This article originally appeared in the Globe and Mail.
By Diya Jiang, Daniel Béland and Trevor Tombe, March 14, 2025
On March 4, after weeks of threats from Donald Trump’s administration, the United States imposed 25-per-cent tariffs on nearly all Canadian goods. This dramatic turn of events is all part of what we can now call an outright trade war between the United States and Canada, which immediately retaliated with tariffs of its own on American goods.
The good news is that this has sparked real momentum toward the reduction of Canada’s internal trade tariffs. Recent analyses have shown that these barriers cost up to 7 per cent of the country’s GDP, and lowering them is hence likely one of the easiest ways to boost incomes and employment amid a backdrop of rising U.S. protectionism.
Recently, many have called for provinces to undertake unilateral initiatives to reduce existing interprovincial trade barriers, as this could result in much faster action than waiting for a nationally coordinated solution. Certainly, past national efforts such as the 1995 Agreement on Internal Trade (AIT) and the 2017 Canadian Free Trade Agreement (CFTA) were subject to intense negotiation among different provinces and still included many exemptions. Analyses have shown that unilateral actions would yield relatively quick and significant economic benefits, even in the absence of broader co-ordinated action.
In fact, even smaller, regional initiatives such as the New West Partnership Trade Agreement between B.C., Alberta, Saskatchewan and Manitoba have required intensive co-ordination efforts. Recently, some provinces, such as Nova Scotia, have taken some initial unilateral steps by tabling legislation aiming to remove internal trade barriers, though larger provinces have yet to act.
Independent moves toward greater internal free trade are likely to be the quickest path toward greater free trade, period. However, for provinces to be willing to undertake them, a classic co-ordination problem will have to be overcome – that is, a typical prisoner’s dilemma.
The most beneficial outcome would be the elimination of trade barriers from all provinces. Despite this, both economic and political incentives push provinces to maintain some internal trade restrictions even if others drop them. In addition, the same factors make any individual province wary about being the first to reduce trade barriers, since they cannot be certain that others will follow suit. So how can this situation be overcome?
First, it is important to acknowledge that the primary motivator might come from south of the border. Indeed, Mr. Trump’s tariffs create significant economic and political incentives toward internal trade liberalization. In turn, these make the risks that might otherwise be associated with unilateral provincial moves to reduce barriers relatively less unpalatable. While risking upsetting powerful industries might be a scary proposition for provincial leaders in normal times, hundreds of thousands of jobs are at risk due to the U.S.’s actions; the electoral risks associated with liberalizing internal trade now seem much less daunting.
Moving internal trade liberalization to the top of the Canadian political agenda and linking it closely with the issue of U.S. tariffs can create further incentives toward unilateral provincial action. In recent decades, the technical nature of this issue has reduced its political salience and made it tough for politicians to campaign on it. But if the removal of internal trade barriers can be portrayed as a direct remedy to the economic damage brought on by them, public pressures favouring it will increasingly outweigh the particularistic interests benefitting from their existence. Similarly, in the current context, any provincial leader’s decision to hold out on internal trade liberalization would likely face widespread backlash.
Finally, smart legislative design by provinces can reduce the risks associated with unilateral action on their part. The bill recently tabled in Nova Scotia’s legislature notably pledges to eliminate trade barriers only with provinces enacting similar legislation to remove their own. This reduces the likelihood of successful free-riders. Internationally, the design of trade legislation has long been recognized as one of the most effective ways to overcome co-ordination problems brought on by the prisoner’s dilemma. This is certainly true in regard to interprovincial trade as well.
Unilateral actions by provinces represent the best steps that Canada can take to liberalize internal trade in the short term. Achieving that will require overcoming co-ordination problems between them and guarding against free-riding. While this prospect might seem daunting, Mr. Trump’s tariffs offer a unique chance to do so. Politicizing the question of internal trade and linking it to U.S. protectionism, while offering well-crafted provincial trade legislation as a solution, are the first steps toward success.
Diya Jiang is a lecturer at McGill University and a researcher who specializes in the politics of international trade and protectionism.
Daniel Béland is the director of the McGill Institute for the Study of Canada.
Trevor Tombe is an economics professor at the University of Calgary and a senior fellow at the Macdonald-Laurier Institute.
The Globe and Mail