Fast facts

A lot of public discourse in Canada right now is about how we need to urgently remove interprovincial trade barriers in the face of the Trump tariff threat. But if we look at the actual evidence, politicians need to lower their expectations about what is possible and not jump for problematic solutions like mutual recognition of regulations.

  • Proponents claim huge numbers when talking about internal trade barriers: they say they cost the Canadian Gross Domestic Product (GDP) $240 billion a year, or up to four to seven per cent of GDP.
  • When we look at what actual trade barriers exist, the list is very small—alcohol sales, some minor trucking regulations, and government procurement policies. 
  • While there is some work to be done in some areas—especially credential recognition for skilled workers moving from province to province—the low-hanging fruit of trade barriers was harvested long ago.
  • The big numbers politicians love to cite come from  studies that do not actually measure trade barriers but instead use a methodology that overstates costs due to several unrealistic assumptions about interprovincial trade 
  • By the numbers, interprovincial trade is doing just fine: Total interprovincial trade in 2021 (the last data year) was $451 billion, up 44 per cent since 2007, compared to international export growth of 47 per cent and import growth of 56 per cent.
  • The attempts to remove so-called interprovincial trade barriers is mostly a push for “mutual recognition” of regulations—a process by which all provinces could be forced to accept the least stringent regulations for safety, environmental protection, and consumer protection. It is a way of attacking provinces’ ability to pass laws for environmental, worker, and consumer protection.

In response to the threat of Trump tariffs, an old narrative about interprovincial trade barriers has risen from the dead. The idea that eliminating supposedly massive internal trade barriers would lead to thousands of dollars per year in gains for ordinary Canadians makes for great soundbites for politicians, but should we really believe that there is a free lunch to be had?

While politicians and media figures have claimed that Canada’s GDP could grow by up to $240 billion, such incredibly large numbers simply don’t make sense based on what we know about interprovincial trade. Prior economic research on purported barriers to trade comes up with numbers that are an order of magnitude smaller. 

Below we look more closely at the methodology underpinning the claims, but first let’s review some key background and evidence on interprovincial barriers to trade. Our first problem is finding compelling examples to show the existence of widespread interprovincial trade barriers, and how eliminating them would manifest in higher incomes for ordinary Canadians. 

A short history of interprovincial trade barriers

Canadian premiers have been working to reduce barriers between provinces for more than three decades, starting with the Agreement on Internal Trade in 1995, which aimed to make interprovincial trade relationships compliant with the North American Free Trade Agreement (NAFTA). They revisited the topic in the 2017 Canadian Free Trade Agreement (CFTA), and their current work program is the 2024-2027 Internal Trade Action Plan to address outstanding trade irritants and barriers. Additional side deals include the Alberta-BC Trade, Investment and Labour Mobility Agreement (TILMA) and the successor New West Partnership that includes Saskatchewan and Manitoba.

To the extent that there is low-hanging fruit from removal of interprovincial trade barriers, that fruit was harvested long ago. It is not clear whether any differences that remain are actually barriers that should be removed—or whether they could even easily be removed by measures like mutual recognition, and that doing so would not pose other costs or reduce other benefits from existing policy choices. Most regulations, even if there are additional costs to business, actually reduce risks to companies and consumers.

By the numbers, it seems that interprovincial trade is doing just fine. Total interprovincial trade in 2021 (the last data year) was $451 billion, up 44 per cent since 2007, compared to international export growth of 47 per cent and import growth of 56 per cent. Growth in interprovincial services trade, a prime focus for the call for mutual recognition, grew much faster than goods trade, by 58 per cent between 2007 and 2021.

So where exactly are these trade barriers? When pressed, proponents typically cite a very limited number of areas: alcohol, government procurement, agricultural regulations, trucking regulations and occupational/professional licensing. Each of these have their own peculiarities and have been well-known issues in internal trade for decades. For the most part they remain in place because of provincial government policy choices.

Alcohol restrictions are bona fide barriers to trade in the classical sense due to provincial liquor monopolies that decide what gets on the shelves. While a wider selection of beer, wine and spirits from other provinces might be nice, the reality is that more choice won’t necessarily be accompanied by lower prices, and for society as a whole having more options for drinking alcohol is of dubious economic benefit. Most provinces already have generous allowances for bringing home beer, wine or spirits for personal use.

Supply management in dairy, poultry and eggs is the program conservatives love to hate. While consumer prices are sometimes higher in these areas, the alternative would be over-production hurting small-scale farmers, as is the case with milk in the U.S.. Or consider that Avian flu hitting the freer market in the U.S., with its massive industrial-scale producers, has led to cartons of eggs costing $20 compared to $5 in Canada. Supply management ultimately supports more objectives than efficiency, such as food security (provincial supply is equal to demand), price stability and ensuring decent incomes for farmers.

Outside of supply managed areas, restrictions on moving hogs between Ontario and Quebec has been cited as a barrier. In part this is due to the loss of local processing capabilities for pork, as well as provincial differences in meat inspection and other regulations. However, a solution exists in the form of federal licensing of meat plants, which would allow producers to sell their meat across Canada and internationally.

