Proceedings of the Standing Senate Committee on
National Finance
Issue 6 - Evidence - October 26, 2011
OTTAWA, Wednesday, October 26, 2011
The Standing Senate Committee on National Finance is meeting this day at 6:45 p.m. to study the potential reasons for price discrepancies in respect of certain goods between Canada and United States, given the value that the Canadian dollar and the effect of crossborder shopping on the Canadian economy.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: We continue tonight our special study on the potential reasons for price discrepancies in respect of certain goods between Canada and United States.
[English]
We are very pleased to welcome this evening Professor Ken Wong, who is the Distinguished Professor of Marketing at Queen's University. We are also pleased to welcome Professor Avi Goldfarb, Associate Professor of Marketing with the University of Toronto's Rotman School of Management.
We will begin with a short presentation by Professor Wong and then we will go to Professor Goldfarb. Following that we will go into a question and answer period. We have one hour set aside for this particular session.
Ken Wong, Queen's University, as an individual: Good evening. I was pleased to be asked to be with you tonight to talk about this issue because it is a very complex one. I am sure we all recognize its importance, but its complexities often lie somewhere below the surface or below the radar of the general public.
The problem is there are a number of factors bundled in pricing decisions on either side of the border. There is also enormous variation into the impact of each of these factors on different products carried by the same retailer or even on the same product carried by different retailers, all of which makes the detection of any form of price gouging very hard to do, and the regulation of such price gouging by an external agency nearly impossible.
There are, to be certain, three different components of price differences between Canadian and U.S. products. The first are sourced in what I will call legitimate additional costs. These are the things that you often hear about. They are the tariff charges and the higher shipping and transportation expenses incurred by Canadian retailers, relative to the U.S. For small retailers, it is the use of wholesalers in order to make certain they have the right goods to supply to their customers and the like.
The challenge, however, with those costs is they are not standard across all businesses. Different businesses with different asset bases have different cost structures, and as a result you cannot simply look at differences in prices and assume that one is price gouging and the other is not.
As an example, if one firm owns a fleet of trucks that it uses to handle all of its supply chain requirements, whereas another firm has to rent those assets from a trucking firm, obviously the firm that is big enough to have its own trucks has lower cost than the firm that has to rent those assets from a third party. Those lower costs tend to be reflected then in lower prices. That does not mean that the more expensive retailer is gouging their customer, it simply says they have higher costs than the other firm and, as such, their prices will reflect that cost difference.
In some categories, for example cameras, it has been reported that the price difference between Canada and U.S. goods is as little as 7 per cent. In other categories, like stand-up refrigerators, a price difference has been noted somewhere in the order of 80 per cent. That leads to an obvious conclusion by some people that there is a 73 per cent price gouge going on in the home appliance business, but that is not the case at all. The price for a refrigerator is dramatically different, given its size, bulk and so on, than the price for a camera.
The second thing that makes it difficult to do straight price comparisons between Canada and the U.S. has to do with volume or scale effects. The U.S. market is 10 times the size of the Canadian market and, accordingly, the average retailer in the States is much larger than the average retailer here in Canada.
As a consequence, with size comes certain advantages and cost efficiencies but also comes enormous buying power. It is like the difference between me walking into a car dealership and asking how much for a particular car, and then asking how much it would be if I bought six. Clearly I would expect a better price if I was buying six. Big U.S. retailers will get better prices than even big Canadian retailers and, as a consequence, they will reflect those buying advantages in having lower prices.
The third and final component, and the one I think is most difficult to talk about, is the margin objectives of each firm because here there is no standard base and there is no real comparison. Margins, that is to say the amount of markup that exists between costs and price, are really determined by a number of factors such as the inherent risk that the retailer is taking in carrying a particular product. It is the risk of obsolete inventory; it is the risk that comes with having to provide follow-on service to the consumer, and so on.
There is the risk that comes with what happens if we are not operating at full capacity and our costs are a little bit higher, and obviously margins have to cover that as well. Margins of course have to reflect competitive realities because competition has always been the great regulator, so to speak, of prices. The more competitive the market, the greater the number of competitors; typically, the smaller the margins a retailer can apply to their costs and still remain in business. Since we have fewer retailers in Canada, it stands to reason margins in Canada have tended to be a little bit higher than for comparative products in the U.S.
Finally, there is the component that we can refer to most simply as "whatever the market will bear." This is a tough one. Frankly, most businesses work in a world of profit maximization. It is, I think, at the heart and soul of our capitalist system. It is very difficult for us to regulate that, because it requires that we apply some standard notion of what is a fair and normal profit. How much should someone be allowed to charge for their particular good? Of course, because we have trouble doing that, it is very hard to detect exactly what it is that is going on here.
My suspicion is the public really does not think about the cost component. The public's reaction to the price disparities probably finds its genesis in things like the covers of books, where we look at a book and we see one price in the U.S., one price in Canada and the customer says it is the same book, how can it possibly be a different price? Because they are unaware of the cost differences and the scale differences, they typically attribute that entire difference to corporate avarice and, of course, to currency valuation. When currency goes up, even though currency may represent a small part of that price difference, the consumer logically expects that it will come down.
The problem, as I suggested earlier, is that that is a very hard to thing to do, except on a product by product and almost retailer by retailer basis. It is a very hard claim and charge to make. I think what you have to hope here is that the consumer starts to play a more active role and a militant role almost in responding to these price disparities to the extent they exist — the consumer in a spirit of competition.
That is a theoretically nice concept. Here is the problem with consumer sovereignty and the notion of competition: Competition assumes perfect information and competition assumes access to competing goods.
We do not always have access to competing goods. Sometimes products, if you look at the online community, manufacturers will not ship into Canada if they have a Canadian agent. As a consequence, the consumer has no option, they are virtually held captive to a monopolist, and that monopolist will logically charge whatever the market will bear. It has nothing to do with currency valuations; it simply has to do with them trying to maximize their profitability.
The second big component is information. The information one is a huge problem for us, because there are considerable disparities amongst socioeconomic classes in their access to information. The consumer today should be more empowered than ever to detect price variations tied to price gouging simply because of their access to the Internet. Unfortunately, not everyone has access to the Internet.
The coming revolution of mobility commerce has the potential to put the consumer in possession of price comparisons right at the point of purchase, holding up their smart phone, getting price comparisons from stores virtually within walking distance of where they are seated at that moment in time. That service will not be available to all Canadians at all economic levels, and that creates a problem.
The only solution I can see is to come up with some way of making certain that the information is available to the consumer and available to them at the point of purchase. This is not an ad campaign because I may not see the ad and frankly the ad may not resonate enough with me that I carry it with me into the retail establishment. However, it is not inconceivable that the government could, working with someone like the Canadian Marketing Association, come up with a code of conduct, something that retailers could voluntarily sign on to and, if they signed on to it, would have the ability to post some kind of decal or some kind of certificate at every cash register.
Doing so does not force compliance, but what doing so does is it clearly presents to the consumer a choice. You can support a retailer who buys into a certain code of conduct with respect to currency valuations and the like, or you can buy from someone who does not. If someone chooses to not care about the presence of that decal, then frankly they get what they deserve.
The point is to try and make this a marketing issue for retailers. I can assure you that many of the retailers that people are automatically assuming are guilty of this are not guilty of this. If you look at the major chains, the Walmarts, the Costcos and Indigos of this world, they operate on razor-thin margins, they are in highly competitive businesses and they do not want to lose their ability to position themselves as the best value for the consumer. They are not going to be gouging to make a couple of pennies. The stakes are simply too high. There are others, however, who do not have that competitive situation to keep them in line, and there I think some kind of voluntary compliance that the retailer can aggressively market or should aggressively market would be a great way of ensuring that the public knew who was and who was not on side.
