Proceedings of the Standing Senate Committee on
National Finance
Issue 11 - Evidence - February 7, 2012
OTTAWA, Tuesday, February 7, 2012
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study the potential reasons for price discrepancies in respect of certain goods between Canada and the United States, given the value of the Canadian dollar and the effect of cross-border shopping on the Canadian economy.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call this meeting of the Standing Senate Committee on National Finance to order. We have two different sessions this morning, honourable colleagues. Before I go to the business of today, I would like to call on the deputy chair of the committee, Senator Gerstein.
Senator Gerstein: Thank you very much, Mr. Chair. I have one quick item of business to deal with before we hear from the witnesses. I must say to you, and to the committee, that it is with mixed emotion that due to other obligations I will no longer be able to serve as deputy chair of this committee. I have greatly enjoyed my time as deputy chair, particularly having the privilege and pleasure of working with you, Mr. Chair, and other members of the committee. In resigning, I must say I look forward to continuing as an active member of the committee. Accordingly, I would move that the honourable Senator Neufeld be appointed deputy chair of the Standing Senate Committee on National Finance.
The Chair: There is no need for a seconder in committee.
It has been moved by Senator Gerstein that Senator Neufeld be the deputy chair of the Standing Senate Committee on National Finance. All those in favour signify by saying "yea.''
Hon. Senators: Yea.
The Chair: Senator Gerstein, it has been a pleasure working with you these past two or three years, and I wish you well on whatever might be in store for you.
Senator Gerstein: Thank you.
The Chair: Senator Neufeld, you have been on our steering committee previously and know our committee. You have been with us for some time. I am sure it will not take you long to get up to speed on the extra responsibilities that you will have as the deputy chair. I look forward to working with you.
Senator Neufeld: Yes, and perhaps I could just say a few words, Mr. Chair.
I want to thank Senator Gerstein for the great leadership he has demonstrated over these last three years. You and I joined the Finance Committee at the same time, and I appreciate your leadership very much. I hope you and I will be able to continue to have that good, close relationship that we have had from day one in the duties that I am undertaking now.
I look forward to working with you on the steering committee again, Senator Day. We have worked together before. It has always has been a good experience, and I assume that process will continue. I believe in cooperation and consensus building as much as we possibly can in moving these important things forward for the Government of Canada and others that are here. I look forward to the job.
The Chair: Good. We will continue to strive to make this the model of committees operating in the Senate. My understanding is that Senator Runciman will continue as the third member of the steering committee?
Senator Neufeld: Yes.
The Chair: Thank you. Congratulations to all. We will move now to our business at hand for the day.
As you will recall, our committee undertook a study in the fall with respect to the potential reasons for price discrepancies in respect of certain goods between Canada and the United States, given the value of the Canadian dollar and the effect of cross-border shopping on the Canadian economy. In our initial meetings we heard from the Minister of Finance, government officials, academics and the Governor of the Bank of Canada. We took a bit of a break from our study in order to deal with supplementary estimates and other government business, which has priority in this particular committee, as it does in all committees. However, we are now back to the study and are interested in hearing from Canadian manufacturers, suppliers, distributors, consumers and the associations that represent those various groups.
Colleagues, in our first session this morning, we are pleased to welcome Mr. Martin Lavoie, Director of Policy, Manufacturing Competitiveness and Innovation with the Canadian Manufacturers & Exporters. This is not Mr. Lavoie's first visit here, and we welcome him back to our committee.
[Translation]
We are pleased to have you here with us this morning and we look forward to hearing from you. You have the floor.
Martin Lavoie, Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers & Exporters: I thank you for having invited us to discuss this important matter of price discrepancies in respect of certain goods between Canada and the United States.
[English]
If I recall, this is an issue that was studied in the early 1990s by a task force on cross-border shopping. At the time, the Canadian dollar had reached 87 cents U.S., which was considered very high at the time. It makes me realize how rapid and drastic the economic context has changed since then. That was before NAFTA, Walmart, the BlackBerry, the Internet, and even before I started to grow a belly.
Before I begin the discussion on the core subject of the meeting, let me give you a quick idea of who I represent. I am the Director of Policy at Canadian Manufacturers & Exporters. We are Canada's largest business and trade association, representing more than 10,000 manufacturers and exporters across the country. We focus our activities among five broad categories of issues including manufacturing competitiveness, energy and environment, people and skills, international business, with the most focus on Canada-U.S. business.
More than 85 percent of our members are SMEs. Our membership accounts for an estimated 82 per cent of total manufacturing production in the country and 90 per cent of our exports.
We commend the Senate for undertaking such an important study. As you probably know more than I, this is a very complex issue that involves many people in many industry sectors. I will start my presentation by looking at some structural characteristics of the Canadian market and those that can affect price discrepancies between the two countries. I would then like to say a few words about the regulatory differences between the two countries that affect manufacturers and explain a bit more about the role of manufacturers in the whole picture of the chain of production, distribution and retail.
In 2005 the Bank of Canada published a very good study on the price flexibility among Canadian firms. One of the factors they came up with was the exposure to international competition. We also know that more export-oriented firms are also more exposed to potential price changes given their exposure to more competition.
I think we could say in Canada that some sectors — and I would probably include the retail sector — are less exposed to competition than others. I think when Mark Carney came here he mentioned that the retail environment is more concentrated in Canada than in the U.S. He mentioned that the top four retailers in Canada have about 28 per cent market share, compared to only 12 per cent in the United States. We should note, however, that this sector is probably going to be facing more competition in the future with the introduction of Target into the Canadian retail market, for example.
There are other factors related to our economy that may affect the price differences, and I am sure you have heard them before. Labour cost is one that is often mentioned, considering that Canada's labour costs are higher than in the U.S. Our productivity seems to be lower than in the U.S. as well. The retail sector is one where they tend to use more labour than their U.S. counterparts. Transportation costs and Canada's lower population density may contribute to higher pricing per item basis. I think retail space in Canada seems to be more expensive than in the U.S. as well. I would like to talk about some regulatory differences between Canada and the U.S. that definitely affect the cost for manufacturers, but also may have some effect on the price of certain goods.
For example, if you look at the inspection of goods crossing the border and packaging, all of these are adding costs to the products being imported from the U.S. If a barbecue, a bike, toothpaste, or whatever you are selling in Canada has to have two inspections and a different packaging system, this will add cost to the price of the product for sure.
The main difference comes from Canada's market being relatively small. On a per item basis, the cost of all these regulations will add up quicker in Canada than in the U.S. If you sell 2 million barbecues in Canada and 25 million in the U.S., the cost of your regulatory differences will be higher per item in Canada. This is why we have been a strong supporter of the Regulatory Cooperation Council, the RCC, which was established in February 2011 by President Obama and Prime Minister Harper to make it easier for Canadian and American firms to do business on both sides of the border. The joint action plan released last December included recommendations in key sectors, including agri-food, transportation, health and personal care products, workplace chemicals and environmental regulations. Again, I take this opportunity to express our support for the work of the RCC.
I would like to say some words about the role of manufacturing and the overall price of goods one finds in stores in Canada. It is important to state here that the role of manufacturers as an explaining factor of the price difference is relatively small, for several reasons. First, I have heard from retailers and others that the costs of their supplies are going up, the price of things they buy, but it is also true for manufacturers. The price of mineral resources and the components and parts they buy is still going up. The way our sector has reacted to these increased costs is by increasing innovation and productivity in order to keep the prices as competitive as possible. Again, it is important to state that our sector is facing strong international competition from low-cost countries as well.
There are some things that are important to raise here with regard to the role of manufacturers. Most consumer products sold in Canada are imported, increasingly from developing countries; Canadian manufacturers have a small market share in the retail sector for goods of consumption. The line between manufacturers, wholesalers, importers and retailers is getting more and more thin, I would say. Canadian retailers themselves manufacture about 800 million of the products they sell, mainly food products, wood products and some clothing. They actually produce more of these products in Canada than they buy from Canadian suppliers.
If you look at Industry Canada's input-output accounts, which looks at the breakdown of a price of a good that you find on a bookshelf, only 2.5 per cent of the price of the goods is the price they pay to the manufacturers. Another 5.4 per cent is the cost of the wholesalers. Together, only about 8 per cent of the cost of a product is dependent on the manufacturer and the wholesaler. Even if the price of the manufacturer goes up significantly, that will only account for 8 per cent of the total cost of the product.
