Thank you very much, and it's really my pleasure to be here.
My brief opening comments will focus on how certain barriers to interprovincial trade in Canada may represent material drag on our national productivity, competitiveness and ultimately our economic prosperity. First, to fix ideas it's necessary to appreciate what internal trade costs are, because unlike costs between countries, they are not tariffs. They're not observable in that way. Instead they're countless tens of thousands of individually modest but collectively significant differences in the rules, regulations, standards, certifications and so on, that add costs to businesses operating across provincial boundaries.
Examples abound. In agriculture there are inspection and labelling requirements. For trade in services and a lot of professional services in particular, provincial standards and certifications can prevent customers in one province from accessing the services of a supplier in another. For trade in goods, you have differences in trucking regulations and so on. These are just a small handful of examples, but recent advances in data availability and economic modelling techniques make it possible to measure costs on a broader scale.
For example, Statistics Canada researchers Robby Bemrose, Mark Brown and Jesse Tweedle recently constructed what is perhaps the most sophisticated and robust estimate of interprovincial trade barriers. They found that for manufacturing it adds about 7% to 8% to the cost of shipping from one province to another. Predating their work, Lucas Albrecht,a former University of Calgary graduate student, and I estimated that when you include services, the average cost of trade between provinces is between 8% and potentially as high as 15%.
These may appear modest at first, but they are not. They can inhibit productive producers in one region from expanding and exporting to another. They inhibit consumers' ability to purchase lower-cost goods and services from elsewhere. This matters for productivity, because if you specialize less in areas where you have a comparative advantage, overall productivity can decline. Estimating the size of that effect is not easy of course. It requires a rich model of Canada's economy but that work has been done recently. I and others have developed such models.
In recent work with my University of Calgary colleague, Professor Jennifer Winter, which is forthcoming in the Canadian Journal of Economics this year, we find that internal trade may lower Canada's overall productivity by between 3% and 7%, depending on the measure. Work published through the International Monetary Fund, researchers there and I suggest that liberalizing internal trade in goods alone, just manufacturing, could increase Canadian productivity by nearly 4%. This is large. This represents an increase in Canada's economy by nearly $90 billion per year, over $2,000 per person or $5,000 to $6,000 per household per year.
The results here also suggest that lower-income regions benefit more than higher-income ones. Among the five provinces with the lowest average household, for example, we find that gains there average more than 5% which is significantly more than the overall average.
There's a lot that government can do. A lot of recent reforms have made some progress on this file, notably the Canadian Free Trade Agreement from 2017, but there's much left to do. Continued federal, provincial and territorial co-operation through the various efforts within the Canadian Free Trade Agreement is critical. There is funding needed to increase capacity, for example, to bolster the ability of the CFTA secretariat to work through its growing work plans. That's something we saw yesterday's budget provide a little bit on actually. That can be valuable.
The gold standard may involve provinces moving unilaterally, potentially. Alberta, for example, moved in the summer of 2019 to drop many of its self-imposed exemptions under the CFTA. I estimate that roughly two-thirds of the gains from lower internal trade barriers for a province can be achieved by that province moving unilaterally and recognizing the regulations and standards that prevail in another province as automatically compliant with respect to its own.
I see the 30-second notice. I'll end by saying that of course there are some valid objectives of regulations that apply in one province and another, and so the goal, I think, ought to be, to think about regulations that don't achieve a very specific and well-defined public policy objective and otherwise harmonizing, smoothing out the differences that prevail.
Thank you very much.