The Chair: Professor Wong, that is very interesting. Thank you. I am sure there will be some questions arising from that, but first we will go to Professor Goldfarb and his introduction.
Avi Goldfarb, University of Toronto, Rotman School of Management, as an individual: I was honoured to be invited to appear before you today to discuss price discrepancies between Canada and the United States.
By way of introduction, I am Avi Goldfarb, Associate Professor of Marketing at the University of Toronto. I teach courses on pricing, marketing research and marketing using information technology. I have a doctorate in economics from Northwestern University and my research examines how companies use information technology to become more productive.
I would like to highlight four studies that discuss differences between Canada and the United States in productivity and prices. The combined message will be: Canadian business productivity is lower than U.S. business productivity, and lower productivity can lead to higher prices. Second, one reason for this is differences in competition. Third, trade and border policies can help in competition, thereby reducing prices, but fourth, some Canadian companies are likely to suffer because of this. Competition reduces prices. Competition from American companies reduces prices in Canada. There will be Canadian companies that will be hurt. The more effective the policy actually is at reducing prices, the more likely that existing Canadian retailers will be hurt.
The first study I would like to discuss is the study I conducted for Industry Canada called ICT and Productivity, a Synthesis of Canadian, American and European Research. This study examined differences across firms, industries and countries in their ability to adopt and use cutting-edge information technology.
First, among the findings of the study was that there is low Canadian retail productivity relative to the United States. Second, low Canadian adoption and usage of information technology — relative to the United States — can explain that difference. Finally, even when Canadian firms adopt cutting edge technology, they are somehow not as able to convert it into productivity as American firms. We do relatively well compared to Europe, but these are comparisons to the United States.
The differences between Canada and the United States were only noticeable in less competitive industries in Canada. When there are a large number of fiercely competing firms in Canada, we see very little difference between Canada and the U.S. When the Canadian market is as competitive as the American one, firms adopt and use technology effectively to increase their productivity, much like American firms. A key explanation of the observed difference in productivity between Canada and the United States is the level of competition by industry.
A second study I conducted two years ago for Industry Canada was called Understanding differences between Canadian and American Internet Use: Geography and education. This study examined differences between Canadian and American consumers in their online activities. It found that Canadians are much less likely than Americans to buy online, and to browse the Internet for information. It discussed two main reasons for this. First, higher levels of university education in the United States explain some of the difference. Second, opportunities for buying online in Canada are limited relative to the United States. A notable exception is in online banking, where Canadians continue to lead Americans. To the extent there is a short or medium term policy solution to Canada-U.S. differences, it relies on reducing barriers to U.S.-based Internet companies in entering the Canadian market and using their U.S. distribution systems.
A third study I would like to discuss is a paper I published with co-authors from Georgia Tech and NYU on competition between online offline retailers in the United States titled Competition Between Local and Electronic Markets: How the Benefit of Buying Online Depends on Where You Live. Using U.S. data, we showed that Amazon, Barnes & Noble, and Walmart compete fiercely. When Walmart opens in a town, Amazon sales in that town suffer. The expansion of Walmart and Amazon across the United States has reduced prices, increased variety, and increased the number of attractive retail options U.S. consumers face. The benefit of shopping on Amazon is particularly large for those consumers with expensive and limited local retail options. For Canada, I believe this suggests that the benefit of buying from a fully stocked Amazon.ca — or other online retailer with the same selection, prices and shipping times as an Amazon.com — would be particularly high. I would argue that enabling Amazon alone is insufficient. Competition will increase and prices will fall to the extent that delays and fees for many U.S.-based businesses to ship across the border can be reduced.
The fourth study I would like to discuss was conducted by a colleague at the University of Toronto, Professor Ambarish Chandra, with UBC professors Keith Head and Mariano Tappata, called The Economics of Cross-Border Travel. They found that Canadian consumers are quite price sensitive. When the Canadian dollar rises, cross-border trips increase sharply. In an op-ed piece in The Globe and Mail based on their research, professors Chandra and Head argue that raising the personal exemption would have a substantial impact on competitive pressure facing Canadian retailers. They argue that public policy should be designed to benefit all Canadians rather than a few large retailers. They assert that while some retailers may suffer, millions of Canadians will benefit from reduced prices — directly through cross-border shopping and indirectly through competitive pressures — that cross-border shopping will bring. There is still a lot that we do not know about the current price differences. The aforementioned research gives us a sense of some key issues. Broadly, one likely driver of the difference is low retail and wholesale productivity. American businesses are more productive than Canadian ones.
While scale, channel structure, input prices and the cost of doing business are all possible causes, all of these may be largely driven by differences in the intensity of competition. The responsibility of retailers is to provide products at their profit-maximizing price. As long as Canadians have few options, the profit-maximizing price in Canada will be higher than south of the border. Increasing competition will likely lower prices, but it will also mean some Canadian firms will lose. Some will not be able to compete at the lower prices.
There are not many regulatory tools available for fostering competition. The two most notable are anti-trust policy and trade and border issues. The anti-trust case against Canadian retailers and wholesalers is not clear to me, although perhaps there is a case that can be made in specific sectors. Rather, opening the border to increased cross-border shopping and easier warehousing and shipping of products — particularly for Internet retailers — will go some way to increasing competition and lowering the effective prices faced by Canadian consumers.
The Chair: Thank you, Mr. Goldfarb.
Could you look at your number four before we go to senators? You talk about the op-ed piece in The Globe and Mail by Professors Chandra and Head. Could you tell us approximately how long ago that was? Perhaps we could access it and circulate it.
Mr. Goldfarb: I believe it was May 2011.
The Chair: It was very recent then. To clarify and help us understand, are suggesting that the personal exemptions a Canadian has — depending on how long they stay offshore or in the U.S. — should be raised? That would increase competition back home?
Mr. Goldfarb: Yes. Their evidence suggests that if you can do cross-border shopping in a day without a penalty, people would jump at that. A lot of Canadian consumers would shop across the border. That would increase the competitive pressure on Canadian retailers who would then be forced to reduce their prices.
The Chair: I think most of us have the sense there is quite a bit of that going on now, without the exemptions being changed or raised. Have there been any studies on the impact of cross-border shopping on employment and inflation in Canada? Has there been any study on that that either of you can direct us to?
Mr. Goldfarb: I imagine there has been, but I am not aware of it. Professor Chandra would know.
The Chair: We just made a note of that.
Professor Wong did you have any comment with respect to that last question?
Mr. Wong: No, other than to say U.S. retailers are certainly looking to Canada. It is green pasture for them. Margins here are quite superior to those found within the U.S. That has nothing to do with currency. That is a simple reflection of the degree of competition. As Professor Goldfarb points out, when we are equally competitive as suppliers, we are equally competitive on price. Over time we would expect those things to be somewhat mitigated.
Cross-border shopping to me is a very positive situation for us. It does force Canadian retailers to be mindful of price comparisons to their U.S. counterparts.
The Chair: In your presentation, I was intrigued by this logo that you might have on the cash register. You talked about a code of ethics, but we seem to be talking only about the handling of currency valuation. What other items would the consumer know from looking at that logo? How would that help in communicating their practices?
Mr. Wong: First of all, in this country we have never been supporters of the concept of retail price maintenance. We have never believed in the notion that a supplier can force a retailer to sell at a specific price. Despite what we see on the inside cover of books, we can often go to book stores or wholesalers like Costco and buy that book at a considerable discount off that price.
I do not believe it would be appropriate to expect retailers to divulge their full cost structure and profitability to their customer. That information might be available if they are publicly held and someone wanted to get at it. For most retailers, especially smaller ones, I do not think they would be willing to share that element of their finances. You could have a policy on how certain things are reflected in prices. That policy would include currency valuations. I do not know that you can have them claim scale effects or cost advantages tied to their ownership of supply chains or what have you.
