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Fen Osler Hampson and Tim Sargent: Interprovincial trade barriers are seriously stunting Canada’s growth

Commentary

Eliminating interprovincial trade barriers to create one genuine national market is one of the hardy perennials of Canadian politics and federal-provincial relations. But it is a flower that never blooms. It is time for Ottawa to exercise genuine leadership by creatively applying its fiscal powers to incentivize provinces to do the right thing.

Study after study has shown that interprovincial trade barriers seriously stunt Canada’s economic growth and productivity, which now lag further and further behind the single markets of the European Union (EU) and the United States (U.S.). Studies, by the International Monetary Fund and the Bank of Canada among others, find that removing these barriers would boost Canada’s GDP anywhere from four to seven percent. 

Lower GDP not only means that Canadians are poorer per capita, but it also means “lost” revenue of roughly $15 billion or more to the federal government and the provinces each year. That is a lot more than Ottawa plans to spend on fast-tracking the building of new housing ($8.5 billion), pharmacare ($1.5 billion over five years), or defence ($8.1 billion over the next five years).

Despite various attempts over the years to reduce internal trade barriers, many obstacles to trade across provinces remain, especially in procurement, labour mobility, trucking, and agriculture and agrifood. There is less free movement of goods and services in Canada than in the EU, which has 27 member countries and more than ten times Canada’s population, or in the United States, which has 50 states and more than eight times Canada’s population.

Why do these barriers persist? There are well-organized, self-interested lobbies for particular sectors, such as dairy producers in Ontario and Quebec that can block change. Perhaps even more important is the coordination problem: the benefits of removing interprovincial barriers are much greater if all provinces act together, and so provinces are reluctant to lower their own barriers—and anger these domestic lobbies—without some assurance that other provinces will do likewise. However, as we saw with the Canadian Free Trade Agreement in 2017—with its dozens of exceptions—simply bringing the provinces together will not bring about the change that is needed.

So what is the way forward? In one world, the federal government would direct the provinces to remove barriers under its trade and commerce powers (S. 121) in the Constitution. But in a series of crucial rulings, the Supreme Court, including its controversial decision in R. vs Comeau (also known as the “free-the-beer case”), has upheld the rights of provinces to restrict the purchase of goods and services across provincial boundaries.   

Ottawa’s challenge is to exercise leadership, not coerce or hector the provinces, but to offer calibrated inducements to remove trade barriers. 

The basis of such a bargain should be as follows: if provinces are willing to pay the political price for dropping barriers, Ottawa should compensate the provinces with something else in return. However, it should not cut the provinces a cheque, as some have suggested, from the increased revenues generated by substantial GDP growth. This would simply increase provincial dependence on federal transfers. Except for equalization, which is enshrined in the Constitution (and rightly so), each level of government should be as self-reliant as possible to enhance administrative efficiency and provide clear accountability to voters.

A customer takes a jug of milk from a cooler at a grocery store in Airdrie, Alta., on Tuesday, Aug. 30, 2016. Jeff McIntosh/The Canadian Press.

Instead, Ottawa should provide so-called “tax points” to the provinces, reducing its tax take so that provinces can get a greater share of the revenue. 

The provinces could, if they chose, raise their taxes by the same amount as the feds lowered them and use it to pay down debt or spend it—perhaps on measures that would help those groups negatively affected by the elimination of barriers. 

Importantly, taxpayers would be no worse off in this scenario and indeed could be better off if the provinces chose not to take up all the tax room given to them—remember that because eliminating barriers increases GDP for everyone, provincial revenues will rise as well. Accordingly, a province could choose not to raise taxes and still see higher revenues.

A key decision when implementing such an approach is whether to offer a deal to any province that wants it or require all provinces to join simultaneously. The problem is that reluctant provinces might try to water down the deal and bargain with Ottawa to remove some barriers and not others for a lower tax point transfer. On the other hand, an extensive federal-provincial negotiation would be a painful and possibly underproductive exercise unless the groundwork is laid properly in advance. 

