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Senate report cites barriers at border for price gaps

Pawel Dwulit/The Globe and Mail

Canadian consumers are victims of higher prices driven by less competition than in the United States, the Senate says, as it formally urged the federal government to close that price gap by reducing tariffs and other barriers at the border.

As long as competition is slacker in Canada than in the U.S., consumers here will struggle with higher prices, the long-awaited report on price disparities from the Senate committee on national finance said on Wednesday.

Steeper costs and tariffs play a part in the higher prices, and in sectors such as automobiles, the manufacturers "can charge what the market will bear," it says. "This is not against Canada's Competition Act. It does explain large gaps in the list prices of vehicles sold in Canada and the United States, especially for high-end vehicles."

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Even as consumers feel "ripped off" by price gaps at a time when the loonie is at par or higher than the U.S. dollar, as the committee found, it could offer no full definitive explanation for the price discrepancies, putting into question whether much will change despite its 16-month study into the issue.

It urges the federal government to lower tariffs and harmonize safety standards between the two countries, while reducing a 10-per-cent mark-up on book distribution to minimize price gaps.

Federal Finance Minister Jim Flaherty, who asked the Senate to study the price gaps, vowed to look at the committee's recommendations "very closely" while opening the door to eventually lowering tariffs on some consumer goods.

"We've been looking at our tariff situation carefully, particularly with respect to consumer goods in Canada, to see what we could do," Mr. Flaherty said just before the report's release.

Mr. Flaherty and the committee say lower tariffs might help offset the often-steep price gap on many products, but that's not the direction in which Ottawa is heading. Last year's omnibus budget bill will end the long-standing preferential tariff treatment of goods from many of the newly industrialized countries that produce clothes, electronics and other items consumers buy. The new higher tariffs will go into effect July 1, 2014, making goods from China, India, Brazil and dozens of other countries more expensive.

The committee acknowledges the complex web of factors that lead to the price discrepancies, including the smaller size of this country, smaller economies of scale and manufacturers that charge domestic retailers 10 to 50 per cent more than U.S. retailers for identical products.

It adds that consumers will become more savvy – and demanding – as they gain access to smartphone applications and online price comparison sites, putting more pressure on retailers.

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Diane Brisebois, president of the Retail Council of Canada, said the report vindicates merchants' contention that they operate in a higher-cost environment here, especially with steeper supplier charges. She said retailers need to negotiate more aggressively with vendors to force them to lower their rates.

Senator Joseph Day, chairman of the senate committee, acknowledged there's only so much that government can do to address price discrepancies. He urged Canadians to bargain more aggressively with retailers to get the best price possible.

"There is no one answer," he told reporters. "The government doesn't determine prices. The marketplace determines prices."

He pointed out, for example, that the price gap in cars is much narrower for smaller cars because there's more demand for them in Canada than in the U.S.

Mr. Flaherty asked the committee to study price gaps in the fall of 2011. "Canadians are rightly irritated when they see large price discrepancies on the exact same products being sold on different sides of the border," the minister wrote to the committee at the time. "I share their irritation."

Last year, a survey by Bank of Montreal on a basket of goods found that domestic retail prices are about 14 per cent higher than those in the U.S.

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The report pointed to some wide price gaps in the auto industry. "A car buyer in Oshawa could be at a dealership within walking distance of the factory where the Chevrolet Camaro was assembled and face a list price almost $5,000 greater than the list price of the Camaro in Hawaii."

The gap is lower, or even in favour of Canada, for lower-priced vehicles, it adds.

Nevertheless, "for a Canadian wishing to buy a Chevrolet Camaro, a pickup truck or a high-end automobile, it is small comfort to be told that lower-priced vehicles are relatively less expensive in Canada."

Spokespeople for Ford of Canada and General Motors of Canada said they price their vehicles to be competitive in the Canadian market while manufacturers' suggested retail prices are merely suggestions.

"What a customer actually pays for a vehicle is negotiated with the dealer," said Lauren More, spokeswoman for Ford. And suggested prices do not include the incentives, which can lower the cost, she said.

The committee also called on the government to consider raising the current $20 threshold for duty-free entry of goods ordered by mail. Courier companies typically charge consumers and businesses an extra $25 to process these shipments – a fee that often exceeds the value of the item and discourages shopping online for imported bargains. The U.S. allows shipments worth less than $200 to enter the country duty-free.

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The book sector, which also has higher prices in Canada than in the U.S., faces added pressures, including the increasing popularity of digital books and non-traditional discount booksellers, such as Wal-Mart Canada Corp. and Costco Wholesale.

But the book industry has an added challenge: a 10-per-cent mark-up that Canadian exclusive distributors can add to the U.S. list price of U.S. books imported into Canada. The committee suggests that the Minister of Canadian Heritage study reducing the mark-up.

Over all, price disparities are pinching retailers in this country. After Ottawa loosened its duty-free rules last June, Canadians began to flock across the border in record numbers: Overnight travel to the United States hit 950,000 in September, the highest number since Statistics Canada began record-keeping in 1972.

David Shepherd of Kitchener, Ont., said he finds the worst price disparities in auto parts. For example, he replaced the intake manifold on his car recently: The part is $430 in Canada, but $152 (U.S.) south of the border. He estimates Canadian retailers have lost more than $3,000 in purchases from him over the past two years. He said even on lower-priced goods, the difference in price is so great it's worth a shopping trip to the U.S. "Unless the tariffs on these items are in fact in the hundreds of per cent, there's no excuse for this gouging."

With files from reporter Greg Keenan

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