That would be very difficult, but you can with currency valuations, just as you can with employment equity issues or with sustainability and environmental issues. Retailers are very quick to promote themselves as the green alternative. There is no reason they would not want to promote themselves as the fair pricer. In fact, if you look at organizations like Walmart and Best Buy who constantly comment on their rolling back of prices, clearly, they take considerable pride in that policy.
The Chair: If the consumer considers the statement that many retailers put out, namely, that they will give 5 cents extra — now it is basically par between the U.S. dollar and the Canadian dollar — and if they applied that policy, whatever it might be, to the U.S. versus the Canadian price on the book or the magazine the consumer is buying, someone will have to give an explanation because that will not bring those two to the same figure.
Mr. Wong: If you are suggesting a need for some kind of monitoring agency, certainly, that can be done. I do not think you would want to do it on a daily basis. I think the cost of that kind of administration would be so exorbitant that prices would have to go up in order to cover it. Certainly, you could do things like surprise audits on a six-month basis on a random sample of goods, just to see whether price changes have reflected currency changes.
Again, you can do this on a product-by-product basis. You cannot do it on a category-to-category basis or retailer- to-retailer basis.
The Chair: I was not suggesting a monitoring agency, but I was wondering about this logo on the cash register and people knowing what the policy is with respect to currency fluctuations. However, they then apply that policy to the prices on the magazine and that does not get you there. There is still quite a variation between the recommended Canadian price and the U.S. price. Someone will have to explain that that is the policy with currency fluctuation, but there are many other factors like transportation, smaller market, bigger risks, et cetera.
Mr. Wong: First, the policy does not have to be specific to a number. It can be directional in nature. For example, "On a quarterly basis, we will look at currency valuations and reflect that in the pricing of U.S.-sourced products." You could make that sort of statement. If an individual consumer found they were afoul of that, then the consumer could complain to the company, and the company could respond as they would to any other service complaint.
Again, the profile of this issue is so significant that any firm that makes a public declaration that they will adhere to a policy would not want to be caught afoul of that policy.
The Chair: I think you are right. I think Canadians are very sensitive to the value of the Canadian dollar versus the U.S. dollar these days on a daily basis.
Mr. Wong: I think it fair to say we might be able to forgive them if they price gouged us. We would not forgive them if they lied to us.
The Chair: Thank you. We will move on to other senators with that statement.
Senator Gerstein: Thank you, witnesses, for an excellent presentations. It was very enlightening.
The study we are embarking on was initiated by the Minister of Finance, and, basically, the question that backed it up is the following: Why are Canadian retail prices not coming down with the dollar increasing in value? If you look over the past five, six or seven years, the dollar has moved from roughly 60 cents up to par, over par at some point, and settled back close to par.
You have given wonderful evidence to this point. The question I would like to ask you is this: If we change the word "why" to "should," what is your reaction? In other words, with the Canadian dollar value increasing, should we see some effect on prices as a result? The perception is, obviously, as it was started and he mentioned in his comments to us, Canadians are irritated; he is irritated. Should prices be coming down as a result of the change in the value of our dollar?
The Chair: If so, how quickly?
Mr. Goldfarb: Yes, prices should come down. However, they should not come down in direct proportion to the amount that the dollar changes. As Professor Wong mentioned, all sorts of things go into the price of a good. Some of them are the import prices, effectively. For the pieces that you buy in the United States, for that part, you should see the price coming down, but for everything else — for the cost of the retail space, for the cost of your employees, for shipping within Canada — there is no real reason why we should expect to see prices come down. Prices should come down, but they almost certainly should not come down in proportion.
Mr. Wong: I will give a definitive answer of "it depends." I say this because if we were talking about a 40 per cent currency valuation, obviously, that is a big enough change that we would expect it to make a material difference.
If we are talking about a couple of cents, the exercise of going through a re-pricing of an entire store containing thousands of items could add so much to the administrative cost of the retailer that the result could be an increase in prices due to the cost of compliance. In other words, the cost of compliance would be greater than the consumer benefit that would come from the currency factor being weighed in.
I should add that in reality nothing is instantaneous. Prices do not come down instantaneously with factor costs, nor do they go up instantaneously with increases in factor costs. Most businesses will tell you that in the current situation where the prices of food and of energy have risen, prices have not necessarily risen. Margins have become compressed, and, in short, business, for competitive reasons, has had to swallow that loss of profitability.
We do not see business coming before the Senate and saying, "We should have a right to raise our prices automatically every time energy prices go up." Therefore, if you want it to work down, then you must also be prepared for it to work up. We do not regulate it working up; we cannot regulate it working down.
Senator Gerstein: Would I be correct in assuming, determined by the commodity and the rate of turnover it has in a retail store, that that would directly impact the pricing in view of how quickly he is replacing the inventory that is being sold?
Mr. Wong: Again, a definitive "it depends." Not every firm has the same inventory practices. Some run on very lean inventory. Some run on consignment type inventories in some store goods. Not all suppliers provide inventory on the same basis. Some suppliers will provide inventory on a just-in-time basis, meaning we ship more frequently but in smaller quantities so that the retailer does not have excessive handling and inventory costs, whereas others remain with more conventional and traditional practices. They will ship to a retailer the bulk of its order once or maybe twice a year, and the retailer is expected to carry that inventory.
If you look at things like musical instruments, for example, most of the buying in that industry is done at the annual trade show. I believe that is held in August or September of every year in Toronto. As a result, most of that inventory is shipped within a month after the show, and those orders are placed. You carry it for the whole year.
In other cases, there are some "rogue suppliers" within the music industry that will only ship to you on a periodic basis, depending on how many sales you have historically made, that kind of just-in-time basis.
Again, we cannot assume anything, even though there is a prima facie logic that says if it is turning over more often, clearly, we should have a chance to re-price more often.
Senator Finley: Thank you for a fascinating insight on this issue.
Mr. Wong, recently — I think in April in an article in The Globe and Mail — you said that some retailers may also be restricted by contracts under which manufacturers dictate what retailers can charge in Canada.
Could you explain what you mean?
Mr. Wong: The quote was a little bit misinterpreted. It had to do more with the situation that I described a little earlier, where a company makes its product available in Canada, but only through a licensed agent. In effect, the U.S. company is therefore giving the Canadian agent a monopoly position within Canada, and its refusal to ship across the border supports that monopoly.
In that instance, even though there is no de facto price maintenance, there really is because whatever the cost is, that is what the agent will eventually base their price on.
Senator Finley: How prevalent is this kind of arrangement? I am not asking for an exact dollar figure, but is there a lot of it or is it becoming less as the thing goes more international?
Mr. Wong: I am not an expert in international trade, but my understanding is that is typically the first stage of international expansion that any company, American or Canadian, undertakes. We do not set up shop in another country as much as we try to find an agent to work through. For example, if I was trying, as many Canadian companies are now, to penetrate the Chinese market, we do not go in with our own sales force. We find a local to represent us in that area.
Senator Finley: Yes, but for Americans selling into Canada, are we regarded still as some kind of backwater here?
Mr. Wong: Not necessarily. There are some people I am sure who would hold that view, just as there are some Canadians who would hold less than impressive or charitable images of Americans.
To be a little more to the point, I do not know what the exact numbers are, but I would suggest to you that in the spirit of Canadian entrepreneurism, there are many instances where Canadians go to the U.S., recognize an idea as having potential and then seek out the Canadian rights to represent that idea here.
Senator Finley: Going back to something that Senator Gerstein mentioned, we have been asked to do this study by the Minister of Finance, presumably with an eye to perhaps being able to enable some form of government action later — whether that be less tariffs or lower taxation or some kind of bill of conduct or something, I do not know.
