EXPLORING THE ECONOMIC IMPACT
OF AIT CHAPTERS
PREPARED BY EUGENE BEAULIEU
DEEP DIVE PAPER
PRELIMINARY DRAFT
Exploring the economic impact of AIT
chapters
A Report Prepared for Public Policy Forum
by:
Eugene Beaulieu
Department of Economics
University of Calgary
May 2013
PRELIMINARY DRAFT: DO NOT QUOTE WITHOUT PERMISSION
This paper focuses on the economic impacts of measures already taken under the
AIT. It compares the progress made to date in chapters that have had some
successes and some failures, and examines the economic impacts of these
chapters in the AIT. This paper provides an overview of other studies on the
impacts of measures to facilitate internal trade and of studies on the performance
of these sectors in the Canadian economy. This will establish comparables and
context for the keys issues and challenges. The paper will identify the main
indicators for a quantitative analysis of economic benefits of the AIT and
examines the economic impact of liberalized internal trade. The goal is to assess
the progress to date, determine priorities for further reductions in internal trade
barriers, and examine best practices for making progress.
2
All articles of the growth, produce, or manufacture of any one of the provinces
shall, from and after the union, be admitted free into each of the other
provinces. (The Constitution Act, 1867, Article 121)
Today interprovincial barriers to trade create an interlocking, tangled and
expensive web of vested interests. Together they slowly and steadily choke
Canada’s economic arteries, losing output, incomes and jobs for Canadians.
(Graham Parsons 1994, 2)
There are some exceptions to Canada's generally open trade and investment
regimes, notably in agriculture and cultural sectors. The domestic market
remains fragmented by, inter alia, barriers to internal trade and regulatory
complexity, despite the implementation of an Agreement on Internal Trade
between the Federal and sub-federal governments. (WTO, Trade Policy
Review: Canada 2011)
1
Introduction
Canadians are free to move, live and work anywhere within the country and
interprovincial tariffs on domestic goods are strictly forbidden by the Canadian
Constitution. Unfortunately, Canada is not the common and united market this
suggests. Barriers to interprovincial trade became enough of a problem that in
1994 the Agreement on Internal Trade (AIT) was promulgated between all
provinces and the federal government to address the most egregious barriers to
interprovincial trade. Despite the agreement, interprovincial barriers to trade
continue to exist, and these barriers reduce the economic efficiency, productivity
and growth of the Canadian economy.
Internal trade is a large and important part of almost all national
economies and this is also true for the Canadian economy. In 2008 (the most
recent year data are available), interprovincial trade in Canada reached $326.6
billion representing over half of total Canadian international exports or imports.
Statistics Canada estimated that in 1998 one third of private-sector jobs in
Canada depend on provincial exports. Half of these jobs are related to exports to
other provinces in Canada and the other half to exports to other countries.1
Although internal trade is economically important, and barriers to internal
trade can have serious negative consequences for productivity and economic
growth, a clear understanding of the key impediments to internal trade remains
elusive. It is therefore, not surprising that the hard work it takes to reduce
internal trade barriers further has stalled and the interprovincial trade file has
not been a priority. Close examination of trade barriers and labour mobility
between provinces in the 1980s, led The Royal Commission on the Economic
Union and Development Prospects for Canada (known as the MacDonald
Commission) to produced a comprehensive accounting of the variety of
interprovincial barriers that existed in the 1970s and early 1980s. The report by
Whalley and Trela (1986) carefully documented the internal barriers to trade and
provided evidence required to get action. This evidence helped compel the
provincial, territorial and federal governments to agree to reduce a broad range
1
See Statistics Canada (1996, 2000).
3
of interprovincial trade barriers through the signing of the Agreement on Internal
Trade (AIT).2
Federal and provincial policies that affect interprovincial trade and labour
markets have evolved considerably since the last accounting by Whalley and
Trela (1986). However, there is no careful examination of the impact of the policy
changes on interprovincial trade, and there is no comprehensive understanding
of the current situation. There are three types of studies that have examined the
magnitude and costs of internal trade barriers. One type of study has tried to
identify some of the key types of barriers affecting internal trade. This was the
approach by Beaulieu et al (2003). A second approach employs Computable
General Equilibrium (CGE) models to measure the costs of internal trade
barriers, for example Whalley and Trela (1986). A third approach has been to use
economic models to infer how large the barriers to trade must be to explain the
observed trade patters. This is a more recent approach undertaken by Jim
Anderson and co-authors and by Tombe and Winter (2013). The goal of this
paper is to provide an overview of the types of trade barriers that currently exist
between Canadian provinces. Identifying the problem areas that exist and
providing a look at the effectiveness of the Agreement on Internal Trade and
subsequent policies that address interprovincial trade.
