Marc’s testimony to the Senate

Both Erin Weir and I gave testimony to the Senate Committee on Banking, Trade and Commerce in the past 24 hours, and I think we made an impression by challenging their assumptions about “interprovincial trade barriers” and bogus “solutions” like TILMA. My testimony follows:

Presentation to the Senate Committee on Banking, Trade and Commerce
By Marc Lee, Senior Economist
Canadian Centre for Policy Alternatives, BC Office
May 17, 2007

I would like to thank Senator Grafstein and members of the Committee for inviting me to testify before you today.

Almost everyone agrees that interprovincial barriers to trade are astonishingly large, undermine our productivity performance, and prevent Canada from being a true economic union. Everyone, that is, except economists who have studied the issue.

I would like to provide a reality check for the Committee because none of those assertions are substantiated by the available economic evidence. At the broadest level of abstraction we find substantial rhetoric about barriers based on the logic of free trade. There are also some anecdotes, though not too many. Reviewing testimony before the Committee, I counted very few barriers. In between the rhetoric and the anecdotes, there are not data one can really point to that could be considered persuasive evidence that there is a fundamental problem.

A couple of reports, that in my opinion have been discredited, suggest barriers are costly. A 1991 report by the Canadian Manufacturers’ Association argued that barriers cost 1% of Canada’s GDP. However, the CMA made only a crude estimate of some costs, without considering any of the benefits of existing policies. More than three-quarters of the CMA estimate stemmed from government procurement policies, based on the assumption that liberalization would reduce procurement costs. In only one area did the CMA cite a classic barrier to trade: restrictions on alcoholic beverages. In both of these areas the vast majority of gains have already be reaped through the AIT.

More recently, the Conference Board of Canada claimed in a report for the BC government that the TILMA would add 3.8% to BC’s GDP. This report is deeply flawed. It made no attempt to list or estimate the cost of barriers. Upon close examination, the Conference Board essentially made up its numbers after looking at a small sample of results from a survey of business organizations and government ministries. Its estimate was doubled through a simple arithmetic error.

The best available economic evidence suggests that any barriers to trade in Canada are miniscule. Over 20 years ago, the MacDonald Commission, based on a study by John Whalley and Irene Trela, found that barriers amounted to about one-twentieth of one percent of Canada’s GDP. Since then Agreement on Internal Trade has reduced that number even further.

While this evidence is now quite dated, the finding that interprovincial barriers must be incredibly small is corroborated by research pioneered by UBC economist John Helliwell and former Cabinet Minister John McCallum that Canadian provinces are much more likely to trade with each other than with US states, after adjusting for population size and distance to market. That number has fallen in recent years but still amounts to a factor of 12 for goods and 30 for services. That is, Ontario and BC trade goods with each other 12 times more than Ontario trades with California.

In recent years, the data tell us that interprovincial trade has grown faster than international trade. Between 2000 and 2005, interprovincial trade grew by 25%, compared to 9% for international imports and 6% for international exports. Thus there is no prima facie evidence that Canada is suffering from internal trade barriers.

That said, I do not mean to suggest that in those isolated cases where barriers exist, we should not act to ameliorate the situation. As long as we do not compromise the public interest – whether protecting the environment, ensuring decent labour standards or adequate consumer protection – this need not be controversial. But we should not falsely convince ourselves that this is a magic bullet to solve our productivity problems.

Moving forward, we also need to be clearer in our use of language. This issue is incorrectly framed as “barriers to trade”, when really we are talking about differences in provincial regulation due to the federal nature of our government, different business registration and reporting requirements, and differences in professional certification standards. The work of this Committee would best serve the public interest if it were to clearly outline specific problems, and leave the rhetoric at the door.

This Senate committee, with the resources at its disposal, could add greatly to the debate on interprovincial barriers by developing a list of top ten or twenty irritants in interprovincial commerce, vetting those to make sure they do not violate any public interest concerns, and to press for action, using federal constitutional powers to resolve the issue if necessary. This would be a better approach that seeking sweeping legalistic approaches like the BC-Alberta TILMA.

I would caution the committee to distinguish between bona fide barriers to commerce, and constitutional differences related to federalism. There are regulatory differences among the provinces, but by and large these are not trade barriers per se, though they may pose some costs to business. Our constitution gave provinces the ability to make regulations based on their local needs, so any attempts to harmonize regulations must consider the loss of local decision-making as a cost netted out of any benefit arising from harmonization.

That said, the changing nature of the Canadian economy and its trade and investment relationships with the US and others may require new approaches that would upload some responsibilities to the federal government in order to create national standards and regulatory frameworks. If so, these should aim, where possible, for a high standard, and avoid lowest common denominator approaches, such as mutual recognition.

Finally, I would like to make a few comments about TILMA. In light of the evidence on trade barriers, at best TILMA is a gimmick. But the Agreement contains some very broad language that may prove problematic with the passage of time. It is a “top-down” agreement, so that everything is in unless specifically exempted, which means governments must anticipate the full legal jeopardy of what is in and what is not.

TILMA enshrines investor rights to challenge public interest regulation which I believe will cause problems by having trade panels second-guess democratic decision-making. Moreover the presence of such language creates a chill over the creation of new regulation. My organization published a study looking at the public interest regulation that are exposed by the TILMA and found many areas are exposed, including most areas of municipal planning, environmental regulations and efforts to restrict private health care.

Whether they will be challenged, and whether those challenges succeed, remains to be seen. But it is of concern that decisions on interpretation will be made by trade panels outside the domestic legal system, not by the architects or proponents of TILMA. In the domestic courts, there is transparency and clear rights of appeal, something that is not the case in commercial arbitration panels, where secrecy is the norm.

In sum, the TILMA is a solution in search of a problem.

Thanks again to the Committee. I hope I have challenged some of your assumptions and clarified the real issues moving forward. I would happy to answer any questions.