However, most of the things that you appear to have addressed between yourself and Mr. Goldfarb are things that governments have very little to do with, as far as I can see. In my view, we might be making matters worse by interfering in any way, shape or form with the wholesale structure and systems of distribution. Short of a huge increase in population, which I do not think the government has any business in either, the volume and scale will not change.
Let us leave tariffs out for a second because I think we can track down tariffs ourselves. However, from either of your perspectives, are there areas that you see any kind of government role here in not only explaining what the situation is but improving it?
Mr. Goldfarb: To the extent that one of the reasons for the difference between prices in Canada and the United States is due to competition and that we have less competition here than in the United States, we have two policy levers. One is opening the border more than we have, so it is tariffs but you said not to focus on that. The other tool we have is the anti- trust policy.
Anti-trust is a tool that is explicitly for increasing competition. You cannot apply it to the entire retail sector, obviously, but if you are looking for another government tool, that is the one we have, in my opinion. There may be others, but those are the two that come to mind for me in increasing competition. To the extent the difference is due to competition, we either open the borders or we create competition within the country through an anti-trust policy.
Mr. Wong: I will add two other possible instruments. The first would be Canada Post — simply the cost of the last mile of delivery. They may not be the most popular things in the world, but you could do things with postal rates to try to negate some of the U.S. advantage. Whether or not that would pass the test of some of the trade organizations is not my area of expertise.
The second, however, is something government could directly affect, which is access to information. The consumer without information is absolutely powerless to whatever companies want to do.
The Internet was supposed to usher in an era of greater price transparency than ever before. You cannot go to a marketing conference or convention and not hear about the impact of the Internet on transparency and accountability on price and all other matters. Social networks, if you are found to be running afoul of anything, can decimate your public image. To the extent that government can ensure that all Canadians at all income levels and all geographic regions have access to the Internet, have access to mobility services and so on, that would go a long way to improving consumer sovereignty.
Senator Finley: As you were speaking and you touched on books, I tried to think of some products that should be pretty well transparent to everything that we have talked about — distribution channels, distance, whatever. Those would be e-books because they are distributed through the ether, iTunes or music downloading services, and software. Are you aware of any studies — or perhaps this is something we should look at — of any significant factors that would show there are huge differences between Canada and the United States, or even marginal differences, and what would those be, other than taxes at the retail level?
Mr. Wong: I do not know of any studies. However, I do know that in areas like e-books, for example, the right to the licence to have an electronic version of a book available through your service may require that you also purchase physical books. It is not clear to me exactly what the terms of trade are there, whether or not we can say they cost less.
For iTunes, it would be a different story. In those instances, there is no reason to believe there is any cost variation, no reason to believe there is any volume or scale effect, so the difference would then be purely profit motive, profit margin.
Mr. Goldfarb: To add to that, when you think about digital purchases, it is important to distinguish between two types of things you can buy or two channels you can buy from online. One is if it is a digital download of software, there is nothing stopping you from going to an American site and buying it, because they will almost always accept your Canadian credit card. You go to the American site, buy it and you pay no price difference.
The issue comes when you have these closed systems like you have with iTunes and with most e-books, where you do have what is like a monopoly provider who gets to pick the prices. In those situations, we do see a Canadian price higher than a U.S. price, but it is only when we have that closed system.
In cases where the system is open, we do not see a difference between Canadian and U.S. prices. When we do, no one buys from the Canadian seller; everyone just goes to the U.S. That difference between closed and open systems is very important to an understanding of what is going on in online purchasing.
Senator Eggleton: Thank you for your contributions. You have convinced me that, yes, many factors go into these differentials and there is much complexity.
Professor Wong you have talked lot about the retail industry. Let me talk about a couple of products where I do not see as much influence coming from the retail industry. One is books; the other is cars.
On books — that is, the paper books, printed books — when you go to a bookstore, the publisher has already put the Canadian price on there. It stands out right in front of you that there is a difference. Of course, when the dollar is at par, it is an irritation for many people. It comes from a publisher, presumably in the United States. Transportation costs may be a factor, but the publisher may be closer to some Canadian cities than American cities. Other than the exchange, the sunken costs are in the first printing of this thing, so it is hard to understand, other than the exchange, what the difference would be.
Second, on cars, the car prices are much lower in the United States — even, I am told, for a car made in Canada. Of course, the industry is by and large operated on a continental basis, operates in Canada and the United States, and things are going back and forth across the border all the time; it is part of the components of building the car. Here is a case where the manufacturer does, to a great extent, dictate the price as opposed to a retailer. I would like to understand better what justifies those differences.
Mr. Wong: First, on the subject of books, you have to distinguish between that printed price on the cover and the actual price being charged. My suspicion, and I have neither done research nor seen research on this, is that as a book buyer, I can say that if I buy a book in Canada from its lowest source of supply, I am not paying anywhere close to that listed price. If I were to buy that same book in the U.S. from a comparable sized retailer in a comparable sized geographic region, therefore buying in equivalent volumes, I would probably not find a whole lot of price difference. The currency is simply not a huge component of that price gap.
When it comes to cars, and I am not an expert on cars by any stretch of the imagination, I can easily understand how the simple supply chain on cars, the distribution network for cars, could have a massive effect. Cars are extremely bulky and expensive to ship. If I am shipping to a remote Canadian location, a town with a population of 10,000 or 15,000 people and a single car dealership, I may be delivering one car. That is still expensive, but I am delivering one car. I may be able to send six, eight, ten cars to a dealership in a large U.S. centre and therefore experience considerable shipping and handling efficiencies relative to the Canadian situation. Again, it really does depend an awful lot on the specifics of who is buying and how many they are buying. It is not just tariffs and it is certainly not just price gouging.
If you talk to anyone in the car industry, they will tell you that margins on cars today are not what margins on cars may have been historically. They are typically running on single-digit margins to the best of my knowledge. Most of the money on cars is made on the servicing side and on the servicing side there is really no currency factor that comes into play.
My suspicion is that there are some very good reasons. That is not to suggest that an individual cannot find a great deal. It is to say that I do not think, if we all turned to buying in that way, we would all find the same deals that some people have gone on record as saying they accessed.
Mr. Goldfarb: I have two points to add. First, there is research in the United States that shows that regulations on what dealers are allowed to do across states have a big impact on prices. The fewer regulations you have on what dealers can do in terms of selling in their area and selling online, the lower the prices. If one dealer can sell anywhere in the state through the Internet, the prices in the entire state go down.
In terms of books, there is a lot of competitive pressure in Canada and the U.S., but in the U.S. we have seen it quite directly with the bankruptcy of Borders. It is just a reminder that competitive pressure is nice, it brings prices down, but if we encourage lower prices through the online channel, it will threaten the off-line channel.
Senator Ringuette: Professor Wong, I really appreciate your presentation because you have indicated to us that the best way to study the issue at hand is to divide it into three components. That makes a lot of sense.
I look at your first component, which is the legitimate additional cost, which is all the tariffs and transportation. This is our third meeting and I have been indicating that, just on transportation, there is 26 cents a litre on average just on additional Canadian taxes on that gasoline. Then we look at rental rates. Rental rates in Canada, the real estate market and the rates are higher for retailers, and so forth. I like the way that you have regrouped the issue.
The second component you talked about is the volume. Yes, the U.S. has 10 times the population; therefore, it has 10 times the purchasing power, distribution through the density of that population, and so forth. For me, this is a given.
You then look at margin objective of firms. Basically, margin objective of firms, since we all believe in the power of the market, is a section that we cannot change as government policy or regulations.
The second component, the size of the population between two countries, we cannot change either. I come back to the first component, the tariffs, the transportation cost, the real estate cost in Canada. I think that is probably the only area that government can seriously look at having some kind of influence on price structure. Am I wrong in my assumption?