This paper focuses on the economic impacts of measures already taken
under the AIT. It presents an overview of progress made to date in chapters that
have had some success such as Labour Mobility and Agriculture, and examines
the economic impacts of these chapters in the AIT. This paper provides an
overview of other studies on the impacts of measures to facilitate internal trade
and of studies on the performance of these sectors in the Canadian economy. This
will establish comparables and context for the keys issues and challenges. The
paper will identify the main indicators for a quantitative analysis of economic
benefits of the AIT and provides an estimate of the economic impact.
2 Interprovincial Trade Barriers: Defining the Problem
What exactly is an interprovincial, or internal, trade barrier?. Within Canada,
explicit barriers (tariffs) between provinces are strictly prohibited under Section
121 in The Constitution Act of 1867. Most of the barriers between provinces take
the form of different rules and regulations between the provinces as well as
explicit regional programs that distort the markets. Internal trade barriers often
involve provincial legislation that has the effect of removing out-of-province
competition for the sake of protecting local vested interests. In addition to this
type of protectionist legislation, in his paper The Distant Realities of Free Trade
in Canada, Dr. Parsons makes the important point that there are large costs
associated with a bureaucratic “web” of federal and provincial administrative and
regulatory compliance. Parsons shows that the costs of the duplication of
government bureaucracy are large and he concludes that “there is an apparent
2
Although the AIT was not signed until 1994, the intergovernmental process to eliminate barriers to domestic trade started
as early as 1985 when Regional Economic Development ministers agreed on a process to remove barriers. This “road to the
AIT” is described in more detail in Beaulieu et al (2003) and is well-documented in Doern and MacDonald (1999, p. 42),
Trebilcock and Schwanen (1995) and Knox (1997).
4
overlap in 55% of the federal expenditure apportionable to Alberta” (Parsons
1996, 5).
Although many of the regulations and regulatory measures are in place for
good reasons, the lack of coordination between levels of government that has
arguably led to the unnecessary duplication and compliance costs that restrict the
flow of goods through provincial jurisdictions. In his research paper entitled “Big
Wheels Stalling,” Norman Bonsor (1994) argues that almost all of the
interprovincial barriers affecting transportation companies are caused by rules
and regulations enacted by governments. It is unclear whether Bonsor’s “Big
Wheels Stalling” argument is less relevant today than it was in 1994.
Canada’s federal form of government is at the root of the problem of
interprovincial barriers to trade. Indeed Canada’s federal form of government
was chosen in response to the diversity of its people, economy, and geography.
The Canadian Charter of Rights and Freedoms has further augmented the
constitutional provisions for the free flow of goods within Canada, especially with
respect to labour mobility. Section 6 of the Canadian Charter of Rights and
Freedoms assures Canadian citizens the right to move and earn a living anywhere
in Canada. In addition to these provisions, a broader view of freer internal trade
in Canada was illustrated in the Macdonald Commission Report citing the ruling
by Justice Rand of the Supreme Court of Canada in Murphy v. CPR where the
importance of the free flow of “commerce” is emphasized:
I take section 121, apart from customs duties, to be aimed against trade
regulation which is designed to place fetters upon or raise impediments
to or otherwise restrict or limit the free flow of commerce across the
Dominion as if provincial boundaries did not exist. (MacDonald
Commission Report 1986, 115)
Provinces have been playing a game of tug-of-war with the federal
government since they joined the confederation. Through the use of Section 92 of
the BNA Act, provinces have used their constitutional authority over local
matters and direct provincial procurement restrictions to support local vested
interests. The result has been the creation of interprovincial barriers to trade.
However, this is only part of the problem. Many of these barriers result from poor
coordination between jurisdictions and are unintentional.
Federalism in Canada is based on two levels of government, federal and
provincial, each with their own areas of jurisdiction. In their respective areas of
jurisdiction, federal or provincial officials may pursue their own policies. These
policies may be implemented without consultation or approval from the other
levels of government. However, there are certain limitations to the provincial
powers of policy making and jurisdiction. Schwanen (1999) presents three such
cases. For one, the constitution and other pre-existing obligations to the various
levels of government must be honoured. Second, the federal and provincial levels
share many areas of jurisdiction. And third, provincial policies have spillover
effects. That is, a certain policy in one province may lead to costs or benefits
“spilling” over into a neighbouring province.
The ability of the provinces to create “customized” policies and adopt
different economic strategies is often considered a strength of the federalist
5
system. However, this institutional feature has also created trade barriers
between provinces. Indeed sometimes different policies work against each other
negating the intended effects. Other provincial policies have the effect of “beggarthy-neighbour”/protectionist trade implications, which can lead to trade disputes
and retaliation by other provinces. A good example of this type of “beggar-thyneighbour” policy is the Quebec regulations on prohibiting the sale of pale-yellow
margarine in that province. It is clear that the legislation is designed to protect
the powerful Quebec dairy lobby from competition originating outside the
province.
