Thank you, Mr. Chair, and good morning, everyone.
This morning I'm actually going to focus on only one aspect of an important issue for Canadian manufacturing, and that's really the issue that's already been touched on by Mr. Murphy: the regulatory regime and the regulatory burden faced not only by Canadian manufacturers, but also by other firms in Canada.
The Conference Board of Canada just released a report in May of this year, Death by a Thousand Paper Cuts: The Effect of Barriers to Competition on Canadian Productivity. I've tabled four copies with the clerk. Unfortunately, I only have them in English. They're also available on the Conference Board website, and I can direct you to that website if you so wish later.
The issue of regulations and I guess in general the barriers to competition in Canada have obviously been talked about for decades, if not centuries. There's always the sense among members of the business community that they're over-regulated, and they often complain about the extent to which they need to comply with existing regulations or the extent to which existing regulations in fact impede their ability to compete or to be appropriately productive. What we often lack is some hard research on whether these complaints are justified.
So the Conference Board, rather bravely, undertook a research project to try to get some sense of whether or not non-tariff barriers and other barriers to competition in Canada were having an effect on Canadian productivity. I guess the real issue is how one measures, indeed, the extent to which any one industry may be facing regulatory barriers. The answer we have adopted, based on other work done in Europe and in the United States, is really to suggest that if there are important barriers to competition in any one industry, you will see that reflected in the industry selling prices, particularly if those industry selling prices are adjusted for transportation costs and for wholesale and retail margins.
We have compared, for 31 industries, the industry selling prices thus adjusted between Canada and the United States. The hypothesis is that if in general the prices are higher in Canada than in the United States--adjusted again for the dollar, for transportation costs, for wholesale-retail margins, and taking all those factors out--most likely those higher prices exist because of some kind of barrier to competition that protects those industries. Prices can be higher in the United States, prices can be higher in Canada, depending on which country has the highest regulatory barriers.
We then correlated those price relationships with productivity measures for those 31 industries in both Canada and the United States. The results are actually quite interesting in the sense that for 16 core industries, almost all focused in the manufacturing sector, the correlation between these barriers to competition and productivity is very high. The higher the regulatory framework as reflected in higher prices, the lower the productivity. The statistical significance of that result in fact is startlingly high from our perspective. It's a much stronger conclusion than we originally expected to achieve.
So I think it's become quite clear, at least for the manufacturing sector, that there is a trade-off. If you're going to impose regulations, you are going to lower productivity, and that now seems to be pretty much an indisputable conclusion.
What's also interesting in the work is that we were unable to find much of a relationship between regulatory barriers to competition and relative productivity in the service sectors. This could reflect either one of two things, or both: the data is poor in the service sector in terms of productivity performance and also in terms of relative prices, and in addition, the service sector outputs tend to be non-tradeable. In fact, you're not facing the same kind of potential competitive pressure. It's not clear that the barriers to competition are going to generate a measurable difference in productivity—Canada versus the United States—because you don't have that U.S. competitor beating down your door to take your haircut business away.
It's probably a combination of both. There's no doubt that in the manufacturing sector, the regulatory framework in Canada is currently lowering our productivity. Obviously there are often a host of justifications for regulations. They protect our health and safety, and they often generate the appropriate competitive environments. But it's important to recognize that every time you impose a regulation, in general you are imposing an economic cost on the firm and lowering productivity.
We made some recommendations in the report. The tariff barriers, such as they now exist, are minimal in their impact, especially when we're talking Canada-U.S. trade. They've been lowered to the point where they're almost non-existent. There are a few sectors—particularly dairy, milk, and poultry—where we still have some significant barriers. But other than those specific sectors, we really aren't focusing much on any action with respect to tariff rates. We have NAFTA in place.
There's no doubt we have a host of regulatory non-tariff barriers for trade, both between provinces and between Canada and other countries in the world. It may be apocryphal, Mr. Chair—and I'm not sure I could prove it—but it is my understanding that Industry Canada made an attempt to inventory the regulatory legislation facing Canadian firms and gave up because it became too onerous a task. The list goes on and on; the pile gets higher and higher. How much money do you really want to spend on that project?
We definitely have to do something to try to simplify and rationalize. We really need to take a long, hard look at whether our current regulatory framework is necessary.
There are a few points I want to raise. One is that we need to harmonize our regulatory framework with the United States. Businesses complain, I think justifiably, particularly in the manufacturing sector, that it's an enormous cost to deal with satisfying the needs of the Canadian and all the various provincial regulators and at the same time meet the needs of the U.S. regulator—often for the same product with only minor differences in the regulations, but you're still filling out paper. We need to harmonize our regulations with the United States as much as possible, and there are great benefits to be gained.
In addition, we have to make a much stronger effort to do something similar with our interprovincial trade barriers. We know that AIT, the Agreement on Internal Trade, has certainly made some progress. The Council of the Federation has picked up the ball in many areas as well, but there's still so much work that needs to be done.
To give that effort a little bit more oomph, Mr. Chair, we were recommending, first, that unless there's a good reason to put a regulation in place, de facto and a priori all interprovincial trade is free—just do away with it all. Unless you can come up with a good reason why you think there should be a regulation, let's start with the principle of free trade.
In every sector, the language of the agreements should reflect that fact. The current language tends to be the other way. All trade is restricted except for the following areas where we've managed to free it up, which from our perspective is 180 degrees in the wrong direction.
Second, regarding interprovincial trade agreements, we need to have some binding dispute settlement mechanism. Currently, provinces can ignore any adverse rulings brought against them under AIT. To be honest, there's nothing with much teeth, Mr. Chair. So our sense is that to try to make this process work, we need to have some kind of binding dispute resolution mechanism.
Other provinces have already recommended that. They may include punitive monetary impositions. I think we have to put some teeth into the resolutions that come from various dispute settlement mechanisms.
In general, we also really have to think about how to reduce and/or rationalize the number of regulations we have in general in Canada. It's a huge effort. It's not particularly sexy, if you like; it's just a lot of grunt work.
In conclusion, I think I need to reiterate that the empirical evidence is now very strong that we are not doing ourselves any favours, particularly from a productivity and a competitiveness perspective, with the current regulatory regime as it exists in Canada.
Thank you very much, Mr. Chair.