Canada-U.S. Price Gap: Budget's Tariff Changes Could Mean Higher Prices For Consumers

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CANADA US PRICE GAP BUDGET TARIFFS
A little noticed tariff change on imports in the budget is likely to fatten Ottawa's coffers for years to come, but wind up costing Canadian consumers. | Getty Images

OTTAWA - Canadians will be paying hundreds of millions of dollars more on everything from food to bicycles because of a little-noticed change in tariffs Ottawa places on imports from emerging nations like China and India, say analysts.

The change comes from a notice in Thursday's federal budget that starting in 2015, Canada is "graduating" 72 countries previously classified as developing to full developed status for the purpose of tariffs.

In essence, the move is the flip-side of the coin of the much-hyped removal of all import duties on sporting and athletic equipment for such things as hockey pants and gloves — as well as baby clothes — that Finance Minister Jim Flaherty said he hoped would help close the Canada-U.S. price gap.

The change in classification, which will increase import tariffs from emerging countries by an average of about 3 per cent, will dwarf any price drops Canadians are likely to see from the elimination of those on sporting goods and baby clothes.

The tariff relief affects a total of 37 imported goods, while the tariff penalty will raise prices on more than a thousand items, says Mike Moffatt, a professor at the Richard Ivey School of Business at the University of Western Ontario.

The impact on Canadians will likely be higher prices on a wide range of goods, including imported food.

Some examples include an increase on the tariff on bicycles to 13 per cent from 8.5 per cent; venetian blinds to 7 per cent from 3 per cent; table fans to 8 per cent from 2.5 per cent; tableware to 6.5 per cent from 3 per cent; umbrellas to 7 per cent from 5 per cent, and potato starch to 10.5 per cent from 5 per cent.

According to the government's own calculations, the elimination of duties on sports and baby clothes will cost $76 million a year, but it will gain $333 million annually by its other measure.

"They are basically giving us a dollar and taking back five. It's a bit of a shell-game," Moffatt said.

Bank of Montreal chief economist Doug Porter, who regularly tracks the U.S.-Canada price gap, says the changes may actually widen the differences between the two countries rather than narrow them.

"One wonders if this doesn't potentially lead to even more of a problem on the price gap. I have to wonder if this isn't taking from one hand and piling on to the other... aggravating cross-border shopping," he said.

In the budget, the government explained it is making the changes in how countries are treated to reflect the changing global economic landscape. The criteria is based on whether any country's share of world exports is greater or equal to one per cent for two consecutive years, or if they are classified as high income or upper-middle income economies by the World Bank.

Flaherty said on Friday that he decided to remove tariffs on sports equipment and baby clothes because he wanted to run a real-world test of the relationship between duties and retail prices. The Senate committee that reported on the issue in February made the case that prices would likely fall if tariffs did, he said.

"We chose a few items so we can watch and see what happens to consumer prices," he explained. "If it works there are other tariffs we can reduce over time."

Flaherty said it no longer made sense to have some relatively wealthy countries in a category receiving preferential treatment, noting that the list had not been updated since 1974.

But the groupings make for some strange bedfellows. Hong Kong, Israel and South Korea get "promoted" to developed economy status, but so do Jamaica, the Dominican Republic, India, Iran, Jordan, Cuba, Venezuela and Kazakhstan.

"Some of them make sense. Treating Korea and Japan the same way makes sense," said Moffatt. "But when you get into countries like Kazakhstan, Jamaica, even India... they are developing, but to say they are a fully-developed country is a little unusual."

The economists speculate one of the reasons behind the move may be to undo what Canada and other developed countries claim is a trade advantage being gained by fixed-currency economies such as China, which can adjust exchange rates to boost exports.

Moffatt added that the higher tariff levels may also give Canada a bargaining chip in trade talks with Asian countries in the TransPacific Partnership negotiations, and in future bilateral talks with China.

"The idea is we are raising all these tariffs so it gives us a negotiating leverage to say if you want these tariffs back down or even lower, you are going to have to give us something in return," he said.

The changes don't affect about 100 countries, so those designated "least developed" will continue to receive preferential tariff treatment.

As well, the budget says Ottawa will amend rules of origin regulations to ensure imported textiles and apparel from poorer nations won't be impacted even if they use inputs from the promoted countries.

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