## wpiea2019158

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---

### Introduction and scope
- NTBs cited as an important factor behind Canada’s lagging productivity growth2.
- NTBs include measures such as “dairy quotas to trucking requirements, from business registration to professional licensing” that arise from different regulations across provinces3.
- NTBs hinder labor mobility, limit choice for consumers, fragment markets, stifle competition, and limit the effective scale of production thereby lowering productivity growth4.
- Survey evidence: the 2011 Survey on Financing and Growth of Small and Medium Enterprises suggests only 3.5 percent of firms that do not trade across provincial borders are exporters.
- Paper scope:
  - Assesses the collective cost of internal trade barriers and proposes policies to enhance internal trade6.
  - Two-stage analysis (methodology detailed in the paper).

### Categories of internal trade barriers
- Four categories (Canadian Federation of Independent Business, 2014):
  - Natural barriers: geographical characteristics such as distance and border configuration.
  - “Prohibitive” barriers: provincial and territorial laws that unintentionally prohibit internal trade (example: restrictions on the sale of alcoholic beverages to customers in other provinces5).
  - Technical barriers: sector-specific regulations that differ across provinces and territories (example: vehicle weight and dimension standards).
  - Regulatory and administrative barriers: provincial and territorial permits, licensing, and other paperwork requirements (examples: business registry regulation; technical standards and safety certification).
- Areas frequently affected: labor mobility, business regulation, transportation, markets for drugs, agricultural products, food and alcohol products, and government procurement (until recently).

### Methodology for measuring internal trade barriers
- Indirect approach using trade flows and the Head-Ries index; direct measurement of NTBs infeasible.
- Head-Ries index computed for each sector j and pair of regions n and i using bilateral import shares.
- Decomposition:
  - Geographic component: population-weighted distances and contiguity (border) effects.
  - Residual non-geographic component: interpreted as policy-relevant NTBs.
- Regression specification:
  - ln(τ̅_{ni,t}^j) = α1_j Distance_{ni} + α2_j Neighbor_{ni} + β1_j Intra_{ni,t} + β1_j Inter_{ni,t} + γ_{n,t}^j + η_{i,t}^j + ε_{ni,t}^j.
  - Non-geographic component: ln(τ̅_{ni,t}^{j,NG})̂ ≡ ln(τ̅_{ni,t}^j) − (α1_ĵ Distance_{ni} + α2_ĵ Neighbor_{ni}).
- Sample and data:
  - 12 Canadian provinces and territories (Northwest Territories and Nunavut merged), the U.S., and the Rest of the World, years 1997–2015.
  - Reclassified into 18 goods and services sectors. International service flows only available 2010–2015.
- Elasticities and parameters:
  - Goods elasticities from Caliendo and Parro (2015).
  - Service elasticity set to 5 (Costinot and Rodriguez-Clare (2014)).
  - Income-elasticity of migration κ set to 1.5 (Tombe and Winter (2018)).

### Key empirical estimates of trade barriers and geography
- Geography accounts for 57 percent of total trading barriers across all regions and trading routes.
- Distance effects:
  - An extra 1,000 km is associated with a trading barrier increase of around 3-13 percent for agricultural, food, and most manufacturing goods.
  - Distance effects highest for utilities and retail trade services and lowest for petroleum, chemicals and mining.
- Neighbor (border) effects:
  - Bordering a trading partner associated with a barrier reduction of 4-30 percent, largest in agriculture and food products, metals, electrical machinery, textiles, and other manufacturing.
- Average (trade-weighted) non-geographic tariff-equivalent of NTBs in 2015: 21 percent.
  - Sector ranges in 2015 (non-geographic barriers):
    - 7 percent for textiles, petroleum and chemicals.
    - Over 27 percent for heavier metals, food products and other manufacturing.
    - Significantly higher for services.
- Aggregate trends 1997→2015 (trade-weighted, domestic-only):
  - Goods: non-geographic barriers declined from 23 percent (1997) to 19 percent (2015).
  - Services: non-geographic barriers declined from 51 percent (1997) to 47 percent (2015).
- Provincial variation (trade-weighted averages, domestic-only, 2015):
  - Lowest trade-weighted average cost of NTBs in 2015: Ontario and Quebec.
  - Highest average cost: Prince Edward Island, Newfoundland and Labrador, Nova Scotia, Yukon.
- Table excerpts (exact figures preserved):
  - Canada (1997): Trade barrier 51.8; Geography 17.5; Non-Geography 34.4.
  - Canada (2015): Trade barrier 55.1; Geography 20.3; Non-Geography 34.8.
  - Change 1997-2015: Trade barrier +3.2; Non-Geography +0.4.

### Evidence on regional agreements and integration
- Dummy-variable regressions (goods only) show statistically significant reductions in trade barriers for routes affected by:
  - 2007 TILMA (Alberta–British Columbia),
  - 2009 New Brunswick–Quebec agreement,
  - 2010 PARE (NB–NS),
  - 2010 TCA (Ontario–Quebec),
  - 2011 NWPTA (Alberta, British Columbia, Saskatchewan; Manitoba joined 2017 but sample ends 2015).
- Estimated average reduction in trade barriers associated with these agreements: between 1 and 4 percent (trade-weighted regressions).
- Trade growth decomposition: growth after agreements largely driven by declines in measured bilateral trade barriers rather than by growth in local production or multilateral resistance changes.

