Senators call for less tariffs to help close 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 yesterday.
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 Canada still has an 18 percent 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 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 routinely are cheaper in the U.S. by up to 40 percent with some titles.
As Sen. 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 said.
The report pointed out that 90 percent 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 percent. 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 policy-makers,” Porter stressed.
But he noted the gap has narrowed since he began his comparison shopping studies five years ago—from about 25 percent to about 13 percent today.
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.