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Ottawa to cut cross-border price gaps but doesn’t say how it will do it

Loonies are seen in this file photo. Economists say there’s no magic solution to easing the Canada-U.S. price gap for consumers.


Ottawa pledged to eliminate price gaps on products sold in Canada and the United States, but failed in the Throne Speech to outline specific policies to do it.

Canadians "should not be charged more in Canada for identical goods that sell for less in the United States," the government said on Wednesday. It said that it will "take further action to end geographic price discrimination against Canadians," but did not elaborate.

Canadians pay an average of 10 per cent more than Americans do for a basket of consumer goods, Bank of Montreal said in a report last week. The gap has led to accusations of retail gouging and driven Canadians to shop across the border or buy online from U.S. retailers. Canadian merchants counter that higher wholesale prices and tariffs imposed by Ottawa at the border drive up the prices Canadians pay at the cash register.

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David Wilkes, senior vice-president at the Retail Council of Canada, said he wants to know what the government's next steps are to make good on its pledge to get rid of the price gap. "We would always welcome more detail," he said.

The council and other industry players have pushed Ottawa to slash tariffs and harmonize labelling and safety standards with the United States if it wants to narrow the premium Canadians pay for goods compared with Americans.

A Senate report on the price gap in February blamed less competition between retailers and said the federal government should cut tariffs to give consumers a break. The report also called for a harmonization of product safety standards, cutting the 10-per-cent mark-up on imported books and raising the $20 limit on goods that are exempt from customs fees charged by couriers.

The Senate studied prices of everything from skates to cars, but said it fell short of discovering the definitive reason why Canadians pay more than Americans do.

Stephen Gordon, an economics professor at Laval University, said the government should remove obstacles that drive up costs, but should not impose price controls.

"We think we have free trade [with the United States] but we seem to have a whole whack of tariffs and fees," said Mr. Gordon, adding some price gaps are normal, as a result of costs and market characteristics that vary by region.

Retailers say that they have little choice but to charge higher prices in some cases because wholesalers charge Canadian stores more for goods than U.S. ones. Mr. Wilkes said he hopes the federal government will use the Competition Act to target suppliers that use so-called "country pricing," or charging different prices to retailers in different countries.

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He said Canadian retailers face higher costs than their U.S. counterparts for such things as transportation and healthcare, but they are often baffled by higher invoice prices on imported goods. "Some of it may be justifiable but a lot of it we don't understand," he said.

Tom Velk, an economics professor at McGill University in Montreal, said eliminating tariffs to spur trade is an "easy" way to improve the economy and raise standards of living.

Ottawa in the spring reduced the tariffs on baby clothes and hockey equipment, which had an immediate impact on the prices Canadians pay.

Sebastien Galy, a currency strategist with Société Générale SA, said if Ottawa slashes more tariffs it will have a wider deflationary impact, boost real disposable incomes and allow the Bank of Canada to keep interest rates low for a longer period of time.

"The real problem in Canada is lack of productivity relative to the U.S., but none of the decisions at the [Throne Speech] seem to address this," Mr. Galy said.

Still, a strong Canadian dollar is making it tough for the federal government to reduce the premium consumers pay for goods, said Doug Porter, chief economist at BMO Nesbitt Burns.

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"The reality is that there is no easy or magic solution, where Ottawa could just pull a lever and – poof – the gap would vaporize. ... The only thing that could do that would be an abrupt drop in the value of the Canadian dollar," said Mr. Porter, noting a 5-per-cent decline in the loonie would lead to a corresponding drop in the price of goods.

The global commodities boom has helped keep the Canadian dollar higher than 95 cents (U.S.) for more than four years, hampering exports while driving up prices relative to those in the United States.

A study published on Wednesday by think tank World Economics said the Canadian dollar is overvalued by 10 per cent. Mr. Porter agrees.

"If the currency did drop below 90 cents, this would be a non-issue. This whole concern about the price gap would vaporize," he said.

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