Mr. Wong: No, other than the information campaign I articulated earlier. I think if government can affect the cost of business, then government will ultimately affect the price charged. Pricing is generally done, 99 per cent of the time, on a cost plus basis. Add up our cost and add the margin and the sum of the two is our final price.
The two challenges you have is ensuring that any cost reductions do indeed get passed on to the consumer. That is a much tougher nut to crack because, again, tariffs are just one small part of that overall pricing mix. You can remove the tariff, but, let us face it, that is not the same tariff on every product. Canada customs has manual this big of different rates. It gets very tough to figure out whether or not that is getting passed through.
The other problem is that you start to open up a can of worms and set a precedent. One can easily say: If you really want to reduce the cost of transportation, then why not give us a rebate on the taxes that we pay on fuel? With any luck, that gets passed on through the supply chain. The public would be very skeptical about that ever finding its way back into their pockets.
Senator Ringuette: The members of this committee did not open that can of worms. It was opened by someone else.
Mr. Wong: I say this with all sincerity. I do not envy your task. This issue is so obvious to the public. How can you not pass that on? How can you not force them to pass that on? Yet, the reality is such a complex task administratively, just figuring out the magnitude of the effect, let alone how to resolve it, is nearly impossible. You will make no one happy. The best you can hope for is to make everybody equally unhappy.
Mr. Goldfarb: I do not have anything to add to that.
Senator Runciman: This has been very interesting. Your suggestion is to increase competition as a way to bring more balance to prices, especially through lowering or changing the amounts that Canadian shoppers are able to bring back to Canada. That is part of the perimeter security conversation now. The Americans would like to see that occur and, as someone who lives on the border, I find that idea attractive. Currently, it is on an ad hoc basis whereby we have turned Canadian Border Services Agency personnel into tax collectors, in some respect, rather than allowing them to focus on their primary goal. A lot of stuff is coming back without being checked.
I am curious about a couple of things in the area of vehicle standards. Have we come quite a good distance? That was raised earlier. I know that bumpers were changed a couple of years ago in an attempt to achieve standardization in the autos produced in the United States by the Big Three, Toyota and Honda. Has that particular issue been resolved?
Mr. Wong: Not that I am aware of. You run into that dangerous problem of extra territoriality, I believe the technical term is, about whether you have the jurisdiction to interfere with someone else's line of business unless they want to ship into your country, in which case you can force compliance with your own safety standards.
Senator Runciman: What about import taxes? How much of a factor are they?
Mr. Goldfarb: The research that we have from the last time we had a dramatic reduction in import taxes in 1988 suggests that they had a very big impact on the Canadian market in both directions. They had a big impact on the productivity of our firms, which, we expect, would lead to lower prices — but first become more productive. It also had an impact on short-term employment. Professor Daniel Trefler at the University of Toronto has done a lot of research documenting this to show that lowering tariffs increased Canadian productivity, and in the long run of five to six years, increased the size of the Canadian workforce and wages. In the very short run of two to three years, it hurt the Canadian workforce. The worst performing firms who had the highest prices shut down.
Senator Runciman: The argument was made about it being a small market, but most of the Canadian population is bunched into high density areas. Is it a valid argument when you look at that in terms of transportation? I know we said that fuel costs are a factor. Do you see significant differences in pricing in outlying areas versus downtown Toronto?
Mr. Goldfarb: It depends on the industry. The one I am most familiar with is information technology. A Canadian dense urban area looks like an American dense urban area. In fact, Canadian adoption of broadband services until recently led American adoption of broadband services. Why? Even though we are spread out, we are pretty densely packed into suburbs, relative to the Americans, and so we are broadband leaders because of that. Differences in pricing will depend on the industry, who is shipping where and the extent to which they want to maintain equal prices across the country.
Mr. Wong: You also have to understand that pricing is a game of averages. No price is precise. For example, I could not have a situation where a customer goes to my store in Kingston, Ontario, versus downtown Toronto and gets a better price in downtown Toronto. That would be marketing suicide for me. Therefore, my costs tend to be averaged out. In Canada we like to live a distance away from each other. For whatever reason, that is our cultural heritage, and there is a cost to that. That cost means a certain subsidy is implicit in every price. Those living in dense urban areas will subsidize those who choose to live in rural areas, just as, to a certain extent on other issues, those of us in rural areas subsidize those in more densely populated regions. That is part of the price of democracy.
I also add that we have to be a little careful. Like Mr. Goldfarb, I am a huge supporter of open competition. However, you have to make certain from a Canadian perspective that the competition is between equals. If you were to open up the border completely, the consequences could be devastating for Canadian-owned retailers who would not have the opportunity, at least at the outset, to spread their losses in Canada across an entire U.S. market. That big U.S. retailer present in all of their states could afford to take a little bit of a loss in Canada in order to maintain their averages across North America. A Canadian firm, unless it could grow instantly to be North America wide and, therefore, compete on an equal basis, could be at a disadvantage at the start.
The Chair: Thank you, Professor Goldfarb, from the Rotman School of Management; and Professor Wong, from Queen's University, for most interesting presentations. We look forward to the opportunity to follow up on some of the points you have made. In the event that we may wish to contact you, we know where you are. Certainly, we appreciate your help on this colossal job that we have undertaken.
Mr. Wong: Thank you.
Mr. Goldfarb: Thank you.
[Translation]
The Chair: We are continuing our special study on the potential reasons for price discrepancies in respect of certain goods between Canada and United States.
[English]
This session we welcome Mr. Brent Patten, Director of the Commercial Border Programs Division at the Canada Border Services Agency. Mr. Patten will be giving a formal presentation this evening. He is accompanied by Mr. Wayne Tallack, Manager of the Port of Entry Operations Division; and Ms. Lily Ooi, Director of the Trusted Travellers Programs Division.
Mr. Patten, would you like to begin?
[Translation]
Brent Patten, Director, Commercial Border Programs Division, Canada Border Services Agency: Good evening, I would like to take a few minutes to thank you for this opportunity to discuss the role that Canada Border Services Agency plays and the responsibilities regarding the subject the committee is studying.
[English]
I would like to introduce my colleagues, Wayne Tallack and Lily Ooi.
To begin, it is important to understand the mandate of the CBSA so that it is clear about who we are and what we do as a border agency.
The CBSA has a unique mandate because it must balance two integral facets that support Canada's prosperity. Using risk management techniques, we ensure that legitimate trade and travel flow across the border freely. For example, from an operational perspective, last fiscal year the CBSA processed more than 13 million shipments and over 90 million travellers.
From a financial perspective, the CBSA collected over $23 billion in duties and taxes.
In additional, we keep Canada safe and secure by enforcing its laws and regulations to keep harmful goods and people out of the country.
In 2010-11, the agency made over 10,000 drug seizures valued at $550 million, seized over 4,500 illegal weapons, intercepted 46,000 prohibited food, plant and animal products, and removed almost 15,000 people deemed inadmissible to Canada.
The dual mandate of facilitation and security is at the heart of all CBSA's day-to-day operations.
Mr. Chair, the committee should be aware that while the CBSA administers and enforces more than 90 acts and regulations, our responsibility for setting policy only relates to the Customs Act and the Immigration and Refugee Protection Act. The policy responsibility for all other legislation we enforce rests with other government departments. Specifically, the committee should know that the policies and legislation that govern duties, tariffs and taxes fall under the authority of the Department of Finance and the Canada Revenue Agency.
For the purposes of this committee, and to keep within the scope of my appearance, I would like to speak to the facilitation aspect of our mandate.
The CBSA has in place various processes and operational programs to streamline the customs experience for business and travellers as we understand how unnecessary red tape at the border can negatively impact trade and add to increased costs.
The goal here, Mr. Chair, is to alleviate the pressures of the physical border by simplifying processes and reducing wait times.
