Key Takeaways:
- Canadian federalism, which divides power between Ottawa and provinces, is poorly suited for the 21st century.
- The system of federalism has limitations, including the inability to eliminate interprovincial trade barriers and complete projects in the national interest.
- The federal government’s inability to eliminate trade barriers can result in significant economic losses, estimated to be around $200 billion.
- Provincial autonomy can incentivize provinces to prioritize local interests over national interests, leading to delays or cancellations of projects such as pipelines.
- The lack of clarity and consistency in policies across provinces can disincentivize investment and hinder economic growth.
Introduction to Canadian Federalism
Canadian federalism, the system of governance that divides power between Ottawa and provinces, has been a cornerstone of how Canada balances regional interests. However, in the context of Prime Minister Mark Carney’s meeting with provincial leaders, it is worth remembering just how poorly suited that system looks for the 21st century. The origins of Canadian federalism are illustrative of both its utility and its weaknesses. By giving provinces meaningful autonomy, Confederation united disparate colonies into a workable national state, but it also hard-wired a recurring challenge: when the national interest requires coordination, provinces must negotiate their way to a solution.
The Limitations of Federalism in Trade
One way the limitations of federalism manifest today is in trade. Despite the federal government’s talk of eliminating interprovincial trade barriers, it cannot eliminate all of them on its own. Many of the frictions that affect the free flow of goods, services, and labor across provincial borders are still decided by the provinces. The International Monetary Fund estimates that eliminating all such barriers could raise Canada’s real gross domestic product by 7 percent, or more than $200 billion. However, even with agreements such as the Canadian Mutual Recognition Agreement and bilateral memorandums of understanding, many critical bottlenecks remain. For example, food and alcohol are not covered by the mutual recognition agreement and are excluded from most of the memorandums of understanding.
The Impact of Federalism on National Projects
Federalism also limits Canada’s ability to complete projects in the national interest. Centralization works like insurance, where provinces give up their short-term interests in return for federal support on projects where it is most needed. However, if federal authority to build major infrastructure is limited, provinces have much more incentive to dig their heels in to defend short-term local interests. Canada’s chronic inability to build pipelines is a canonical example of this. The fact is that exporting energy to Asia is relatively low-hanging fruit for growth, particularly under the threat of U.S. tariffs. However, because the benefits of pipelines accrue disproportionately to Alberta while the potential harms fall largely on British Columbia, provincial autonomy incentivizes stalling these kinds of projects instead of rewarding British Columbia in the long run for being a team player.
The Effects of Federalism on the Electricity Grid
Another example of the limitations of federalism is the electricity grid. The Canadian grid remains largely segmented by provincial borders, according to the C.D. Howe Institute, a think tank. This raises costs and risks for consumers, but also slows down the adoption of renewable energy. If demand for Ontario wind power is restricted to the province, that lowers the incentive to build the turbines. Grid improvements can significantly accelerate the adoption of renewable energy, but the current system of federalism makes it difficult to coordinate and invest in these improvements.
The Impact of Federalism on Political Uncertainty
Perhaps more subtly, constitutional federalism also bleeds into political federalism. This tendency to prioritize provincial identity over national interest raises uncertainty, which disincentivizes investment. The classic example is the Quebec independence movement. Until 1970, Montreal was the center of the Canadian economy, but as the Parti Québécois moved to hold a sovereignty referendum, businesses relocated from the province to hedge political risks, stifling Quebec’s growth. Even if the possibility of secession is remote, like in Alberta, the rhetoric provides political leverage for defying federal policy, such as minimums on the industrial carbon price. Such disconnect leads to a patchwork of policies across provinces and a lack of clarity for investors.
Conclusion: The Need for Reform
In conclusion, Canada faces a very different set of challenges than it did in the past, where compromises had to take precedence over dreams of the perfect union and the country could reap gains from the slow march of globalization. Today, it is far more important that Canada turns to each other for help, but the current system of federalism is no longer fit for purpose. The limitations of federalism in trade, national projects, and the electricity grid, as well as the impact of federalism on political uncertainty, all point to the need for reform. Canada must find a way to balance regional interests with national interests and create a more cohesive and coordinated system of governance. Only then can the country unlock its full potential and address the challenges of the 21st century.
