It’s time to tear down some internal walls that have been holding Canada’s economy back.
American President Donald Trump has paused his 25% tariff threat on Canadian goods entering the United States for 30 days. But the threat remains. And it is an existential one to Canada’s economy.
About 77% of our exports go to our neighbours to the south.
A 25% tariff from the United States could trigger a recession in Canada double the magnitude of the recession Canada experienced during the pandemic, according to RBC. In this scenario, gross domestic product would contract by at least 3.2%.
Canada would be “hit with its largest trade shock in nearly 100 years,” said the bank in a statement.
There could also be a prolonged recession and a spike in unemployment should Trump’s tariffs be put in place for any significant length in time, according to TD Bank.
Canada’s economy could be in for a very bumpy ride. Whether these tariffs are implemented or not, a clear response is needed.
Given our dependence on the U.S. market, what can Canada do to respond to this unprecedented economic challenge?
A good start would be tearing down Canada’s internal trade barriers, which cost the Canadian economy tens of billions of dollars every year.
The reality is that it is cheaper and easier for Canada’s provinces to trade with the United States than with each other.
How could this be the case?
Canada’s provinces impose a series of regulations that limit the services, goods and labour that can move across Canada’s provincial borders.
Internal trade barriers in Canada represent a tariff equivalent of 21%, according to the International Monetary Fund.
Meanwhile, the average tariff for Canadian goods and services to access the U.S. market is roughly 3%.
That means Canada’s internal trade barriers are several times more impactful than the average U.S. tariff on Canadian goods.
How much do Canada’s internal trade barriers cost Canadians?
Canada’s economy is losing $200 billion every year because of internal trade barriers, according to the CFIB.
Economist Trever Tombe estimates that Canada’s GDP is 3.2 to 7.3% smaller than it would be if Canada’s internal trade barriers were to go the way of the dodo bird.
In other words, if internal trade barriers in Canada were gone tomorrow, the positive impact of eliminating internal trade barriers would outweigh the impact of Trump’s threatened tariffs.
Internal Trade Minister Anita Anand also estimates eliminating internal trade barriers could lower prices by up to 15%.
When free trade agreements are negotiated, countries usually produce a short list of products or services that are exempt from the agreement. When it comes to free trade within Canada, there are more than 400 carve-outs, meaning more than 400 goods or service areas that are not subject to free trade.
With more than 400 carve-outs presently on the books, Canada’s current internal trade regime is anything but free or fair. It is outdated and protectionist.
Several of Canada’s premiers have said that tearing down internal trade barriers is necessary for Canada to respond to the negative economic effects of U.S. tariffs.
Nova Scotia’s Tim Houston, for example, declared last week that it’s time to find “new markets here at home.”
Ontario’s Doug Ford says after years of inaction, “Enough’s enough.”
They’re right.
But politicians need to do more than talk. Canada’s premiers should lay out a plan to negotiate a new internal free trade agreement that truly breaks down trade barriers between provinces and ends the old approach of applying hundreds of protectionist carve-outs.
Premiers should meet urgently and get a deal done as quickly as possible.
Canada’s economy will take a major hit from U.S. tariffs if they come to pass. To stave off a major recession and make
Canada a more perfect union, it’s high time for Canada’s internal trade barriers to come down.
Jay Goldberg is Ontario director of the Canadian Taxpayers Federation