American negotiators in the NAFTA talks find themselves on the same side as some Canadian economists on the issue of how Canada treats e-commerce shipments coming into the country.
The United States is using the talks to try to get Canada to raise its so-called "de minimis threshold" – the level below which goods are given exemptions from duty and sales tax. Today, that threshold is very low: U.S goods up to $20 in value are exempt from duty and sales tax when shipped to Canadian customers.
Canadian goods shipped to the United States, on the other hand, are exempt from duty up to US$800 in value. (Each state has the right to collect sales tax, though in most cases they don't.) The discrepancy has long been a trade irritant between the two countries, and U.S Trade Representative Robert Lighthizer and U.S e-commerce retailers have been pushing for Canada to raise its de minimis threshold closer to the U.S. limit.
A higher exemption would benefit U.S. e-commerce giants such as Amazon.com Inc., as well as smaller companies that sell goods across borders.
The issue does not have the same profile as other matters at the bargaining table, such as Canada's protection of its dairy market and the United States' wish to eliminate the current system for resolving trade disputes. To some, the threshold is a matter on which the Canadian government could give some ground – which could mean savings for consumers, but pain for some retailers.
A study by the C.D. Howe Institute found that the Canadian economy could benefit over all from a higher threshold because it would put more money in the hands of consumers. Daniel Schwanen, the study's author, said that Ottawa would actually save money if de minimis thresholds were raised because they would need to spend fewer resources on border services to check incoming goods.
“They would collect fewer duties but the costs [for border services] would be lower,” he said.
“It’s not a bad thing to compromise on. We think this is a thing that Canada could put on the table, and it could please the Americans.”
Bank of Montreal senior economist Sal Guatieri said studies show that consumers would benefit by saving money on U.S. imports, and would receive products quicker because of less friction with cross-border shipments. “It would be a big win for parcel delivery companies, with a rush of new orders by Canadians from the U.S.”
But he said Canadian businesses could be undercut by a significant margin if American goods are exempt from sales tax as well as duty. He said that negotiators will have to sort out whether an increase in Canada’s de minimis threshold would exempt goods from both.
“I believe it’s not one of the red lines that the Canadian government has set,” Mr. Guatieri said, saying that it is likely that negotiations will be about how much Canada raises its de minimis level, rather than if it will raise it at all.
The retail industry, however, sees trouble.
Larry Rosen, CEO of men's wear brand Harry Rosen, says allowing U.S businesses to undercut Canadians through a tax exemption would give foreign merchants an unfair advantage in the Canadian market when compared with local businesses.
“I’m optimistic that even if there is an increase in the de minimis … it won’t be as severe as [US$800, the U.S. limit], although any amount is a concern,” Mr. Rosen said.
Karl Littler, spokesperson with the Retail Council of Canada, said raising Canada’s de minimis threshold would have a severe impact. A study conducted by PricewaterhouseCoopers Canada commissioned by the retail council found that more than 300,000 jobs could be lost by 2020 and provincial and federal governments would lose more than $10.8-billion in annual revenue if taxes and duties were waived for all cross-border shipments worth $800 or less.
The report found similar results if Canada raised its de minimis threshold to just $200, with a loss of 286,224 jobs and $10.2-billion in government revenue.
“You’d basically get two different streams of tax treatment, and the advantageous treatment goes to any external shipper who sends goods into Canada,” Mr. Littler said.
“You'd then have an incentive to set up your distribution centres outside of Canada,” he continued, meaning that Canadian jobs could end up shifting to the United States.
E-commerce platform eBay Inc. has been lobbying for years for Canada to raise its de minimis threshold.
“[EBay] Canada has long advocated for an increase in Canada’s de minimis threshold as a way of reducing the frictions that prevent small and medium-sized businesses from fully engaging in global trade,” Andrea Stairs, general manager for eBay Canada and Latin America, said in an e-mail. She says the current rules put Canadian businesses at a disadvantage for supply chain inputs and make accepting returns a hassle.