### Quantitative counterfactuals and gains from trade
- Counterfactual 1: observed trade vs autarky (2015 equilibrium comparisons):
  - Internal trade increases national real GDP by over 5 percent.
  - External trade increases national real GDP by nearly 11 percent.
  - Trade overall increases national real GDP by nearly 20 percent.
  - Canada (table values): Internal 5.1; External 10.9; All Trade 19.6 (Real GDP Per Capita percentage changes).
  - Trade lowers variance of real GDP per worker by 22 percent compared to autarky.
- Counterfactual 2: complete removal of measured non-geographic internal trade costs for goods (upper bound, goods sectors only):
  - Removing non-geographic internal trade costs increases internal trade volumes as a share of GDP by roughly 15 percentage points.
  - National real GDP per capita increases by 3.8 percent (Internal column, Table 7).
  - Canada (Table 7): Internal 3.8; External 6.2; All Trade 9.1 (Real GDP Per Capita percentage changes).
  - Provincial gains (select examples, Internal column, Table 7):
    - Prince Edward Island: 16.2 percent real GDP per capita increase.
    - Newfoundland and Labrador: 12.8 percent.
    - Atlantic provinces overall: real GDP per worker increases by about 8 percent.
  - Employment reallocation:
    - Migration responses shift employment toward provinces with larger productivity gains (e.g., Atlantic provinces).
    - Aggregate migration induced by reducing internal non-geographic barriers represents 0.8 percent of total Canadian employment.
    - Table 7 examples, Employment (Internal):
      - Prince Edward Island: employment +18.4 percent.
      - Newfoundland and Labrador: employment +13.3 percent.
- Sector-level simulation (reducing measured internal trade costs by 10 percent, one sector at a time):
  - Largest national real GDP gains from liberalizing: finance, computers, and business services; wholesale and retail activities; transport and warehousing.
  - Gains larger for sectors that are important suppliers of intermediate inputs (high forward linkages); sectoral input-output multipliers matter.

### Policy discussion, constitutional constraints, and institutional design
- Constitutional and legal context:
  - Section 90 (federal power to reserve or disallow new provincial legislation), Section 91(2) (federal control over “trade and commerce”), and Section 121 (goods admitted freely across provinces) are cited.
  - Provincial powers under Section 92(13) (“property and civil rights”) constrain federal unilateral action.
  - Supreme Court cases:
    - 2011: proposed 2010 Canadian Securities Act deemed not valid under federal trade and commerce powers.
    - 2018: R. v. Comeau found New Brunswick within rights to impose fines on transport of alcoholic beverages into the province; Section 121 interpreted historically.
  - Federal disallowance/reservation powers largely dormant (not invoked since 1961) and limited in scope (only within first year of provincial law).
- Practical implication:
  - Political, cooperative solutions across federal, provincial and territorial governments are the most viable path to liberalize internal trade.
  - CFTA (Canadian Free Trade Agreement, 2017) replaced AIT with a negative list approach, improved procurement coverage, dispute resolution, and promoted regulatory cooperation via the Regulatory Reconciliation and Cooperation Table (RCT).
- From AIT to CFTA:
  - AIT (1995): positive list, narrow scope; amended in 2015 to include enforceable dispute resolution with monetary penalties.
  - CFTA (signed July 1, 2017): negative list approach; RCT to eliminate duplicate/inconsistent regulations; strengthened dispute settlement; exceptions list exceeds 135 pages.
  - Remaining CFTA challenges: lengthy exceptions, administratively burdensome RCT process, provinces can opt out, limited progress on labor mobility and professional accreditation, Internal Trade Secretariat insufficiently resourced.
- Lessons from other federations:
  - Australia: mutual recognition (1993), single consumer protection law (2010), Productivity Commission (1997), courts invalidating internal trade barriers.
  - European Union: Treaty of Rome prohibitions, directives, Mutual Recognition Regulation (2008), Commission oversight of national legislation.
  - Direct translation to Canada limited by constitutional and judicial differences.

### Recent actions and timeline (examples)
- Regulatory/reform actions: occupational health and safety, transport regulation, licensing in agriculture, corporate registry reforms, addressing personal use exemption limits for alcohol.
- Jurisdictions eliminating personal import limits: Manitoba, Alberta, Saskatchewan, Nova Scotia, Prince Edward Island.
- Regulatory/standards developments:
  - January 2019: Safe Food for Canadians Regulations came into effect.
  - April 2019: National Building Codes made available for free online.
  - Five reconciliation agreements completed.
  - Agreement in principle to allow wide-base single tires at weight parity with conventional dual tires on all major trade routes in Canada by the end of 2019.
  - Common standards agreed for first aid kits, head protection, eye and face protection, hearing protection, foot protection, and personal floatation devices and life jackets.
  - Multi-jurisdictional registry access system (MRAS) expected to be in operation by 2020.

### Policy recommendations to deepen internal trade liberalization
- Clearly identify NTBs and assess progress at regular intervals.
- Set explicit targets for reducing the number of exemptions in the CFTA in future negotiations.
- Make regulatory reconciliation more effective:
  - Address administrative burdens and protracted negotiations.
  - Reduce ease of provincial opt-outs.
  - Adopt a “comply or explain” approach to ensure accountability and accelerate harmonization.
- Resource the Secretariat sufficiently (budget and full-time employees) to assess and communicate progress, publish an annual report, and assume responsibilities of ad hoc committees and working groups.
- Calibrate penalties for non-compliance to better distinguish large barriers from small; current penalties “still do not fully reflect the magnitude of the economic impact.”
- Recognize unilateral provincial action via a “national recognition” regime where a province deems another province’s certification as compliant even if not reciprocated.

