

The deal will leave largely untouched some of the sacred cows of interprovincial protectionism - energy, booze, financial services and supply management. In these areas, entrenched and often unseen barriers sap billions of dollars a year from the economy.

And that isn’t likely to change any time soon.

Well beyond Canada Day, provincial monopolies will still control virtually all sales of liquor and electricity within their borders. Regulation of Canada’s financial markets will remain splintered and uneven, without a single national securities watchdog. And the dairy and poultry industries will still be among the most regulated anywhere in the world, with costly limits on cross-border shipments.

Details of the agreement are still sparse, but Ottawa and the provinces have apparently created a framework to spell out government commitments on trade, resolve disputes and harmonize regulations.

The Globe and Mail’s Bill Curry reported last week that federal and provincial officials have completed negotiations and plan to unveil the details in the next few weeks.

The most important feature of the new agreement is a so-called negative list. Provinces will have to spell out what regulations and policies they want to exempt from the deal - areas where they want to keep barriers in place. Provinces, for example, may choose to continue doling out certain government contracts to local suppliers, but they’ll have to be clear that is what they are doing.

In theory, everything not on the list would be free. Under the old agreement, only the areas specifically mentioned were liberalized.

Ottawa should clearly spell out how the new deal addresses the costs of interprovincial trade. Overall, internal trade barriers lower Canada’s GDP by as much as $130-billion a year, or roughly 6 per cent of economic output, according to a 2016 report by the Senate committee on banking, trade and commerce, titled Tear Down These Walls.

There will be major gains. The provinces have made progress on opening their procurement markets and liberalizing beer and wine sales. There will also be an enhanced dispute resolution system.

But much of that penalty will likely remain in place.

Consumers are paying a steep price. Chicken can’t easily cross between Quebec and New Brunswick. Quebec also sets a retail floor price for milk, prompting many Quebeckers to shop in Ontario, where prices are much lower.

A wave of protectionism around the world could further stall progress on internal trade in Canada.

Ottawa and the provinces felt the need to upgrade internal trade rules after years of neglect in part because of pressure from foreign trade deals. Ratification of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) in the coming month would have created an absurd situation in which foreign companies enjoyed better access to provincial contracts than Canadian suppliers.

CETA might be the last deal Canada signs for a while to liberalize trade.

Donald Trump’s arrival in the White House is likely to usher in an era of greater protectionism – in North America and beyond.

The Trump administration has said it will not ratify the 12-country Trans Pacific Partnership and the deal is now effectively dead. Among the key concessions by Canada in the agreement were pledges to open more of its dairy and procurement markets to foreign competition.

With the TPP off the table for now, Ottawa and the provinces face less pressure to reform.

But Canada isn’t entirely off the hook. The prospect of a renegotiation of the North American free-trade agreement could put many of these sensitive issues back in play. The United States could pressure Canada to make additional concessions to the supply-managed dairy and poultry sectors, even beyond what it offered in the TPP negotiations.

The good news is that Canada will soon have a mechanism to fix flaws in the economic union.