The Lowdown on Interprovincial Trade Barriers

Well guys, we did it. We avoided tariffs from the U.S….

For another month, anyway. Hopefully longer, but who knows!

The tariff discussion was actually a massive wake-up call for Canada, and as an investor with a large percentage of his portfolio put to work in Canadian equities, I’m glad we had it. It’s a harsh reminder that we can’t depend solely on the United States as friend, protector, and primary trading partner. Canada must take steps like diversifying its economy, investing more in its military, and looking for other markets to sell to.

One common suggestion made in the last week has been eliminating interprovincial trade barriers, which block commerce from moving freely inside Canada. I thought this was a terrific idea, and I wanted to read more.

Just how exactly can we do this? And just what are the barriers that are blocking trade?

And so I read, and I read, and I read some more. And, before I knew it, pretty much a whole day had gone by. So, what did I learn?

What I read both empowered and frustrated me. I was empowered because, like the pundits say, there is a bunch of low-hanging fruit we can pick here. I’ll highlight some examples that, if you’re anything like me, will have you shaking your head at the absurdity of it all. But there are many more that don’t have an easy solution. In fact, as we’ll see, some of the biggest barriers of all mostly can’t be solved.

Today’s edition of the newsletter will look at these barriers and group them into three categories — the unsolvables, the maybe-solvables, and the easily-solvables. Let’s do it.

The unsolvables

Without scrolling down, can you name the largest interprovincial trade barrier in Canada?

I bet it’s something that never actually crossed your mind. I know it sure never crossed mine.

It’s distance. 

Distance is the largest trade barrier in Canada, and for most products affected, there’s zero way to solve this.

Think about a potato farmer in PEI for a second. They might want to sell their potatoes to folks in Saskatchewan, Alberta, or B.C., but that just isn’t going to happen. Barring a cross-country giant potato cannon/pipeline — which would be undoubtedly awesome — there’s no way for this farmer to get his potatoes across the country at a reasonable price. They’re too heavy for the price. He just can’t do it.

Besides, there’s really no reason to ship PEI potatoes across the country. Farmers across the southern parts of Alberta, Saskatchewan, and Manitoba are large potato growers, partially to sell potatoes to consumers and partially to sell them to french fry and potato chip plants in the area. It’s no coincidence that a McCain plant, Lamb Weston plant, a Cavendish Farms plant, and Frito Lay plant are located within 100km of each other in Southern Alberta. Those plants are there because that’s where the potatoes are.

One study estimated that an extra 1,000km of shipping is the equivalent of a trade barrier of 3-13%, depending on the item. And it’s the equivalent of about 4,500km from PEI to Alberta. Therefore, the only realistic domestic markets for PEI’s delicious spuds are Quebec and the Maritime provinces. So rather than send them all the way to the western part of Canada, they get sent to McCain factories in the Maritimes or exported to the Northeastern U.S., which is much closer.

I feel like I’ve been talking about potatoes for too long, so we’ll move on. The point is Canada is a gigantic country and shipping things from one end of it to the other is expensive, cumbersome, and unnecessary — especially when there are willing buyers a much shorter distance away. And so that’s what happens — PEI grows about 20% of Canada’s potatoes, but accounts for about a third of exports. They go to America, and then the smaller seed potatoes are exported to other places.

I’m focusing a lot on geography here because it’s really important when discussing interprovincial trade barriers. In fact, it’s the most important factor, at least according to the IMF’s study on the subject. It estimates that 57% of Canada’s total trade barriers (and nearly 80% of the trade barrier on goods) are due to distance, and I’m not sure how we can ever solve that.  

The good news is there are large swaths of the Canadian economy where distance doesn’t matter that much. For instance, oil and natural gas. Pipelines can transport large amounts of both oil and natural gas for a small amount per barrel. They cost a lot to build in the first place, but then after that the cost falls substantially on a per barrel basis.

Many other commodities can be transported for a relatively low cost as well.

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Ultimately, the point is this. The majority of the trade barriers that exist between provinces are due to geography, and there’s not much we can do about that. This fact alone means that a big chunk of these trade barriers are permanent.