### Data description (Appendix I)
- Sample: all Canadian provinces and territories, the United States and the rest of the world (ROW).
- 18 sectors: 9 goods sectors and 9 service sectors.
- Trade data sources:
  - Bilateral interprovincial trade: Statistics Canada tables 12-10-0085-01 (1992-1996), 12-10-0086-01 (1997-2006), 12-10-0088-01 (2007-2015).
  - Merchandise trade between US and Canadian provinces: Statistics Canada table 12-10-0099-01.
  - Service trade between US and Canadian provinces: provided by Statistics Canada.
  - Trade with ROW: derived by subtracting US trade flow from total international trade flow.
  - Trade between US and ROW: USA Trade Online.
- Production data:
  - Provincial production: Statistics Canada tables 12-10-0086-01, 12-10-0088-01, 12-10-0085-01.
  - US and ROW production: Eora’s world input-output tables (harmonized 26-sector classification).
- Expenditure data: provincial expenditure from Statistics Canada tables; US and ROW expenditure calculated by adding international imports and subtracting international exports from gross output.
- Distance data:
  - Population-weighted centroids using Global Rural-Urban Mapping Project (Version 1) Settlement Points (year 2000).
  - Orthodromic distances calculated between population-weighted points.
  - Note: measure does not reflect differences in transportation costs per kilometer (e.g., territories costlier; Rocky Mountains more costly).
- Detailed sectoral classification mapping provided with exact code mappings for 18 categories (examples preserved in the source).

### Robustness to alternative elasticities (Appendix II)
- Baseline trade-cost elasticities from Caliendo and Parro (2015); alternative reference Bemrose et al. (2017) aggregate elasticity 휃=6.4.
- Robustness exercise: alternative 휃 values from 4 to 8.
- Analytical finding:
  - Lower elasticities produce larger gains from trade liberalization.
  - If goods-sector elasticities are uniform 휃=8, aggregate welfare gains from lowering internal trade costs are 3.2 percent.
  - Baseline results suggest gains of 3.8 percent.
  - For 휃=4, aggregate gains exceed 7.3 percent.
  - Authors conclude baseline results are conservative.
- Table 1 — Gains from Eliminating Non-Geographic Internal Barriers for Goods, 2015 (exact region-level results preserved):
  - AB
    - Real GDP Per Capita: 6.0, 3.8, 2.8
    - Employment: -2.1, -1.3, -0.8
  - BC
    - Real GDP Per Capita: 6.0, 3.8, 2.7
    - Employment: -2.1, -1.4, -0.9
  - MB
    - Real GDP Per Capita: 13.0, 8.3, 5.9
    - Employment: 7.7, 5.3, 3.8
  - NB
    - Real GDP Per Capita: 10.9, 6.9, 4.9
    - Employment: 4.7, 3.2, 2.3
  - NL
    - Real GDP Per Capita: 20.7, 13.2, 9.0
    - Employment: 19.0, 12.4, 8.3
  - NS
    - Real GDP Per Capita: 10.8, 6.8, 4.7
    - Employment: 4.6, 3.1, 1.9
  - NT & NU
    - Real GDP Per Capita: 12.7, 8.1, 5.6
    - Employment: 7.4, 4.9, 3.3
  - ON
    - Real GDP Per Capita: 5.9, 3.6, 2.6
    - Employment: -2.3, -1.6, -1.1
  - PE
    - Real GDP Per Capita: 27.4, 17.8, 12.2
    - Employment: 29.0, 19.3, 13.2
  - QC
    - Real GDP Per Capita: 8.9, 5.6, 3.9
    - Employment: 1.9, 1.3, 0.8
  - SK
    - Real GDP Per Capita: 9.8, 6.2, 4.3
    - Employment: 3.2, 2.1, 1.4
  - YT
    - Real GDP Per Capita: 13.0, 8.2, 5.8
    - Employment: 7.8, 5.1, 3.6
  - Aggregate Canada:
    - Real GDP Per Capita: 7.3, 4.6, 3.2
    - Employment: not reported as an aggregate in the table.
  - Table source: Staff calculations.

### Conclusion (key takeaways)
- Measured average non-geographic trade barrier about 20-21 percent with substantial sectoral and provincial variation.
- Complete removal of measured non-geographic internal trade costs for goods (upper bound) yields meaningful national and regional gains:
  - National real GDP per capita increases in the range reported (e.g., 3.8 percent in goods-only upper-bound scenario).
  - Large proportional gains for Atlantic provinces and smaller relative gains for larger provinces (e.g., ON, BC, AB).
- Policy path: sustained cooperative federalism (CFTA enhancements, empowered Secretariat, targeted removal of exemptions, improved RCT processes, calibrated penalties, and national recognition regimes) is the most viable avenue to deepen internal trade liberalization and realize the quantified gains.

*Source: wpiea2019158 - References .............................................................................................................*

### References .............................................................................................................

### wpiea2019158 - References .............................................................................................................

### Introduction
- Non-tariff internal trade barriers (NTBs) are often cited as an important factor behind Canada’s lagging productivity growth2.
- NTBs include a range of measures—“dairy quotas to trucking requirements, from business registration to professional licensing”—that arise from different regulations across provinces3 due to the division of powers between federal and provincial authorities.
- NTBs hinder labor mobility, limit choice for consumers, fragment markets, stifle competition, and limit the effective scale of production thereby lowering productivity growth4.
- Survey evidence: the 2011 Survey on Financing and Growth of Small and Medium Enterprises suggests that SME firms that trade across provincial borders are more export oriented, more growth oriented, better educated and innovative; only 3.5 percent of firms that do not trade across provincial borders are exporters.

