Tired of paying more for the same product in Canada that sells for less in the U.S.? Don’t point the finger at retailers. Blame Ottawa instead.
At least that’s the takeaway from a new report from the C.D. Howe Institute, which says government policy is driving the Canada-U.S. price gap.
“While a rising Canadian dollar was clearly the catalyst for increased purchasing power by Canadians in the U.S., consumers naturally wonder how the same goods can exhibit such large price gaps across countries despite small distances and a relatively open border,” says the report titled, “Sticker Shock: The Causes and Consequences of the Canada-U.S. Price Differential” and written by University of Toronto economist Nicholas Li.
The Senate has studied the price-gap issue looking at causes such as tariffs, market size, business costs, retail competition and so-called “country pricing,” which is basically price discrimination. Ottawa also said in the 2014 budget that it would empower the Competition Bureau to look into the matter.
But Li says there’s a simpler solution to the problem – and Ottawa alone has the power to fix it.
“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,” the report.
“In many cases, ill-advised government tariffs and policies such as supply management are responsible for the Canada-US price gap.”
It also says Ottawa should continue to increase duty-free exemptions for travellers and postal shipments, while also consider certain taxes and regulations that might be making it more expensive for manufacturers, distributors and retailers to do business in Canada.
“If the federal government is serious about reducing prices for Canadians, it might want to first look at some of its own policies before tasking the Competition Bureau with investigating companies charging higher prices in Canada relative to the U.S.,” the report says.
To come up with the findings, Li compared prices from a major grocery retailer operating in both the U.S. and Canada. He found gaps in wholesale prices played a much greater role in the price difference than retail margins.
Looking at rising wholesales prices between 2004 and 2007 period, Li says they are more associated with government regulation such as high tariffs and supply management, and not with competition in Canada.
Based on his findings, there are actually one-third fewer major brands in Canada versus the U.S. His study shows Canada has 10,000 products at the average retail store compared with 14,000 in the U.S.
The price gap has been widening since about mid-2000, thanks to the rising value of the Canadian dollar, the report notes.
According to Li’s research, a B.C. resident that went shopping in 2004 for items such as seafood snacks, diapers or chocolate bars in nearby Washington state would have paid the same price, in Canadian dollars. However, in 2007, the seafood snack would have cost 3 per cent more, the diapers 16 per cent more and the chocolate 25 per cent more under the same scenario.
“Since the Canadian dollar appreciated during those years, boosting Canadians’ purchasing power in US stores, many have wondered why the same products became relatively more expensive in Canada,” he says.
By 2012, the report says prices for a typical basket of goods were 27 per cent higher in Canadian stores, and 57 per cent higher for food.
"As Canadian policymakers turn their attention to the relative prices of similar goods on each side of the border, they should understand why prices for many goods are higher in Canada than in the US,” Li says.