The main cost for retailers is labour, as I said before. About 48 per cent of the price of products is related to labour costs. Real estate costs account for about 12 per cent. We would argue that even if manufacturers' prices increase, they represent a very small part of the final price paid by the consumer. Labour costs combined with profit of retailers account for almost 60 per cent of the full cost of the product. This is a strong argument to look at productivity in the retail sector.
As another example of the fact that the price of manufactured goods in Canada has not gone up significantly, if you look at Statistics Canada's producer price index, which is a measure of the price of a product when it comes out of a production facility, there are about 19 categories of goods in there. In half of these there has been a decreased price or a stable price in the last three years for most products. I included some in my introductory remarks: clothing, lumber and other wood products, furniture, pulp and paper products, printing and publishing — which I think is one area that the committee is interested in — machinery and equipment, communication products and non-metallic mineral products. In these specific sectors, if you see prices in Canada go up for goods manufactured in Canada, it is impossible to blame the manufacturer for that. We have to look at another element of the whole chain.
In summary, Canadian manufacturers have not much to do with the price discrepancies, but where we can make a difference, we count on the Senate to look at regulatory differences, which could result in better prices for manufactured products.
I will stop here. It has been 10 minutes. I am happy to answer your questions.
The Chair: Thank you very much. There are a number of interesting statistics here; 48 per cent of costs relating to labour is an interesting one that we will have to pursue, as well as a comparison between labour costs in the U.S. and Canada.
We will start with the former deputy chair of this committee, Senator Gerstein.
Senator Gerstein: Thank you, Mr. Lavoie, for appearing before us. I found your presentation very interesting. You focused to a great degree on productivity. You have talked to a great degree on cost. In particular, I would like to take you back to what our study is very much focused on, and that is the fact that 15 or 20 years ago the Canadian dollar was at 60 cents. In your opening paragraph you talk about the 1990s when it reached 87 cents, and today it is at par.
What has happened with retail prices in Canada, which is what we are really addressing? In your view, what has happened over this period of time and what do you think should have happened?
Mr. Lavoie: It is difficult to talk about all the industries. Some industries are facing regulations, for example, maybe some protection that decreases the competition they are facing from international markets. Supply management in the food sector has been raised here, where prices are a bit more expensive in Canada for agricultural products — poultry and milk products — that also affect food processors, but I do not think you can look at it from an industry-wide perspective because all these sectors are facing different regulations.
What happened is that perhaps in some sectors we have been protecting some industries for a number of other reasons than just price discrepancies. These sectors have not been facing as much international competition as others. Maybe it is something that happened here.
Our members are raising questions about that because, you are right, in theory, if you have a stronger dollar you would be able to import at a lower price. Actually, to go back to food products, in some food products you have seen some decrease in price. Canada is the second-lowest country in terms of the cost of food per disposable income, the lowest being the U.S. Again, if we compare with the U.S., we are higher, but we are second. The strength of the dollar here is one factor that may explain that.
With a sector-by-sector approach, you might find more answers.
Senator Gerstein: I will let you do that. Let us take the retail sector and deal with consumer goods. We were not dealing with marketing boards or food at this point.
Mr. Lavoie: Food is something you buy at a retail store, so that is one of them. The manufacturing sector controls a very little piece of all of this. What happens with the wholesalers and with the retail sectors is outside my control. You will have to ask the retailers about that. I can say that if I look at the industrial price index, the price of goods manufactured in Canada has remained stable or decreased in the last three years in about half of the categories of goods listed. It is definitely not an issue with Canadian manufacturing increasing its prices.
I keep hearing from our members that labour cost is an issue. Because Canadians do not have more purchasing power for some goods, they ask for increased salaries to keep up the purchasing power. Many of our members have actually seen labour costs increase. Is it a result of the price discrepancies? That is a question out there that I cannot answer.
The Chair: In labour costs, do you include any taxes or any fees that the employer may have to pay for each employee?
Mr. Lavoie: The measure I have heard about so far, when I looked at the retail sector, is the difference in the minimum wage. What I hear from our members that are looking sometimes at the U.S. for potential production facilities — for example, they look at certain categories, either electricians or other types of skills — they also see a difference between 10 and 15 per cent with some states in terms of labour costs. I could not tell you if it includes taxes or not, but I think the comparison has to be made on the same levels. It probably does not include taxes and other things like that.
The Chair: Could you verify that statistic for us and let us know?
Mr. Lavoie: Yes.
The Chair: Let us know if the 47.5 per cent is solely the salary to the employee, or does that include other employer costs of employment such as the payment to Employment Insurance — that kind of additional cost that the employer pays.
[Translation]
Senator Ringuette: Mr. Lavoie, you said that few products manufactured in Canada end up on the Canadian retail market. What would the percentage be?
Mr. Lavoie: It is difficult to set a percentage, specifically for consumer goods. I do not have the statistics as such, but we know that over 50 per cent of consumer goods are exported. I will try to find that information and have it sent to you.
Senator Ringuette: Does your association include automobile manufacturers?
Mr. Lavoie: Yes, some automobile manufacturers are members of our association.
Senator Ringuette: Manufacturers such as Chevrolet and Ford?
Mr. Lavoie: Yes these are Canadian manufacturers.
Senator Ringuette: You seem to be a well-informed individual. I get the impression you listened to our committee's deliberations before preparing your presentation. You must have noticed that I have often questioned why cars manufactured in Canada are sold at a much higher price here in Canada than in the U.S. Can your association explain this to us?
Mr. Lavoie: I cannot provide you with any further detail as to that specific sector. After having had a few conversations with them, I hope to be able to provide you with some new facts.
What I was told with respect to cars is that there are fundamental differences in the nature of the two markets. The Canadian market is mainly dominated by what manufacturers call entry-level cars. To give you an example, I would say that in Canada Honda Civics and Toyota Corollas are somewhat more affordable whereas in the U.S. the market has traditionally been dominated by higher-end cars.
In fact, if you compare Corollas in Canada to Corollas in the U.S. you will see that some years they were less expensive in Canada because there is a more competitive market for those cars in Canada.
Whereas if you turn to higher-end cars, you will see that price differences are less in the U.S. than in Canada. Added to that there may be differences that would probably apply to other sectors such as a weaker market and higher transportation costs.
Senator Ringuette: Essentially, in response to the question of why cars manufactured in Canada are more expensive in Canada than in the U.S., you are saying that it is not related to the costs of manufacturing the cars but rather to manufacturers' marketing policies?
Mr. Lavoie: It may be related to manufacturing costs and it may be a manufacturers' marketing policy issue. It might be a bit of both. But I cannot say which factor is more significant.
Senator Ringuette: If it is both, I would like the information on this point to be clear. The question is simple; why does a Chevrolet Camaro built in Oshawa sell for $26,995 in Canada and $23,200 in the U.S.?
Mr. Lavoie: You need to know the internal structure of Camaro manufacturers as they assess the various markets. You need to know what factors enter into play in pricing. I do not have this information. You would have to ask car manufacturers.
Senator Ringuette: Will you ask them?
Mr. Lavoie: I will ask them on your behalf.
Senator Ringuette: You can send the information to our committee clerk. Then we can see what all of this is based on. Mr. Lavoie, you said that Canadian retailers manufactured $800 million worth of goods. Can you elaborate on that?
Mr. Lavoie: I wanted to highlight the fact that when you look at manufacturers, retailers and wholesalers you realize that sometimes the same company may be both a retailer and a wholesaler. Take for instance Loblaws and its product lines. Whether you look at food products or clothing, I think the same principle would apply to retailers.
An increasing number of major retailers import their own products and get their products from Asia. In some sectors, aside from a stronger dollar, there are fewer middlemen, and that would generally lead to a price drop on items.
Senator Ringuette: You said something quite true when it comes to transportation. We have identified that the price of gas and of diesel are different. There is a 36-cent per litre difference in Canada compared to the U.S.
I would like to address the issue of credit card purchasing, something that is quasi-universal. Whether a consumer pays cash, uses a debit card or a credit card, retailers are unaware of the method of payment until the total price appears at the cash register.
For merchants in the U.S., Australia and New Zealand, credit card transaction costs are approximately 0.5 per cent compared to 3 per cent and more in Canada. So, there is a 2.5-per cent increase in the price of consumer goods that is added automatically to transactions to counter Visa and MasterCard costs. Why did you not raise this point in your analysis?
Mr. Lavoie: I did not do so because that is not a cost that is covered by manufacturers. Retailers shift the cost to consumers as you stated. If what you are saying is true, 2.5 per cent more is significant.
To get back to the point on the competitivity of some sectors, our financial sector is one which, for reasons other than price discrepancies, has been better shielded than other sectors because it led to less competitiveness when it comes to the cost of credit card operations.