### Categories of internal trade barriers
- Four categories of internal trade barriers in Canada (Canadian Federation of Independent Business, 2014):
  - Natural barriers: geographical characteristics such as distance and border configuration.
  - “Prohibitive” barriers: provincial and territorial laws that unintentionally prohibit internal trade (example: restrictions on the sale of alcoholic beverages to customers in other provinces5).
  - Technical barriers: sector-specific regulations that differ across provinces and territories (example: vehicle weight and dimension standards).
  - Regulatory and administrative barriers: provincial and territorial permits, licensing, and other paperwork requirements for businesses operating in multiple provinces/territories (examples: business registry regulation; technical standards and safety certification).
- Areas frequently cited as mostly affected by trade barriers: labor mobility, business regulation, transportation, markets for drugs, agricultural products, food and alcohol products, and until recently, government procurement (Beckman and others, 2006).

### Macroeconomic effects and evidence
- The collection of regulatory distortions can have important macroeconomic effects through reduced labor mobility, fragmented markets, and restricted effective production scale, which lower productivity growth4.
- Recent literature finds sizeable costs of internal trade barriers: Agnosteva, Andreson and Yotov (2014) estimate bilateral trade costs using a panel regression model and find that distance is a significant interprovincial barrier—the average interprovincial tariff equivalent is higher than 100 percent6.

### Scope and approach of the paper
- The paper assesses the collective cost of internal trade barriers and proposes policies to enhance internal trade6.
- The analysis proceeds in two stages (details follow in the full paper): first, the authors follow the approach by [methodology references implied in the source text].  

*Source: wpiea2019158 - References .............................................................................................................*

### 5.6 percent after controlling for distance and contiguity. Bemrose, Brown and Tweedle (2017) estimate a 6.9

### wpiea2019158 - 5.6 percent after controlling for distance and contiguity. Bemrose, Brown and Tweedle (2017) estimate a 6.9 percent tariff equivalent in goods sectors

### Methodology for measuring internal trade barriers
- Direct measurement of NTBs is infeasible; an indirect approach is used based on trade flows and the Head-Ries index.
- Head-Ries index formula (as presented) summarizes average trade costs and is computed for each sector j and pair of regions n and i using bilateral import shares.
- The index is decomposed into:
  - A geographic component driven by population-weighted distances and contiguity (border) effects.
  - A residual non-geographic component interpreted as policy-relevant NTBs.
- Regression specification: ln(τ̅_{ni,t}^j) = α1_j Distance_{ni} + α2_j Neighbor_{ni} + β1_j Intra_{ni,t} + β1_j Inter_{ni,t} + γ_{n,t}^j + η_{i,t}^j + ε_{ni,t}^j.
- Non-geographic component: ln(τ̅_{ni,t}^{j,NG})̂ ≡ ln(τ̅_{ni,t}^j) − (α1_ĵ Distance_{ni} + α2_ĵ Neighbor_{ni}).
- Sample: 12 Canadian provinces and territories (Northwest Territories and Nunavut merged for consistency), the U.S., and the Rest of the World, years 1997–2015, reclassified into 18 goods and services sectors. International service flows only available 2010–2015.
- Trade elasticities: goods elasticities from Caliendo and Parro (2015); service elasticity set to 5 (Costinot and Rodriguez-Clare (2014)). Income-elasticity of migration κ set to 1.5 (Tombe and Winter (2018)).

### Key empirical estimates of trade barriers and geography
- Geography accounts for 57 percent of total trading barriers across all regions and trading routes.
- Distance effects: an extra 1,000 km is associated with a trading barrier increase of around 3-13 percent for agricultural, food, and most manufacturing goods; distance effects highest for utilities and retail trade services and lowest for petroleum, chemicals and mining.
- Neighbor (border) effects: bordering a trading partner is associated with a barrier reduction of 4-30 percent, with largest effects in agriculture and food products, metals, electrical machinery, textiles, and other manufacturing.
- Average (trade-weighted) non-geographic tariff-equivalent of NTBs in 2015: 21 percent.
  - Sector ranges in 2015 (non-geographic barriers): 7 percent for textiles, petroleum and chemicals; over 27 percent for heavier metals, food products and other manufacturing; significantly higher for services.
- Aggregate trends 1997→2015 (trade-weighted, domestic-only):
  - Goods: non-geographic barriers declined from 23 percent (1997) to 19 percent (2015).
  - Services: non-geographic barriers declined from 51 percent (1997) to 47 percent (2015).
- Provincial variation (trade-weighted averages, domestic-only, 2015):
  - Lowest trade-weighted average cost of NTBs in 2015: Ontario and Quebec.
  - Highest average cost: Prince Edward Island, Newfoundland and Labrador, Nova Scotia, Yukon.
- Table summaries (selected entries preserved exactly as reported):
  - Canada (1997): Trade barrier 51.8; Geography 17.5; Non-Geography 34.4.
  - Canada (2015): Trade barrier 55.1; Geography 20.3; Non-Geography 34.8.
  - Change 1997-2015: Trade barrier +3.2; Non-Geography +0.4.

### Evidence on regional agreements and regional integration
- Dummy-variable regressions for regional agreements (goods only) show statistically significant reductions in trade barriers for routes affected by:
  - 2007 TILMA (Alberta–British Columbia),
  - 2009 New Brunswick–Quebec agreement,
  - 2010 PARE (NB–NS),
  - 2010 TCA (Ontario–Quebec),
  - 2011 NWPTA (Alberta, British Columbia, Saskatchewan; Manitoba joined in 2017 but sample ends 2015).
- Estimated average reduction in trade barriers associated with these agreements: between 1 and 4 percent based on trade-weighted regressions.
- Trade growth decomposition (for signatory pairs) indicates that growth after agreements was largely driven by declines in measured bilateral trade barriers rather than by growth in local production or multilateral resistance changes.