The bureaucratic administrative mechanisms of provincial governments
sometimes increase the costs of doing business between provinces and create
barriers to interprovincial trade. It is possible that the coordination of the various
governments, both federal and provincial, would result in a stronger and more
unified social and economic union in Canada. The following section examines the
potential benefits from lowering interprovincial barriers.
3 The Benefits from Lowering Interprovincial Barriers
Interprovincial barriers to trade represent additional costs that are faced by
Canadian firms. This increase in cost in turn affects the ability of Canadian firms
to compete within markets in other provinces and potentially adversely affects
their competitiveness internationally. Indeed Canadian firms have smaller
margins with which to compete against the incumbent firms, both Canadian and
foreign, as a result of the increased costs. In turn, these “outsider” firms may not
pursue the national market, since the costs of entry resulting from the barriers
may be too high. The end result is numerous producers operating at a less
efficient scale, where the firms would otherwise have consolidated and achieved
economies of scale, if interprovincial barriers were not present. The costs of these
inefficiencies are passed on to consumers, acting to reduce their real income,
where real income is defined as the amount of goods one can purchase given a
fixed level of income. It is clear that interprovincial barriers to trade hurt both
consumers and producers.
The first major push to removing interprovincial trade barriers was in 1985 with
the publishing of the MacDonald Commission Report. In this report, the issue of
interprovincial trade barriers was addressed. The MacDonald Commission
Report detailed economic arguments for the removal of these barriers and
acknowledged that these barriers represented real costs to the Canadian
economy. Another important aspect of the MacDonald Commission Report was
that, in addition to citing problem areas and barriers, it also called for a remedy.
The MacDonald Commission proposed a “Code of Economic Conduct” be
developed and adopted by provincial governments. This was the first step in the
realization that perhaps the lack of government coordination was a problem in
Canada. As Doern and MacDonald put it, “the MacDonald Commission was
explicitly arguing for a policy on internal economic conduct.”
Internal trade barriers remain an unresolved policy issue but are not an
important agenda item in current policy debates. Businesses, associations,
scholars, and various government departments have conducted numerous
6
reports and studies attempting to list, quantify, and suggest possible remedies to
interprovincial trade barriers. The research provides evidence that
interprovincial barriers have wide and far-reaching concerns for a cross-section
of interest groups. The results of these reports show that many sectors are
affected. An important issue that is common in the various reports is the role that
a strong economic union plays in strengthening national identity and unity.
Unfortunately the costs of ignoring this consideration are not easily measured.
This is an important point and deserves reinforcing. As Robert Knox (2000)
points out, the Agreement on Internal Trade was not only intended to improve
efficiency but also to establish an open and stable domestic market. The preamble
to the agreement states that it is intended to promote equal economic
opportunity for Canadians and enhance competitiveness. A necessary component
of a strong union is a set of rules that are applied equally to all, are predictable,
and reduce or eliminate the arbitrary application of government authority. The
movement toward an internal agreement originated with regional development
ministers who believed that an open and competitive domestic market was
necessary to ensure regional development.
However, consensus is lacking in regard to the costs that these barriers
represent to the Canadian economy. The costs that have been cited range from
small fractions of GDP to the substantial figure of 1% of GDP estimated by the
Canadian Manufacturers’ Association (CMA). This is a large number since it is
comparable to the estimated costs of international trade barriers with the United
States before the 1989 Canada–U.S. Free Trade Agreement (CUSTA). Although
there does not seem to be a consensus with respect to the magnitude of the costs
from interprovincial trade barriers, there is a consensus that interprovincial
barriers to trade do represent a cost to the Canadian economy.
Copeland (1998) argues that the CMA-predicted gain of 1 percent of GDP
from eliminating internal trade barriers is incorrect and that if the analysis were
conducted properly the gains are in the order of 0.1 percent of GDP or even lower
at 0.05 percent of GDP. He argues that the CMA study makes important errors
and omissions. It confuses some international trade barriers with internal trade
barriers, and it does not net out the benefits of the provincial trade barriers.
Moreover, he argues that the most blatant trade barriers included in the CMA
study are in the alcoholic beverages industry, where many of the barriers have
been removed. Copeland concludes that the costs associated with interprovincial
trade barriers in Canada are small.
The question is how large are the costs and are the costs larger than the
benefits. Moreover, can the same legitimate policy goals of government be
achieved with lower cost. Let’s take a closer look at the evidence. Two types of
evidence can help shed some light on how large the barriers are between
provinces. One approach compares the flows of goods and services as well as
labour and capital among provinces to the flows between provinces and the rest
of the world. This approach examines how large the border is – that is holding
other determinants of trade flows constant – what effect does the existence of a
border have on trade flows. The other approach examines the flow of goods
between provinces. If trade barriers are large, all else equal, we would expect to
find an effect on trade flows.