Senator Ringuette: There is no competition.
Mr. Lavoie: I would like to get back to the point discussed with Senator Neufeld. Some sectors may have been better protected than others and for other reasons, good or bad. That may be something the committee may wish to examine.
Senator Ringuette: Given that there is no real competition in the credit card operations sector, do you think we should regulate and make sure that transaction fees are reasonable?
Mr. Lavoie: I believe there is competition. There are several banks.
Senator Ringuette: No, there is Visa and there is MasterCard.
[English]
The Chair: I am sorry, but we will unfortunately have to call an end to this line of questioning. As interesting as it is, we have quite a few senators who are interested in making their points.
We have in our next round a teleconference for one of our participants, so that puts us into a strict time limitation with respect to finishing this round. I have seven senators and 30 minutes, so five minutes for question and answer for each senator.
[Translation]
Senator Rivard: I am replacing a senator here today. So I did not attend previous meetings and perhaps the question I will be asking has already been asked. I apologize ahead of time if that is the case. I would like to get back to what Senator Ringuette was saying regarding General Motors. You know that it is even worse with Chrysler. They manufacture some models in Ontario that are sold at a higher cost in Canada than in the U.S. Perhaps General Motors would provide the same response but I would be curious to know what their response would be if the same question was put to them.
This committee is mainly interested in price discrepancies, in understanding why things cost more here. You have given good answers, but have you ever sought to know whether Canadian products other than cars, such as maple syrup, are sold at a lower price in the U.S. than here in Canada?
Mr. Lavoie: No, we did not do a comprehensive study on products exported to the U.S.
Senator Rivard: Take for instance well-known television sets like the Samsung models built in Korea and that are far less expensive in the U.S. than in Canada. If they were built in the U.S. we could assume the differential is related to the cost of labour, or productivity. But how can you explain this difference on a finished product such as a Samsung television set?
Mr. Lavoie: Some observers have mentioned the impact of import tariffs. The Department of Finance Canada itself states that tariffs are approximately the same and that there should not be such a significant difference. Do these differences have to do with the size of the market? I am sure that part of the price depends on that. Can it have an impact? You would have to ask these manufactures about their internal price structure.
[English]
Senator Marshall: When you were talking about the factors that have an impact on costs in Canada, you were talking about labour and transportation costs. I thought you had forgotten about the exchange rate, and I notice you mentioned it later.
A number of witnesses have given testimony with regard to the correlation between the fluctuation in the exchange rate and how it impacts the cost of goods in Canada. You were saying in your opening remarks that many Canadian manufacturers would say that foreign suppliers are increasing prices and profits as the Canadian dollar rises in value. I was interested in that. You were saying that companies do not get the full benefit of the exchange appreciation. Is that hearsay or do you have actual evidence of that? How pervasive is it?
Mr. Lavoie: No, it is a general statement to the fact that as our dollar goes up other manufacturers of components of parts that sell into Canada might see that and change our price accordingly. I do not have exact evidence or examples to give you, but if you want, I can investigate and get back to you.
Senator Marshall: That would be interesting. Is that confined to certain industries or certain manufacturers, or is it across the board?
Mr. Lavoie: No, I was not thinking of certain sectors. Related to that, the Bank of Canada study I referred to looked at price flexibility or how quickly firms respond to exchange rates.
Senator Marshall: Yes, we have read that. It just seems that as the Canadian dollar appreciates someone is taking advantage at our expense, so I would be interested in any further information you have on that.
Mr. Lavoie: Okay.
Senator Callbeck: In reading your brief, item number three on the second last page, you say the cost they pay for manufactured products accounts for 2.5 of total sales, and wholesale costs for another 5.4, maximum around 8 per cent. Are you saying that if a retailer sells a chair for $500, that only 8 per cent of that $500, $40, is actually the cost of production, including the wholesaling prices?
Mr. Lavoie: Across industry, yes. That is not specific to one sector, so it might be higher for some goods and less for others. With clothing, for example, if you buy a shirt that is made in a low-cost country and sold for $120 here, it is an average across all products.
Senator Callbeck: Which ones are bringing that down so low?
Mr. Lavoie: I have not looked, but it is easy to look at Statistics Canada input-output tables.
Senator Callbeck: I find that figure completely unrealistic. I will look it up.
You mentioned Mr. Carney saying that the top four retailers in Canada have 28 per cent of the market, whereas in the United States the top four have 12 per cent. Have you looked at the bottom line of these retailers? Is the bottom line better for the top four retailers in Canada as a percentage of sales than the four top in the U.S.?
Mr. Lavoie: Sorry, I missed the question.
Senator Callbeck: If you take the top four retailers in Canada, they have 28 per cent of the market, and we are saying we need more competition, and the top four in the U.S. have 12 per cent. My question is about the bottom line. Are the four retailers in Canada actually doing better, taking their profit as a percentage of sales, than the four top in the U.S.? Have you looked at that?
Mr. Lavoie: I have not, but I am sure the U.S. has the same statistics as we do in Canada. For retailers, for example, we have operating profits that account for about 12 per cent of the price. I am sure we can compare some sectors with the same statistics that the U.S. compiles.
Senator Callbeck: That is lumping everything together.
Mr. Lavoie: Yes.
Senator Callbeck: You cannot compare apples to apples between Canada and the U.S.
Mr. Lavoie: That is a good question. Companies that have operations on both sides of the border could probably tell you.
Senator Callbeck: I am just wondering whether you looked into it.
Mr. Lavoie: No.
Senator Callbeck: On your website you talk about the Canada Border Services Agency implementing a new regulation this year that the importer must submit data on the goods being imported at least an hour before and that it is difficult for the importer to get this information in that time frame. What happened before that regulation came into effect this year? Did they not have to provide information?
Mr. Lavoie: Do you mean information about the product that is being imported?
Senator Callbeck: Right.
Mr. Lavoie: I am not sure what exactly you are referring to on our website.
Senator Callbeck: On your website it states that importers are often unable to provide this information within the prescribed time frame. What did you have to provide in 2011 as compared to now?
Mr. Lavoie: For context, when goods cross the border for importation between U.S. and Canada, there are about 45 different agencies from both sides of the border that require data, depending on the type of goods. Each of them has their own requirements, forms and administrative processes.
I am not sure which one exactly we are talking about for this one hour. Is this a time constraint that was imposed recently? I do not think the kind of information has changed. It has probably added up within the last few years. This is an example where, when I was talking about the regulatory differences between the two countries, one of our recommendations to the RCC panel was to have single-window reporting. Why have 45 different agencies sometimes asking for the same information?
In terms of this one-hour time frame, I would have to look into it more. I do not know exactly which one it is referencing.
Senator Callbeck: Maybe you can look at your website.
Mr. Lavoie: I will.
Senator Runciman: One area where Canadian manufacturers do produce products that are very much attracted by consumers in this country is beer, wine and spirits. It is an area where we see significant differences in terms of the prices charged in New York State versus Ontario.
Can you speak to that issue? Why do we see in many instances very significant differences between the products purchased here in Ontario, or in Canada generally, and the same products that have been exported to the U.S.?
Mr. Lavoie: That is a specific industry that I have not looked at in much detail. For sure, I would think that taxes on tobacco and alcohol products usually make a big difference, but I could not tell you exactly.
Senator Runciman: Are you not representing any wine and alcohol businesses?
Mr. Lavoie: Not many. There is an association that is part of our manufacturing coalition so we have worked with them on some border issues, but we have not looked at the specific issue of price discrepancy.
Senator Runciman: Certainly that is an issue we hear about all the time. It would be helpful if you could check with your membership and see if we could give the committee some feedback in terms of the specifics of why alcohol prices in some instances are so dramatically higher in this country.
You talked about regulatory differences in your submission, and packaging and inspection are the two that you have highlighted. Are there any other priorities for your association with respect to regulatory change that you would like to see occur?
Mr. Lavoie: As I just said, single-window reporting is one big ask we have made to the panel and I think they will go on with this. It is an important one.
Senator Runciman: What does single-window reporting mean?
Mr. Lavoie: It is for goods crossing the border that are being imported. As I said, about 45 different agencies on both sides of the border require data at some point, depending on the product. Sometimes it is the same kind of information. They all have different forms and there are administrative costs for importers and manufacturers of the products. We are seeing an electronic-based reporting process where all this information being tackled in one place could help reduce these costs for manufacturers and importers.
Senator Runciman: Do you face the same challenges exporting into the United States?
Mr. Lavoie: Yes. That is why this joint Canada-U.S. panel is looking at it.