### Quantitative counterfactuals and gains from trade
- Counterfactual 1: observed trade vs autarky (2015 equilibrium comparisons):
  - Internal trade increases national real GDP by over 5 percent.
  - External trade increases national real GDP by nearly 11 percent.
  - Trade overall increases national real GDP by nearly 20 percent.
  - Canada (table values): Internal 5.1; External 10.9; All Trade 19.6 (Real GDP Per Capita percentage changes).
  - Employment: provinces vary; internal trade tends to raise employment in Atlantic provinces and territories. (Table6 contains detailed regional percentage changes.)
  - Trade lowers variance of real GDP per worker by 22 percent compared to autarky.
- Counterfactual 2: complete removal of measured non-geographic internal trade costs for goods (upper bound scenario, effects reported for goods sectors only):
  - Removing non-geographic internal trade costs increases internal trade volumes as a share of GDP by roughly 15 percentage points (bringing internal trade to levels similar to international trade volumes).
  - National real GDP per capita increases by 3.8 percent (Internal column, Table 7).
  - Canada (Table 7): Internal 3.8; External 6.2; All Trade 9.1 (Real GDP Per Capita percentage changes) when eliminating non-geographic trade barriers for goods.
  - Provincial gains (select examples from Table 7, Internal column):
    - Prince Edward Island: 16.2 percent real GDP per capita increase.
    - Newfoundland and Labrador: 12.8 percent.
    - Atlantic provinces overall: real GDP per worker increases by about 8 percent (text).
  - Employment reallocation:
    - Migration responses shift employment toward provinces with larger productivity gains (e.g., Atlantic provinces). Aggregate migration induced by reducing internal non-geographic barriers represents 0.8 percent of total Canadian employment.
    - Examples from Table 7, Employment column (Internal):
      - Prince Edward Island: employment +18.4 percent.
      - Newfoundland and Labrador: employment +13.3 percent.
      - Canada aggregate employment change not reported as a single number in Table 7; migration across provinces is 0.8 percent of total employment (text).
- Sector-level simulation (reducing measured internal trade costs by 10 percent, one sector at a time):
  - Largest national real GDP gains from liberalizing: finance, computers, and business services; wholesale and retail activities; transport and warehousing.
  - Gains are larger for sectors that are important suppliers of intermediate inputs (high forward linkages); sectoral input-output multipliers matter.

### Policy discussion and institutional constraints
- Constitutional and legal context:
  - Section 90 (federal power to reserve or disallow new provincial legislation), Section 91(2) (federal control over “trade and commerce”), and Section 121 (goods admitted freely across provinces) are cited.
  - Practical limits: provincial powers under Section 92(13) (“property and civil rights”) constrain federal unilateral action; Supreme Court cases cited:
    - 2011: proposed 2010 Canadian Securities Act deemed not valid under federal trade and commerce powers.
    - 2018: R. v. Comeau found New Brunswick within rights to impose fines on transport of alcoholic beverages into the province; Section 121 interpreted in historical context allowing provincial regulation with incidental trade effects.
  - Federal disallowance/reservation powers are largely dormant in practice (not invoked since 1961) and limited in scope (only within first year of provincial law being enacted).
- Practical implication:
  - A political, cooperative solution across federal, provincial and territorial governments is the most viable path to further liberalize internal trade because most barriers stem from regulatory differences.
  - The CFTA (Canadian Free Trade Agreement, 2017) replaced the AIT with a negative list approach, improved procurement coverage, dispute resolution, and promoted regulatory cooperation. The CFTA’s Regulatory Reconciliation and Cooperation Table (RCT) uses work plans informed by government-commissioned analyses (including non-public EY index referenced) to reconcile barriers.

*Source: STATCAN; and staff calculations (as presented in the supplied IMF working paper content).*

### Section 92 gives the provincial legislatures the authority to make laws regarding important economic areas

### Section 92 gives the provincial legislatures the authority to make laws regarding important economic areas

### Constitutional framework and cooperative federalism
- Section 92 gives provincial legislatures authority over matters of a “merely local or private nature in the province”, including starting and running a business, obtaining professional accreditation, ensuring safety and generally any other matters of a “merely local or private nature in the province”.
- Federal and provincial governments share responsibility over specific areas such as immigration, agriculture, old age pensions, etc.
- Canadian securities markets are regulated by Canada's provincial and territorial governments; the 2010 Canadian Securities Act intended to establish a national securities regulator.
- The Supreme Court’s 2011 securities reference case emphasized cooperative solutions and respect for each level of government’s sphere of jurisdiction: “Cooperation is the animating force. The federalism principle upon which Canada’s constitutional framework rests demands nothing less.”
- Example of provincial regulation: New Brunswick’s Liquor Control Act limits personal importation to 12 pints of beer and one bottle of alcohol or wine, aimed at public supervision and sustaining a provincial monopoly liquor distributor.
- Courts in Canada have generally not applied Section 121 to eliminate laws creating internal trade barriers, often interpreting Section 121 as prohibiting tariff barriers only and respecting a balance between federal and provincial powers.

### Lessons from other federations (Australia and the EU)
- Australia:
  - Adopted mutual recognition in 1993 to remove regulatory barriers across states and territories.
  - Single consumer protection law adopted in 2010 under federal authority replaced state/territory laws.
  - Success attributed to collaborative federalism, the Mutual Recognition Accord of 1992, the Productivity Commission (created 1997), and courts applying Section 92 of the Australian Constitution to invalidate internal trade barriers.
  - Note: constitutional division of powers in Australia differs from Canada.
- European Union:
  - Treaty of Rome prohibits measures “capable of hindering, directly or indirectly, actually or potentially, intra-Community trade”.
  - Uses directives requiring harmonization of laws and issued the Mutual Recognition Regulation in 2008.
  - European Commission reviews proposed legislative and regulatory changes prior to national ratification, providing oversight.
- Applicability to Canada:
  - Direct translation of Australian or EU approaches to Canada is limited due to Canadian courts’ interpretation of Section 121 and constitutional differences.

