Interprovincial trade barriers are a longstanding problem. Perhaps Trump’s tariff threats will provide Canadian leaders the political will to tame them.
by Diya Jiang, Daniel Béland. Originally published on Policy Options
February 9, 2025
(Version française disponible ici)
Many have offered takes on how Canada can best emerge from the current economic spat with the United States after the erosion of trust caused by President Donald Trump’s aggressive tariff threats and untraditional negotiation tactics, which are nothing less than a form of bullying. This tension created urgent calls to diversify trade relations to reduce our deep economic dependency on our decreasingly reliable southern neighbour.
Interprovincial trade barriers have come under focus with politicians such as federal Conservative Leader Pierre Poilievre and Ontario Premier Doug Ford highlighting barrier reduction as a solution to ongoing U.S. tariff threats.
Those threats remain acute despite the 30-day tariff pause that Trump granted on February 3 after two phone calls with Prime Minister Justin Trudeau.
Analysts and commentators have pointed out that interprovincial trade barriers represent a self-imposed penalty in Canada’s quest for greater economic competitiveness and productivity. An IMF report published in 2019 estimated that such barriers add up to 14 per cent to the price of goods and services and decrease Canadians’ GDP per capita by about four per cent.
There is no denying the economic benefits of removing interprovincial trade barriers. Polls also suggest that Canadians largely support reducing them. The issue has long been on the federal government’s agenda, from the National Agreement on Internal Trade (AIT) in 1995 to the Canadian Free Trade Agreement (CFTA) in 2017, both of which targeted reducing internal trade barriers. So why hasn’t more been achieved?
Reducing internal trade barriers only sounds simple
While reducing internal trade barriers seems simple and logical from an economic perspective, it is much more difficult to achieve politically. As one of the most decentralized countries in the world, Canada is bound by the constitutionally and politically entrenched principle of provincial autonomy for their policy decisions. The structure makes it difficult to achieve standardized regulation on the internal trade front.
This decentralization helps maintain national unity and has the advantage of allowing provinces to tailor policies to local needs. Provinces can experiment in ways that can make them “policy laboratories.”
Still, there are potentially negative economic consequences of the country’s high level of uncoordinated decentralization, as many existing sector-specific barriers are strongly motivated by local interest groups that have lobbied their provincial government to preserve their narrow interests.
Other province-specific factors such as language can also contribute to different regulatory standards. For example, Quebec’s French labelling laws, while imposing costs for firms seeking to enter its market, reflect a popular desire to protect the French language, according to recent polls. In Quebec, this issue is closely related to a strong defence of provincial autonomy, which has led some commentators in the province to oppose internal trade reform. Still, it is clear to us that, while some internal trade barriers stem from legitimate public demands, others are grounded in the preservation of narrow local interests.
For example, alcohol sales, which received attention as part of retaliatory measures against the U.S., are subject to various layers of regulatory barriers within Canada. Different provincial tax codes for alcoholic beverages create a costly additional step for interprovincial sales. Moreover, provinces such as Ontario prohibit consumers from directly ordering from another Canadian province. Other sectors such as the dairy industry are intensively regulated, with strict quotas set for each province by the Canadian Dairy Commission. These barriers, which create economic externalities, reflect decades-long efforts from powerful alcohol and dairy lobbying groups.
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Overall, while the notion of reducing internal trade barriers might be attractive to most Canadians, the specific steps required to accomplish it are likely less popular. Interprovincial trade barriers are often highly technical. They’ve had little political salience recently, meaning they are relatively unknown to the majority of Canadians. This has made it difficult for politicians to campaign on the issue and to mobilize people to the cause effectively.
Increased talk about internal trade barriers in Canada’s media and political circles in recent weeks is a step in the right direction. Notably, both Conservative and Liberal politicians, including Liberal leadership hopefuls, have proposed barrier reduction as a straightforward way to alleviate the impact of any U.S. tariffs. Hopefully, this can help the issue gain new salience among a public that is largely favourable toward greater free trade within Canada. In turn, such politicization will make it harder for provinces to get away with prioritizing narrow industries over the broader national economic interests.
A challenge worth taking on
The current trade spat with the United States has rapidly become an issue of national pride and sovereignty and this reaction can also serve as a tool to engage the public in addressing interprovincial trade barriers. By framing the issue as one of economic unity and opportunity, leaders could channel public interest into constructive support to improve internal trade in Canada.
Because these internal trade barriers are grounded in provincial autonomy, which is particularly strong in Canada, the federal government cannot simply dismantle them. A long and potentially difficult intergovernmental negotiation is likely to be necessary to improve internal trade in Canada.
Jean Philippe Fournier, a former adviser to Quebec’s minister of finance, recently pointed out on social media that “provinces will have to reduce their autonomy on some things.
“Are we ready to have that discussion?” he asked. “Will provinces agree when push comes to shove and their back is against the wall with lobbyists breathing down their necks? Historically the answer has been a resounding and hard No.”
But history does not always repeat itself. The ongoing trade tensions with the United States constitute an existential threat that should mobilize the public and motivate officials at all levels of government to work together to improve internal trade and reduce – even by a little – our excessive economic dependency on our increasingly unreliable southern neighbour.
The authors thank Trevor Tombe for his comments and suggestions.
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This article first appeared on Policy Options and is republished here under a Creative Commons license.