I will give another example of little things we can do that would make a difference. All the goods are categorized in HS codes, which are North American industry codes. For example, a pen would fall under a code. There are 10 digits to go into specific categories. The first six digits are harmonized between Canada and the U.S. but the last four are not. Just for that, a company that makes many products and imports and exports has to keep many databases of all these products, everything in double pretty much, to ensure they do not confuse the products they export.
Looking at inspections, one of the issues that I think will be looked at in more detail by the joint council is food inspection, especially for some food products that have already been inspected in the country. They require a second inspection at the border, so we are saying that if it has been inspected in one country before crossing the border, we just have to inspect in one. That is one area they are investigating.
Other regulatory issues include initiatives such as the Chemicals Management Plan that Environment Canada has put forward, which looks in detail at all the chemicals that can be found in a product. I have nothing against this initiative, but the problem becomes that a product made in Canada is subject to this detailed review. A good imported from another country will not because it is not manufactured in Canada. It puts our manufacturers at a disadvantage. For example, the auto manufacturers will have to list and report on all chemical products on a car seat, for example, for a car made in Canada, but a car imported from another country will not. This is one issue where, before going on our own to put this initiative forward, perhaps we should do it on a North American basis and try to harmonize both regulations.
[Translation]
Senator Hervieux-Payette: In your third point, you provide percentages. I have a small favour to ask. Earlier on, we talked about the four major department stores. Would it be possible, to provide, with all costs combined, an explanation in the margin as to the cost differential between Canada and the U.S.? You could easily find this information, right?
Mr. Lavoie: Yes, probably.
Senator Hervieux-Payette: We would at least have a point of comparison. My colleague referred to European cars a little earlier. Most German cars cost not only $3,000 more in Canada but $10,000 more. That is right, even though they are shipped overseas, I cannot see how transportation costs can be much higher for a boat going to Montreal versus one going to New York.
Does your association include the book publishing industry, the Chapters of this world?
Mr. Lavoie: People in that field have their own associations, and we do work together with them on some issues.
Senator Hervieux-Payette: Because in this area as well there are remarkable price differences that have always, in the past, been attributed to the fact that our dollar was weak, and this has changed. Furthermore, the American price tag clearly shows a price of say $32, whereas the Canadian price tag, right next to it, shows $45. It is difficult to understand why the same book should cost more. Here again, the difference cannot be due to transportation.
Do you have any members from the pharmaceutical industry?
Mr. Lavoie: We do have some.
Senator Hervieux-Payette: Again, that is an area where the price differences are worrisome. I will give you an example, I take vitamins which cost $28 in the U.S., $40 in Europe and in Canada, where a product was recently cleared for consumer use, it costs $140. There is something wrong with this. I am unable to understand why I should pay $100 more for a Canadian product. As well, the pharmacist tells me that it is covered by my insurance. I find that even more worrisome because we are being told that our health care system is expensive.
I do not know why in Germany, Mexico or the U.S. a given product costs $25 to $40 whereas here it costs $140. There is something wrong with that.
I will close with your Regulatory Cooperation Council that involves two phases. First there is the enforcement of regulations and then the establishment of regulations.
Are you working on enforcement, to facilitate the formula, et cetera, or are you also working on the regulations as such, the substance of the regulations?
Mr. Lavoie: We are working on both. But at the moment, because the plan was published in December, we are in a consultation phase. As you probably noticed in the plan, these are relatively aggressive deadlines. We are engaged in broad consultations at the moment. We are focusing more on enforcement because the plan was released last December.
Senator Hervieux-Payette: All this to say that — I am not sure if my colleagues would agree — I have no problem with joint regulations, but I have a problem with using other countries' regulations.
Looking at any product from a security standpoint, making sure products available to the public present no danger, this is not a problem for me, but I have a problem with there being two standards, a Canadian standard and an American standard, and that the standard which is most favourable to companies be the one that prevails. The idea of developing a joint approval system is certainly laudable. I think that we all support that.
Mr. Lavoie: There is indeed an issue of sovereignty which is important and has been recognized by the council.
[English]
Senator Nancy Ruth: If 8 per cent is the cost of manufacturing the good, the other statistic that interested me was 12.9 per cent as a return on equity for profit. Is this a goal that manufacturers set for themselves, or is there a variety of percentages there?
Mr. Lavoie: Ten to twelve per cent is certainly an objective that lots of manufacturers would like to reach. Unfortunately, many of them are way below that level.
Senator Nancy Ruth: Mr. Chair, could the clerk send us the link for the Regulatory Cooperation Council?
The Chair: We will try to track that down.
Senator Nancy Ruth: You mentioned in your presentation that packaging was also an issue in terms of regulations. Can you talk a bit about that?
Mr. Lavoie: It can be. There are reasons for that at times. Packaging, and how it relates to everything, is translation. I am not saying we should not translate. I am a francophone and like to read my cereal boxes in French. If certain sectors have requirements for different packaging, it has a cost which is passed on to the customer. I think packaging itself is minimal compared to other regulatory costs such as reporting requirements or inspections.
Senator Nancy Ruth: To repeat, you think the packaging costs for translation from French to English is minimal compared to others?
Mr. Lavoie: Yes.
The Chair: Has this Regulatory Cooperation Council that was announced by the President and the Prime Minister been established? Is it functioning? Have they done anything yet?
Mr. Lavoie: Yes, they released their report in December.
The Chair: Is it just government officials on this particular council?
Mr. Lavoie: Yes.
The Chair: Is there any industry representation?
Mr. Lavoie: A separate group called Beyond the Border Working Group, in which we participate is feeding the council with industry standards and recommendations.
The Chair: We will ask our Library of Parliament people to bring us background information on the council you mentioned.
Senator Neufeld: You list a number of things for which the costs are higher in Canada. You said labour costs are higher in Canada than in the U.S. Can you tell me what labour costs? Are you taking an average of all labour costs that are more expensive in Canada? I will give you my experience.
For people in the natural resource industries, labour costs are similar, in fact in most cases much higher. We have a tremendous problem in Canada of people leaving to work in the U.S. Whether it is in the electrical energy industry, or oil and gas, people tend to go across the border because they can make more money.
When you say labour cost, are you talking about minimum wage costs? Is that the only thing you are targeting in here? What is it?
With respect to manufacturing cars, I doubt there is a big difference between a person that screws bolts onto a car in the U.S. compared to Canada. I would think those costs are almost similar because it is much the same unions. I appreciate there would be some differences, but not many. How do you justify that?
Mr. Lavoie: In the context of my remarks, I was referring to the labour costs for the retail sector, so that would have two components. Minimum wage is one. Someone mentioned that there is about a 20 per cent difference between Canada and U.S. in terms of minimum wage. There is also the issue of productivity. If you need more employees per square foot in your retail store, your labour costs will go up. The best way to get your labour costs down is to probably improve your productivity, the way you have your inventory and the way you structure your store, for example.
In other sectors such as the manufacturing sector, you are right. In those cases we have seen unionized workers within the same companies or industry with similar labour costs. Sometimes you outsource other types of workers, such as electricians, to a different firm. Not all firms have their own electricians. What I have heard from manufacturers who were actually looking at places to set up production in the U.S. is they also saw a difference of 10 to 15 per cent for specific types of workers.
Senator Neufeld: It is interesting to me, to be perfectly frank, that we are always the bad guys. We use too many people. Our labour costs are too high. Obviously what you are saying is that retailers are not working as smart as they do in the U.S. I do not always believe that. I am a little shy on believing those things. I realize there are some differences.
If you take input costs for manufacturing, natural gas is priced on a North American market and oil is a world market. You can buy copper in the U.S. or in Canada and you are paying the same price. Lead, zinc, silver and gold are all the same basic price. All of those costs go in.
When you agree with me that when you get to the trades where the labour costs the same, I am having trouble understanding why it costs more to manufacture some of the same things in Canada than it does in the U.S. I suppose we can sit here and argue about that forever, but that is where I come from.
When we import from Asia, using this as an example, a large container ship comes into the Port of Vancouver and unloads. A lot of those goods stay Western Canada for distribution right there in Alberta and British Columbia, which are close. Then a unit train will take a whole load of those containers and go straight across Canada into Chicago for redistribution in Chicago — because it is a huge redistribution place — and it goes to different places in the U.S. Yet, you can find that same product cheaper in the U.S. than you can in Vancouver. When talking about transportation costs, those costs in Vancouver are less than the transportation costs in Chicago with redistribution. I am having trouble trying to figure out how you are justifying transportation costs. They may higher be in some cases. If you transport something from the Lower Mainland to Inuvik, that might be a different story. They pay dearly for everything up there.