7
3.1
How Much Do National Borders Matter?
So how much do border effects matter? The well-known research by McCallum ()
and Helliwell () on international and internal trade flows; comparing trade flows
among Canadian provinces with those between Canadian provinces and certain
Amercian states. Helliwell extends the analysis to other countries in the
Organization for Economic Cooperation and Development (OECD) and to
developing countries with suitable data. Furthermore, Helliwell extends this
study to include capital mobility between provinces compared with capital
mobility between countries. He also examines border effects on population
mobility using labour migration data between Canadian provinces and American
states compared to migration between countries.
Based on both McCallum’s and Helliwell’s analyses, international borders
continue to have large effects on trade flows. Indeed Helliwell shows that in 1988
Canadians in one province were seventeen times more likely to trade with
another province than they were to trade with the United States, all else held
constant. However, this border effect declined to about twelve by 1993 and
remained about the same through 1996. Helliwell examines border effects
between “representative pairs” of provinces and states. For example, he examines
trade flows between Quebec and Ontario versus trade flows between Quebec and
New York. Given that Quebec shares it’s borders with Ontario and New York, and
that New York’s 1990 GDP was 2.5 times that of Ontario, a gravity model without
border effects would predict that Quebec would export more than twice as much
to New York as to Ontario. However, the trade data shows that Quebec exported
more than five times as much to Ontario as to New York, resulting in a border
effect of roughly thirteen! Similarly, Ontario is almost the same distance from
British Columbia, California and Washington State. In 1990 the Californian
economy was twelve times larger than that of B.C., yet Ontario merchandise
shipments to B.C. were fully twice as large as those to California, therefore the
border effect is twelve. Looking at Washington State’s GDP, which was more than
one-third larger than that of B.C., a border effect of twelve is also computed,
given Ontario’s exports to B.C. were more than twelve times larger than those to
Washington State.
Extending the analysis to the service sector, Helliwell shows that
interprovincial trade in services is between thirty and forty times more intense
than that between provinces and states! Indeed, strong border effects were shown
in all extensions of Helliwell’s study. Domestic sales of goods were found to be
about ten times greater than sales among OECD countries (in the absence of
trade bloc and common language effects); the border effect was found to be much
stronger for some developing countries. Helliwell also provides evidence showing
that capital mobility is much greater within countries than between countries.
Finally, Helliwell uses “census data to compare interprovincial and interstate
migration with immigration from the other country, showing that, after allowing
for the effects of distance, population size, and income differentials, a resident of
a Canadian province is almost one hundred times as likely to have been born in
another province as to have been born in the United States. The border effects for
southbound migration are much smaller, but still very significant” (1998, 117).
8
Indeed, Helliwell provides compelling evidence that border effects are still
“alive and well.” There is no doubt that globalization has led to increased
international economic linkages and integration; however, it is clear that these
linkages are not nearly as strong as those within nations. Canada’s internal
economic integration is much stronger than her international integration.
However, this does not mean that differences in provincial regulations and other
sources of provincial and federal government policy do not present large barriers
to trade between provinces. It means that, although international trade barriers
between Canada and the United States have been reduced and trade flows
between the two countries have greatly increased, trade and immigration flows
continue to be more restricted internationally than they are between provinces.
In fact, lowering interprovincial trade restrictions may improve economic
efficiency and lower costs in Canada and enhance Canada’s international trade
relations. Moreover, the research by Helliwell implies that, although the border
effect between Canada and the United States is still large, the CUSTA and NAFTA
have been effective at reducing the border effect. From this research it is unclear
whether interprovincial borders have become more or less of a barrier to trade.
One way to consider the extent of interprovincial trade barriers is to examine
trade flows between Canadian provinces over time and compare interprovincial
trade flows to international trade flows.
3.2
How Much Interprovincial Trade?
If interprovincial trade barriers are large, they likely affect the flow of goods
between provinces. If the barriers between provinces have been reduced, the
effect will likely show up in comparisons of trade flows between provinces over
time. If interprovincial trade barriers have increased over time, we are likely to
see declines in interprovincial trade flows. Note, however, that declines or
increases in interprovincial trade flows may be caused by factors other than trade
barriers. A comparison between interprovincial trade flows and international
trade flows over time may shed further light on the issue. We know that
international trade barriers have been lowered through GATT obligations as well
as through the CUSTA and NAFTA. If these international barriers have come
down relative to interprovincial trade barriers, we may see international trade
expanding relative to interprovincial trade. If interprovincial trade barriers have
come down concurrent with international barriers, for example through the AIT,
we should see a similar pattern in interprovincial and international trade flows.
