The US needs a free trade deal with itself

It’s called the Canadian Free Trade Agreement (CFTA). Look closely and you’ll see that the name of the trade deal doesn’t say who Canada signed it with. That’s because Canada didn’t sign CFTA with any other country. Rather, Canada signed CFTA with itself. And that’s what makes CFTA so interesting: It seeks to increase commerce inside of Canada by lowering inter-provisional trade barriers. The U.S. can learn a lot from CFTA.

Free trade is difficult to achieve within countries, let alone between them. Canada is a big country geographically, which adds to the costs of trade. But there are also provincial policies that get in the way. According to one estimate, the tariff equivalent of these policies is a staggering 6.9 percent. To cut these costs, Canada’s Agreement on Internal Trade (AIT) came on line in 1995, just seven months after the World Trade Organization (WTO) made its debut. These trade deals are complementary.

By 2015, the amended AIT included 18 chapters on topics from government procurement to investment. AIT had some design flaws, made worse by an abundance of provincial carve-outs. Still, by 1998, the International Monetary Fund concluded that the AIT had made real progress in liberalizing inter-provincial trade. 

CFTA is more comprehensive than the AIT. For one thing, the provinces agreed to a “negative list” approach, meaning exceptions were negotiated, not treated as the default. There are still exceptions: on the low end, Alberta has six, while on the high end, Quebec has 35. But the text runs deeper, and is more enforceable, than the AIT. A 2021 study by Deloitte estimated that, by slashing inter-provincial trade barriers, Canada could realize an 3.8 percent increase in its gross domestic product.

Importantly, CFTA also allows groups of provinces to “enter into bilateral or multilateral arrangements” that do more. In other words, provinces are free to strike “CFTA plus” deals, deepening rights and obligations among coalitions of the willing. This is key. CFTA’s greatest contribution may well turn out to be that it incentivizes provinces to experiment with stronger and wider commitments. 

This provision of CFTA may also put pressure on existing provincial trade deals to update their texts. For example, the New West Partnership Trade Agreement, which includes Alberta, British Columbia, Manitoba and Saskatchewan, might need to be tweaked so that it goes “beyond the level” of trade liberalization achieved by CFTA. That would be a game changer. 

What are the lessons for the U.S.?

Since its founding, America has been no less mired by inter-state trade barriers. The CATO Institute reported in 1987 that these barriers were a “more serious problem” than international ones, and “entirely within the purview of US policymakers.” Other studies have found that more than 1,000 agricultural regulations impede trade among Western states, in particular. Taxes and subsidies at the state level, more generally, are argued to blur the line between “promoting” and “protecting” local businesses from inter-state trade.

CFTA complements Canada’s many international trade deals, rather than substituting for them. Likewise, an American Free Trade Agreement merits attention not as a way to avoid global commerce, but rather as a way to make the most of it.

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University. Follow him on Twitter @marclbusch.