Why Canadians may never realize their dream of having U.S. prices

Why Canadians may never realize their dream of having U.S. prices

Dan Ovsey | 13/05/23 | Last Updated: 13/05/23 10:36 AM ET
In 2011, an average of 3.4 million Canadians made a conscious choice to hop in their vehicles each month and make a run for the border — to shop.

That trend is likely to grow in the near future given that the federal government’s 2013 budget announced the introduction of new tariffs to be imposed on goods entering Canada from 70 different countries, costing Canadian consumers an estimated $330-million more each year in retail prices.

Cross-border shopping is far from new, of course. For decades, Canadians have been traversing the 49th parallel for deals on everything from clothing and accessories to household goods, electronics and furniture. Even when the exchange rate was unfavourable and duties had to be paid at the border, the price difference still made a cross-border shopping trip worthwhile.Most Canadians, however, presumed the price gap would narrow if and when the disparity between the value of the loonie and greenback narrowed, and were predictably outraged when that failed to be the case. To show their indignation, consumers have begun flocking across the border in greater numbers and welcoming giant U.S. discount retailers such as Target in hopes of taking advantage of U.S. prices.

If you talk to manufacturers, a lot of businesses will tell you that it’s harder to do business between one province and another than it is between Ontario and Massachusetts

Yet, blaming government alone wouldn’t be fair. A Senate Committee report released last month shows price disparity between Canada and the U.S. is the inevitable result of a variety of factors, including less advantageous economies of scale, higher transportation costs, more complex (read bilingual) packaging requirements, onerous tariffs, disparate provincial regulatory requirements, inharmonious bilateral trade requirements, a smaller consumer market and mysterious “country pricing” used by some international manufacturers to make up for the aforementioned costs simply because polite and passive Canadians are too passive to protest.

“If you talk to manufacturers, a lot of businesses will tell you that it’s harder to do business between one province and another than it is between Ontario and Massachusetts,” says Diane Brisebois, president and CEO of the Retail Council of Canada.

Ms. Brisebois says onerous and inharmonious inter-provincial regulations make the cost of manufacturing and transporting goods across what is already a vast geography even higher. Others point to Canada’s small consumer population relative to the U.S. as another factor behind higher Canadian prices, noting the cost of doing business has to be spread out among a much smaller group. But some just don’t buy the argument.

Fred Lazar, an economics professor at the Schulich School of Business, notes there are examples of multinational retailers, like Zara and H&M, which were founded in nations only slightly more populous than Canada. (In fairness, both Spain and Sweden — the home nations of Zara and H&M respectively — have population densities significantly higher than that of Canada.)

Prof. Lazar believes the price gap boils down to competition, or lack thereof.“Take The Bay. When The Bay was just a Canadian company it lagged behind in every important characteristic of retailing.… It’s only since it brought in new management and became a U.S.-owned company that you saw significant changes and improvements,” says Prof. Lazar, noting the higher degree of competition in the U.S. forces retailers to invest in e-commerce and other innovative mechanisms that serve to reduce costs, lower prices and widen profit margins.

He isn’t alone in his belief. Martin Lavoie, director of policy at Canadian Manufacturers & Exporters noted in his submission to the Senate Committee that Canada’s top four retailers have a 28% market share compared with only 12% in the U.S.

Because retailers in the U.S. enjoy lower labour rates and have higher productivity, it allows them to keep costs down

Yet even Mr. Lavoie acknowledges there may be more to the story. “Because retailers in the U.S. enjoy lower labour rates and have higher productivity, it allows them to keep costs down,” he says. “In the U.S. they’ve made advancements in how they manage inventory.”

Then there’s the sensitive issue of Canada’s protected industries, such as dairy and poultry, which enjoy the advantage of having tariffs placed on foreign competitors in their industry. Such barriers, says Mark Milkie of the Fraser Institute, are usually reciprocated by other nations, and consumers lose out in the end.

“How you get Canada to be more competitive is you make it easier for new entrants into the market to compete against existing players,” he says.

Whether the cause is competitive barriers, higher labour costs, a smaller consumer market or something else, Canada’s retailers aren’t generating the revenue they need to invest in innovative cost-reducing technologies and operations that allow them to compete at an international level. In the end, everyone loses, especially the consumer.