What has happened to interprovincial trade during the recent past? As
Figure 1 and Table 1 show, total interprovincial exports within Canada increased
from $107 billion in 1984 to $141 billion in 1990 and $177 billion in 1998. This
represents a growth in exports between provinces of 32 percent between 1984
and 1990 and a smaller, 25 percent, increase in interprovincial exports between
1990 and 1998. This pattern is in stark contrast to the growth in international
exports. International exports grew at an identical rate of 32 percent between
1984 and 1990 but increased at a phenomenal rate of 121 percent between 1990
and 1998. Interprovincial imports and international imports display a similar
pattern. Growth rates in international imports were larger than increases in
interprovincial imports between 1984 and 1990 (52 percent and 32 percent
9
respectively), but the growth in interprovincial imports declined to 25 percent
between 1990 and 1998 while the growth rate of international imports more than
doubled to 109 percent.
Source: Statistics Canada Catalogue # 15-546-XIE and CANSIM
Table 1: Interprovincial and International Trade: 1984, 1990 and 1998
Export
Nfld
PEI
NS
NB
Quebec
Ontario
Manitoba
Sask.
Alberta
BC
Interprovincial
1984 1990 1998
International
1984 1990 1998
653
408
2580
2459
22916
39441
4847
4073
22179
6835
1811
193
2011
2628
21368
56286
3205
6448
13924
14018
942
554
3395
3606
33263
57476
6379
4745
18851
10884
1267
821
4273
5605
38011
72420
9119
6381
24170
13786
2578
264
2619
3534
29723
75458
4196
5357
16690
19511
3668
718
5412
5357
69043
18524
6
8700
11415
33477
10
Yukon
NWT
Gov’t
abroad
Total
Import
Nfld
PEI
NS
NB
Quebec
Ontario
Manitoba
Sask.
Alberta
BC
Yukon
NWT
Gov’t
abroad
Total
90
359
1
1068
41
124
507
2
143
540
62
1407 17659
28
8
85
262
21
570
490
39
1222 16102
60
9
3094
772
4896
4001
24191
30634
5469
6625
12968
12387
287
1357
158
3656
1063
6464
5458
30651
37236
7179
8161
20255
18911
506
1009
180
4630
1547
8149
6951
39386
43195
9928
10589
26660
23579
524
1438
23
985
193
2979
2644
23325
52738
2934
2877
8495
9278
63
307
880
1924
254
4209
3626
36281
80995
4018
3277
12156
15673
109
214
1249
1068
39
1407
29
17659
9
1076
98
1639
85
32109
238
420
31
3558
34
2875
448
7212
5981
67824
17987
2
9366
7817
28194
32421
171
516
492
3431
89
Source: Statistics Canada Catalogue # 15-546-XIE
A similar trend is seen when comparing the growth in trade flows to growth in
aggregate output. Grady and Macmillan (1998) show that between 1981 and
1989, interprovincial exports in nominal terms grew slower than GDP, resulting
in a decline in the share of GDP from 27 to 22 percent. However, shortly after the
Canada–U.S. Free Trade Agreement (CUSTA) was instituted, this trend
“worsened,” and between 1989 and 1997 interprovincial exports slid further to
19.7% of GDP. Over this same period, international exports grew faster than GDP
and by 1997 were 40.2% of GDP.
This trend has raised some concern, and Grady and Macmillan
acknowledge that
Some fear the Canadian internal market is disintegrating amid federalprovincial bickering and under pressure from the forces of globalization.
They point to trade and investment disputes among provinces and their
failure to support a strong set of internal trade rules in the Agreement
on Internal Trade (AIT). (Grady and Macmillan 1998, 1)
Grady and Macmillan use an econometric model to examine what factors
“explain” the change in interprovincial and international export shares from 1984
to 1997.3 Grady and Macmillan explain both the reduction in interprovincial
3
The authors estimated econometric equations for interprovincial and international exports using the provincial economic
accounts data from 1981 to 1997, as well as data on Canadian exports to the United States. Real interprovincial exports are
specified as a log-linear function of real GDP, relative costs of production in Canada and the United States, the average
11
exports relative to GDP and, conversely, the increase in international exports
relative to GDP. The authors argue that the reduction in interprovincial exports
relative to GDP was caused by three factors: 1) reductions in Canada’s
international trade barriers that opened the Canadian market to foreign
competition (particularly as a result of signing the CUSTA); 2) the slower growth
of the Canadian market compared to the U.S market; and 3) the relatively low
increases in the prices of goods traded interprovincially. Grady and Macmillan go
further to allay fears of domestic market disintegration by stating that these
factors “should have run their course and are unlikely to cause any further
declines in the share of interprovincial exports in GDP” (p. 5), and in their paper
they have even shown that the AIT may have helped increase interprovincial
exports. Finally, the increase in international exports is explained by Grady and
Macmillan as the result of improved Canadian labour costs relative to the United
States, improved trade conditions between the United States and Canada as a
result of CUSTA/NAFTA, and increased import demand by the United States.
