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The $3.6 Billion Extra Canadians Are Paying for Goods

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Whenever Canadians cross the border, it is inevitable they will find cheaper goods in the United States. Whether milk, books, electronic goods or vehicles, it seems bargains abound south of the 49th parallel.

The Canadian Senate has just done a bang-up job of adding hard data to anecdotal observations on this issue. In a recent report, the Standing Senate Committee on National Finance found several reasons for higher Canadian prices, including higher regulations in Canada and higher taxes. (The latter explains the difference in gasoline and diesel prices at the pump, for example.)

Other factors that explain the price discrepancies include the relatively small size of the Canadian market. However, one submission to the Senate noted that prices in Montreal (pop. 2 million) are substantially higher than in neighbouring Plattsburgh, USA (pop. 20,000). So the size of the market doesn't explain everything.

However, there is another reason that helps explain part of the price differences: $3.6 billion in customs tariffs.

For example, ice hockey gloves are subject to a duty of 16.5 per cent while ice hockey pants are subject to an 18 per cent duty. This is why it is helpful to think of a tariff on imported goods as a tax. After all, imagine if Ottawa imposed a visible 18 per cent sales tax on all your kids' hockey equipment. But that tax is there; it's just not visible on your receipt.

One caveat: As the Senate report notes, 90 per cent of goods that entered Canada in 2010 came duty-free. However, of the $3.6 billion the federal government collects in tariffs every year, 60 per cent of that comes from tariffs applied to apparel and textile products, automobiles, auto parts and footwear. And as the Senate committee observed, such tariffs have a much more dramatic effect upon prices because of what I dub the "cascade effect." The Senate report explains how "wholesalers and retailers also apply their respective gross margin on the cost of the imported product including the tariff." That, the Senate found, magnifies the effect of that tariff on the final price.

In one example, almost 76 per cent of the price discrepancy between Canada and the United States was due to the tariff and the additional margins cascaded on top. (The rest was due to differences in demand for the product between the two countries and the cost of doing business.)

So what is the remedy to eliminate much of the price difference between Canada and the U.S.? One Senate recommendation included a review of the $3.6 billion tariff bill to consumers. But here the Senate committee fudged a clear call for the complete abolishment of tariffs; it asked the government to keep in mind "the impact on domestic manufacturing." The Senate was also concerned that businesses might not always pass on the full benefits of tariff reductions to consumers.

That $3.6 billion is a tax on consumers. The Senate committee's fear could be assuaged if the federal government allowed more competition, which in some cases, an abolishment of tariffs would provoke.

For instance, vehicles not assembled in NAFTA countries are subject to a 2.5 per cent tariff in the United States but a 6.1 per cent tariff in Canada. If Ottawa removed our tariff, NAFTA-based auto manufacturers would be forced to drop prices for consumers in order to compete with vehicles imported from elsewhere.

Here's another example and one the Senate report ignored completely: federal tariffs in the dairy and poultry sector. There, tariffs on foreign imports range from 202 per cent (skim milk) to 298 per cent (butter); cheese, yogurt, ice cream and regular milk fall within that range. If Ottawa dropped the tariffs and ended the government-protected dairy and poultry cartels where supply is restricted and new competitors banned, consumers would see real drops in prices.

All consumers would benefit from more competition and an end to anti-consumer tariffs. But more importantly, low-income Canadians would benefit the most. That's because what little money such families do have is spent on the necessities of life. Those are often the items subject to tariffs.

Abolishing tariffs -- whether on automobiles, necessary for most people to earn a living and to transport kids around, or on the basic necessities of life -- would positively affect poorest Canadians the most. That's why Ottawa should end $3.6 billion in tariffs: because tariffs are a tax on the poor.

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