The good news is there’s still plenty of low hanging fruit. So let’s move on to some interprovincial trade barriers we can actually solve.

The maybe solvables

Next, let’s talk about some things that could help tear down interprovincial trade barriers — but would need things to change quite a bit from today.

I’m going to focus most of my attention on alcohol, because there are opportunities there, and I find the business interesting.

There are ten provinces in Canada. All ten of these provinces have some sort of provincial liquor board that purchases the province’s alcohol in bulk. This alcohol is then distributed to liquor stores — or, sometimes, sold to consumers online — but almost never crosses provincial lines. In fact, I think there’s only one province that allows alcohol to be shipped anywhere in Canada, and that’s Manitoba.

So, how do we encourage these boards to diversify away from U.S. products? It turns out there are very real reasons for preferring the likes of Jack Daniels or Budweiser.

Firstly, for a lot of liquor boards, it’s just easier to buy U.S. products. The products are cheaper, they can easily make them in bulk, and the U.S. has fewer rules for an alcohol buyer at the LCBO or AGLC to contend with. It’s also much easier for larger, more established producers to meet all the rules that the various provincial boards have. Besides, once a product is established in the U.S. market, it’s comparatively quite easy to move it up to Canada.

I’m going to focus on LCBO here, because it’s the biggest bad boy on the block. Basically, the way LCBO operates now is through a process that’s designed to be fair — but actually gives large, established brands a big advantage.

Let’s look at the hurdles a Canadian wine producer would need to clear if they want to list a product or two in the LCBO:

• Produce something that meshes with the LCBO’s product calls grid (I downloaded it, and they’re mostly looking for foreign wines. Already our local producer has an uphill climb)

• Get the wine professionally tested to make sure it meets LCBO’s quality standards

• Make sure the product’s labeling meets LCBO’s guidelines

• Submit something like 50 pages of paperwork as part of the application process

• Submitting your winery license, a Certificate of Compliance, and a Certificate of Origin

• Getting the right wholesale price

• Then, after all of that, the producer needs to go to individual LCBO stores and try to convince each individual manager to bring in their products

And those are just Ontario’s rules. For a manufacturer to go national, they have to negotiate nine more provincial liquor boards.

Most just work with agencies that do the work for them (in fact, some of the provincial liquor boards will only work with agencies). Naturally, these agencies take fat fees for their service.

In addition, there are higher taxes in some provinces than others, so creating a nationwide alcohol program would come with a certain amount of issues there.

There are also very few manufacturers who have the ability to expand coast-to-coast who haven’t already done so. So it’s not like Canadian liquor stores can just draw on this untapped supply — it just isn’t there.

The supply problem just isn’t solvable. However, the various liquor boards can (and should) make it much easier for a smaller producer to get listed. They should work together to easily allow a B.C. winemaker to get listed in Ontario or Quebec. There should be one standard set of rules, not ten slightly different ones. 

There’s a lot to improve here, and it’ll only happen if various provincial liquor boards work together. It’s definitely possible, but it’s going to be difficult to implement.

Easily solved problems

Onto the good news. In my research, I discovered a few interprovincial trade barriers that can be quite easily solved — we’re just lacking the political will to do so. Hopefully this latest episode with the U.S. gives us the kick in the pants to finally solve these, for good.

Out of Province vehicle inspections

A car coming into Alberta must have an out of province inspection done on it before it can be registered. This inspection generally costs about $200 and if the vehicle fails, then you must get the offending thing fixed within 10 days.

This inspection is for every “new” car/truck that wants to be registered in the province, even if it was continually insured and registered in a different province. It makes zero sense, and should be eliminated yesterday.

(We’ll note that Alberta is slowly moving in the right direction here — certain vehicles that were registered in B.C. or Saskatchewan are exempt)

I’m singling out Alberta here because it’s my home province and I know the rules. But we’re not the only culprit here. These are common across Canada.

Commercial truckers

Commercial trucking regulations across Canada are a hodgepodge of federal, provincial, and even municipal rules. In addition, each province is responsible for enforcing its own trucking regulations, with an obvious focus on their own, local rules.