Mr. Lavoie: The way I see it is the transportation cost per item. If you transport goods from one country to another and you have 5,000 items, the price per item will be lower than if you have only 100. The transportation costs are raised for those goods that go into smaller-sized markets. There are fewer people in this market. It is in this context where I agree with you. Transportation costs in themselves are the same, but how many products you are transporting would have an effect. That is the way I understand it.
Senator Neufeld: Yes. I can relate to that to a degree, but I have a problem relating with it if you are talking about transporting a Samsung TV all the way from Vancouver to Chicago and then redistributing in Chicago. Wherever it is made, in Korea or Japan, wherever it comes from, it is shipped to Vancouver. Millions of them are sold in our country, too, not just 10 or 100. Everyone has four or five TVs in their house now; it does not matter where you are at.
With respect to the regulatory committee that you are working with, can you give us three major examples that would make a difference to pricing in Canada that your agency or your group can collectively agree on so that we can actually understand them a little bit more and maybe pursue them?
Mr. Lavoie: The examples I brought here affect the manufacturers. I cannot guarantee it will necessarily reflect on the price of the retail, but the three I brought here to focus on was single-window reporting, the harmonization of industry codes, and the double inspection in the food sector, one done in the country of origin and one done at the border.
Senator Neufeld: That would be interesting.
Chair, we could actually pursue those manufacturers, then, that do not want to give the benefit of what would happen if, in fact, we decreased our costs. If that makes their margin 15 per cent instead of 10, we can actually target those ones. That is where I am coming from. I need something concrete, not just a general statement that our wages are higher so everything is going to be higher and take it. I want to dig down. I want to drill into three of them and find out why, and if in fact there is some saving, will it be passed on to the consumer in Canada?
Mr. Lavoie: Absolutely. I will send a copy of our letter to the council that has all of our recommendations.
Senator Neufeld: Thank you.
The Chair: Other senators have questions but we have run out of time. We have our other panel waiting and we also have a teleconference for part of the next panel.
On your behalf, I will call this first session to an end.
[Translation]
Thank you, Mr. Lavoie, for appearing before our committee today.
[English]
Honourable senators, in our second session this morning we are pleased to welcome a fairly extensive panel for the next hour: Mr. Bruce Cran, President of the Consumers' Association of Canada; Mr. Michael Janigan, Executive Director and General Counsel, and Ms. Janet Lo, Legal Counsel, with the Public Interest Advocacy Centre; and, finally, via video conference from Montreal, we welcome Mr. Jean-François Vinet, Business Practices and Financial Services File Analyst with Option consommateurs.
[Translation]
We will close with Mr. Vinet.
[English]
Bruce Cran, President, Consumers' Association of Canada: Good morning, senators. I am a consumer advocate, so the presentation that I am making is on behalf of consumers and not industry.
Five years ago our dollar started to rise towards parity, and we have been watching it ever since; I think four and a quarter, something like that. It reached parity and it has flirted with parity ever since. There has actually been a 50 per cent rise in the dollar. Back then it was 66 and two thirds per cent and now it is a dollar. Some people do not seem to get their arithmetic right on this, but it is 50 per cent, which is quite a substantial rise.
During that period we have seen very little of that passed on to consumers. The odd item has changed a little, but in the main there has been relatively no advance for consumers in sharing the rise in the dollar.
The reality of this whole thing for consumers is quite a simple equation: What does it cost here and what does it cost across the border? Our advice to consumers has been to make themselves very much aware of that fact and then make their decision. We hear a lot from people who want to see consumers making patriotic decisions — in other words, buying on this side of the border instead of going across the border. Such a decision is quite a lot easier on a Christmas card or a greeting card with a small price tag as compared to, say, a high-end motor vehicle. We have things that we wonder about.
How can a snowmobile that is made in Quebec sell for a third less in the United States? How can a pickup truck manufactured in Canada sell for five or six thousand dollars less across the line? Why should we be going across the line to spend our dollars on American airlines and American airports because the fares are half what they are here? Why is a book that is printed in the United States selling for a third to half more in Canada, and on occasion double, when it is the same book printed in the same factory and sold to the same group of consumers?
We are very concerned as consumers to try to keep our money in Canada, but we also must be enlightened as to what that is going to cost us, and that is how we make our decisions.
I have not come along today with a bunch of statistics, but I would like to answer questions. I have seen a lot in the last five years. I have seen situations where I have been very much in sympathy with retailers.
I have visited with many retailers, probably including a couple of dozen of the largest ones in Canada. One item that really struck me was the fact that they were buying a particular product — this is a United States-controlled company buying from another United States manufacturer — and they told me that there was a premium put on the prices of goods coming into Canada by the manufacturers, as opposed to the price that they could buy the same goods for in the United States.
I was a bit skeptical about this. I was very reluctant to believe it, but they led me through the process. They even showed me the letter that said in very cold terms that if they did not like to pay the price, they did not have to have the goods and they would find another distributor in Canada.
This was a product I guess that had been developed over 30 or 40 years, with a big investment in it, so that company certainly had my sympathy. However, the reality is still that you can go across the border and buy it for about 40 per cent less than you can in Canada. Those are the differences that I do not understand.
One last item I would like to bring up, which is very pertinent to the average household, is the price of a gallon of milk. I live in Vancouver, right up against the United States border. I can pay $3 for a gallon of milk in the States; it is almost $6 in Canada. That is one that is very difficult to explain to the average person. Of course, then you have got gasoline prices and all the rest of it.
I do not have much more to say than that, but I would certainly like to deal with any of your questions.
The Chair: Thank you very much, Mr. Cran.
Michael Janigan, Executive Director and General Counsel, Public Interest Advocacy Centre: Thank you very much, Mr. Chair and members of the committee. The Public Interest and Advocacy Centre, PIAC, in addition to its principal interest in the delivery of important public utilities and services, has also been engaged in issues associated with general consumer protection and the state of competition in consumer markets. We welcome this opportunity to discuss an issue that appears to have vexed a variety of agencies and stakeholders.
There appears to be a consensus at this time that there is a minimal amount of determinative evidence available. However, there are some features of this pattern of price intransigence that seem important from a consumer standpoint.
First, as one witness has phrased it, the relative stickiness of prices seems to belie the previous explanation for the cross-border pricing differential that reached its zenith in the 1990s, namely that the prevailing exchange rate that was previously very favourable to the American currency was the determining factor. The reasons for the same may include some of the possible theories that have been advanced in this committee concerning country differences and retailer confidence in the escalating value of the Canadian dollar. However, it may also be attributable to a lack of competition in the Canadian retail market.
If it is, then we must be concerned with the removal of potential barriers to competition or consider more hands-on measures, including changes to tariffs or duties payable, in the hope of jump-starting Canadian retail commerce that is more price friendly to consumers.
Second, this phenomenon seems on its face very subversive of the objective of open markets, which was not simply to open up foreign markets to Canadian exporters but the maximizing of domestic consumer welfare in the result.
We would also like to add a small nugget of information concerning consumer purchases online, which comes about as a result of a recent study conducted by our organization for Industry Canada. Our legal counsel Janet Lo will briefly address the same.
Janet Lo, Legal Counsel, Public Interest Advocacy Centre: In November 2011, PIAC published a study called Point of No Return, Consumer Experiences Returning Online Purchases. In the course of our study, PIAC purchased and returned products from 15 North American retailers, 12 Canadian and 3 American, to test the online return process. We also conducted a survey with consumers to gauge the importance of the consumer's right to return.
While our study focused primarily on the return process for Canadian consumers, we did come across some issues with the online cross-border sample purchases. We experienced the very problem your committee is studying today — a surprising difference in Canadian and American prices for cross-border shopping, given the value of the Canadian dollar.
Two of the three cross-border online purchases charged PIAC using American currency. However, the taxes charged amounted to 33 to 34 per cent of the subtotal price of the products. In one case, the tax was presented to the consumer as an international tax, with no further explanation. In the other case, the taxes were broken down to duty taxes and taxes with no further explanations.
In the third cross-border online purchase, prices by the American retailer were displayed in Canadian dollars for Canadian consumers, and the Canadian price displayed was nearly 30 per cent more than the American prices, resulting in a US$48product listed for C$62 despite the parity of the Canadian dollar to the American dollar at that time.
As PIAC's study was focused on the return experience for Canadian consumers shopping online, we were merely able to make the observation that price discrepancy for retailers exists for consumer cross-border purchases. At that time, we were not able to speculate about reasons for the price discrepancy.
