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Recent friction between Canada and its biggest trading partner, the United States, has directed the federal and provincial governments to focus on new trade opportunities. Canadian provincial governments are not only attempting to strengthen trade relationships around the world but are also looking at how inter-province relationships may be improved. To a large extent, the economies of the thirteen Canadian provinces and territories are integrated; 532 billion dollars of goods were traded across provincial and territorial boundaries in 2023 and yet varying regulations and local protectionism prevent the country from reaching its full domestic economic potential. It is estimated that internal trade barriers are costing the Canadian GDP 200 billion dollars annually. However, even with this large financial incentive to work through internal economic barriers, they are so numerous and varied that it will take significant cooperation and federal leadership to institute a unified domestic Canadian economy.
Beginnings of Disunity
A key motive for Canada’s confederation in 1867 was the possibility of strengthening the trade connections between British North American colonies. This motive was represented in s.121 of the Constitution Act, 1867, which states “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.” Despite the clarity of this section, the Supreme Court of Canada (SCC) chose—several times—to interpret it to allow economic barriers to be put up. For instance, in its decision on Gold Seal Ltd. v. Alberta, the SCC ruled that s.121 only referred to preventing the creation of customs barriers.
This precedent is only one component that encouraged thirteen Canadian economies to emerge instead of one. Provinces, often faced with internal pressure to protect local industries—which might collapse under the weight of national economic competition—resolved to instigate policies restricting the sale of goods from other provinces and territories.
The Barriers to Internal Free Trade
Currently some of the most significant barriers to internal free trade in Canada are professional requirements, regulation of transportation and goods, and hostile procurement practices. Various professionals who require licensing or training, such as doctors, lawyers, or construction workers, face significant obstacles when moving between provinces. The amount of required recertification varies, but this boundary prevents labour from seamlessly moving across provincial borders. Instead, when there is a labour surplus in one province, workers are impeded from filling a deficit of their profession in another. When it comes to transportation and the goods being transported, differing regulations regarding trucks and highways mean that cross-province transportation is obstructed, and the transported goods face different standards in the different jurisdictions. Provincial governments are also known to undertake hostile procurement processes, favouring contractors from their own provinces rather than allowing for fair competition. Even though this practice was prohibited in the 1990s, this prohibition has not been properly enforced, and so provinces still regularly discriminate.
Past Efforts to Resolve Barriers
The federal government and its provincial counterparts are not only now recognizing the harm that internal trade barriers cause the Canadian economy. In the 1980s, during the high point of neoliberal political dominance, liberalizing domestic trade policy became a key issue for several federations. This movement was especially prominent in Canada due to the recently signed North American Free Trade Agreement in light of which Canadian provincial trade policy seemed hypocritical. To address this issue, in the early 1990s the Canadian provinces and territories signed the Agreement on Internal Trade (AIT), which promised the actualization of internal free trade. Unfortunately, the AIT limited its own reach through sector-specific exclusions and fostered the continuation of hostile domestic trade policy by creating the illusion the AIT remedied internal barriers.
Decades later, in 2017, provinces and territories signed the Canadian Free Trade Agreement (CFTA) which was a significant step forward. In contrast to the AIT, which required provinces to opt in, the CFTA immediately applied its rules to the economic sectors pertaining to it. The CFTA also created a framework for future efforts toward free trade, proceduralizing how to resolve regulatory conflicts between provinces.
If the CFTA is the solution Canada was looking for, then why has the problem of internal free trade not yet been solved? At the most basic level, the existence of a large number of items being regulated in different ways by different jurisdictions means the process will take time. Furthermore, it is necessary to approach the various regulatory differences through the harmonization of standards—instead of the faster process, mutual recognition, where jurisdictions would co-recognize each other’s standards as being equally applicable. However, harmonization is preferred as opposed to mutual recognition, as mutual recognition often opens loop holes—allowing individuals and corporations to sidestep more restrictive standards.
Nevertheless, this focus on harmonizing regulations brings in budgetary issues. For smaller provinces and territories, regulation and enforcement are proportionally more expensive due to their smaller fiscal capacity. This means they might struggle to maintain some of the standards that provinces with more funding find negligible.
A Pressing Need for Leadership
Federal leadership is necessary to resolve the internal trade barriers quickly so that the reaped benefits can help Canada deal with negative effects from declining trade with the US. Harmonization and mutual recognition schemes need to be applied evenly and with proper enforcement in order for them to prove truly effective, which will be hard to achieve with only provincial involvement. Provincial governments are responsible for various local economic and social interests they need to factor in when negotiating, often leading to hold-ups, whereas the federal government is more able to look at the interest of Canada as a whole. This level of removal from local pressure means that federal leadership could guide cooperation towards overarching solutions. The federal government also has the advantage of close connection to several cross-province organizations, such as Health Canada and the Canadian Centre for Occupational Health and Safety, whose resources can be employed to leverage cooperation between provinces. These two organizations, specifically, were put to use during the standardization of Workplace Hazardous Materials Information System (WHMIS) training across the country, a process which serves as a golden example for inter-province regulatory harmonization.
In the past federal leadership has typically faced resistance from provinces who value their sovereignty and fear federal overreach. However, recently, a number of premiers have called for further domestic integration, and the provinces seek to benefit from federal leadership, as the federal government could provide funding to offset some of the expense of changing regulatory regimes.
Removing internal trade barriers will not be easy and will take an incredible amount of interprovincial cooperation and political goodwill. However, this process is justified, as the benefits that can be unlocked through wider economic integration will help secure Canada’s future as a more independent economic actor. The display of intergovernmental cooperation during this effort might also inspire an increasingly united Canada, which would be more capable of countering the American threat than an economically and socially divided country.
Edited by Catriona Hayes Morris
The argument defended in this article is solely that of the author and does not reflect the position of the McGill Journal of Political Science, the Political Science Students’ Association, or the McGill Department of Political Science.
Featured image by Benson Kua from wikicommons