Accordingly, it may be helpful to take a page from the Canada-U.S. free trade negotiations in the 1980s, where the foundations were laid by the Royal Commission on the Canadian Economy, which conducted a detailed and careful sector-by-sector analysis of the costs and benefits of free trade before talks formally began, thus building critical public support for what the Commission’s chair, Donald Macdonald, called “the leap of faith.” A similar exercise today on removing interprovincial barriers and the benefits of tax point transfers would have to be collaborative with the provinces and the private sector but should start now.

Undoubtedly, a concerted effort to remove interprovincial trade barriers will have immediate political costs. At the same time, the economic benefits will take a few years to materialise as they did with CUSMA and then NAFTA. To ease the pain, the federal government should lower taxes immediately after an agreement is signed and absorb the impact through a temporarily higher deficit or temporary spending reductions. Above all, Ottawa must show leadership and demonstrate its commitment to an agreement from the beginning.

Adam Legge and Irfhan Rawji: Our immigration strategy is failing to deliver on its most important promise

Commentary

Canada is a nation that has benefited tremendously from immigration. At its core, the promise of immigration is this: that new Canadians can come here from around the world, contribute to our economy and society, and build a great life for themselves, and that when they do, we will all collectively be better off for it.

The problem is, we have not been delivering on that promise.

In recent years, Canada’s immigration system has strayed, and while there are still many positives, it hasn’t been delivering as well for established Canadians and newcomers alike. Perhaps most importantly—and most frankly—is that it’s not making everyone better off, and Canadians are getting poorer.

Right now, Canada’s economy has stagnated. In fact, Canadians are no better off today than they were in 2014. And, with future productivity expectations in the gutter, our economy will not grow at the pace required to deliver opportunities for a growing population. All this has created frustration among Canadians, both long-established and new ones. Less than one-third of Canadians believe that our current approach to immigration is effective, and one-third of immigrants are unsure of their decision to move to Canada.

That’s a bad sign for Canada’s future. Future prosperity requires that the Canadian economy generates more value, not just because there are more of us, but because each one of us is better off. To get there, we need an enhanced approach and a renewed focus on the actual purpose of economic immigration: to generate prosperity for all. 

There are two main ways we need to do this:

  • Attracting and selecting the best candidates for economic immigration
  • Improving outcomes for newcomers themselves

On the selection of the best economic candidates, the statistics around this may surprise many Canadians. Today, about half of the people admitted into Canada in the economic category were not, in fact, selected for their economic contributions. They are the spouses and dependents of a primary economic immigrant. For every 10 newcomers to Canada, about three are personally selected for their economic contribution. While many of these additional people have great contributions to make to our economy as well, when we’re counting five-year-olds as economic immigrants, it’s no wonder we’re not seeing the level of economic boost we might expect.

Also, there are big gaps in how Canada decides which economic immigrants to select. Take as an example a person with a master’s degree in—because we need to pick something—Latin, versus a person with a certification as a heavy-duty mechanic.

All else held equal, the person with the master’s would receive more points than the mechanic, due simply to years of education, despite the fact that the mechanic has vastly higher average earning potential in Canada today. And, with full respect to both professions, Canada also needs far more heavy mechanics right now than we do TAs in Latin.

A clear needle-moving fix is to reform the points system used to better select economic immigrants, prioritizing those with higher earning potential over other measures. We should also make this system dynamic and update it frequently to account for changes in what skills our economy needs in real time.

On the second front, improving newcomer experience and outcomes, the fixes are clear but that doesn’t make them easy. The process needs to be streamlined and simplified. We need to connect newcomers to supports so they can find a home and a job as quickly as possible. More than all else, we need to make it much easier for newcomers to use their skills in the Canadian labour market. We must view it as economically and morally unacceptable to have people delivering Skip the Dishes who are trained as—and would prefer to be working as—physicians and engineers.

Finally, as every business person knows, what gets measured gets done. For our immigration system, we need to enhance it to deliver on its stated goal of making everyone better off. That requires tying our strategy to clear indicators of prosperity such as GDP growth per capita and directing our resources to best increase those metrics.  

There is a mandate for change. In a poll from Abacus, nearly 70 percent of Canadians feel the current immigration targets are too high. We owe it to all Canadians, from those who have been here the longest to the newest, to deliver on the promise of immigration and make everyone better off from it.