Differences in trucking regulations are largely the consequence of geography—and common sense. Trucking standards that make sense in flat Saskatchewan are simply inappropriate for mountainous British Columbia. Allowing the huge “truck trains” favoured by shippers also increases the costs of repairing damage to roads and bridges.

Recognition of professional qualifications across provincial borders, whether for accountants or nurses or other registered occupations, is an area where progress has already been made in programs like the Red Seal trades program, but more could be done. However, these differences are not actually trade barriers in any conventional sense.

Finally, government procurement includes a wide range of expenditures where provincial governments traditionally preferred providing contracts to local suppliers. Smaller provinces were wary of losing business to large provinces such as Ontario. However, almost all local preferences have already been outlawed under the CFTA and regional procurement agreements.

That’s about it. These cases are usually invoked as if they are the tip of a much larger iceberg—but in fact, they are the whole iceberg. For almost all products, there are no meaningful restrictions to trade across provincial borders. 

Even if these sectoral issues could be resolved with a wave of hand, the massive numbers that proponents and commentators are citing are highly implausible from such a small number of sectors. If we break down Canada’s GDP by sub-sector, the areas above (food and beverage stores, truck transportation, and a number of professional services such as legal, accounting, architectural, engineering, scientific and technical services) combine to a total of only 6.7 per cent of Canada’s GDP. 

The rest is an exercise in corporate Canada pushing mutual recognition—a form of deregulation that says regulations in one province should be sufficient for anywhere in the country. A major problem with this alleged solution is that mutual recognition of different provincial regulations for health and safety, consumer protection and environmental and resource management could set in motion a race to the bottom, where provinces lower their standards to attract investment. 

Any proper evaluation would also consider the benefits associated with the underlying public policy choices, such as the safety of truck drivers moving cargo through the mountain passes of British Columbia. Differences in provincial regulation may cause additional compliance costs for businesses operating across multiple provinces, but this is true for trade between U.S. states as well.

Academics and government researchers have studied interprovincial trade barriers for over three decades now. Back in the 1990s, an often-cited study from the Canadian Manufacturers’ Association claimed GDP costs of trade barriers of one per cent of GDP, due primarily to government procurement and alcohol restrictions. Economists, even then, disputed that figure as far too large—and for failing to consider the economic benefits of government policy choices. The CMA study was based on Canadian interprovincial trade prior to the implementation of the Agreement on Internal Trade in 1995, which reduced internal trade barriers.

Most serious studies conclude that there are few significant obstacles to trade and investment within Canada, and that investment and migration are far more likely across provincial borders than across the Canada-U.S. border. Indeed, a number of studies have found that, relative to distance and market size, Canadian provinces were much more likely to trade with each other than with U.S. states. University of British Columbia’s John Helliwell estimated that provinces were 12 times more likely to trade goods and 30 times more likely to trade services with other provinces over American states. Canadians are more likely to trade with each other across provincial boundaries than Americans are across state boundaries. 

Where do those large numbers come from?

The case for large barriers to interprovincial trade stems from a series of studies by University of Calgary professor Trevor Tombe along with various co-authors. Their core methodology does not, in fact, measure trade barriers at all—but instead undertakes a complicated exercise in abstraction to put numbers to some economic theorizing. Unfortunately, technical jargon and dense mathematics serve to hide a series of highly problematic assumptions that are driving the large estimates.

While there are several such studies, two have received widespread public attention. A 2019 working paper published by the International Monetary Fund (IMF) claims that removing interprovincial trade costs across Canada would yield gains of between three and seven per cent, equivalent to real GDP gains of $50 and $130 billion. A 2022 paper for the Macdonald-Laurier Institute argues that mutual recognition of regulations across provinces would boost Canada’s GDP by $100-$200 billion per year, or four to seven per cent of GDP. We focus on these two studies below.

The starting point is to imagine a Canada where there were no transportation costs and no barriers to trade, and consumers in each province have identical preferences for purchasing goods and services. As the 2022 MacDonald-Laurier paper states: “If trade was perfectly frictionless, the gaps between what BC buyers allocate to Alberta suppliers would not be so starkly different from what Alberta buyers allocate to Alberta suppliers.” 

Put another way, the authors argue that if there were no transportation costs or trade barriers, then consumers in all provinces would purchase from other provinces in the same proportions. The authors then measure what provinces purchase locally and what they import, and assume that after excluding transportation costs, the remaining differences must be due to invisible trade barriers.

Is this a reasonable approach? There is good reason to believe that this is a radical assumption that does not account for differences in provincial industrial structure and resource endowments. Canadian provinces have inherently different staple resources (such as forestry and fishing on the BC coast, oil and gas in Alberta, grains and potash in Saskatchewan) and linkages to suppliers and value-added production. Development patterns have been shaped by industrial policy choices (subsidies, resource royalties, cheap electricity). International exports as a share of provincial GDP are also different and affect interprovincial trade. 

Given these obvious differences, this approach greatly overstates trade barriers, as opposed to the wide range of other factors that shape spending by businesses and households.  