Therefore, Grady and Macmillan believe that it is not the case that the Canadian
internal market is disintegrating but improved international factors. In
particular, they argue that increased North American economic integration has
been driving the trend of “interprovincial trade down and international trade up.”
This may not be the proper interpretation of the evidence. It is clear from
Helliwell (1998) and from Grady and Macmillan (1998) that the CUSTA and
NAFTA trade agreements reduced the “density” of the Canada–U.S. border and
contributed to an increase in international trade flows. It is also possible that
more open international trade opportunities with the faster-growing U.S.
economy meant less interprovincial trade. Since the econometric model used by
Grady and Macmillan tries to explain the trend in the levels of real interprovincial
exports rather than the declining share of interprovincial exports as a proportion
of GDP, there is no reason to expect that international exports “crowd out”
interprovincial exports. An alternative interpretation of the evidence is that
international trade barriers declined and, together with a depreciated Canadian
dollar, this contributed to rapid growth in international exports. Interprovincial
barriers came down somewhat (through the AIT), and this had a positive growth
effect on interprovincial exports. This alternative interpretation is consistent with
the smaller border effect after CUSTA compared to before CUSTA, found by
Helliwell. It is also consistent with Grady and Macmillan’s conclusion that the
AIT may have contributed to the growth in interprovincial exports. Let’s take a
closer look at the AIT.
4 The Agreement on Internal Trade (AIT)
Under construction
Canadian tariff rate, and a dummy variable for the AIT (the authors set this at 0.5 in 1995 and 1.0 in 1996 and 1997).
Similarly, the authors have real international exports specified as a log-linear function of U.S. real imports, relative
production costs, and the average U.S. tariff rate on Canadian imports. Grady and Macmillan then determine the effect of
these factors on interprovincial and international exports by solving the preferred equations for interprovincial and
international exports for 1997, first by using the actual values of the explanatory variables and then using the 1981 values.
The differences between the two solutions provide estimates of the impacts.
12
4.1 Marketing Boards
Perhaps the most visible and explicit barriers to provincial trade are the various
marketing boards that exist in Canada. Of course, the goal of these organizations
is to affect the domestic price faced by producers in order to raise and stabilize
producer’s income. To achieve this end, several farm product marketing agencies
are given monopoly powers to control and restrict the sale of agricultural goods
produced within their “jurisdiction,” and to the first point of sale outside their
“jurisdiction.” These agencies also regulate the quantity and price of the farm
products. Movement of goods between provinces is permitted by the national
supply management marketing boards via a quota system, under the National
Farm Products Marketing Agencies Act (1971). The importance of supply
management as a barrier to interprovincial trade is clear; marketing boards
explicitly restrict the interprovincial movement of goods to maintain price levels
that they have predetermined. The costs of these programs are substantial, and
this can be seen in Figure 3 based on research by Prentice (1994) that shows the
percentage of farm income derived from supply-managed commodities.
Figure 3: Share of Farm Income from Supply Management
Commodities
BC
Sa
sk
.
Al
be
rta
NB
NS
PE
I
Q
ue
be
c
O
nt
ar
io
M
an
it o
ba
Al
NF
LD
60
50
40
30
20
10
0
lC
an
ad
a
Percent
Figure 3: Share of Farm Income
from Supply Management
Commodities
Source: Prentice (1994), 91.
4.2 Dairy industry in Canada: Quota system in action
Agriculture is covered in Chapter 9 of the AIT and the scope and coverage of
Chapter 9 is limited. According to the BC government: “it covers five technical
measures that have now been largely addressed (game farmed/ranched animals,
blueberry maggot control measures, UHT/sterilized milk standards, semen
licensing and livestock bonding and licensing) and five so-called “ technical
13
barriers with policy implications” that were subsequently added in 1997.4 These
latter measures include federal Ministerial Exemptions for bulk shipments of
horticulture products and the absence of a federal Canada No. 1 small potato
grade; standards for dairy blends and imitation dairy products; coloured
margarine restrictions and other margarine standards; and fluid milk standards
and distribution.” The AIT Chapter 9 obliged agriculture ministers to complete a
review, to achieve “broadest possible coverage and further liberalizing of internal
trade”, by September 1997. However, little progress has been made. In February
2004, provincial Premiers agreed on a Workplan to revitalize the AIT and reduce
barriers to trade and investment across Canada. The federal government also
agreed to this plan. Again little progress was made, and they agreed to undertake
a review to enhance the scope and coverage of the agriculture and food Chapter
no later than July 2005. In November 2005, parties agreed to expand the
coverage of Chapter 9 to capture all technical measures. But again, progress was
fleating. Some Ministers, vexed by the continuing delays, decided to proceed with
a trade enhancement arrangement (TEA), as provided under article 1800 of the
AIT, as an alternative way forward to ensure concrete progress.