I will turn it back to Mr. Janigan to finish our submissions.
Mr. Janigan: We would also note in passing the 2006 study by the Centre for the Study of Commercial Activity at Ryerson University, which noted that mergers and acquisitions were the main tool for retail corporate growth in the 1980s. Retailers grew larger and fewer, changing their relationship with consumers and suppliers at different levels of geography.
While increases in size brought about by mergers may have increased profitability, they have also given big chains more market power. The statistics from 2003 show that the top three corporations have over 30 per cent of the retail market, with the largest 30 firms controlling 68 per cent of the market.
High levels of concentration tend to lead to standardization and a lessening of competition, possibly brought about by systemic or intentionally erected barriers. It is not a scenario that should be casually dismissed or, on the other hand, adopted as proven fact without the kind of market-based studies that should be the province of the Competition Bureau.
The OECD recognized this need in 2004 in its country-specific study of competition in Canada, entitled "Updated Report on Competition Law and Institutions.'' No agency in Canada presently has express authority to study an industry simply for the purpose of illuminating its competitive dynamics.
This is a tool that should be available to advance the objectives of competition policy. Market studies can reveal previously unsuspected forms of private conduct or government regulation that impair competition, and study results can play an important role in promoting public understanding of how competition works and what benefits it produces.
In PIAC's view, this would be an important outcome of this committee's review, and an important and necessary precursor to implementation of some of the possible fixes already discussed before this committee. We would be pleased to answer any questions on this.
The Chair: Thank you, Mr. Janigan and Ms. Lo.
Jean-François Vinet, Business Practices and Financial Services File Analyst, Option consommateurs: Thank you so much for inviting me to represent Option consommateurs. As the sharp thinkers you are — and as I guess I am, I hope — I always find it funny to hear the industry saying why prices are higher in Canada than in the United States.
We heard Mr. Lavoie saying that translation fees make prices maybe a little bit more expensive in Canada. However, in the United States, it is as if people were not speaking Spanish. Industries often try to find ways to explain why prices are high, but when you analyze things more precisely, sometimes it does not make sense.
The other thing that was mentioned is economies of scale. In the United States, all those consumers make prices go lower, and the Canadian market is smaller. We heard that before. I mean, this is not a new thing. The parity of the dollar has been there for at least a year or two. What about Plattsburgh and Detroit? Plattsburgh has 20,000 people. Many people near the border in Montreal go there because it is much cheaper, and, as a matter of fact, in Montreal, there are 2 million people. How can a city with such a little market have prices that are so much cheaper, whereas prices are higher in a huge urban area like Montreal? We heard that. It is going to be economies of scale; it will be labour cost, then translation fees.
For me, it cannot be that. It does not explain why electronics are more or less sold at the same price in the States as in Canada. These things have to be transferred. We have to pay labour for it. We have to pay fees to bring a Samsung TV into Canada. Why is it more or less the same price in the States and in Canada? There are very strange things in the retail market.
I have heard for at least two years the merchants and manufacturers trying to explain it. It does not make sense for Option consommateurs, which I represent. We are asking, as is the Public Interest Advocacy Centre, to do a study. The Competition Bureau has the mission to ensure markets in Canada are fair for consumers, retailers, manufacturers and everybody.
Now we are seeing that it is not fair for consumers. At least, it does not seem to be fair for consumers. In the food distribution market, four businesses own 40 per cent of the market share in Canada. Of course the less competition there is, every economist is going to tell you prices will be higher, and maybe we will support what PIAC said. We need a study done by professionals. We have an institution in Canada that can do it, and it is called the Competition Bureau. Let them do their job and bring back a study on the state of the retail market in Canada, and after that, we can go further with the committee.
That is what I had to say for Option consommateurs. Thank you for hearing me.
[Translation]
The Chair: Thank you, Mr. Vinet. We will now continue with questions and comments from the senators. You may respond in English or in French. We have all the technology required to do this in both official languages.
[English]
Mr. Vinet: Did you understand me in English?
[Translation]
The Chair: Yes, sir.
[English]
I will now begin with senators who have expressed an interest in proceeding. Senator Neufeld, our new deputy chair of the committee, Charlie Lake, British Columbia.
Senator Neufeld: I have one question for Mr. Cran. I think all of us know why dairy products are more expensive in Canada than they are in the U.S. It is because, as Canadians, we protect our farmers. Right or wrong, that is a fact. It is not just where you live in Vancouver. It is all across Canada. I think cheese is the dominant thing out of Quebec, and it comes across Canada. That part I can fully understand.
I do not know if there is much difference in gasoline once you peel away all the taxes that we in Canada put on, whether it is provincial or federal.
What is on your mind? You have obviously studied this for a long time and are knowledgeable about consumers, and we are concerned about whether the consumers are getting a fair deal. In many cases we do not think they are. Other than those two things, what things can this committee dig into to drill down and find out what we can do, just a couple of examples? If you do not have them now, you can provide them to the clerk and we can review them later.
Mr. Cran: Well, senator, I have far more questions as a consumer than I have answers, but I will try in due course to give you a written answer on a couple of items.
With regard to milk, we all know why it is, but it is still a reality, and that takes people across the border and they buy other stuff.
I live near Point Roberts, Washington, and there is a mile of traffic. I live on the main street, and sometimes I cannot even get out of my house for the traffic going up there.
I will make an effort to do what you are suggesting.
I can tell you that about five years ago, maybe a fraction more, we selected 50 items. We have never revealed those items because I do not want a discussion about whether we picked the right ones or not. They are a good sample, believe me. Those items now have gone down to 35 because of attrition, items not being available, whatever. There is still a differential that has never gone below 25 per cent, and it fluctuates at 5 per cent, never down, but up, 25 to 30 per cent. That still remains today. People could go across the border to save a reasonable bunch of money. I know people are telling us right across Canada that they can go across the border for a weekend, Friday night until Sunday, have a good time while they are down there, and come back ahead if they are spending something like $1,000 or more.
As for the lines and the lineups right across Canada, we check those every week. They are very solid. Every one of those dollars being spent down there, of course, is a dollar going out of Canada, but I cannot fault consumers for going down there to look after their own pockets. I do not think anybody can.
I do not know whether that helps, but I will try to get you something in writing on two items anyway.
Senator Neufeld: Please do that.
Mr. Cran: I will.
Senator Neufeld: If we totally eliminated what people could bring back across the border duty free, would that have a shock effect on our retail sector in Canada to become a bit more competitive with prices in the U.S.? That is just an observation, and I would like to know what you think.
The other thing about milk is that I live in Fort St. John, so it is a thousand mile drive to get across the border.
Mr. Cran: You have my sympathy.
Senator Neufeld: I cannot buy the milk the same as you can. What makes me angry is some of those dairy producers in the Lower Mainland who are protected by that price buy their milk across the border, too, so it is always interesting to me how that whole process works.
Mr. Cran: The showdown for that must be coming.
Senator Neufeld: You could actually help us maybe with the dairy industry and the problems that may arise if, in fact, marketing boards were removed, not just in dairy, in chicken and a whole bunch of things.
Mr. Cran: You have got my phone number.
I will give you one more item that absolutely baffles me. You know you can buy soft cover and hard cover books online. You can take delivery online. Why is there a difference of about 25 to 30 per cent on the books you buy online across the border to here? I finally figured out, and many Canadians can, that you can join a U.S. ISP and get your Amazon books down there for 20 to 30 per cent less than here. If there is an answer, I have yet to hear it.
Mr. Vinet: If I may answer as well, some very interesting things were said there and I would like to say something about that.
Mr. Cran mentioned milk, but let us forget things where the state does intervention.
Many journalists in Quebec compared prices recently, including on tires, shoes, jeans, ketchup, washers and dryers, cars, planes and alcohol. There are a lot of products. If you want examples, I can give you some because we did our own study as well. We can see that there are huge differences in prices. As I told you, I do not think we can understand when we listen to retailers speaking.
Interestingly, you mentioned the duty-free issue. It might help consumers because if there are fewer taxes or if we allow consumers to bring more products into Canada, it might help those who bring back the products. I do not know how much it could hurt the Canadian economy, but we can think about these issues. At the same time, the people who live up North, maybe two or three hours from the border, that answer would not be an option for them because the cost of fuel would be too high. All the economies could boom in Detroit or Plattsburgh, or wherever, but it would be spent in fuel. It might help, but we have to look at the Canadian economy as a whole to help all Canadians benefit from a competitive economy in Canada.
The Chair: Mr. Vinet, I suspect that colleagues would be very interested in any studies or any reports on price comparisons that you have made mention of that you could send to us.
