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The Globe and Mail

Provinces embrace free trade with EU, but not each other

It's a 7-per-cent tax, unseen and insidious.

Do business across a provincial boundary and that's what the federal government estimates you'll face in extra costs due to the myriad of conflicting regulations, standards, registrations and restrictions.

Canada's Agreement on Internal Trade, a deal struck in the early days of Jean Chrétien's Liberal government to reduce trade barriers between provinces, will be 20 years old in 2014. But hold the celebration. Open commerce at home remains as elusive as ever. And that's an awkward problem as the country works to finalize a massive new free trade deal with Europe – a market of 500 million people.

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If provinces continue to resist full free trade at home, domestic and international trade rules could wind up out of sync, leaving some European companies with better access to markets in Canada than their Canadian rivals.

How absurd would that be?

Ontario recently piled on additional local contracting preferences even as it takes part in negotiations with Europe to get rid of them. A new "local knowledge" requirement on provincially-financed infrastructure projects, including Toronto's proposed light-rail line, would steer more work to local contractors and make it tougher for bidders from outside the province.

It is one of numerous protectionist barriers that continue to be erected, and staunchly defended.

The Agreement on Internal Trade looks like a conventional free-trade deal. It spans 200-plus pages, and includes the usual chapters on such things as procurement, investment, labour mobility and dispute settlement.

But it doesn't behave like a free-trade agreement. Commitments typically default to the lowest common denominator because of the need for consensus among the provinces. Maximum penalties are set at a paltry $5-million. And the dispute settlement system is plodding and ineffective.

Alberta, for example, fought for nearly a decade to strike down an Ontario ban on mixing a bit of butter or milk into vegetable oil or soy-based drinks and spreads, such as Land O' Lakes Fresh Buttery Taste Spread.

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In 2010, Ontario was finally forced to remove the ban, originally introduced to protect dairy farmers from competition.

It was only a partial victory. Quebec, the country's largest dairy producer, continues to prohibit the sale of those same blended products, along with a wide array of other dairy substitutes that are legal in the rest of the country, such as soy cheese. Mandated consultations with Quebec have proven fruitless.

Saskatchewan, the main complainant in this second case, will finally get its day in court in January. A ruling could take a year or more – nearly 15 years after the filing of the original Ontario complaint. And the outcome is pretty much a foregone conclusion, given the precedent set by the Ontario case.

No surprise, then, that other costly and unnecessary barriers go unchallenged. This includes bans on cross-border liquor sales, arcane food safety laws, and the inexplicable variety of standards for truck tires and gasoline ethanol. Professionals and trades workers still face onerous restrictions as they move from province to province. The massive dairy, poultry and egg industries operate as virtual provincial silos, with cross-border trade tightly controlled to maximize returns to farmers and processors.

The absence of a national electricity market means we produce too much of the wrong kind of power and foist inflated costs on consumers. So much for Canada being an energy superpower.

The provinces may talk a good line about free trade with the world. But, somehow, they manage to justify the perpetuation of blatantly protectionist laws at home.

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Provincial trade ministers are slated to meet federal Industry Minister James Moore later this year to draft a new work plan for the AIT and refocus internal free trade efforts.

Federal officials are quietly hopeful that the prospect of free trade with Europe will be a catalyst for further liberalization.

The behaviour of Quebec, Ontario and others suggests otherwise. Provinces will oppose real free trade as long as voters tolerate narrow-minded parochialism. And Canadian consumers will continue to blindly pay the AIT surcharge.

Interprovincial trade is worth about $300-billion a year. Apply a 7-per-cent tax and that's a penalty of more than $20-billion – money the country could use to help exporters make the most of the new trade opportunities in Europe, and elsewhere.

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