The Unpleasant Whiff of Canada-U.S. Trade Rules

Commentary, Trade, Frontier Centre

Say “perimeter security” and many Canadians think of spies secretly swapping files or Mounties riding the high seas with the U.S. Coast Guard.

Jayson Myers, president of the Canadian Manufacturers & Exporters, thinks of deodorant.

Deodorant regulations, to be exact.

Canada’s unique rules on what’s in deodorant and how it’s made are among hundreds of regulatory discrepancies that businesses say needlessly gum up the Canada-U.S. border and cost consumers untold billions.

Prime Minister Stephen Harper and U.S. President Barack Obama pledged earlier this month to seek convergence on a vast array of trade-inhibiting regulations as they pursue a broader North American security perimeter deal.

Consider the case of Procter & Gamble. The consumer goods colossus makes deodorant for the Canadian market at a plant in North Carolina. Different U.S. and Canadian standards mean the company must operate a dedicated production line for Canada, subject to on-site inspections by Health Canada officials. The product is inspected a second time at the border, forcing the company to ship deodorant separately from its other products.

The net result is that Canadians pay significantly more to control their body odour than Americans.

“Are Canadian underarms so different that we need two sets of regulations?” Mr. Myers wonders.

For businesses, regulatory harmonization is clearly the main attraction of all this perimeter talk.

At a time when efforts are stalled to reach a new global trade deal in Geneva, the new buzz-phrase is regulatory co-operation. It’s a key element of the free-trade negotiations between Canada and Europe, and now it’s the focus of Canada-U.S. talks.

As the smaller partner in relations with the U.S. and Europe, Canada has a lot to gain from harmonizing regulations, according to a recent report by the Conference Board of Canada.

“Regulatory incompatibility is particularly damaging for smaller economies,” author Kathleen Macmillan argues. The cost of overseeing those regulations is spread over a smaller economy. Canadian companies tend to be smaller so compliance costs are more burdensome. And finally, regulations that are out of step with international norms make Canada a less attractive place to invest, says Ms. Macmillan, citing research by Carleton University’s Michael Hart.

Ms. Macmillan identifies several areas where regulations are particularly costly to Canada: agriculture and food, trucking, motor vehicles, biotech and telecom, drugs, and professional licensing.

In the auto sector, for example, the Canadian Chamber of Commerce estimates that inconsistencies between Canadian and U.S. regulations add an average of $800 to the cost of vehicles sold here. Auto makers also typically offer fewer models in Canada than elsewhere.

The potential gains are significant.

But it won’t be easy. There are good reasons why Canada has made so little progress in the more than two decades since the Canada-U.S. free-trade agreement. Regulators fear a loss of turf. There are sovereignty concerns and a general mistrust of other regulatory regimes. Many areas of regulation are in provincial hands, and there may even be less harmonization within Canada. Sometimes resistance is blatantly protectionist.

And every industry has unique concerns, making the process of harmonization and mutual recognition long and tedious.

That doesn’t mean Canada shouldn’t try. The economic gains are substantial, and the price to pay in many cases may be relatively low.

Look at the P&G case: There’s no danger that Canada would lose manufacturing jobs because the products are already made in the United States. And there’s no evidence U.S. consumer product safety standards are any laxer than Canada’s.

We already recognize the validity of U.S. regulators in an array of areas. When Americans move to Canada, for example, we don’t make them retake a new driver’s test, and vice versa.

There’s also a good road map for getting a deal done between a large country and a smaller one. The 1998 Trans-Tasman Mutual Recognition Arrangement committed Australia and New Zealand to reconcile differing professional and product standards. Under the deal, stuff produced or imported into one country can be sold in the other, without being subjected to another level of regulatory scrutiny. In many cases, New Zealand simply adopted Australian standards, particularly where it made economic sense to do so.

There will be touchy areas. But Ottawa can pick and choose where it makes sense to harmonize and where developing new common standards is more appropriate. The two countries may also opt to keep other areas off the table entirely.

So while politicians get all stirred up about border security, the more interesting action could be on the regulatory front. And that’s a good thing for Canadian businesses and consumers.