Border Towns — Senate investigation digs into price differential

Tariffs a main cause of higher prices in Canada for identical goods.

A report on a Senate investigation of higher Canadian prices opens with the sentence “Canadians are feeling ripped off.”

The report by the the Standing Senate Committee on National Finance, “The CANADA-USA Price Gap” notes large price gaps remain between the two countries even when the Canadian dollar is worth as much or more than the American currency.

Released Feb. 4, the report calls for a review of government policies that boost costs, including cross-border tariffs that slap additional charges on imported goods coming into Canada, unique-to-Canada safety regulations that can add to a car’s expense and a policy that aims to protect the Canadian book publishing industry by allowing a 10 per cent markup on the price of American books imported into Canada.

Committee chair Senator Joseph Day said there was no single explanation for the price discrepancies.

“The study showed that there are many variables that contribute to the price of products,” Day said.

For example, the committee report notes that some American manufacturers charge Canadian retailers 10 per cent to 50 per cent more than U.S. retailers for the same products.

When Canadian companies complain to the U.S. suppliers, they are told there are three main reasons — Canadians are used to paying more; the higher costs cover the expense of maintaining offices and warehouses in Canada; and the mark-ups compensate distributors for the higher cost of doing business in Canada.

The committee heard 53 witnesses over eight months of public hearings that started in the fall of 2011, including government officials, consumer groups, retailers, manufacturers, importers, exporters, experts from the academic sector, accountants and independent economists.

Among the witnesses, Bank of Canada governor Mark Carney suggested the price differences also have something to do with the near-collapse of the U.S. economy in 2008 and its slow recovery.

“Unexpected economic weakness in one country, in this case the U.S., could lead to an undesirable buildup of inventories and result in local discounting of prices,” Carney said.

Carney added the smaller size of the Canadian market may make volume discounts harder to get.

However, another witness, business analyst Jean-François Vinet, noted that residents of Montreal, a city of two million people, are finding bargains in the nearby U.S. city of Plattsburgh, which has a population of 20,000 people.

“How can a city [Plattsburgh] with such a little market have prices that are so much cheaper, wheres prices are higher in a huge urban area like Montreal?” Vinet asked.

One answer to that question may be tariffs, the extra charges levied on imported goods that are designed to protect Canadian manufacturers.

Those charges are having the unintended effect of boosting prices when there is no local industry to protect, the report suggests.

It notes that consumer products that are not actually made in either Canada or the U.S., such as ice hockey pants and helmets, are still subject to an 18 per cent tariff rate when imported into Canada, compared to the 2.9 per cent tariff the U.S. charges on the same products.

The report says Canadian car prices tend to be higher than U.S. prices, but mostly for high-end luxury and larger vehicles, while the difference is slighter for lower-priced cars in the compact and subcompact categories that make up 67 per cent of vehicle sales in Canada.

In fact, some vehicles in those smaller categories are cheaper in Canada than the U.S., the report notes.

The vehicle price differences are attributed to tariffs and differing safety standards in Canada and the U.S, which require manufacturers to produce Canadian versions of vehicles, something that adds cost, especially when the vehicle is a relatively low-volume luxury model.

Cheap gas, another motivator of cross-border trips by Canadians, is the result of higher fuel taxes in Canada, the study says, more than three times the amounts levied in the U.S.

However, the report adds, gasoline is “significantly cheaper in Canada than in Japan, Spain, France, the United Kingdom, Germany and Italy.”

The Retail Council of Canada (RCC) praised the findings of the report.

“The committee’s findings illustrate that without change, Canadian retailers will continue to operate at a cost disadvantage” Diane J. Brisebois, RCC president and CEO said.

“The government must now act in its upcoming budget to implement many of the recommendations of this report — to assist in levelling the playing field for our businesses in Canada,” Brisebois added.

Brisebois said the government’s decision in the last budget to allow larger duty exemptions for cross-border shopping has had a “very negative impact” on Canada’s retailers, particularly those in border communities.

She said the the Minister of Canadian Heritage should consider reducing the 10 per cent mark-up that distributors can add to the U.S. list price of American books imported into Canada.

The report can be found at http://www.parl.gc.ca/Content/SEN/Committee/411/NFFN/rep/rep16feb13-e.pdf

 

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