The C. D. Howe Institute on TILMA

Yesterday, the C. D. Howe Institute released a Backgrounder supporting TILMA by Kathleen Macmillan and Patrick Grady. They make the most sensible case for the deal that I have read, but give short shrift to its pitfalls.

They previously co-authored papers on internal trade and labour mobility for a federal conference that I attended. Days after this conference, Grady largely endorsed Marc’s and my critique of the Conference Board’s estimates of benefits from TILMA. The Backgrounder acknowledges that, since internal barriers cost very little, the potential benefit of eliminating them is correspondingly small:

The general perception is that interprovincial trade barriers cause businesses significant harm (COMPAS 2004). Empirical studies conducted during the 1980s and 1990s found, however, that these barriers impose only a small cost on the overall economy and that removing them would increase Canada’s gross domestic product by less than 0.5 percent. Indeed, since many of the barriers these studies examined – notably preferential procurement measures – have been substantially reduced over the past 10 years, earlier economic research probably overstates the cost of internal trade impediments. Yet the absence of hard economic evidence has not stopped international bodies such as the Organisation for Economic Co-operation and Development (2007) and the International Monetary Fund (2007) from singling out interprovincial trade barriers as a major factor explaining Canada’s relatively poor productivity performance. The perception, legitimate or not, that Canada is rife with internal impediments affects the way international investors regard the country. Internal trade barriers may be small but they create a big impression about Canada’s commitment to international competitiveness and multilateral trade liberalization.

The case for reducing or removing barriers should not require exaggerated estimates of their cost. The existing barriers have long been a sore point with Canadian businesses and with individuals who have encountered them when seeking work in other provinces and territories. Subject to some limitations, section 6 of the Charter of Rights and Freedoms already guarantees the mobility rights of Canadians. The right to work and do business anywhere in Canada as common economic citizens should be all the justification that is required to eliminate remaining barriers to trade and mobility.

The sources footnoted in support of this section provide estimates around 0.05%, which is quite a bit “less than 0.5 percent.” One should not assume that internal barriers cost anywhere near 0.5% of GDP.

Macmillan made the same point about international perceptions at Saskatchewan’s public hearings. However, it seems to me that TILMA validates and reinforces the incorrect view that Canada is hobbled by interprovincial trade barriers. Surely, a better approach would be for experts like Macmillan and Grady – and organizations like the C. D. Howe Institute – to present the empirical evidence to the OECD and IMF in order to dispel the myth of interprovincial trade barriers.

The general notion that Canadians should be able to work and do business in any province or territory would be a sufficient reason to remove alleged barriers if doing so were costless and risk-free. However, TILMA entails significant costs and risks, which Grady and Macmillian do not explore beyond the following paragraph:

The TILMA’s approach to dispute settlement has received a great deal of attention, both favourable and unfavourable. Its critics maintain that it undermines the ability of governments to legislate and regulate as they wish (Weir and Lee 2007). Its defenders argue that it addresses only measures that restrict trade in a manner inconsistent with the TILMA and that it enshrines the principle of “national treatment,” which does not require that rules be the same across provinces and territories but only that suppliers located elsewhere in Canada be treated no less favourably than domestic suppliers when doing business in a province or territory.

While I appreciate the citation, what’s missing is an attempt to weigh TILMA’s potentially large negative consequences against the potential economic benefits, which the authors acknowledge to be quite small. Regarding Saskatchewan, the Backgrounder explains, “after public hearings that focused considerable attention on the TILMA’s subsidy provision (Saskatchewan 2007), the province has decided not to sign on.” Although a desire to maintain business subsidies may have motivated the Saskatchewan Party’s ultimate rejection of TILMA, most of the opposition centred on more fundamental issues such as the undemocratic dispute-resolution process. Macmillan and Grady do not mention the extent to which municipalities across Canada oppose TILMA based on the legal opinions of city solicitors. In addition to overlooking many legitimate concerns about the deal, the authors overlook several possible alternatives to it:

Among the most-cited barriers are those pertaining to trucking weights, dimensions, and licensing requirements, financial services, and construction safety. The AIT [Agreement on Internal Trade] has made some progress in reconciling regulatory barriers but has been overwhelmed by the sheer number of measures involved. The agreement’s bottom-up approach, which involves negotiating on a case-by-case basis, has not been a good model for achieving major breakthroughs. The regulatory agenda is broader than just interprovincial trade barriers, however, and it is quite possible that much of what businesses consider to be barriers are simply cases of excess regulation. In fact, there are very few remaining provincial or territorial measures explicitly designed with protectionist intent.

Most are annoying regulatory differences and redundancies that could be easily eliminated if the will to cooperate existed. For example, both British Columbia and Alberta require oilfield operations to have first-aid kits on hand, but at one time the two provinces had different requirements for what the kits should contain, necessitating two separate kits for teams operating across the provincial boundary. Once presented with this annoyance, officials from the two provinces quickly came to a common understanding.

In rejecting the AIT’s “bottom-up approach”, the Backgrounder implies that a top-down approach is needed. However, if the issue is “excess regulation,” much of which has little to do with interprovincial trade, why is an agreement that purports to be about trade the solution? If democratic governments choose to deregulate, they should do so transparently rather than by pretending to remove internal trade barriers.

The story about first-aid kits speaks to inter-provincial mobility, but also illustrates that the bottom-up approach worked well. I do not understand how a TILMA-like agreement could have solved this problem, other than perhaps by allowing employers in all provinces to adhere only to the weakest first-aid standards maintained by any province.

Macmillan and Grady also discuss the problem of multiple securities regulators, which TILMA would not solve. Indeed, Alberta’s Premier recently promoted TILMA and rejected a national securities regulator in the same speech.

The Backgrounder outlines a few bonafide trade barriers in agriculture and food, including (of course) Quebec margarine. However, the inefficiencies of supply management mainly result from international barriers as opposed to interprovincial barriers. These inefficiencies must be weighed against the system’s benefits, which prompted the Conservative government to affirm its support for supply management in last week’s throne speech. If governments instead choose to remove internal barriers for agriculture and food, they may do so directly or by joining five provinces and the Yukon in signing the Interim Agreement on Internal Trade in Agriculture and Food Goods. Again, it is not clear why TILMA is needed.