### Public support for internal trade liberalization
- Canadian Federation of Independent Business (2014) survey: 87 percent of firms believe premiers should commit to reducing internal trade barriers.
- Nine in ten small businesses think all firms should have open access to all markets in Canada.
- More than half of firms believe provincial and territorial governments should not protect local businesses from competition in other provinces and territories.
- Ipsos Public Affairs (2017) survey:
  - 89 percent of respondents agree Canadians should be allowed to bring any legally purchased product from one province to another.
  - Nine in ten Canadians say there should be free trade between the provinces “because we are one country.”
  - 81 percent see reducing trade barriers between provinces as being good for consumers.
  - 77 percent see reducing trade barriers as being good for Canadian businesses.

### From AIT to CFTA: institutional design, outcomes, and remaining challenges
- AIT (came into force 1995):
  - Narrow scope using a positive list approach focused on removing barriers in eleven sectors.
  - Initially lacked an effective dispute resolution mechanism; amended in 2015 to include an enforceable dispute resolution mechanism with monetary penalties.
  - Achieved measure of success in public procurement transparency and labor mobility for regulated occupations.
  - Empirical evidence (Anderson and Yotov, 2008) finds no positive effects of the AIT on interprovincial trade.
- CFTA (signed July 1, 2017 by the federal government, ten provinces and three territories):
  - Adopts a negative list approach where rules apply automatically to almost all areas of economic activity, with exceptions clearly identified.
  - Introduces a Regulatory Reconciliation and Cooperation Table (RCT) to eliminate duplicate, overlapping and inconsistent regulations.
  - Carries forward and strengthens the 2015 AIT dispute settlement mechanism with higher penalties for non-compliance.
  - Fully harmonized with international agreements to ensure a level playing field for domestic and foreign firms.
- Remaining challenges with the CFTA:
  - The list of exceptions is long, itemized in well over 135 pages, and includes alcohol, dairy and other farm products, trucking regulations, corporate registry.
  - RCT process is administratively burdensome, negotiations are protracted, and provinces can opt out of the process (opt outs must be transparently listed on the CFTA’s website).
  - Progress on labor mobility and professional accreditation remains limited.
  - Internal Trade Secretariat is insufficiently resourced to study and prepare regular progress reports.

### Recent and planned actions (examples and timeline)
- Agreed regulatory/reform actions include:
  - Reducing regulatory restrictions related to occupational health and safety.
  - Addressing transport regulation.
  - Licensing in agriculture.
  - Corporate registry reforms.
  - Addressing personal use exemption limits for alcohol across provincial/territorial boundaries; some jurisdictions have eliminated limits (Manitoba, Alberta, Saskatchewan, Nova Scotia, Prince Edward Island).
- Regulatory and standards developments:
  - January 2019: Safe Food for Canadians Regulations (streamlined and outcomes-based) came into effect.
  - April 2019: National Building Codes made available for free online.
  - Five reconciliation agreements have been completed.
  - Agreement in principle to allow the use of wide-base single tires at weight parity with conventional dual tires on all major trade routes in Canada by the end of 2019.
  - Provinces, territories and the federal government agreed to adopt and recognize common standards for first aid kits, head protection, eye and face protection, hearing protection, foot protection, and personal floatation devices and life jackets.
  - A new multi-jurisdictional registry access system (MRAS) is being developed; system expected to be in operation by 2020.

### Policy recommendations to deepen internal trade liberalization
- NTBs should be clearly identified and progress towards removing them should be assessed at regular intervals.
- Targets for a reduction in the number of exemptions included in the CFTA should be explicitly set out in future negotiations.
- Make the regulatory reconciliation process more effective:
  - Address administrative burdens and protracted negotiations.
  - Reduce the ease with which a province can opt out of negotiations.
  - Adopt a “comply or explain” approach to ensure better accountability and accelerate harmonization.
- Resource the Secretariat sufficiently (with budget and full-time employees) to assess and communicate progress, including publishing an annual report on goals set and progress achieved; Secretariat would assume responsibilities of ad hoc committees and working groups to initiate, develop, and monitor policy reforms.
- Calibrate penalties for non-compliance to better distinguish large barriers from small; current penalties raised when CFTA came into force in 2017 but “still do not fully reflect the magnitude of the economic impact.”
- Recognize unilateral provincial action via a “national recognition” regime where a province considers a certification from another province as deemed-compliant with its own, even if not reciprocated.

### Quantitative findings and economy-wide impacts
- The average non-geographical trade barrier in the measure is about 20 percent.
- Sectoral range:
  - 7 percent for textiles, petroleum and chemicals.
  - Over 27 percent for heavier metals, food products and other manufacturing goods.
- Provincial non-geographic barriers:
  - Lowest: Alberta, British Columbia, and Ontario.
  - Highest: Manitoba, Prince Edward Island, Nova Scotia, Yukon, and Newfoundland and Labrador.
- General equilibrium impacts of full liberalization of trade in goods:
  - Real GDP per capita would increase by 4 percent nationally if trade in goods was fully liberalized.
  - Employment would increase by 6 percent in Atlantic provinces as workers migrate from provinces where gains are below average (British Columbia, Alberta, and Ontario).
- Sectors with largest economy-wide benefits from reducing barriers: finance, business and insurance sectors, due to interconnections with other parts of the economy and the gains from unified securities regulation and enhanced labor mobility.

