Over the past few months, federal, territorial and provincial governments have committed to reducing internal trade barriers in response to Trump’s tariffs on Canadian exports to the U.S.
Some have suggested these barriers, which include minor regulatory differences between provinces and rarely used “buy local” preferences, can cost the Canadian economy up to $200 billion dollars a year in unrealized growth.
CCPA Senior Economist Marc Lee pours cold water on these sensational cost estimates and proposes they be dealt with in a surgical way. Instead, governments are stepping up with grandiose-sounding proposals for sweeping changes to internal trade rules.
The federal government dropped an additional 20 exceptions from its Canadian Free Trade Agreement (CFTA) obligations, following a similar move last July. Nova Scotia recently introduced legislation to drop any its own specific exceptions, providing other provinces reciprocate. British Columbia plans to do the same.
The vast majority of these exceptions relate to public procurement: the goods, services and construction purchases made by public entities. Removing them, as the federal and provincial governments are doing, forces governments to spend public money in highly restrictive ways.
Let’s be clear: Canadian public procurement is a tremendously wasteful industry that, in value, represents over an eighth of our economy. Here, procurement consultants and managers have greatly profited from so-called competitive tendering. The removal of these exceptions in the CFTA will do little to nothing to help Canada get a better deal out of public spending. If anything, it will make matters worse by reinforcing the existing system.
Public procurement rules could stiffen government flexibility
For the most part, trade treaties like the CFTA and the Canada-EU Comprehensive Economic and Trade Agreement (CETA) include public procurement rules that open access to firms in other jurisdictions and standardize tendering processes. The cost of these rules, and the market access granted to a wider variety of bidders, is policy flexibility. Notably, trade-based procurement rules stop governments from favouring local firms and workers.
The CFTA well exceeds any of Canada’s international agreements in its coverage of public spending to these strict rules. This includes lower thresholds (minimum covered contract value), above which governments cannot buy local, more covered public entities, and fewer general exceptions from these same rules.
The federal government plans to go further and remove select entities—like the House of Commons and Senate—from its procurement exclusions. This means these entities must abide by the CFTA and not discriminate based on a suppliers’ location, which would be a minor inconvenience, given these entities are mostly compliant already.
The bigger challenge is future proofing. Previously, the federal government excepted successor agencies and Crowns, including those created “for the safety of Canadians,” from CFTA rules. Public entities serving the safety of Canadians need to purchase with agility, regardless of other commitments. As we saw during the COVID-19 pandemic, our well-being may depend on that flexibility—and it’s now undercut.
The CFTA has general exceptions for national security (Article 801) and social services (Article 805), but these exceptions are narrow and relatively untested.
Interprovincial barrier reductions could hurt regions
Worse yet, it seems the federal government has forgotten its regional commitments. Historically, Canadian federal procurement has been instrumentalized to sponsor regional development. Our federation does not work if there are radical disparities in income or employment between regions.
The federal government has now excised these regional exceptions. Any exceptions to shipbuilding—especially relevant to Nova Scotia—are gone. The reference to the Industrial and Technological Benefits Policy, formerly the Industrial and Regional Benefits Policy, is also dropped. This policy has a strong regional and industrial development component, which the CFTA had previously allowed.
Nova Scotia’s approach to removing alleged internal trade barriers is more troublesome. That government has introduced legislation to waive any CFTA “party specific exception” for reciprocating governments.
Like other provinces and territories, Nova Scotia’s procurement exceptions included “regional economic development.” This exemption from the CFTA procurement rules was capped at 10 uses per year and limited to contracts (in part or full) valued at or below $1 million.
In other words, the exception for regional economic development was already significantly watered down from what should be reasonably allowed. The Nova Scotia government would remove it entirely. This can only blow back on Nova Scotia.
Just like across Canada, there can be major disparities within a province. Some rural and under-resourced communities rely on getting contract work. They may lose out on work in the name of efficiency.
Curiously, other governments want to do the same thing. The British Columbia government has introduced very similar legislation to Nova Scotia, but is facing public opposition to alleged “overreach” in the bill. New Brunswick’s government has the same intentions.
No real savings
Governments of every political stripe have dogpiled on public procurement exceptions. But they haven’t done their homework.
There are no real savings here. These actions assume that competitive tendering creates best value for taxpayers. There are two big problems with this logic.
First, “competitive” public procurement is rarely all that competitive. Proactive disclosure data shows most reported contracts had three bidders or fewer. Tenders are often dominated by the usual suspects who have the internal capacity to bid on contracts.
In fact, some suppliers specialize in the bids themselves. These “procurement managers” or “consultants” are highly pervasive within Ottawa. One report suggests $1.2 billion was allocated to procurement consultants in the Department of National Defence alone.
Second, we can get better value by concentrating public purchasing on industrial needs. With a concerted procurement strategy, Canada can build up domestic industries to be more internationally competitive. This is the case made by ‘mission-oriented’ and ‘social procurement’ advocates. When we remove procurement flexibility, we are undermining the potential for this strategic planning.
On this point, Canadian governments are sending mixed signals. On the one hand, federal and provincial governments are encouraging Buy Canadian procurement. On the other hand, they are removing the flexibility to instrumentalize procurement for public goals.
The former seems more valuable in this moment than the latter. Worse yet, there is the real potential that foreign suppliers pass as local (e.g., a subsidiary office) and gain from new CFTA access.
The public is understandably nervous about American protectionism and Trump’s repeated threat to annex Canada. Public servants are keen to respond. But it’s a misstep to unilaterally shed our ability to spend public money wisely. We have public procurement exceptions for good reasons.
Still want better bang for our buck? Go after the consultant suppliers who often offer little in-house capacity and, instead, subcontract their work at a premium. Alternatively, we could go after the hiring suppliers that provide cheap, non-unionized labour that make governments seem slimmer.
