Key Takeaways:
- Canada’s internal trade barriers could be costing the country around 7% of its real GDP in the long run.
- Eliminating these barriers could result in a $210 billion increase in GDP.
- The majority of the gains would come from liberalizing services sectors, which make up the majority of GDP.
- Smaller provinces would gain the most in percentage terms, while larger provinces like Ontario and Quebec would still benefit substantially in absolute terms.
- Internal trade barriers are equivalent to a 9% national tariff, with some sectors facing barriers as high as 40%.
Introduction to Internal Trade Barriers
The International Monetary Fund (IMF) has released a new report stating that Canada could increase its real GDP by around 7% in the long run if it were to fully eliminate its internal trade barriers. This would translate to a significant increase of approximately $210 billion in GDP. The report highlights that the costs of these barriers are mostly concentrated in services, which make up the majority of trade between provinces. The IMF notes that these barriers are economically consequential and affect productivity, competitiveness, and overall resilience.
The Impact of Internal Trade Barriers
The IMF report emphasizes that the interprovincial trade barriers that remain in place equate to about a 9% tariff nationally, using widely accepted trade analysis methods. The costs of these barriers are not evenly distributed, with smaller provinces facing costs that are "multiples higher" in sectors like health, retail trade, and professional services. The report warns that provinces and territories face "uneven" barriers, resulting in a patchwork economy where geography and regulation jointly shape opportunity. This means that advantages that normally come with scale are muted, and the economy is not operating at its full potential.
Recent Efforts to Address Internal Trade Barriers
In recent years, there have been efforts to address internal trade barriers in Canada. In November, the provinces, territories, and federal government signed an agreement to allow the trade of tens of thousands of goods to be free. This agreement, which took effect in December, applies to most products, though it excludes food, beverages, tobacco, plants, and animals. While this agreement was a step in the right direction, it did not address the issue of services, which make up the majority of GDP gains. The IMF notes that roughly four-fifths of the total GDP gains would come from liberalizing services sectors, which reflects their growing weight in the economy and their role as inputs into nearly all other activities.
The Benefits of Eliminating Internal Trade Barriers
The impact of fully eliminating internal trade barriers would be felt differently by jurisdiction. The report says that smaller provinces would gain the most in percentage terms as companies gain larger market access. For example, Prince Edward Island would see a nearly 40% point change in GDP per worker. Ontario and Quebec, the two largest provinces, would see a smaller change of about 4-6% GDP, but the report says they will still benefit "substantially in absolute terms." The IMF notes that internal integration is not a zero-sum reallocation, but rather a national productivity dividend.
Challenges and Opportunities Ahead
The IMF recognizes that eliminating internal trade barriers will take time, with challenges around implementation and coordination. However, the report emphasizes that the country’s economic future will be shaped not only on a global level but also by how it changes its domestic markets. The IMF sees this as an opportunity for Canada to turn 13 economies into one, which is no longer an aspiration but an economic imperative. The report concludes by stating that "the opportunity is now, and the prize is large." With the potential for significant economic gains, it is essential for Canada to prioritize the elimination of internal trade barriers and work towards creating a more integrated and productive economy.
