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Ottawa could act to reduce U.S.-Canada price gap, study says

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The federal government likes to cast itself as the champion of consumers in combatting the frustratingly large gap between Canadian and U.S. prices.

But a new report from the Toronto-based C.D. Howe Institute says Ottawa could fix much of the problem by putting its own house in order first – starting by slashing import tariffs and getting rid of the supply management regime that artificially inflates prices for dairy products, chickens and eggs.

"The easiest thing Canadian governments can do if they want to reduce the Canada-U.S. wholesale price gap is to eliminate existing tariffs and supply management policies that are responsible for the largest price gaps," University of Toronto economist Nicholas Li concludes in the 15-page report, Sticker Shock: The Causes and Consequences of the Canada-U.S. Price Differential.

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The federal government should also raise duty-free exemptions for Canadians who buy goods outside the country, Mr. Li said.

The report, being released Tuesday, similarly questions whether Ottawa's plan to direct competition authorities to pursue companies that overcharge will work. "It is not obvious how the government can increase the extent of competition in sectors … that already have relatively free entry," the report said.

In its 2014 budget, Ottawa proposed beefing up the powers of the Competition Bureau to pursue manufacturers that engage in illegitimate country-specific pricing.

But Mr. Li argued that the practice of companies using their market power to impose country pricing – where manufacturers sometimes charge retailers and distributors higher prices in Canada – is ubiquitous in most market economies.

Several other factors also contribute to higher Canadian prices, including less competition, higher costs of doing business and added distribution costs due to Canada's sparser population density, according to the report.

In a recent letter to Industry Minister James Moore, a coalition of Canadian manufacturing groups similarly urged Ottawa not "intervene in setting prices," pointing out that federal government policies contribute to the cross-border gap through such things as outdated regulations. "It is critical to note that the government itself plays a major role in the retail price consumers pay for goods in Canada," said the letter, signed by the heads of nine organization, including Canadian Manufacturers & Exporters.

The C.D. Howe report found that a large wholesale price gap emerged in the 2000s, exacerbated by a runup in the Canadian dollar. In 2002, a typical basket of goods that consumers buy regularly was 22 per cent lower in Canada than the U.S. – a trend that was the norm from the mid-1990s to the early 2000s. By 2012, the trend had reversed and the same goods had become 27 per cent more expensive in Canada.

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An even larger swing hit food prices, which were 57 per cent more expensive in Canada in 2012, compared to 9 per cent cheaper a decade earlier. The widest price discrepancy of all, at 76 per cent in 2012, was for milk, eggs and cheese – products governed by supply management, according to the report. And the Canada-U.S. price difference for these products widened more than for other food items over the decade. Under supply management, Ottawa allows farmers to fix their own prices, while imposing tariffs of up to 300 per cent to keep most imports out.

The report also found that Canadian consumers enjoy much less product variety than Americans – 10,000 products at an average store versus 14,000 in the U.S. – the result of a less competitive manufacturing and retail environment.

U.S. supermarkets chains, for example, have larger stores than Canadian grocers (an average of 49,000 square feet versus 41,000), and outlets are served by fewer and larger distribution centres.

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