The principle behind this thinking is that the more we know about who and what are coming into the country, the better we can facilitate low-risk people and goods and focus our efforts on the high-risk areas.
These types of programs operate in two ways. First, they use the risk management principle of advance information to know who and what is coming before arriving in Canada. For instance, on the commercial side, trusted trader programs such as Free and Secure Trade give members access to streamlined border clearance processes. This reduces delivery times and keeps down costs, providing them with a competitive advantage.
On the traveller side, programs such as NEXUS allow people to speed up the clearance process by using designated lanes and kiosks to make their border declarations.
Second, these programs make the clearance process more efficient, which means speedier clearance and better assessment of duties and taxes.
For example, the CBSA has streamlined its courier operations, resulting in more efficient processes for low-value shipments and has several programs in place, such as pre-arrival review system and release on minimum documentation to ensure commercial goods enter the country as expeditiously as possible.
After goods have entered the country, the CBSA offers trade incentive programs that assist companies by providing relief from duties under special circumstances.
The CBSA also publishes advance rulings for tariff classification of goods, which lets importers know beforehand how goods will be classified. This allows them to prepare the appropriate documentation more accurately and efficiently.
To complement the efficiency of these programs, the CBSA also regularly conducts public information campaigns. For example, before high periods of travel, we publicly advise travellers of their obligations and responsibilities before they arrive at the border. On the trade side, the CBSA conducts seminars and information sessions for importers, small businesses, and the general public about significant topics such as how to import a vehicle into Canada.
The agency also regularly meets with its key stakeholders to receive feedback from the very people who use our programs.
To conclude, Mr. Chair, the CBSA plays an important role in Canada's economy by effectively keeping the border open to secure trade and travel and working closely with those who set the policies and laws we enforce.
[Translation]
I would like to thank the committee. My colleagues and I will be able to answer your questions.
[English]
The Chair: Thank you, Mr. Patten.
Could we ask Ms. Ooi, Director of the Trusted Travellers Programs Division, just what is involved in that particular division?
Lily Ooi, Director, Trusted Travellers Programs Division, Canada Border Services Agency: CBSA administers a couple of trusted travellers programs. One is a domestic program that is called CANPASS. That allows members who are pre-risk and pre-approved facilitated access into Canada when they fly in by air or whatever the case may be.
The other program we administer is a joint program with the U.S., and that one is referred to as NEXUS. That allows members to enter into Canada and the U.S. using expedited clearance. For example, they would be able to use a kiosk where they would not have to see an officer. They would be able to go straight through, once they answer the questions on the kiosk, get their iris captures, which identifies them, and be able to go straight to their luggage and then exit.
The Chair: Mr. Patten, the figures that you gave us, $23 billion in duties and taxes, that is a lot of money. How much of that would be from individuals who go across the border to buy some product and then bring it back in and it is above the limit that they are entitled to bring in?
Mr. Patten: The vast majority of that $23 billion is on commercial goods. I will get the exact figures. It is approximately $190 million from casual importations brought in by personal means.
The Chair: What we are interested in, in part at least, in this hearing are people who decide to go into the United States to buy rather than to buy in Canada because they perceive a cost reduction in the U.S. and a saving by doing so. Can you help us with that kind of scenario? Someone comes back with a trunk load of goods. They have been down to a major store; they have bought some groceries; they filled up with gas. What do you do at the border?
Mr. Patten: I will start, and obviously Mr. Tallack will add into it.
There are large numbers of travellers heading into the U.S. for that particular purpose. There are a different number of practices that we put into place in terms of processing these individuals that are guided by the tariff itself. How long you have been out of the country will determine a specific exemption rate that can be applied that would allow goods to come in without duties and taxes. Essentially, at a land border, for example, you would come back through a border crossing in southern Ontario area, mostly bridge crossings. You would make your declaration to the border services officer at the primary inspection line. They would make a decision at that point about the value of the goods you are declaring and determine how long you have been away. Then, if required, they would send you for secondary processing into the office for collection of duties and taxes.
Once you are inside the secondary area for processing of duties and taxes, the process would involve looking at your declaration in more detail to determine what the goods are, where they came from and applying the tariff rates according to the tariff. At that point in time, a decision can be made as to whether an examination is required to verify that declaration.
The Chair: Let us talk about someone who has been there less than 24 hours, so there are no exemptions. Are there any tariffs or goods and services taxes they have to pay if they just say it is all groceries? Do they still have to make their declaration out and spend that time in the office? You must have quite a line-up of people.
Wayne Tallack, Manager, Port of Entry Operations Division, Canada Border Services Agency: If they have been away from the country for less than 24 hours, basically any duties and taxes payable on the goods they are bringing back would be fully payable. Groceries may be a little different because, for the most part, they are not taxed in Canada, and given they are coming from the U.S., the same rates apply. If it was real food, there would be no HST payable. If it was potato chips or something that is not considered food, then duties and taxes would be assessed accordingly.
The Chair: Do you have people employed who look through the trunk or the back seat of the car and pick out all the potato chips and peanuts and say, "You better go in and pay tax on those"?
Mr. Tallack: I would not classify it quite like that. The person would make their declaration, perhaps $50 or $60 worth of groceries. The officer may ask what they bought, and they might say meat, chicken, potatoes and that kind of thing. He may ask if there are any non-food items. They will probably present a bill to the officer, and he would apply discretion and determine on $50 worth of groceries with $6 or $7 worth of non-grocery items, that is fine and they can proceed. We would hopefully not send someone in to collect.
The Chair: Would clothing items or a flat-screen TV be treated differently?
Mr. Tallack: Yes. Again, for the most part, they are taxed in Canada, so the same tax rates would probably apply. Of course, it would depend on the origin of the goods as well, and that would be determined at the time the person makes the declaration. As Mr. Patten described, they would assess what they had and whether further verification is needed or simply take the oral declaration of the traveller and make the appropriate assessment.
The Chair: How many people across Canada do you have employed doing that kind of assessment and collecting taxes like that as opposed to those who are looking after security at the border?
Mr. Patten: I do not know if we have the exact number, and it is a little difficult to provide one number. The function that an officer performs in terms of collecting of duties and taxes is combined with their overall mandate based on who they are processing at the time. We may have dedicated officers in the secondary area collecting duties and taxes, but it is balanced depending almost on who is next in line. An officer could literally be dealing with a duties and tax situation one minute and dealing with an enforcement or security issue the next. I think it would be difficult to say how many officers we have doing only one function. It falls in line with the scope of the activities they have to perform at the border.
The Chair: Can you give us a figure of the total number of employees at the border working on border-type issues?
Mr. Patten: My understanding is the number of uniformed officers we have is somewhere in the range of 8,000, obviously including land borders, airports, marine operations, postal centres, what have you. The total number of uniformed officers is in the 8,000 range, and we can get you that exact number.
Senator Gerstein: Thank you, witnesses, for appearing before us. We are all very interested in this because we all get exposed to it from time to time during the year.
Mr. Patten, there are two roles of border officers, one is protecting our security, the other is collecting customs, duties, et cetera. It is the same officer approaching both. In his own mind, does one take priority over the other, or how do you try to school someone? What is the framework when they look at someone coming across the border?
Mr. Patten: That is a very good question. The dual mandate of the CBSA is something we live and breathe and try to engrain within all our employees. That dual mandate is equally as important, depending on the situation and depending on where you are and what you are doing at a particular time. It is something we take very seriously. That facilitation, trade and finance is something that all officers, all employees, must balance with their security activities. I think it is important to note. It depends on the situation of what you have to deal with at that particular time.
Obviously, certain jobs that CBSA employees are in may tend to focus on one aspect more than the other. For example, if you are an intelligence officer or something like that, you would be more focused on enforcement type activities versus if you worked on trade issues, wherein you would be more focused on revenue. Equally, however, we take both mandates seriously and apply them as required.
