We have learned this month that the Canadian government is resisting efforts by the United States to increase exemptions for cross-border travellers in both countries. We believe this is a mistake. Canada's interests are generally better served by lower trade barriers with the United States. This is particularly true on the issue of barriers to cross-border shopping, a subject of our ongoing research.
Cross-border travellers must pay HST, and when applicable, duties, on purchases above their personal exemptions. Recent legislation in the United States would raise the exemption for its residents returning from a same-day trip abroad to $1,000 from the current $200. The current exemption for Canadians is zero. U.S. legislators would like to see exemptions raised for Canadians too. This no doubt serves the interest of U.S. businesses that sell to Canadians. But the primary beneficiaries of such an approach would be Canadian residents, as well as our beleaguered Canadian Border Services Agency.
The CBSA's mandate includes determining the admissibility of travellers to Canada, enforcing border security, regulating the import of commercial goods and vehicles and collecting taxes and duties on imported goods. In a world of limited resources, requiring the CBSA to monitor and collect tariffs on small-scale purchases diverts its attention away from more vital functions; something that the CBSA admitted to the Senate in 2005.
Ottawa worries that higher personal exemptions would hurt domestic firms and reduce tax revenues. This is unsound reasoning on many levels. First, under NAFTA, most products manufactured in the United States or Mexico are not subject to Canadian duties. Therefore, the duties collected are on the small fraction of goods manufactured overseas. Indeed, a 2007 Senate report noted that customs revenues amounted to just $95-million annually - just 0.04 per cent of federal revenues.
Second, Canadians making purchases in the United States must still pay sales taxes at the point of purchase. While this tax revenue goes to U.S. governments rather than Canadian ones, it is not the case that Canadian retailers are at a huge disadvantage due to tax differences. Cross-border purchases pressure Canadian retailers to be more competitive and provide better, cheaper services to Canadian shoppers.
Third, and perhaps most importantly, we must recognize that public policy should be designed to benefit all Canadians, rather than a few large retailers. The currencies of resource exporters such as Australia, Canada and Brazil have appreciated sharply in recent years. We should all enjoy the higher standard of living the strong dollar entails, rather than allowing retailers to monopolize these benefits.
We recently studied the patterns of cross-border travel by Canadians over the past 40 years. We found that Canadian residents respond strongly to economic incentives created by fluctuating exchange rates. Despite zero exemptions for same-day trips, we find that Canadians travel much more to the United States when the dollar is strong. The scale of their reported purchases is small, but we find evidence that they purchase a wider range of products as the currency strengthens.
We have a clear choice: Treat Canadians as petty criminals for small-scale undeclared purchases of household products, and thereby increase the pressure on the CBSA; or relax exemptions and encourage Canadians and Americans to travel and trade more with each other.
In the decade since 9/11, American desire to secure its borders has transformed the nearly 9,000 km U.S.-Canada land border. This has created delays of commercial shipments, increased bureaucracy and paperwork including the requirement for passports, harassment of travellers, and confusion regarding cross-border travel regulations. For years, Ottawa has bemoaned this "thickening" of the U.S.-Canada border.
We find it disappointing, then, that Ottawa would resist the small but welcome effort by the United States to facilitate cross-border travel and trade. If common sense ever returns to the regulations governing the border, it will be due to economic forces. Therefore, we must embrace, rather than reject, the economic forces that drive the new U.S. thinking on this issue. Matching the $1,000 exemption would help Canadians realize greater gains from trade, while allowing CBSA to focus on its core mission.
Ambarish Chandra and Keith Head are professors at the University of British Columbia's Sauder School of Business.