How to avoid killing Canada’s retailers

Under the USMCA, pretty much every Canadian industry is either ahead or no worse off. Even the dairy industry, which grieves over its minimal surrender of market share, will receive bucketfuls of cash as compensation.

But one industry — retail, including online retail — stands to lose big through new rules that give U.S. online merchants a major advantage over their Canadian counterparts. In future, when Canadians compare prices on offer at Canadian websites with those in the U.S., shopping in Canada will often be too pricey to compete.

The USMCA will let Canadian consumers avoid HST on purchases under $40 in the U.S., a $5 to $6 benefit for most Canadians, and avoid customs duties altogether on purchases under $150, often a big benefit when the product is manufactured outside North America. U.S. online retailers will be sure to tailor their offerings to Canadians to capitalize on these new Usmcadriven windfalls.

Even without the USMCA, Canada’s retailers have struggled to be competitive. According to a PWC study last year for the Retail Council of Canada, there is a 36-per-cent gap in price on products sold in the U.S. and Canada, a gap reduced to a still substantial 11.6 per cent once taxes, duties and shipping are calculated.

Canadian retailers are saddled with higher corporate taxes and needless regulations, such as the requirement that the appliances they import pass a separate Canadian electrical inspection — a burden that can add five or 10 per cent to the cost of a product — even though the identical product has already passed inspections in the U.S. and the EU. Because of this onerous requirement, Canadian retailers avoid importing many items, limiting choice to Canadian consumers and providing another spur to their taking to the internet for satisfaction in the U.S.

This uneven playing field isn’t the fault of the U.S. — Canadian governments are entirely to blame for the many impediments preventing Canadian retailers from being competitive. But how best to level the playing field?

Some Canadian retailers suggest that our governments eliminate HST on the first $40 in Canadian purchases. While that would certainly help, it seems a non-starter. For one thing, governments would lose immense revenue; for another, since most economists favour taxes on consumption, curbing the HST would be criticized as poor tax policy.

A better leveller — one that would eliminate the killer advantage U.S. retail- ers would otherwise land — would be to replace the gas tax with road tolls that charged couriers and other commercial vehicles on the basis of distance travelled. Pay-by-distance road tolls are becoming common in the U.S. because they are widely seen as fairly recovering the costs of building and maintaining roads, and so would raise no trade-based objections from the U.S. Our governments would lose no gas-tax revenue — rather, they would now be collecting revenue from foreign as well as domestic vehicles. As a side benefit, the tolls would act to reduce congestion on our highways, particularly if they employed peak pricing, to discourage road use during high-traffic periods.

By recognizing road costs, a major advantage that online shippers have would instantly stall. Assuming 40 cents per kilometre (a typical fee for a van or lightduty vehicle on Highway 407 north of Toronto), the trip from Buffalo at the Canadau.s. border to Toronto and back would cost the U.S. shipper an extra $136. Assuming 80 cents per kilometre (a typical fee for a heavy vehicle), the cost would be $272.

Road tolls would not only tilt the economics of online shopping to Canadian rather than U.S. retailers, they would especially tilt shopping from online to bricks and mortar, since courier deliveries within Canada would no longer be subsidized through their free use of roads. The winners of allowing the natural advantage of shopping close to home to rule, most importantly, would be the Canadian economy and the Canadian worker.

The PWC study last year estimated the losses in jobs and GDP in various scenarios that removed duties and HST. While it didn’t produce estimates for the precise scenario settled upon in the USMCA, it’s clear from the PWC estimates that by 2020 the USMCA would cost Canada’s retail sector several billion dollars in GDP and many tens of thousands in job losses. Moreover, the job losses “will affect employees with relatively modest incomes and with relatively few options for alternative employment. … most benefits will go to those who consume the most, which tend to be the relatively well off layer of Canadian society. … The result would likely be an increase in inequality.”

The elimination of free roads would protect the one Canadian industry harmed by the USMCA. While we’re correcting that harm, we might also redress other harms to Canadian industry entirely of our own making, by lowering our too-high corporate taxes and lessening our load of needless regulations.

AFTER THE USMCA, SHOPPING IN CANADA WILL OFTEN BE TOO PRICEY TO COMPETE.