It’s time to pay the provinces to embrace interprovincial free trade, says Scotia Economics in a new report.
The persistence of trade barriers between provinces reduces Canadians’ standard of living and prevents the country from reaching its economic potential, the report said.
“There is broad acknowledgement of this own-goal,” it noted. “Several studies have pointed to large economic gains from reducing barriers to interprovincial trade.”
Yet, the gains that could be achieved from dismantling these barriers have proven elusive, as the provinces have been “reluctant to pursue further measures,” it noted.
This reluctance stems from the fundamental difficulty of coordinating action among the provinces and between the provincial and federal governments, the report suggested.
To address this challenge, the report recommends incentivizing improved cooperation with upfront payments.
“The federal government should provide substantial financial inducements for provinces to eliminate trade barriers,” it said.
The report envisions that these incentives for the provinces would be financed by the increased federal revenues generated by growth arising from freer interprovincial trade — a projected $15 billion.
“Our proposal is to transfer all these revenues to provinces through an allocation mechanism linked to either population or economic size,” it said.
The report acknowledges it would take time for the economic gains to materialize, so payments to the provinces would not be neutral to federal finances at the start. “But we consider an upfront payment necessary to overcome the political challenges to further liberalization at the provincial level,” it said. “This would effectively be an investment in Canada.”
As an ultimately self-financing initiative, making that investment simply requires political courage, the report argued.
“The proposal advanced here to lower barriers to interprovincial trade would raise output and generate revenues needed to address the long-term challenges Canada faces,” it concluded. “Because it is based on the sharing of the dividends of higher growth, the scheme does not require lengthy and divisive negotiations between federal and provincial governments. The plan only requires political leadership.”