### Conclusion
- There is evidence of improvements in regional integration, but significant trade barriers remain.
- Reducing the cost of internal trade barriers can benefit the whole economy by increasing trade volumes to levels similar to international trade volumes, raising national real GDP per capita, stimulating regional employment gains, and attracting investment.
- Federal, provincial and territorial governments should make reducing internal trade barriers a common priority; achieving outcomes will require a sustained, concerted collective effort and could be accelerated by a “coalition of the willing.”

*Source: wpiea2019158 - Section 92 gives the provincial legislatures the authority to make laws regarding important economic areas*

### APPENDIX I. DATA DESCRIPTION

### APPENDIX I. DATA DESCRIPTION

### Data coverage and units
- Sample includes all Canadian provinces and territories, the United States and the rest of the world (ROW).
- All variables are classified into 18 sectors: 9 goods sectors and 9 service sectors, to match data sources for trade, production, expenditure in Canada, the U.S. and the ROW.

### Trade data (sources and construction)
- Bilateral interprovincial trade data:
  - 1992-1996: Statistics Canada, table 12-10-0085-01.
  - 1997-2006: Statistics Canada, table 12-10-0086-01.
  - 2007-2015: Statistics Canada, table 12-10-0088-01.
- Aggregated international trade data also obtained from the three Statistics Canada tables above.
- Product categories based on the Supply and Use Product Classification from Statistics Canada.
- Merchandise trade between US and Canadian provinces: Statistics Canada, table 12-10-0099-01 (commodity flow based on HS).
- Service trade between US and Canadian provinces: provided by Statistics Canada.
- Trade between provinces and the ROW: derived by subtracting US trade flow from the total international trade flow.
- Trade between US and ROW: obtained from USA Trade Online (reported based on HS categories).

### Production data
- Provincial production: Statistics Canada, tables 12-10-0086-01, 12-10-0088-01, and 12-10-0085-01.
- US and ROW production: derived from Eora’s world input-output tables (harmonized 26-sector classification).

### Expenditure data
- Provincial expenditure: based on the same Statistics Canada tables used for production and interprovincial trade.
- US and ROW expenditure: calculated by adding international imports and subtracting international exports from gross output.

### Distance data
- Calculated based on population-weighted centroids by province, U.S. and the ROW.
- Spatial distribution of global population: Global Rural-Urban Mapping Project (Version 1) Settlement Points data for the year 2000.
- Data providers: Center for International Earth Science Information Network at Columbia University, CUNY Institute for Demographic Research, IFPRI, the World Bank, and CIAT.
- Procedure: aggregate population data to determine population-weighted longitude and latitude for each Canadian province and territory, the U.S., and the ROW; then calculate orthodromic distance between these points.
- Note on limitations: this distance measure does not reflect differences in transportation costs per kilometer inherent in certain trade pairs within Canada (e.g., territories costlier per kilometer; Rocky Mountains more costly than Prairies).

### Sectoral classification mapping
- Sectoral classifications from different datasets are reclassified into the following categories with exact code mappings:

- Agricultural products, fishing, forestry
  - Supply and Use Product Codes (2007-2015): M111B, M112A, M11D0, M11E0, M1140, M1150
  - HS Code: 01-15
  - Eora Sector: Agriculture, Fishing
  - NAICS Code: 11

- Food, beverage, tobacco
  - Supply and Use Product Codes: M31C0, M312A
  - HS Code: 16-24
  - Eora Sector: Food & Beverages
  - NAICS Code: 311FT

- Mining
  - Supply and Use Product Codes: M21B0, M2122, M2123, M2130, M21A0
  - HS Code: 25-27
  - Eora Sector: Mining and Quarrying
  - NAICS Code: 21

- Textile, apparel, leather products
  - Supply and Use Product Codes: M31D0
  - HS Code: 41-43, 50-67
  - Eora Sector: Textiles and Wearing Apparel
  - NAICS Code: 313TT, 315AL

- Wood and Paper, printing
  - Supply and Use Product Codes: M3210, M3220, M3230, M51E0
  - HS Code: 44-49
  - Eora Sector: Wood and Paper
  - NAICS Code: 321, 322, 323, 511

- Petroleum, Chemical and Non-Metallic Mineral Products, rubber plastics
  - Supply and Use Product Codes: M3240, M3250, M3260, M3270
  - HS Code: 28-40, 68-71
  - Eora Sector: Petroleum, Chemical and Non-Metallic Mineral Products
  - NAICS Code: 324-327

- Metals and metal Products
  - Supply and Use Product Codes: M3310, M3320
  - HS Code: 72-76, 78-83
  - Eora Sector: Metal Products, Recycling
  - NAICS Code: 331, 332

- Electrical and Machinery
  - Supply and Use Product Codes: M3330, M334C, M3350
  - HS Code: 84-85, 90-91, 93
  - Eora Sector: Electrical and Machinery
  - NAICS Code: 333-335

- Transport Equipment
  - Supply and Use Product Codes: M336A, M3363
  - HS Code: 86-89
  - Eora Sector: Transport Equipment
  - NAICS Code: 3361MV, 3364OT

- Other Manufacturing including furniture
  - Supply and Use Product Codes: M3370, M3B00
  - HS Code: 92, 94-99
  - Eora Sector: Other Manufacturing
  - NAICS Code: 337, 339

