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For imports exceeding the allowed limits, there is a 299-per-cent tariff on butter, a 246-per-cent tariff on cheese, and a 241-per-cent tariff on milk. All are plainly prohibitive. (Deborah Baic/The Globe and Mail)
For imports exceeding the allowed limits, there is a 299-per-cent tariff on butter, a 246-per-cent tariff on cheese, and a 241-per-cent tariff on milk. All are plainly prohibitive. (Deborah Baic/The Globe and Mail)

Tariffs are the hidden hand behind U.S.-Canada price gap Add to ...

On the list of things consumers like to rant about, the price gap between Canada and the United States ranks high up, in the company of banking fees and pump prices that flare before holidays.

This week’s Senate report on cross-border price discrepancies was, in and of itself, Rick Mercer material, with its hodgepodge of culprits and vaguely worded recommendations. Canadians looking for someone to blame were left hanging.

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Apparently, there aren’t that many manufacturers that are gorging on Canadians, only consumers who are so intent on buying a brand – and an image – they are consenting victims of higher prices. Nor are there many rapacious retailers, senators concluded, only businesses with lower bargaining power that are passing along high acquisition costs.

What can be done? Canada’s geography, which stretches transportation costs like a never-ending highway, will never change.

About the only thing that could soften the Canadian price disadvantage would be a long and hard review of the tariffs that are slapped on at the border for a range of goods so wide you could extend them from British Columbia to Newfoundland.

Canadians pay little attention to tariffs, understandably so. Unlike sales taxes, they are invisible at the cash register. And the topic is about as entertaining as reading a phone book. But Canada’s 8,192 tariffs categories – each with 18 tariff treatments! – are in dire need of tidying. And if Canadians don’t take Ottawa to task, then they can only blame themselves for the Canada-U.S. price gap.

Tariffs or taxes on imports are designed to protect Canadian industries from foreign competition. But some of these industries are long gone. For example, while Montreal manufacturer Gildan now makes its cotton T-shirts in Honduras, Nicaragua and in the Dominican Republic, imported cotton T-shirts are still hit with an insane 18-per-cent tariff.

After an internal study on a sample of 15,700 products, Canadian Tire Corp. Ltd. found out that four out of five of the goods subject to duty that it imports face a higher tariff in Canada than in the United States. This difference translated into $8.4-million in extra costs in 2011 – costs that are amplified with sales taxes once the retailer passes them on to consumers.

“We’ve been looking at our tariff situation carefully, particularly with respect to consumer goods in Canada, to see what we could do,” Finance Minister Jim Flaherty said just before the Senate report’s release.

Actually, the government is looking into increasing tariffs for products coming from 72 different countries. Ottawa just undertook a review of the preferential tariff regime it implemented in the 1970s to help poor countries increase their exports and revenues. While it makes perfect sense to take out Brazil, China and Russia, now economic powerhouses, from the list of countries with preferential treatment, hitting countries like Peru, Tunisia or Thailand with stiffer tariffs appears unnecessarily harsh. Only Canadian consumers will hurt in the end.

There are vested interests against reducing tariffs – and the Finance Department is among them, as Mr. Flaherty recognizes himself. Customs tariffs generated $3.6-billion in revenues in 2010-2011. This is not an inconsiderable amount for a government aiming to balance its books while feeling the pinch of discounted oil revenues.

Some of Canada’s tariffs protect powerful industries, and even sacred cows. News that Ottawa is ready to increase the quantity of cheese that enters the country tariff-free in order to secure better access for Canada’s beef and pork in Europe sent shock waves through the dairy industry this week.

Canadian consumers have been subsidizing the dairy industry since the 1970s through supply management, a complex system that relies on high tariffs to ensure rich and stable revenues to dairy farmers, whose fortunes have skyrocketed. The average dairy farm holds production quotas valued at a minimum of $2-million, according to a 2009 Conference Board of Canada study.

For imports exceeding the allowed limits, there is a 299-per-cent tariff on butter, a 246-per-cent tariff on cheese, and a 241-per-cent tariff on milk. All are plainly prohibitive.

Of course, most Canadians won’t cross the border into the U.S. just to save 59 cents on average on a one-litre carton of whole milk. But they are going there in droves, and I suspect there are more shopping sprees than day hikes in New York’s Adirondacks.

In 2011, an average of 3.4 million Canadians drove to the U.S. by car every month – that is more than 40 million trips on the year. And since then, the limit on duty-free shopping was raised to $200 from $50 for a stay of 24 hours or more.

Douglas Porter, chief economist at BMO Nesbitt Burns, estimates that cross-border shopping now drains more than $20-billion from the Canadian economy on an annual basis. Even if this figure is difficult to pinpoint, the cost in lost sales, lost jobs and lost fiscal revenues is no less real. Which is why Ottawa should truly mind the gap.

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