Cut red tape. Boost productivity. Foster economic growth. Improve worker mobility.
Ontario has a chance to do all of these and more.
All it takes is joining a little-known (but economically important!) trade agreement with Canada’s four Western provinces: the New West Partnership.
Canada’s productivity and growth challenges are well known. And many ideas have been proposed to address it, from tax reform to easing regulatory burdens to leveraging our natural resources. But the ability of individuals and businesses to trade across provincial boundaries is perhaps the lowest-hanging fruit of them all.
This isn’t news to avid readers of The Hub. Recent articles from Ryan Manucha, Fen Osler Hampson and Tim Sargent, Brenda Frank and Etienne Rainville, and others have made this very point.
At a time of deglobalization and uncertainty abroad, improving our internal market—which accounts for one-fifth of Canada’s economy, or over $520 billion per year—could boost the economy and hedge our risks. And there’s room to grow.
Currently, internal trade is only about half the volume of international trade. However, prior to the significant international deals over the past four decades, internal and international trade were roughly equal, each accounting for about one-quarter of our economy.
Unfortunately, improving internal trade is difficult. The federal government is limited, courts will not touch it, and provinces mostly rule.
Different rules, regulations, standards, certifications, and so on are what hinder internal trade, not tariffs as they do between countries. A province, for example, may have different safety standards than another. This unnecessarily hinders growth by raising costs for businesses and individuals moving, shipping, or operating across Canada.
This is where Ontario has a chance to lead and move the ball forward.
Ontario can lead
Recently, Ontario adopted several modest improvements, including the temporary recognition of professional credentials for certain health professions, which allows people to work while completing their registration with the Ontario regulatory body. If your training and skills are sufficient elsewhere in Canada, why not in Ontario? While this seems like an obvious statement, most provinces maintain a fragmented economy by default. Perhaps not deliberately, but instead because of benign neglect.
Agreements between provinces to tear down these barriers (however slow and imperfect they are) can help nudge us towards improvements.
Started in 2010, an agreement known as the New West Partnership Trade Agreement seeks to facilitate cross-border business for buyers, sellers, investors, and workers.
Articles 4 and 5 summarize the agreement’s intent. Participating provinces must give all goods, people, services, and investors “treatment no less favourable than the best treatment it accords to its own.” Provinces must also “mutually recognize or otherwise reconcile their existing standards and regulations that operate to restrict or impair trade, investment, or labour mobility.”
While much depends on the willingness of provinces to act, the agreement provides an important push and has measurably lowered trade costs.
In work published in 2019 for the IMF, Jorge Alvarez, Ivo Krznar, and I estimated that this agreement lowered the overall cost of interprovincial trade by approximately 2.3 percent. This may seem small, but small changes add up quickly.
Big economic benefits
I use the latest methods and a detailed model of Canada’s economy to simulate how businesses, sectors, workers, and others would react to lower trade costs between Ontario and the four Western provinces.These methods are detailed in the IMF paper cited previously, although the model has expanded and improved significantly since then. The gains are large. Very large.
Assuming trade cost reductions only apply to goods, Ontario’s GDP could rise by $1.4 billion per year. The Ontario economy could grow by over $4.1 billion per year if these reductions apply to all goods and services.This is quite a bit larger than earlier estimates I put forward in 2019. The difference is due to Ontario’s now larger economy and to my using much more detailed trade and input/output flows than were available to me at the time. That added richness in the model amplifies the gains from trade. That boosts worker and business income—about $1,000 per family per year.
The government benefits too since a larger economy generates more income and tax revenue. Based on the provincial government’s recent budget estimates, the more than $4 billion in economic gains translate into an additional $420 million in revenues per year.
Of course, there would be some adjustment costs and possible regulatory changes to work through, but the gains to the province’s economy and the government’s bottom line could make it all worthwhile.
Broad gains across Canada
Ontario isn’t the only one to benefit either. Among existing New West Partnership members, I estimate B.C.’s economy could grow by $1.1 billion, Alberta’s by $1.4 billion, Saskatchewan’s by $400 million, and Manitoba’s by over $580 million. Collectively, that’s roughly $3.5 billion in additional benefits per year.
The potential economic benefits of joining the agreement are clear. Naturally, the agreement’s name must change. Perhaps the “Central-West Economic Partnership” (CWEP has a nice ring to it) or the “Canadian Growth and Trade Partnership”? A little more time with ChatGPT could surely figure something out.
Whatever it is called, it could boost internal trade, reduce regulatory burdens, and expand our economy for the benefit of consumers, workers, and businesses alike. It might even prompt other provinces to step up their game and ease barriers elsewhere.
In short, joining the agreement is an opportunity for Ontario to lead by example and promote a more unified and prosperous Canada.
Trevor Tombe is a professor of economics at the University of Calgary and a research fellow at The School of Public Policy.