Finally in 2006, an “Interim Agreement on Internal Trade in Agriculture and
Food Goods” came into effect between British Columbia, Alberta, Saskatchewan,
Manitoba, Prince Edward Island and the Yukon.5 The agreement expands the
scope and coverage of Chapter 9 of the AIT to include all technical measures
affecting interprovincial agriculture and food trade between the signatories.
These technical measures include health, safety, quality and labelling regulations,
and have restricted trade between provinces.
However, provincial trade barriers remain for a number of non-technical
measures. A prime example is the use of a quota system, for example in the dairy.
Farm milk prices in Canada are the result of the restriction of interprovincial
trade in dairy products. Prices are determined by a combination of provincial
legislation and provincial milk marketing boards.
In most cases, these prices are determined by formulae that start with
some base milk price. That price is then increased in line with increases
in the costs of primary milk production inputs, such as grain
concentrates, forages, labour and other purchases. (Barichello 1999, 46)
The dairy industry is further distorted by a direct subsidy and by an offer-topurchase price. The interaction of these two policies is shown in the following
quote:
This doesn’t change the level of the farm price, which is taken as the
primary objective, just how it is financed. But it means that wholesale
price changes do not simply reflect changes in the net farm price. To
illustrate this interaction, in recent years there has been a reduction in
the direct subsidy. To ensure that farm prices did not suffer, the support
4
See text here: http://www.agf.gov.bc.ca/trade/interprovtrade.htm#AIT_Goods
5
See the Internal Trade Secretariat website under Trade Enhancement Arrangements.
14
prices for butter and skim milk powder were increased to finance the
reduction in the subsidy. (Barichello 1999, 46)
In addition to restricting trade, restricting price, and direct subsidization, there is
also the restriction of domestic production. Marketing quotas are set to restrict
the quantity of milk produced and are determined by the level of expected
domestic consumption. Historical levels determine these provincial quota
allocations. Interprovincial trade is almost halted by the explicit actions of the
marketing board, and this action represents a cost in excess of the gain to
producers that is borne by Canadian consumers.
4.3 Energy Sector
The Energy Sector chapter of the AIT has recently been negotiated but has yet to
be implemented. With respect to interprovincial trade in energy the primary
problem stems from the regulatory environment — in particular, the duplication
of regulation in a federal system. For example, Enbridge’s core business is based
on two major services: 1) liquids and natural gas pipeline transportation; and 2)
natural gas distribution. The company’s pipeline transportation business crosses
provincial borders from British Columbia to Quebec and internationally through
the United States. The primary market for Enbridge’s natural gas distribution is
located in Ontario, particularly in Toronto and Ottawa.
Industry challenges associated with differing federal and provincial
policies is seen with the regulation of oil pipelines. Different regulatory
paradigms exist provincially as compared to their federal counterparts. The
differences can have significant impact upon implementation timing of new
projects as well as overall commercial flexibility for pipeline companies and their
shippers. Generally, the provincial regulatory process provides advantages as
compared to the federal system. A result of this situation is that some companies
create subsidiaries that minimize federal operations to small stretches of pipeline
that simply cross the provincial border while the remaining portions within the
provinces would be subject to the jurisdiction of provincial energy boards. This
leads to economic inefficiencies whereby pipeline companies are subject to at
least two regulatory jurisdictions (i.e., provincial and federal). Each respective
jurisdiction has separate rules and procedures, which increases overall
manpower and administration costs to pipeline companies.
In conclusion, there are significant interprovincial barriers to trade in this
industry. Indeed it was noted that trade within the United States was far easier
than trade between provinces, perhaps because the federal government had more
power in the United States, whereas Canada’s system of increased provincial
jurisdiction has lead to a “balkanizing” in this industry in Canada. As is shown in
the report by Mr. Enns, the distortions caused by these barriers are large and as
such should be of high priority to the Canadian government. However, it was also
noted that the barriers have been “thawing” as a result of the current trend
towards deregulation. Perhaps with the further inclusion of this industry into the
Agreement on Internal Trade, there will be better recourse for firms to combat
these barriers.
