Senators call for less tariffs to help close the Canada-U.S. price gap

OTTAWA – The federal government needs to launch a comprehensive review of its tariff policy to help bridge a yawning price gap between Canadian and American retail prices, a Senate committee said Wednesday.

After studying the issue for eight months, the Senate finance committee said tariffs on consumer imports are not the only, or even major, reason for the price differential, but they are a significant factor and one that government can do something about.

The senators noted that Canada still has an 18 per cent tariff on hockey pants even though it could find no manufacturer still producing them in Canada.

And the problem is compounded depending on when the tariff is applied in the supply chain — by the time it gets to the consumer, the duty could have multiplied two or three times.

“We’re not saying get rid of all tariffs, we’re saying study this and determine if they are appropriate and in most cases they are not,” said Joseph Day, the chairman of the committee.

Prior to the report’s release, Finance Minister Jim Flaherty, who asked the committee to look into the issue in the first place, said the government has “been looking at our tariff situation carefully, particularly with respect to consumer goods in Canada, to see what we could do.”

But he also noted that tariffs bring in needed revenues for the government. According to the report, they brought in $3.6 billion in 2010-11.

The long-awaited report makes clear that there is no one reason — or fix — for the price differential leading tens of thousands of Canadians to cross the border to stock up on clothes, alcohol, food, books, household supplies and even car tires.

Economies of scale, the bigger U.S. market, higher input costs — particularly transportation costs — and so-called country pricing, whereby manufacturers and suppliers charge Canadians retailers a higher price for band-name items than U.S. counterparts, all contribute to the phenomenon.

The report contains some head-scratchers. A Lexus assembled in Cambridge, Ont. sells for $44,950 in Canada, but for only $40,950 in the U.S. A Toyota made in Woodstock, Ont. costs more in the southwestern Ontario community than in Honolulu. Books are routinely cheaper in the U.S. by up to 40 per cent with some titles.

As Senator Larry Smith put it: “Canadians consumers are feeling ripped off. When the Canadian dollar is at parity with the United States, Canadian consumers notice that prices here are typically higher.”

But that does not necessarily mean Canadians are being gouged. And it does not mean the government can make a major contribution to fix the problem, the senators say.

The report points out that 90 per cent of goods enter Canada duty-free, meaning even if all tariffs are eliminated, prices would drop on only a minority of goods. The senators did not look into the impact of Canadian supply management policies on agricultural products, another source of differences in items such as milk and cheese.

Bank of Montreal economist Doug Porter, who has been comparing prices since 2007 when the loonie eclipsed the U.S. currency for a time, said as long as the two currencies are at parity, Canadian shoppers will be at a disadvantage.

In part, he said, it’s because the loonie is overvalued by about 10 per cent. Another is the structural differences between the two markets — one large, the other small and spread out.

“There is not a single reason that explains the price gap and because of that it can’t be fixed, certainly not by policymakers,” he said.

But he noted that the gap has narrowed since he began his comparison shopping studies five years ago, from about 25 per cent to about 13 per cent today.

On Wednesday, the loonie closed up 0.07 of a cent to 100.45 cents US.

The senators said some of the fault lies with shoppers. Canadians are not price-savvy enough, and don’t bargain enough, they said, but they believe with the advent of online shopping, that will change.

The report makes three other recommendations to help close the price gap:

— Canada and the U.S. should integrate safety standards and regulations as much as possible because any difference usually results in higher costs for the smaller market.

— Ottawa should look at raising the threshold of “de minimis” fees on low-value shipments into Canada from the current $20. The U.S. threshold is $200.

— And lastly, it says the government should explore reducing the 10 per cent mark-up Canadian distributors can add to the list price of American books.

Day said the recommendations, if adopted, won’t eliminate the price gap, but they can help reduce it.