- Utilities
  - Supply and Use Product Codes: M2200
  - HS Code: Electric, Gas and Water
  - Eora Sector: Electricity, Gas and Water
  - NAICS Code: 22

- Construction
  - Supply and Use Product Codes: M23A0, M23B0, M23C0, M23D0
  - HS Code: Construction
  - Eora Sector: Construction
  - NAICS Code: 23

- Wholesale and retail trade
  - Supply and Use Product Codes: M4100, M4A00, F3000
  - HS Code: Maintenance and Repair, Wholesale Trade, Retail Trade
  - Eora Sector: Maintenance and Repair, Wholesale Trade, Retail Trade
  - NAICS Code: 42, 44T

- Hotels and Restaurants
  - Supply and Use Product Codes: M7200
  - HS Code: Hotels and Restraurants
  - Eora Sector: Hotels and Restraurants
  - NAICS Code: 721

- Transportation and warehousing
  - Supply and Use Product Codes: M4B00
  - HS Code: Transport
  - Eora Sector: Transport
  - NAICS Code: 48TW

- Post and Telecommunications
  - Supply and Use Product Codes: M5170
  - HS Code: Post and Telecommunications
  - Eora Sector: Post and Telecommunications
  - NAICS Code: 513

- Financial Intermediation, RE, insurance, computer, R&D, and other Business Activities
  - Supply and Use Product Codes: M51D0, M52C0, M5F00, M53D0, M53C0, M541E, M5E00, M5417, M5G00
  - HS Code: Finacial Intermediation and Business Activities
  - Eora Sector: Finacial Intermediation and Business Activities
  - NAICS Code: 514, FIRE, PROF

- Government services
  - Supply and Use Product Codes: M9B00, G6100, G6200, G9110, G9120, G9130, G9140
  - HS Code: Public Administration
  - Eora Sector: Public Administration
  - NAICS Code: G

- Education, Health and Other Services incl Recreational, cultural and sporting activities
  - Supply and Use Product Codes: M6100, M6200, M7100, M8100, M9A00, F1000, F2000, N0000, P1000
  - HS Code: Education, Health and Other Services, Private Households, Others
  - Eora Sector: Education, Health and Other Services, Private Households, Others
  - NAICS Code: 512, 6, 7, 81

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### APPENDIX II. ROBUSTNESS OF THE RESULTS TO ALTERNATIVE ELASTICITIES

### Role of trade-cost elasticity (휃j)
- Trade-cost elasticity of trade flows is summarized in the model by the parameter 휃j.
- Baseline elasticities adopted: estimates by Caliendo and Parro (2015).
- Alternative elasticity estimates cited: Bemrose et al. (2017) estimate an aggregate elasticity across all goods sectors of 휃=6.4.
- Robustness exercise: main results reported under alternative values from 휃=4 to 휃=8.

### Key analytical finding on elasticity sensitivity
- Lower elasticities result in larger gains from trade liberalization (a well-known property of this class of models).
- If goods-sector elasticities are a uniform 휃=8 (high-end), aggregate welfare gains from lowering internal trade costs are 3.2 percent.
- Baseline results suggest gains of 3.8 percent.
- For a lower elasticity of 휃=4, aggregate gains exceed 7.3 percent.
- Authors conclude baseline results are conservative and not biased upward due to elasticity choice.

### Table 1 — Gains from Eliminating Non-Geographic Internal Barriers for Goods, 2015
- Real GDP Per Capita (percentage change) and Employment (percentage change) by region under alternative 휃 values.

- Column headings preserved: 휃=4, 휃=6.5, 휃=8 for Real GDP Per Capita; same three columns for Employment.

- Region-level results (exact figures):

  - AB
    - Real GDP Per Capita: 6.0, 3.8, 2.8
    - Employment: -2.1, -1.3, -0.8

  - BC
    - Real GDP Per Capita: 6.0, 3.8, 2.7
    - Employment: -2.1, -1.4, -0.9

  - MB
    - Real GDP Per Capita: 13.0, 8.3, 5.9
    - Employment: 7.7, 5.3, 3.8

  - NB
    - Real GDP Per Capita: 10.9, 6.9, 4.9
    - Employment: 4.7, 3.2, 2.3

  - NL
    - Real GDP Per Capita: 20.7, 13.2, 9.0
    - Employment: 19.0, 12.4, 8.3

  - NS
    - Real GDP Per Capita: 10.8, 6.8, 4.7
    - Employment: 4.6, 3.1, 1.9

  - NT & NU
    - Real GDP Per Capita: 12.7, 8.1, 5.6
    - Employment: 7.4, 4.9, 3.3

  - ON
    - Real GDP Per Capita: 5.9, 3.6, 2.6
    - Employment: -2.3, -1.6, -1.1

  - PE
    - Real GDP Per Capita: 27.4, 17.8, 12.2
    - Employment: 29.0, 19.3, 13.2

  - QC
    - Real GDP Per Capita: 8.9, 5.6, 3.9
    - Employment: 1.9, 1.3, 0.8

  - SK
    - Real GDP Per Capita: 9.8, 6.2, 4.3
    - Employment: 3.2, 2.1, 1.4

  - YT
    - Real GDP Per Capita: 13.0, 8.2, 5.8
    - Employment: 7.8, 5.1, 3.6

- Aggregate Canada results (exact figures):
  - Real GDP Per Capita: 7.3, 4.6, 3.2
  - Employment: - - - (no employment aggregate values reported in table)

- Source of table: Staff calculations.

*Source: APPENDIX I. DATA DESCRIPTION and APPENDIX II. ROBUSTNESS OF THE RESULTS TO ALTERNATIVE ELASTICITIES (staff calculations).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019158.pdf_