15
5.5
Labour Mobility
Interprovincial barriers to labour mobility have long been considered an
important barrier within the Canadian union. As Gunderson (1994, p. 146) points
out, barriers to interprovincial labour mobility exist in many forms: professional
occupational licensing, government occupational licensing of trades, preferential
hiring practices, income security programs, and education and language
requirements. As discussed above, the Charter protects the right of Canadians to
take up residence in any province and to earn a living there. However,
governments can, and do, impede interprovincial labour mobility by designing
occupational qualifications for licensing, certification, or registration in ways that
discriminate against those from outside the province. An OECD (2004) study
argues that Canada’s federal system that allows for differences across provinces
in regulations, standards, and licenses for workers reduces workers. The report
concludes that provincial licensing and certification requirements limits the
interprovincail mobility
of the 15–20 percent of the workforce engaged in regulated trades and produces
artificially fragmented Canadian labour markets.
The AIT addresses some of these issues. The AIT prohibits residency
requirements as an employment condition and requires jurisdictions to mutually
recognize the occupational qualifications of workers from other jurisdictions and
harmonize occupational standards. Lenihan (1995, 105) argues that “with respect
to the harmonization of regulations and standards, the chapter on labor mobility
is one of the more successful in the agreement.” But how successful has this
chapter been at lowering barriers to labour mobility? The answer is debateable.
Article 708 of the Agreement requires that parties mutually recognize
occupational qualifications but does not require mutual recognition of
occupational standards. Differences in occupational standards across
jurisdictions are to be reconciled between parties. The different treatment of
occupational qualifications and standards reduces the force of this article of the
Agreement. Moreover, a more fundamental shortcoming of the chapter on labour
mobility is in Article 709. Article 709 spells out an expanded definition of
legitimate objective by adding two additional objectives to the seven listed in the
general definition. Under Article 709, legitimate objectives also include the
provision of adequate social and health services to all geographic regions of a
jurisdiction and labour market development. Both of these additional legitimate
objectives are broadly defined and undermine the intention of the chapter. For
example, under the legitimate objectives exemption, a province may be able to
impede the migration of out-of-province trades people as part of a strategy in
dealing with high unemployment in that province.
On the one hand, an Human Resources and Skills Development Canada
(HRSDC) (2001) study finds that all restrictions on interprovincial migration
have been removed and that 97 percent of regulated professional workers are
now benefiting from mutual recognition agreements where professional
qualifications granted in a given province are recognized nationwide. On the
other hand, the OECD (2004) argues that the market remains fragmented. Coe
and Emery (2012) examine the relationship between accreditation requirements and the
speed of labour market adjustment for eight construction trades in 20 Canadian cities. They find
16
that these requirements are not important frictions for labour market adjustment. They
speculate that their results may differ from the OECD analysis because of their
focus on trades occupations rather than on other skilled professions/occupations such as
lawyers, accountants, physicians and nurses.
5.6
Procurement
The procurement provisions in the AIT and NAFTA are very similar in terms of
their scope and coverage and in the provisions applied to the government
procurement sector. Although neither agreement originally applied the
provisions to the MASH sector (municipalities, municipal organizations, school
boards and publicly-funded academic, health and social services entities), the AIT
is now stronger in this regard as an agreement among the Parties to include the
MASH sector under the AIT came into effect on July 1,1999, whereas no such
commitments to include the MASH sector exists under NAFTA. The AIT also has
fewer exclusions of specific goods and services than does NAFTA. Instead the AIT
bases exclusion on specific government entities and on regional development
reasons that would meet the legitimate objectives criteria. The thresholds for
services and construction procurements under the AIT are lower than under
NAFTA, thereby increasing its effectiveness in these areas. The provisions in the
WTO agreement are very similar, but there are extensive exclusions, particularly
of services and construction, and thresholds are higher compared to the AIT.
5
The rise of the bilaterals
Given the slow – or non-existent – progress on removing internal trade barriers, some
provinces are working with other like-minded provinces to make progress. An important
initiative in this respect is the April 2006 comprehensive British Columbia – Alberta
Trade, Investment, and Labour Mobility Agreement (TILMA) which came into effect on
April 1, 2007. According to the BC government: “The TILMA is a single, comprehensive
agreement on a general set of rules between Alberta and British Columbia. There are no
specialized sectoral Chapters, such as for Agriculture, Energy, Investment, etc. (as there
are, for example, in the national Agreement on Internal Trade). There is also a general
exemption for measures that serve a wide-range of defined “legitimate objectives”
including health and safety related measures. For further certainty or for some other
measures that may be inconsistent with the TILMA rules, there is a listing of exceptions
to the Agreement, as well as a listing of “transitional” measures to be addressed and
resolved over the next two years.”6
6
Conclusions
under construction
6
http://www.agf.gov.bc.ca/trade/interprovtrade.htm#AIT_Goods
17
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