New West Partnership and Neoclassical Integration

Many Canadian newspapers ran a story this morning wherein the premiers of British Columbia, Alberta, and Saskatchewan called for an overhaul of the 1995 Agreement on Internal Trade. For many people, the AIT is likely to illicit snoring, but it is actually part of a fascinating case study in the neoclassical stages of integration.

Most Canadians have probably never heard of the AIT, but was essentially an effort to eliminate inter-provincial barriers to trade within Canada; a NAFTA for Canada's provinces. The analogy between the two agreements is not far fetched. Indeed, a quick comparison of the texts of the two agreements reveals similarities many would find shocking, complete with institutional architecture like dispute settlement (see for yourself AIT vs. NAFTA).

When we think about trade liberalization, we more commonly think about the elimination of barriers to trade between countries and protracted, high-level, and controversial negotiations to bring all of it about. The World Trade Organization's various "Rounds" of negotiations, the infamous NAFTA negotiations from the early 1990s, or the ongoing Trans Pacific Partnership negotiations often come to mind.


The goal with all of these negotiations is to eliminate the impact of international borders on the flow of goods, services, and in many cases investment, between countries. The result should be an expansion of production possibilities beyond what your own country can produce and consume by integrating your market with those of others. Not only does trade expand with the reduction of foreign county barriers, your own production runs are longer and more efficient. Finally, capital can flow more easily between markets to where it is most needed and can be efficiently allocated. At least, that's the basic idea.

This same set of principles can be applied within countries as well, and especially federal states like Canada where sub-federal governments wield considerable power under the Constitution. While there may not be a customs and immigration plaza in Lloydminster AB/SK, borders matter where the integration and efficiency of markets is concerned. Indeed, one reading of Canadian political history holds that it is really about the struggle to integrate Canada together economically; large geography, small population, spread thinly across the southern third of the nation, powers shared between the centre and sub-federal governments. In fact, there is a useful comparison to be made between Canada and the United States where the integration of their national markets is concerned (ie. 50 States vs. 10 Provinces and 3 Territories). 

The fact that BC, Alberta, and Saskatchewan are calling for an overhaul is significant because those three provinces have built upon what the AIT started with two additional agreements that went beyond what the AIT did for inter-provincial trade; the Trade, Investment, and Labour Mobility Agreement between Alberta and British Columbia (TILMA) in 2006, and the New West Partnership which added Saskatchewan in 2010. In each of these advancements, an effort has been made to go beyond the elimination of any inter-provincial regulatory or standards barriers to goods and services (ie. trucking regulations) and explicitly tackle such barriers to investment and labour mobility (ie. professional standards accreditation).

None of this is easy since with each deeper stage of economic integration come forms of pooled sovereignty among provinces as they eliminate barriers or harmonize policies-- for some this represents an unacceptable loss of policy sovereignty. Returning to the neoclassical stages of integration, the AIT was essentially a relatively shallow free trade agreement among all the provinces and entailed the lowest levels of commitment in terms of giving up policy sovereignty (see Neoclassical Stages again). With the TILMA and New West Partnership, BC, Alberta, and Saskatchewan have moved in the direction of a true common market relative to their non-member provincial counterparts aimed at the elimination of barriers to the flow of all factors of production, especially labour and capital.

Alberta has been a particularly avid user of the provisions of the AIT. One of the more entertaining cases of inter-provincial trade barriers litigated under the AIT concerned a Quebec measure requiring margarine to be a slightly different color than butter. Alberta (joined by Saskatchewan and Manitoba) argued that this was an arbitrary barrier that discriminated against western Canadian producers and marketers. It might strike some as much ado about nothing, but such regulatory differences can be critically important to the bottom lines of many firms, in this case largely keeping products off Quebec store shelves. Alberta, Saskatchewan, and Manitoba won that case in 2005.

Finally, in most people's minds, the idea of ceding policy sovereignty in pursuit of greater efficiency is anathema. Indeed, on many issues, the pooling of sovereignty under arrangements like the NAFTA or within the European Union is full of all kinds of politically difficult decisions. Indeed, while tariffs are relatively easy to deal with because they are public, numerical, and obvious barriers, many areas of liberalization deal with so-called behind the border measures-- such as regulation-- that can often be highly sensitive politically. Negotiations might entail health and safety standards, trade in so-called cultural goods or, increasingly, production process issues. In all of these cases, the pooling of sovereignty at ever deeper stages of integration invariably touches on sensitive matters of domestic governance. Hence, international trade negotiations have frequently been political dynamite with stakeholders set to "lose" their protected status via liberalization fighting to stop it. 

The interesting thing about the call by three provincial premiers for an overhaul of the AIT is how uncontroversial it's all been. The business community in Western Canada has generally applauded the AIT, TILMA, and NWP exercises. Yet, it is far from clear how far an overhaul proposal will actually go if proposed areas of liberalization and integration touch sensitive or powerful interests. One such area is securities regulation. It's interesting that on the same day premiers were calling for an overhaul and expansion of the AIT, Alberta and Quebec were asserting their opposition to Ottawa's plan for a national securities regulator, the absence of which has long been pointed to as a source of inefficiency in Canadian capital markets (see story).

There is a huge body of literature on regionalism in international trade. In essence, if everyone belongs to a "NAFTA-like" agreement, then you end up with a spaghetti bowl of preferences among countries that is actually highly inefficient. If Alberta and Quebec hold out on securities regulation, while the expansion of the AIT continues, could we not also see something of an inefficient spaghetti bowl of rules and regulations within Canada: a kind of patchwork of preferences with some provinces in, others out? Such an outcome would be counter-productive.....