Senator Gerstein: It is the same individual at the border crossing, is it not? He or she is wearing two hats?
Mr. Patten: Yes, absolutely. For the vast majority of cases for uniformed officers, they balance that mandate and are trained on the importance of that duality.
Senator Gerstein: Part of our study is obviously including the whole issue of cross-border shopping. Is the majority of duty that you collect — and I am excluding major transfers through transport and one thing or another. With respect to individuals that cross, are they basically day-trippers or overnighters, or are they people who have been out of the country for a longer period of time? What is the balance among those people who are cross-border shopping?
Ms. Ooi: I do not believe that I have the exact numbers on hand for that, but it is a good combination of the mix; it depends where you are coming from.
In the cross-border air mode, for example, if they are flying into the U.S., some of those individuals are likely businessmen travelling back and forth, or they would be people or families going for a longer duration. At the border itself, at the ports of entry, you probably have a mixture again of people who are commuters that work in the U.S. or vice versa, that work in Canada. For example, in the B.C. region during the summertime, it would be many cottagers who might own property on one side or the other. Then at other locations it might just be those daytime shoppers who go back and forth.
Senator Gerstein: Finally, for further clarification, are the majority of consumer goods that come in distinct from groceries, or is it apparel or electronics? Or is it just spread all over the lot?
Mr. Patten: We have it broken down in terms of what the most popular items that we process from passengers are, not from the commercial side. We can provide both. I think it is what you would expect: mostly clothing, electronics, alcohol and tobacco. We can absolutely provide the committee with a complete breakdown of that, but it is what you would expect that travellers would bring back from the U.S. for personal use.
Senator Gerstein: It is not primarily groceries? It is not primarily going across to it get your tank filled up with gas?
Mr. Patten: I think they are there. I have the top five with me. I would expect that groceries would be there as well.
Senator Finley: I have a question on the economics of cross-border shopping. I do not think you have the data with you just now.
For example, children — and I am talking seven- and eight-year-olds — do they get an exemption, the same exemption as adults? Here is why I am asking the question: I think you have to be out of the country a minimum of 48 hours to get $400; is that the deal?
Ms. Ooi: Right.
Senator Finley: Let us say my wife and I decide to go cross-border shopping and we want to buy a big-screen television or a digital camera or something, which will save us a couple of hundred dollars. We come back through and we say to you: All right. We bought this thing.
We have not only incurred the cost of getting down there, eating while we are there, but probably, in order to get enough of a duty-free allowance, if you like, we have had to stay probably two nights. If we want to go up to $750, we may have to stay there seven nights.
In your experience, where is the pickup on this? Where is the economics of it, in your view? Your border officials are asking people these things, and I guess what I am asking is: Do they judge that as part of it? You have been away for four days and you will claim this much. You have kids and a wife in the car. Is that how it has to work to make this feasible?
Mr. Tallack: When you started off your question, it was about bringing back a big TV, and a personal exemption cannot be split. You cannot take a TV and say: I will take $300 and I will take $400.
In terms of that aspect of your question, that is right.
As far as someone determining the value of buying something while on a holiday, presumably, that is a personal decision. It may be a spontaneous kind of purchase. They may also plan that. I do not know. It is not something we ask someone when they are returning. It may be a decision they make while they are away. They may suddenly see an item they were thinking of buying in Canada, and they are away for a week. Do not forget that the first $750 of that purchase will be essentially tax free. The item may be exactly the same value as in Canada, but they can save that tax on the first $750. That might factor into their economic decision, rather than the overall price of the item. I am speculating a bit.
Senator Finley: You do not do studies on this or keep statistics of the average number of people in a car, the families, the duration of the stay, for example?
Mr. Tallack: We do have statistics on the number of vehicles and the number of people. I am not entirely sure whether any studies have been done by our department on the basis of how that correlates to exemptions and values of purchases. I am sorry; I do not have that information.
Senator Finley: In 2008-09 you processed about 91 million people through air, highway, marine and rail. I do not know if the final numbers are in, but in 2009-10 the anticipated number is around 85 to 86 million people, about a 5.6 per cent drop. However, I think your own information would indicate that the value of Canadian production protected as a result of the Special Import Measures Act actually increased substantially from a high year, 2008-09, to 2009-10. The people processed went down 5 or 6 per cent, and the value of Canadian production increased by probably 5, 6, or 7 per cent, so quite a gap. To what would you attribute that?
Mr. Patten: If I could request a clarification, it would be helpful if you could repeat the specific statistic about the revenue, or the part that went up.
Senator Finley: The part that went up was the value of Canadian production protected as a result of applying the Special Import Measures Act. Perhaps this is something that I do not understand what it is.
Mr. Patten: A significant factor to take into account with what we call SIMA, the Special Import Measures Act, is that there is more correlation to that with commercial shipments. There is probably not a direct correlation between the number of travellers, the volume of personal people going across the border and the link to SIMA versus what is happening on the commercial side. That said, we can definitely verify that correlation with our trade experts and maybe provide other statistics that may be more applicable for the Special Import Measures Act.
Senator Finley: That would be great, if you could.
In May of 2011, the gentlemen who were here talked about a report published in The Globe and Mail about the economics of shopping in the U.S. The report was written by Ambarish Chandra and Keith Head.
They suggested that the allowance per person should be extensively increased to prevent valuable border agency resources from, in effect, dealing with — the phrase I would use, but I dare not use it because we might be televised, but the real sort of run-of-the-mill, everyday nothing stuff — and allow them to focus more of their attention on the actual border security.
What is your reaction to that? Do you think that is something that would be worthwhile doing?
Mr. Patten: It is a little difficult to answer from our perspective, because the decisions around what those exemptions should be, the purpose of those exemptions, the relation to why tariffs exist and the purpose of tariffs, is beyond our policy responsibility.
In terms of the administration of those exemptions and balancing those responsibilities with our enforcement mandate and the other requirements of what we have to do at the border, that is something we live with on a daily basis, and trying to ensure that the duties and tax responsibility we have, which is linked to those exemption rates, is balanced with everything else we are supposed to do. I do not think I am in a position to comment.
Senator Finley: You do not feel that you could remove some of the burden? Your folks at the border wear two hats. One of the big issues is security. Would it not be better to have them concentrating on security as — I will not say the full-time thing, but it would be the real bulk of the issue as opposed to revenue generation?
Mr. Patten: I think the rationale of why we collect duties and taxes in any of our activities is for the Department of Finance to set the policies, laws and tariffs around why those are a required necessity. If we had more time to spend on security, it would help with security. At what cost to why we collect duties and taxes, that is not for me to say.
Senator Dickson: Previous witnesses — and you were here probably — thought we had an impossible task. If we have an impossible task, you too have an impossible task, as I read it.
Looking at this pre- and post-2003, now you have 90 statutes and all the regulations under them. What was the situation pre-2003? Did you have as many statutes, as many regulations to administer?
Our driver is we are supposed to find the reasons and make some recommendations with regard to price differentials on the same goods as between U.S. and Canada, as you are very much aware. There must be some uplift in the pricing as a result of the 90 statutes and all these regulations. Pre and post, what is the difference? Is there any difference?
Mr. Patten: I think it is fair to say the CBSA, or our previous versions of the organization pre-CBSA, has always had a large scope of legislation and regulations on behalf of other government departments to administer, whether it is revenue related or regulatory related for other government departments, for food and plant and Transport Canada and what have you. The exact number we can absolutely get, but we have always had that element of our responsibility at our ports of entry in terms of various other government department responsibilities, to administer their requirements at the border. Other than a few changes here and there in terms of new responsibilities, we have always had that.
