Six questions about the significance of interprovincial trade barriers in Canada

In the face of major uncertainty with Canada’s largest trade partner, its own interprovincial trade barriers—a topic that’s long been a niche economist discussion—are becoming more mainstream conversation. That’s a good thing, because these trade barriers are longstanding inefficiencies that weaken Canada’s economic resilience and limit opportunities for businesses and workers.

We’ve highlighted before that reducing interprovincial barriers would help Canada’s ailing productivity and general growth challenges. They could even help improve the movement of people and businesses across the country.

At the same time, however, dismantling the barriers to interprovincial trade isn’t entirely straightforward, nor is it a silver bullet solution to the many challenges that Canada’s growth faces. Instead, it is part of a suite of reforms that the country needs to re-invigorate its economy, including a refocus on the resources-based economy.

To shed light on this topic, we address some of the questions RBC Economics has been receiving about interprovincial trade barriers—what they are, how much they cost the economy, and whether they can be effectively reduced.

1. What are interprovincial trade barriers?

Interprovincial trade barriers are a generalized reference to the many factors that impede access to a provincial market for businesses or workers from another province. These barriers take many forms, including geographic distance, restrictions on the sale of certain goods across borders, and regulatory and administrative differences such as variations in licensing recognition, safety certifications, and technical standards.

While some trade barriers, like the physical distance between two provinces, are obvious and unchangeable, other non-geographic internal barriers are more complex and less visible. These arise from differences in how provinces recognize rules, regulations and standards. For example, occupational health and safety or environmental standards may vary between provinces, creating compliance challenges and additional costs for businesses seeking to expand into other provinces.

Canada’s constitution does not explicitly guarantee free trade between provinces, and its decentralized federal system grants provinces significant authority to regulate and oversee trade within its borders. Many trade barriers are imposed to protect local industries, uphold regulatory standards, generate revenue, and preserve jurisdictional autonomy. However, prioritizing narrow economic interests over fostering broader standards across the country has hindered achieving economies of scale, reduced competition, and contained productivity growth in Canada—trends that will continue unless meaningful action is taken.

2. How costly are internal trade barriers?

Interprovincial trade barriers impose significant costs on Canada’s economy and are often difficult to measure.

Geographic barriers may impose costs that are generally more visible, like the cost of transportation, but measuring the costs of non-geographic barriers such as a regulatory compliance burden is particularly challenging. Unlike explicit tariffs or fees on cross-border transactions, these barriers vary by province and are often difficult to quantify.

To assess costs, studies have relied on various methods to determine its effect on trade flows. As a result, estimates of its economic burden can differ widely. For example, a 2020 Statistics Canada study found the burden that internal trade barriers impose is equivalent on average to a 6.9% tariff cost on goods. Meanwhile, a 2019 International Monetary Fund study found the cost of non-geographic interprovincial trade barriers could be roughly equivalent to an average tariff of 21% on trade flows (for goods and services)—underscoring the range of estimates. To put these costs in perspective, Canada’s weighted average tariff rate on international imports was just 1.4% in 2022, while the U.S.’s was 1.5%.

From our point of view, tying the economic inefficiency to a single figure might miss the point. We know there are challenges between interprovincial trade that can be rectified and would make a difference to Canada. The exact dollar figure ranges by province, sector and methodology, because of the complexities of the issue.

3. How would reducing internal trade barriers improve the economy?

There are some lower-hanging fruit when it comes to improving trade barriers. For example, standardizing trucking requirements, mutually recognizing professional credentials, and removing restrictions on the sale of goods and services between provinces are frequently referenced as immediately helpful to supporting the economy.

The overall gains to Canada’s economy are uncertain, but a study from the Bank of Canada in 2017 suggests that a 10% reduction in interprovincial trade barriers could improve potential output growth on average by 0.2% per year. In addition, other studies have found that eliminating interprovincial trade barriers could boost national growth by between 3% and 8% in the long-term. This would represent a potential gain of up to $200 billion annually, or thousands per person.

