June 2001
The Forgotten Trade Agreement: Should We Care about Canada's Agreement on Internal Trade?
by Robert Knox
There wasn't the whiff of tear gas in the air nor fences to protect the delegates at a conference on Canada's internal trade in Toronto at the end of May. There should have been. The Agreement on Internal Trade is important to protect Canada from the threat that demonstrators in Quebec, Seattle, and elsewhere believe is represented by international trade and globalization. They should be demanding that Canada's political leaders pay attention.
Where were Canadian businesses and workers? They should have been at the barricades with the anti-free trade demonstrators demanding that the same political leaders ensure that there is a rules-based Canadian market to improve competitiveness, provide an efficient domestic market, and promote employment and business growth.
These are the things that Canada's Agreement on Internal Trade is intended to do.
Canada has an open economy and strong interprovincial trade links. We share a common currency, reasonably efficient east-west transportation, and an efficient and accessible communications system that has been enhanced in the last 10 years by new technology. But we don't have any enforceable trade rules and Canadian governments can and do use their legislative and regulatory powers to protect local interests and limit trade in their markets.
This is the problem.
International trade agreements are increasing access to international markets. Access to Canadian markets for Canadians is not necessarily getting better and no one seems to care.
Changing Canadian trade patterns
A Statistics Canada study of interprovincial and international trade in Canada between 1992 and 1998, published last year, shows how things are changing and how things are staying the same.
- Between 1992 and 1998, interprovincial trade increased at an average 4.7 percent.
- During the same period, international exports increased by a very strong average of 11.9 percent with imports growing at a slightly slower pace at 10.9 percent
- In 1992, interprovincial trade was $134 billion or 74 percent of international trade at $181 billion. In 1998, interprovincial trade was $177 billion or 50 percent of international trade.
- Exports grew from 26 percent of GDP in 1992 to almost 40 percent in 1998, while interprovincial trade kept pace with GDP at around 20 percent.
- International exports grew faster than domestic exports in all provinces except New Brunswick from 1992 to 1998.
- Ontario and Alberta were the only provinces to generate total trade surpluses and Ontario generated its surplus on the strength of its interprovincial trade. In fact, Ontario is the only province with an interprovincial trade surplus, and it ranged from $20 billion to $29 billion between 1992-98 with robust growth in services.
The country that trades together stays together
All this is good news for Canada's economy but, perversely, it may be bad news for Canada as a nation. In effect, Canada is much less interdependent now than it was 10 years ago.
Some provinces, notably Ontario, may now see their economic destiny to the south. They can be forgiven.
As John Ibbitson pointed out in a recent article in the Globe and Mail (Saturday, April 14, 2001), "most of the Ontario economy is now devoted to trade with the United States, and most of that is with the states in and around the Great Lakes." This trade relationship can only deepen as Ontario and the Northern Central states improve trade accessibility with one another. After all, New York and the Northern mid-Western states are a larger and more accessible market than the rest of Canada.
Still, Ontario should not take its almost $30 billion trade surplus with the rest of Canada (in 1998) for granted. Ontario should also remember that if its international trade in transportation equipment (mainly cars and auto parts) were excluded, its $5 billion trade surplus in 1998 would have been a $19 million deficit.
Ontario's international trade success and that of other provinces is based on the openness and stability of the Canadian market and on more open trade provided by NAFTA. If the Canadian market erodes or discourages domestic productivity, then our international competitive advantage will diminish.
Canadian governments must promote exports further, but they must not ignore or neglect the domestic market.
Pay attention to the Agreement on Internal Trade
International and interprovincial trade are not mutually exclusive and unrelated activities. An open, efficient, and stable domestic market is essential for:
- promoting the competitiveness and productivity of Canadian companies;
- growing small- and medium-sized domestic businesses into experienced traders; and
- strengthening links between provinces, businesses, and other institutions in Canada as a basis for improving economic performance.
A strong domestic Canadian market is the product of a lot of things: efficient transportation and communications, a highly trained and mobile work force, innovation and leading-edge research, and efficient capital markets. It also depends on stability and predictability and on government policies, regulations, and administrative practices that support and promote openness, accessibility, and competition and do not protect local businesses and workers, all of which require co-operation among all governments.
This what the Agreement on Internal Trade is supposed to do. But since the agreement came into force in 1995, it has been invisible. It does not work well in many respects, and Canadian governments have not used it to co-ordinate their efforts to make Canada's domestic market work better.
In fact, the agreement provides an opportunity for Canadian governments to co-operate to ensure that the nuts and bolts of the Canadian market are tight, and the cogs are lubricated and meshing. Better still, trade in Canada should be seamless with a minimum of intervention by governments.
That is what the Agreement on Internal Trade is intended to accomplish, but it hasn't. Why? Possibly the politicians and officials responsible for the Agreement do not see the importance of the domestic market to Canada's economy and political future. Perhaps they do not understand the potential of the Agreement. Or, possibly, Canadian governments believe that selectively protecting their local markets, businesses, and workers from other Canadians has nothing to do with their future economic growth and with national stability.
The fact is that if economic interdependence in Canada erodes, if markets in the United States become more accessible than the domestic market, and if the competitive advantage of being part of an efficient national economy is no longer apparent, then Canada and Canadians will lose. The Agreement on Internal Trade is intended to ensure that these things do not happen.
To the barricades!
Robert Knox is the principal of R.H. Knox & Associates. He provides advice on domestic trade to private sector clients and commentary on internal trade issues and the Agreement on Internal Trade. From 1986 he was the senior official responsible for internal trade policy in Industry Canada, particularly eliminating barriers to interprovincial trade. He was the federal co-chair of the federal/provincial committee of officials responsible for resolving interprovincial trade issues from 1986 to 1992. In 1993 he was appointed Executive Director of the Internal Trade Secretariat and managed the negotiation of the Agreement on Internal Trade that came into force in July 1995. He retired from the federal public service in 1996.
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