Mr. Vinet: There is absolutely no problem. I will make sure you get something.
The Chair: Thank you.
Senator Ringuette: I live in a border community. Actually, while sitting in my living room I see the State of Maine; therefore, I am certainly aware of the issues of milk and poultry.
However, quite a number of years ago the difference in price intrigued me. I want to bring in some facts here. The production of milk in the U.S. in one day is more than the total yearly production of milk in Canada. One day of production of milk in the U.S. is more. That is the same for poultry and turkey and so forth, notwithstanding that if you start to scratch the surface you will find that the U.S. government subsidizes the feed involved in poultry and turkey processing to the nth degree, which is not allowed in Canada because of said free trade agreement with Canada.
If we want to look at specific products and the cause, I think this would be quite revealing with regard to the processes involved between Canada and the U.S. before the products reach the retail sector. That would be quite revealing, I am sure, and maybe even the subject of NAFTA questions.
I have a question for the Public Interest Advocacy Centre. How are you financed? You are a non-profit group. How do you manage to get the funds and do the kinds of studies that you have mentioned?
Mr. Janigan: With a great deal of difficulty. Actually, the study I mentioned was a product, particularly the one from Ryerson's Centre for the Study of Commercial Activity. In general terms, our funding comes from two sources. First, we do policy projects for different government agencies, principally the Department of Industry, but there are other government departments we do it for. Occasionally we do projects for other places, such as the European Union.
The other half of our funding comes from appearing as legal counsel on behalf of consumers in tribunals, such as the CRTC, the Ontario Energy Board, Yukon Utility Board, where cost awards are paid to us to effectively present the position of consumers.
Senator Ringuette: You seem to be operating solely by different kinds of services you provide to government entities.
Mr. Janigan: That is correct.
Senator Ringuette: In your study with regard to online purchasing — and please correct me if I am wrong — I have looked into this, and one of my observations was that if a Canadian bought an online product sourced from the U.S., the cost of the product on the Internet was relatively the same; however, there was no cost for shipping within the U.S. but there was a cost for shipping in Canada, notwithstanding taxes and so forth. With regard to online purchasing, there seems to be two different policies for most U.S. goods online — free transportation within the U.S. but quite enormous costs with regard to shipping to Canada. Am I right in my observation?
Ms. Lo: It really depends on the retailer and how they have chosen to market their products to consumers. In one case we did have free shipping to Canada, but in the other two cases there was shipping in addition to the cost of the product and the taxes. It really is a variable practice. It depends on whether they are really interested, and I suppose Canadian consumers are not. Then the cost of shipping will also be variable depending on the retailer and the different methods of shipping that they provide.
Senator Ringuette: Thank you, because you are confirming.
Mr. Cran: One of the companies we got involved with last year was Babies "R'' Us. A lady had sent me two identical ads from Babies "R'' Us for a particular crib. The price in the U.S. was $312, including freight, and $612 in Canada. I became involved as a potential buyer when I found Babies "R'' Us. I told them of the differences to see if I could make a deal. I finally got up the line to the chief broom closet keeper, or someone, and they told me if I did not like it to go down to the U.S. and buy it there. That is only one of many examples. That was taken up by CBC last year.
Senator Ringuette: Exactly. They are the same chain.
Mr. Cran: This was identical. The pictures were identical. Everything was identical but the price.
Senator Ringuette: At a previous meeting I did the same thing with a gazebo, not the politically famous gazebo, but the ordinary wooden gazebo manufactured in Canada and sold in retail markets in Canada and in the U.S. The U.S. one sold at least 30 per cent less than a Canadian-manufactured product. Then we also go back to the issue of cars.
There does not seem to be a specific recommendation because depending on the sector you are looking at there are a variety of different issues. For instance, with regard to translation, if you look at all the recent products you can buy in Canada you will see it is French, English and Spanish. The cost of labeling is no longer an issue.
Senator Gerstein: Thank you for appearing before us with excellent presentations. The reason I say they are excellent presentations is that you are really going to the essence of our study.
Mr. Cran, you hit it right on the head; the Canadian dollar has gone up 50 per cent in the last 15 years. That is what led the minister to ask for this inquiry in the sense that, as he stated, "I am irritated and consumers are irritated.'' Obviously, competition plays a large role in this, but in effect we are here representing the government.
What are the things you would specifically recommend that we should be looking at? What types of things? Government is not running retail businesses. They create the framework that they operate in. I heard Mr. Janigan talk about tariffs. That is something the government can look at. Customs allowances are something the government can look at. What else should we be putting on our list?
Mr. Cran: One of the things that we did some four and a half years ago — and we have done many times since — is publicly offer to partner with any manufacturer, retailer or anyone else that wanted to challenge any of the tariff items. A good example is a woolen mill. I do not know the last time anyone saw a woolen mill in Canada. If you see one, take a photograph. It might be the only one and the last one. Those tariffs, along the lines of 20 per cent on those goods, could be removed quite easily.
The sad part is, during the last four and a half years, I have had meetings with six or eight of Canada's large retailers and several small retailers. Not one of them has put through a formal request. I spoke to Mr. Flaherty's office yesterday. He has about a dozen inquiries, but no formal applications.
That makes me wonder, what is the real interest of retailers and manufacturers? If they can remove some of these tariffs by taking that action, that is fine. I do not know if it is in confidence or not, but Mr. Flaherty also told me — I imagine he has said this often — they are approaching the stage where they are prepared to look at these tariffs themselves. What a shame. The manufacturers represented earlier on could be encouraging his people to clip those individual tariffs, especially in view of the fact that Mr. Flaherty has indicated his sympathy for having those removed.
We were reminded of where we are at the moment. If anyone in that sector wants to put an application forward, we would certainly be happy to join on the end of it to add effect.
Senator Gerstein: Let us acknowledge that tariffs and exemptions are on our list to consider. What other things should we be considering? This is your opportunity to tell us.
Mr. Cran: You talk about removing the tariffs. Do you mean removing the tariffs coming back into Canada?
Senator Gerstein: I am just saying that there might be a recommendation that we review tariff levels coming into Canada.
Mr. Cran: I hope it would not be to remove them completely. You would have a riot on your hands.
Senator Gerstein: I did not say that. I am simply saying it is an area to focus on because it is under government control. The minister has the ability to deal with tariffs. The government has the ability to deal with customs exemptions. What other things do you feel government can deal with that we may not have discussed to this point?
Mr. Janigan: You put your finger on it in terms of what I think is the principle issue before us. It is easy to get knocked off the puck in terms of looking at why there are price differences in general between Canada and the U.S. We can fight about those until the cows come home, or report to the Milk Marketing Board, I guess.
The principal question is that we have had this decline in exchange rates that has not been reflected in prices in the sense we would ordinarily expect. Either the variables have changed between Canada and the U.S. in that period of time — which does not appear to be the case — or there is some reason why Canadian prices have remained at those levels. From our standpoint, that looks like a situation where there is some degree of market dominance being exercised or concentration that has failed to pass on those prices.
In our view, the first and most important step is to try and discover what the barriers are in terms of competition. Why are these prices not being passed on? Why are competitors not taking advantage of the difference in prices available to them in the exchange and passing them on to consumers? This may include things like problems associated with exclusive agreements with suppliers. It could be a result of either vertical integration in the industry, or a whole variety of different competitive mechanisms put in place by the industry that are subverting the ability to pass on these prices. That is why we placed first emphasis on the Competition Bureau doing a comprehensive study in that area; to discover whether or not there are barriers and whether or not they can be removed through the aspect of competition law. If in fact they are resistant to changes in the law, then we look at more hands-on solutions, such as tariff exemptions, removing personal exemptions, trying to line up different matters in markets, or a variety of different temporary or long-term measures.
We do not have enough information as to why this is happening. I was struck by Mr. Carney's testimony on that level that in fact there may be a number of different reasons, but we have some difficulty describing them. That is why we put our eggs in the basket of doing a comprehensive market study to begin with.
Senator Runciman: Most of the issues I wanted to raise have been covered. This essentially ties in with the Competition Bureau study, which at least two of you have suggested should occur.
We had academics appear before us earlier on. Drawing from some of their testimony, they said that one of the reasons for the price gap is that many big multinational firms — both manufacturers and retailers — have an expectation that they can charge a higher price in Canada than the U.S. In other words, they are saying they charge more here because we will pay for it. Do you have a view with respect to that?