Another major assumption overstates the costs of interprovincial trade barriers by using estimates from the international trade literature. This is problematic due to the border effects noted above, reflecting that there are no customs inspection stations along provincial borders, Canadians use the same currency and share common legal, financial and economic institutions, and are free to live and work anywhere in the country. 

Specifically, the authors use measures of the impact of reducing trade barriers (called trade elasticities) from a 2015 study of Canada-U.S. trade, and assume these trade elasticities are the same for interprovincial trade. For example, they assume a large estimated trade elasticity of five for services trade between Canada and the U.S.— which means that a 10 percent decrease in costs would result in a 50 percent increase in trade flows—is exactly the same between Canadian provinces.

Assuming that estimated costs for Canada-U.S. trade can be plopped into an analysis of interprovincial trade inflates those costs and therefore the supposed benefits from removing them. In reality, there is substantial bias towards services delivered within one’s own province, and then from other provinces, much more so than services trade between Canada and U.S.. 

Even assuming these hypothetical costs could be eliminated, would those reduced costs show up as increased income for businesses and households? Essentially, the authors are in the dreamland of neoclassical economics where everything comes down to changes in price due to perfect competition. They assume that reduced costs just show up as higher GDP, without explaining the mechanism by which this would happen. It is not clear why reducing any costs is not just a transfer of income from sellers in one province to buyers in another, rather than new wealth creation.

The 2022 MacDonald-Laurier report on mutual recognition concludes its elaborate process by flagging four service sectors: finance and real estate, wholesale trade, professional and scientific services, and transportation and warehousing. The authors identify these sectors then have nothing to say about what the barriers actually are and how their removal would lead to higher incomes. Let’s unpack why this methodology for estimating trade barriers is so problematic.

In finance and real estate, it’s not even clear what barriers actually even exist to be eliminated. Canadian banks already have branches across the country, seemingly without complaint about barriers. Beyond that, these are not just sectors of the economy that should be grown like any other. Many economists have actually concluded they play a rent-seeking role that strips income from real production.

Differences in wholesale trade, and transportation and warehousing likely reflect the role of provinces like BC and Nova Scotia as ocean ports, and the differences in trucking regulations in mountainous provinces like BC compared to flat provinces in the prairies.

Professional and scientific services may be an area where there remain labour mobility issues—although the authors don’t actually state any of them. This may simply represent differences based on industrial structure and the resulting jobs due to where key resource sectors are located. Any Canadian or Canadian business can provide services in another province without restriction so it is not clear what is actually restricting trade in these sectors.

Finally, even if we take the numbers at face value, there are a number of other qualifications that have gone unreported in the media. For example, between 1.3 and 1.7 per cent of workers would need to move from their homes to another province in this modelling. Workers would also have to shift sectors within a given province. In Alberta “between 1.7 and 5.0 percent of the workforce would change the sector in which they work.” The human costs of these adjustments are assumed to happen seamlessly and costlessly.

I doubt any politician quoting the incredible savings from imaginary interprovincial trade barriers has read the underlying studies, and any who did would not be able to explain how those numbers were derived. It’s reflective of deeper issues in the field of economics: a paper that is incomprehensible to all but a tiny handful of readers, and lacking in transparency about how extreme assumptions are driving the results. Unfortunately, this is not just some ivory tower exercise, as the large numbers are accepted by politicians uncritically and at their maximum estimated values without the appropriate caveats the researchers themselves admit.

A pragmatic approach

In this moment of crisis created by the Trump tariff threats, Canadian leaders are looking for a policy win by reducing interprovincial trade barriers. But the purported solution of mutual recognition of regulations raises more questions than it answers, and risks becoming a Trojan Horse for deregulation that has long been a top priority for corporate Canada.

The bottom line is that claims about internal barriers to trade are vastly overstated and often made at a very high level without specific examples or intuition about how growth would be enhanced by policy changes. In reality, this neoliberal agenda is chasing small, microeconomic efficiency gains that exist only in economic theory but rarely show up in the real world. 

Instead, it is the big macroeconomic forces in the economy, such as interest rates or government spending or international trade that policy makers need to focus on. Indeed, the biggest thing that could happen to spur interprovincial trade would, in fact, be the Trump tariffs. 

But let’s flip the issue on its head. Let federal and provincial politicians make a public list of their top 10 trade irritants when dealing with other jurisdictions, and let’s have a process to address these through the existing processes of the 2017 Canadian Free Trade Agreement. 

Where differences in provincial reporting and licensing pose unnecessary costs to business, progressives should have no problem with reforms, as long as they don’t encroach on legitimate public policy objectives. And to the extent that there are gains from harmonization of regulation and standards, we should seek the development of high regulatory standards that apply across Canada. But the deregulatory approach of mutual recognition should be left at the curbside.

While policymakers should consider reasonable requests, provinces need to be laser-focused on working together on boosting domestic trade and enhancing self-reliance without lowering levels of public and environmental protection. Obsessing about the few remaining actual internal trade barriers is a dangerous distraction.