4. Would eliminating interprovincial trade barriers compensate for a significant loss of access to the U.S. market?

While internal trade liberalization would enhance Canada’s long-term economic growth, it would not fully offset the immediate consequences of U.S. tariffs. In 2023, about $532 billion worth of goods and services moved across provincial and territorial borders, while total annual two-way trade with the U.S. was more than $1 trillion.

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Even though hopes of eliminating internal trade barriers could be one of the quickest ways to support trade—particularly compared to, for example, opening new mines—we see reform in this area as more of a multi-year process and recognize it would take businesses time to adjust to new regulations, paperwork and standards. In contrast though, tariff shocks can have an immediate and severe impact on the economy. Our estimates suggest that if Canada faced permanent 25% across-the-board tariffs, real gross domestic product growth could be reduced to zero in 2025 and then contract by 2% in 2026.

Nevertheless, internal trade liberalization should be viewed as a complement to, rather than a substitute for, strong Canada-U.S. trade ties. The removal of interprovincial trade barriers could yield economic benefits by improving domestic trade efficiency, reducing operational costs for businesses, and enhancing economic resilience, which could increase Canada’s capacity for self-sufficiency in the long-term.

5. Which provinces and sectors would benefit the most?

Reducing interprovincial trade barriers would benefit Canada as a whole, but the impact would vary across provinces and sectors.

The IMF estimates that smaller provinces such as Prince Edward Island, Newfoundland & Labrador, and Nova Scotia could experience larger gains in GDP per capita and employment compared to bigger provinces with the removal of non-geographic trade barriers for goods. These provinces face some of the highest costs associated with internal trade barriers, so its removal could lead to significant improvements in productivity and economic growth.

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Both the goods and services sectors would benefit, though the services sector currently faces greater non-distance trade costs. A study by the Macdonald-Laurier Institute in 2022 found that non-distance trade costs for services were equivalent on average to a 29% tariff, compared to 10% for goods. Since many services—such as legal and financial services—are critical inputs for other industries, reducing barriers in this sector could create a compounding effect, benefiting multiple areas of the economy.

However, some businesses and industries could face short-term challenges. Certain sectors in one province may struggle to compete with lower-cost imports from other provinces, leading to job displacement and requiring workers to reskill or transition to more competitive sectors. Additionally, provincial governments reliant on revenues from protected industries, such as alcohol sales, may face fiscal pressures as trade liberalization takes effect.

A similar adjustment period followed Canada’s free trade agreements with the U.S. and Mexico. Some industries faced challenges, but the overall economy ultimately benefitted from increased market access, investment and growth.

6. How could trade barriers be reduced?

The primary obstacle for businesses seeking to purchase or sell goods in another province in 2023 was the high cost of transportation. Geographic trade barriers are challenging to address in the short-term, and overcoming them would require significant investment in trade-enabling infrastructure. Strengthening East-West supply chains alongside traditional North-South trade routes would lower trade costs within Canada and improve access to overseas markets for Canadian products.

In contrast, non-geographic trade barriers can be mitigated more quickly through policy reforms. For example, the mutual recognition of regulations and policies can help goods, services, and labour move freely between provinces without additional regulatory hurdles.

The Canadian Free Trade Agreement (CFTA) has made some progress in this area, leading to the reduction or elimination of some provincial and federal restrictions. However, more than one-third of the 334-page agreement consists of listed exceptions by provinces to the agreement. Initiatives such as the Federal Action Plan to Strengthen Internal Trade, and the recent announcement of an additional 20 federal exceptions to be removed as well as regional agreements like the New West Partnership and Atlantic Trade and Procurement Partnership represent important steps forward, but sustained and accelerated progress remains essential.

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Despite these efforts, the complete removal of interprovincial trade barriers would be challenging. Provinces have distinct economic priorities and have implemented these measures to protect their domestic economies, and not necessarily to reduce trade efficiency. These barriers often reflect efforts to support local industries, maintain regulatory standards, and ensure economic stability within their jurisdictions.

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Salim Zanzana is an economist for RBC. He focuses on emerging macroeconomic issues, ranging from trends in the labour market to shifts in the longer-term structural growth of Canada and other global economies.

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