Some of these rule differences are subtle, but enough to annoy drivers. For instance, federal rules state a driver:

• Work no more than 13 hours a day

• After that take a mandatory 10 hour break

• With no more than 70 hours on-duty time over the week

Alberta’s rules, meanwhile, are:

• Can’t drive for more than 13 hours a day

• But can work an additional 2 hours a day not driving

• Must take an 8 hour break after the either 13-hour or 15-hour day

There are other subtle differences. There are higher weight limits in some provinces and lower weight limits in others. It’s more work for a trucker to gain the ability to drive across provinces — suddenly, there’s two sets of rules that must be followed. This causes many truckers to just say screw it, I’ll stay close to home.

Curtailed freedom to work

Each province has slightly different licensing requirements for certain jobs, which makes it difficult for even skilled labour to move from province to province in this country.

Moving is often expensive and comes with a large amount of paperwork, which just adds to the risk of moving to another part of Canada.

This creates a situation where thousands of well-qualified workers find it too difficult to move provinces for a greater economic opportunity. Alberta might be clamoring for electricians, but workers in Quebec can’t figure out how to get their credentials to transfer.

This isn’t just a problem in blue collar industries, either. Healthcare is especially bad for this, especially in the one part of the system we all agree needs more labour — doctors.

Unions are partially to blame for this. The last thing a union wants is for out of province competition to easily show up and take jobs, especially in a weaker local economy.

The 2017 Canada free trade agreement helped here, and rules have been relaxed since then. But we still have a long way to go, and too much of the responsibility is placed on the worker to do it themselves.

Provincial meat inspections

This one is probably my favourite. There are both federal and provincial meat inspectors.

Basically, federal inspectors work at plants that export meat to other provinces or other countries. Provincial inspectors work at plants that sell meat to in-province suppliers.

But Nelson. What happens if a plant wants to ship their meat across provincial lines, and maybe ship it to…

WHOA WHOA WHOA let me stop you there. They can’t.

The reason why parallel systems exist is two-fold:

1. The federal system is far more strict than the provincial system, ensuring that the meat passes every provincial standard

2. The federal system includes veterinarians, which makes it too costly for smaller slaughterhouses. Smaller facilities tend to get 2-3 surprise inspections each year.

This begs the following question. If Alberta’s inspection system is good enough so Albertans don’t get sick, why isn’t it good enough to ensure folks in Manitoba don’t get sick?

Getting every province to use the same rules should be an easy fix here.

Food labeling

When it comes to labeling food in Canada, there are two sets of rules. A manufacturer must meet the federal and then provincial standard.

The federal regulations are pretty simple. They include the name of the product in both languages, the ingredient list, nutrition facts, etc.

Provincial regulations are different. This is mostly a Quebec thing; it has required additional food labeling standards for decades now. For instance, the French and English fonts on a product must be at least the same size in Quebec. Other provinces don’t care, all they require is the translation is there. All promotion surrounding the item must also be translated into French in Quebec. This obviously isn’t mandatory across the rest of the country.

Supply management

I’m not sure we should dismantle supply management in milk, eggs, and poultry completely — it’s basically just a subsidy, but paid for by consumers instead of taxpayers, but there are definitely ways to allow more product to cross provincial borders. We should explore that in more detail.

The bottom line

This edition of the newsletter ran a little long, and isn’t really related to dividend investing. Sorry! We’ll be back to more normal programming next week.

But I think it’s important we tackle this subject. I’m a Canadian investor with the majority of my portfolio in companies that do business in Canada. Eliminating these interprovincial trade barriers will help these companies thrive, ultimately helping these stocks march higher over time.

Ultimately, it’s important for our country. But it’s also important to realize two things. Firstly, this isn’t going to be easy. There are some fixes that are far less painful than others, but the big problems are big because there’s no easy solution. And secondly, some interprovincial trade barriers just don’t have a solution. We’re never going to fix the distance problem.

I wrote this so Canadians could identify these problems, and so they’re better equipped to see the pros and cons in the weeks and months ahead as we continue to discuss these challenges. There just aren’t that many easy solutions — after all, if they were truly easy, they would’ve been implemented by now.