Mr. Janigan: Ordinarily, that attitude is indicative of some degree of market power and that they were able to force a price increase that is effectively anti-competitive or not indicative of a competitive market. We have to look at what circumstances exist in the market that has given them dominance. If there are barriers to entry, or to other competitors effectively competing with them, can we do something from the standard competitive sense, such as an order from the Competition Tribunal, dealing with exclusive contracts with suppliers, or different types of agreements? That is what I would look to in the first case to try to remedy or adjust their expectations to one which is more in accord with competitive markets.
Senator Runciman: I do not think you responded to the issue raised earlier with respect to exemptions. I know removing exemptions was suggested, but what we have talked about to this stage is matching the exemption level that the United States applies, and one-day exemptions that we do not apparently have for Canadians visiting the U.S. In some respects this issue is counterintuitive in that it will encourage cross-border shopping. However, the other element is it will encourage competition and put pressure on Canadian retailers to more aggressively price products in relation to their competitors across the border. I do not think you responded to that issue earlier. Maybe this is an opportunity.
Mr. Janigan: Potentially, it may be a solution in the event that you are not able to alter market structure by way of standard competitive solutions. It is difficult, though, to speculate what effect that may have. It might collapse markets prematurely and lead to difficulties in competition. It may bring competition in and prices down. I do not have enough information to speculate on that.
Mr. Cran: When the matter of tariffs across the border comes up, in every discussion I have been involved in — and I have been in quite a few now — the chief resistance to changing those rules comes from the retail groups, which normally overwhelms us. There is no financing from the Government of Canada to attempt to equalize the playing field for consumer groups. We get no government financing of any type. Britain, Europe, Australia and New Zealand are all given funds. Fifteen years ago, my group got $2 million per year. That would be heaven to me, but I was too stupid to be involved then. Now, there is nothing. We get no operating funds or support from government at all. This is why we cannot easily do studies like Mr. Janigan was talking about.
The other thing I would like to mention is that you are dealing with a 50 per cent rise in the dollar, but where manufacturers are buying raw materials from the U.S., it worked in reverse. Therefore, they should be paying a lot less for what they were previously bringing into the country in the U.S. A heck of a lot of that stuff goes on. These differences are more than 50 per cent in reality because of those factors as well.
Senator Callbeck: Mr. Vinet, you talked about the fact that Canada's top four retailers have 28 per cent of the market, as compared to the U.S. where the top four have 12 per cent. Do you know of a study that has been done to determine whether the bottom lines of those top four Canadian retailers are actually better than those of the American top four retailers? In other words, what percentage of sales is profit? Are the top four Canadian retailers actually doing better?
Mr. Vinet: I understand your question. The study done by Ryerson University in 2003 was taken back by Industry Canada. They said that when four businesses own more than 40 per cent of the market, there would be proof of market domination or a vulnerability of the economy to be in a position of market dominance. In 2001 we saw it in big retail stores, food markets and pharmacies. We were already seeing that in clothing as well. There are a lot of markets in Canada maybe because at one time we wanted to protect the Canadian economy from big U.S. businesses. We wanted to protect the Canadian economy from the American economy. Now, maybe times have changed and we need more competition or, at least, a better understanding of competition in Canada.
For four businesses, 40 per cent of the market is a problem. We see that in many markets. At least since 2001, we have seen that a lot. We want to know what is happening now in 2012. In the food market, Sobeys, Metro and IGA — three businesses — have 40 per cent of the market. There is probably something going on there, but we need more information.
As Mr. Janigan said, we would like to give you a perfect answer and recommendation, but, so far, the recommendation we can give you may hurt more than solve the problem because we do not know enough.
Does that answer your question?
Senator Callbeck: Yes.
Mr. Janigan: The senator spoke about the Ryerson centre. It has updates of the initial study and publishes a number of studies of the retail industry. I have not seen the statistics you have referenced, but I have some inclination to believe that that may be contained in those studies and reports available from Ryerson University.
The Chair: Can you give us the name of the contact person at Ryerson so we can get in touch with them?
Mr. Janigan: The initial study was done by Professor Ricardo Gomez-Insausti at the Centre for the Study of Commercial Activity, but they also have a number of different publications available there. I noted just yesterday that they have a 2010 update of the study by Professor Gomez-Insausti, at a price that exceeded our budget. I am certain the answer might be there.
Senator Callbeck: Speaking of budgets, you represent three organizations. Where does your funding come from, and what is your approximate budget for the year?
Mr. Cran: Our funding, which is very little, comes only from donors and members. I am not supposed to give you exact figures unless I get permission from the board. I cannot do that, so I cannot give you the exact figures. We are a non-profit, volunteer-run organization. I work 12 hours a day, seven days a week sometimes, for this organization and for consumers. There are not very many organizations that have survived the government cuts over the last two decades. We are a non-profit organization. That is one thing we are very good at — making no profits.
My opinion is that there would be a big improvement in Canada if the playing field was levelled in some fashion by giving grants to consumer groups. In Britain, every bill that the telephone companies put out has a cent on it, and that money is divided among consumer groups. A lot of consumer groups have disappeared from the landscape. Instead of disappearing, we have learned to survive with what we have. It is not easy. I could do a lot more advocacy if I did not spend a quarter of my time, or maybe a bit more, looking for money.
The landscape has changed over the last 20 years from us getting $2 million that we used to produce a magazine. We used to have a legal branch. We had all sorts of things. These days, we are bare bones, and I do not have funding to do these projects. The government offers about $1.4 million through OCA. It has been that way for about 15 years.
What we do not like about that is that those studies are not independent. Public servants pick and choose those programs, and when you put them in, they approve them. We feel that is worse than having industry leaning over our shoulder. It is a very difficult time for consumer advocacy, and we do the best we can.
Mr. Janigan: Our funding is in the neighbourhood of $600,000. We have four lawyers located in two offices in Ottawa and Toronto, a couple of articling students, support staff and some summer students and interns.
We derive our money primarily from the policy papers we do, either for Industry Canada or other agencies. We also represent consumers in different tribunals where we get cost awards paid for our representation. To some extent, we use that money to subsidize what we do, including appearing before you here today.
It is a large problem. I think part of it is structural in terms of the government. Given the fact that over 50 per cent of economic activity in Canada comes from consumer transactions, they may be well served to have an actual minister of consumer affairs in this country. I think there are a variety of different solutions that could be employed to try to bring some more resources to consumer and public interest organizations that are active in this area.
Mr. Vinet: Quickly, yes, it is a very hard time for consumer associations in Canada. Our association manages with more or less $600,000. We are a team of 15 people working full-time, and we are doing our best to represent consumers in that position.
I would like to add that it is quite funny because retailers are charging us more. Just a few months ago, they wanted to surcharge people who are using their credit card in their stores. I guess you heard about this.
For the moment, a lot are surcharging even if the Canadian dollar is at parity, and then they want more. They want to make people pay when they are paying. This is quite funny. It is a big game, a lot of money is in place, and we hope that little organizations like ours will help you to do your best.
Senator Marshall: Ms. Lo, I want to ask you a question on the study you referenced earlier in our discussions. You indicated that in addition to the base price of the product there were various taxes added on. The way you expressed it, I read into it that maybe some of the taxes were added specifically for the purpose of upping the price of the goods. What kind of taxes would have been added? Was the base price of the product the same whether you were a Canadian consumer or an American consumer?
Ms. Lo: There seem to be two types of pricing models that American retailers use when you are purchasing items online. With the first model, you would be paying the same price as American consumers. It would just be an American dollar price, and when you go to check out and you indicate that you live in Canada, all these taxes are added.
Unfortunately, I am not able to determine how the taxes are calculated. I just noted that, for example, on one purchase, the subtotal of the product was $70 and international duty taxes amounted to $23.45.
Senator Marshall: That is what I was wondering.
Ms. Lo: That is how it was described to me as a consumer.
Senator Marshall: There was no indication.
Ms. Lo: The second model was by the third retailer. When I went to check out as a Canadian, they displayed a different price in Canadian dollars that was 30 per cent more than the American price on their website. Again, it is various practices by different retailers, but the end result is the same in both cases, which is that as the Canadian consumer I was charged 30 per cent more.
Senator Marshall: Right. We paid more in all the cases that you saw.
Ms. Lo: That is right, and this is independent of shipping, which was added after.
The Chair: Regretfully, colleagues, I will have to call this meeting to a conclusion.
The Standing Senate Committee on National Finance would like to thank you, Mr. Cran, from the Canadian Manufacturers & Exporters; Mr. Michael Janigan and Ms. Lo, from the Public Interest Advocacy Centre; and Mr. Vinet, from Option consommateurs. Thank you very much for being here.
(The committee adjourned.)