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Business Commentary Decades-old policies are at the core of Canada’s economic dysfunction

Leonard Waverman is the dean of the DeGroote School of Business at McMaster University. Gordon Pitts is the school’s business writer in residence and a former Globe and Mail journalist.

For years, Canadians have been basking in the adulation of outsiders who laud this country as a model of an open, high-functioning nation-state. It’s a view captured by the words of former U.S. president Barack Obama: “The world needs more Canada.”

Yet, in economic competitiveness, the reality is different. What the world doesn’t need – and Canadians certainly don’t need – is the level of nation-state dysfunction summarized by two recent events:

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  • The Supreme Court decision that reaffirmed provincial rights to restrict the movement of alcoholic beverages across provincial borders.
  • Trans Mountain Pipeline’s decision to halt construction of its approved line to the Pacific, giving a tight deadline for Canada to sort out its rights to cross British Columbia.

The two decisions are related, representing a showdown of provincial political rights versus national economic reality – and the provincial rights are winning. At the heart of the disputes is the ability to ship wine, spirits and oil across Canada’s internal borders – but the broader impact is an impaired ability for Canada to compete in global markets.

This provincialism is surfacing at the same time Canada is battling for open borders at the NAFTA negotiations. It is hard to portray yourself as a free-trade champion when you deny free trade within your own nation.

The events highlight the vulnerability of the Canadian model, which may prove to be irredeemably broken by economic balkanization (perhaps, the term is Canadianization). Instead of patting ourselves on the backs, we should be working to fix chronic constitutional and structural barriers.

First, the Supreme Court was clearly dealing only with law, not economics, when it agreed with New Brunswick, and the other provinces, that barriers to interprovincial trade in beer, wine and spirits, are legitimate provincial rights. The case casts a large shadow, allowing provinces to put up all kinds of “incidental” roadblocks to commerce, as long as a plaintiff can’t convince a court that their primary purpose is to impede trade.

For the beverage business, it means small B.C. wineries, for example, are still prevented from selling directly to, say, New Brunswick or Ontario consumers, thus impeding them from achieving economies of scale. Craft brewers in any province must still go through byzantine listing regulations if they want to grow beyond their provincial boundaries. Many find it easier to do business across national borders than in other provinces.

Canada is a trading country but the denial of national economies of scale to small producers is a major hindrance for these firms as they head out into global markets.

Meanwhile, the pipeline deadlock comes at a time when 76 per cent of Canadian exports of goods and services go to the United States, including nearly 100 per cent of Canadian oil and gas. Canada has over the years attempted to diversify beyond the United States, with little to show.

The Trans Mountain route is a way to widen this trade, and capture the higher energy prices on world markets. Instead, we are getting tit-for-tat obstructionist tactics that threaten the pipeline – and question the viability of the economic federation.

The alcohol decision lends further support to British Columbia in contending that its environmental concerns override the national interest to bypass U.S. markets. Indeed, there have been legitimate environmental issues with Trans Mountain but they have been addressed through a rigorous review process.

We need leadership at all levels of business and government to take on these roadblocks – and there is a way out of the alcohol impasse. Individuals cannot transport these items from one province to another, but what about companies? Surely, businesses should be able to set up shop in other provinces, thus selling products across the country.

Consider the model south of the border, where each U.S. state taxes wine, beer and booze differently, as does each province, but there is reciprocity among the states. The U.S. Supreme Court held in 2005 that states can ban out-of-state shipments of wine to consumers, but only when in-state shipping is also banned.

In Pennsylvania, for example, an out of-state company selling wine can set up shop with the payment of a flat $250. Of course, it must also pay taxes and submit to regulation inside Pennsylvania.

So to break the logjam on interprovincial trade, we need a battering ram – and the tool could be a serious court challenge. How about B.C. wineries going to court in New Brunswick for right of entry? Or a nationwide coalition of craft brewers? They could argue the federal right to regulate commerce should allow producers in any province the right of establishment in any other province.

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Ultimately, provincial rights to tax goods and services, even to allow monopoly distribution, are not a valid reason to inhibit commerce. And provincial opposition based on environmental or social concerns must acquiesce to the national interest when a robust approval process has been followed.

We must end these 150-year-old uneconomic and self-destroying policies, or be the model of a country that cannot compete in the world.

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