Senator Dickson: Insofar as affecting the prices of goods, has it more effect pre-2003 versus post-2003? I am coming down to the question we have to address. Do you have any idea? You are saying there is no difference?
Mr. Patten: From my perspective, I have no information in terms of our activity at the border and its exact effect on the price of goods on Canadian shelves. I do not know of any information that exists on a correlation between the number of acts that we have to administer.
Senator Dickson: I guess in February 2011, the Border Commercial Consultative Committee met, and the consensus of that meeting — and I assume you were represented there — was that it would be better if we had a single-window agency. Does that mean you are not a single-window agency, that there are more agencies out there or departments administering further regulations? You have more?
Mr. Patten: Absolutely. The other government department's single-window initiative is an initiative underway that the CBSA is coordinating, not to eliminate other agencies or create one single agency. It is an initiative that is being worked on to try to facilitate the regulatory and reporting burden that industry faces to meet all those other government department regulations.
The goal of the project is to create a single window into the Government of Canada for trade importers, exporters, brokers, what have you, in order to submit their information to a variety of government departments and get their goods into or out of the country through one window. It is to make it more efficient and be more facilitative at the border through the CBSA. It would not replace other agencies.
Senator Dickson: We cannot replace anyone.
The CBSA, how many other agencies or government departments do I have to go through to import goods into Canada? Just give me a number. You probably could report in writing what the names of the statutes are, who administers them, et cetera. It is fascinating. It has to affect the prices.
Mr. Patten: Dependent on what the goods are and where they are coming from, I think it is accurate to say there can be a variety, a series of government department requirements for permits and certificates, and just data provision for other government departments to review. Yes, it can be a fairly long list at times.
Senator Dickson: To leave one thought in your mind in conclusion, there was a study done before the only visit that President Obama made to Canada to meet with our Prime Minister, et cetera, insofar as facilitating trade, the issues between our two countries. One of the background reports for this Queen's University study said that there was no movement overall insofar as lessening of the regulatory burden in Canada. The bottom line was that we move slowly, very cautiously in Canada. However, with great respect, if we really did bore in, there would be probably a lot fewer jobs in the civil service and we would get the same results in the end with fewer regulations. Regulations are made to create jobs, not for the betterment of the consumer. I will give you the quote.
The Chair: Thank you, Senator Dickson. I am glad I called on you.
This issue of single-window agency, are you able to provide us with a list of the other agencies that these various importers and brokers were concerned about so that we can have a sense of that?
Mr. Patten: Absolutely.
The Chair: We do not have to have it now, but if you could send it to us.
Mr. Patten: We have that by the agencies and departments as well as the different programs that those agencies and departments administer and that we play a role in.
The Chair: That would be helpful. If you could send that to the clerk, it will be circulated to all members of the committee.
Senator Peterson: Thank you for your presentation. You indicated in your presentation that you strive to minimize delays at the border crossings. At Windsor, the busiest crossing in the country, you have one bridge. Do you have any idea of the monetary cost from delays there?
Mr. Patten: It is very difficult to put a monetary cost on delays. I have not seen a report that generates, at least internally within CBSA, the cost on delays. I do not know if anyone here has, but I have not seen or able to produce a figure in that regard.
Senator Peterson: They are very close to having a second bridge. In that, I am sure, a number has been developed. Someone must have it. Do you have any idea who we could ask for that number? That would certainly factor into the decision of building the second bridge. Someone would have that.
Mr. Patten: I do not have it. I think we can speculate. There may be other departments that are more responsible for infrastructure within the agency, but again there is also private business that makes a business decision about providing infrastructure and bridges. From our perspective, we do not have a say in that regard.
Senator Peterson: You say you collect the GST at the border. Do you collect any provincial sales taxes?
Mr. Patten: Yes, we do. For those provinces where we have an agreement to collect the provincial sales tax, we do. My understanding is we collect provincial sales tax for every province except Prince Edward Island and Alberta, where they do not have a sales tax.
Senator Peterson: Do you have authority at airports to collect there?
Mr. Patten: Yes, the authority for all of our ports of entry is the same for tax collection.
Senator Peterson: I have never paid a provincial sales tax. I have paid GST but never provincial tax.
Senator Runciman: No one is knocking at your door.
Senator Peterson: They have, that is what I am getting at. It came later. I am wondering how. Do you miss some? I would think provinces would be after you all the time to get a list, and where is our money, et cetera. That is strange. I did not think you did that.
Senator Runciman: Senator Peterson was talking about delays at the border, and I know you mentioned the FAST program. It is a cost of doing business, as we know.
You must have statistics, I assume. You have brought in programs like FAST because of concerns about the thickening of the border. Do you have anything you could supply us, not tonight, pre-9/11, for example? There must have been an average time across the border for commercial goods, for examples, versus the challenges you face since 9/11. If you have statistics in that regard, that would enable us, in talking to manufacturers, for example, to quantify the extra cost of doing business in terms of the impact of border delays.
Mr. Patten, you mentioned a $190 million figure. You said it was casual. What do you mean by casual? What are you talking about?
Mr. Patten: They are non-commercial shipments, something you would carry back from vacation or just an individual trip.
Senator Runciman: You are saying the total across Canada is $190 million in terms of cross-border shopping.
Mr. Patten: That is duties and taxes collected.
Senator Runciman: Do you have any handle on the actual volume in items of dollar amounts? You said if they are there for less than 24 hours, for example, and you are going through a booth on a bridge and you say you have $90 worth of groceries or whatever, the officer does not record that, does he or she?
Mr. Patten: No.
Senator Runciman: In essence, whatever number you have is dramatically under-represented in terms of the actual value of goods crossing the border. I suppose there must be an assumption that perhaps you use or not use about smuggled goods. We have heard stories about people buying tires and all kinds of things where it is difficult to come to a conclusion. Do you have any numbers in that regard?
Mr. Patten: To go back a little bit, you are correct. Unless it is processed through a duties and tax collection, the number of a verbal declaration is not input into our system. We do have more information about the value of the goods and other information associated with what is collected upon. We do have more than just the duties and taxes collected. We can give you the types of goods and the value for duty of those goods. You are exactly right that unless it goes through that process, we would not record it.
It is important to note that for commercial goods, which is the bulk of the value of goods coming into the country, we do have specific statistics on those goods that enter the country because they go through a much more formal process of reporting and information required on it that is in our systems that we do use for analysis and program development and what have you. We would be glad to provide any information that the committee would like on commercial goods.
Senator Runciman: Would that include the numbers on new cars that are purchased in the United States and brought to Canada?
Mr. Patten: From a commercial perspective, yes, we can.
Senator Runciman: That would be helpful as well. I was not clear on the numbers that Senator Finley was referencing earlier about the statistics on Canadian visitors in terms of U.S. shopping and the changes you have seen since the increase in the dollar value in terms of Canadian shoppers. Do you have numbers on that and how the dollar has impacted the traffic and, on the other side of the coin, how it has impacted American traffic into Canada? If you have those kinds of statistics as well, it might be helpful.
Mr. Patten: We can get that. Statistics for that are available.
Senator Runciman: What about online purchase volumes? Do you have any data on that as well?
Mr. Patten: We would have some data, particularly in terms of what duties and taxes are collected, depending upon the method in which it is brought into the country, whether it is a courier or a postal shipment or if it is commercial versus traveller goods. We do have data on that, and similar data in terms of the duties and taxes that are collected through postal means and through the courier stream as well. We would be more than happy to share that.
Senator Runciman: That would be helpful. Thank you.
The Chair: How do you intercept something that is ordered on the Internet and shipped by the post office? How do you intercept that?
Mr. Patten: We have CBSA offices at the three international mail centres where international mail is processed through CBSA process for purposes of duty and tax collection, and also for security purposes as well. A similar process exists for couriers, but it is a special program. However, the same concept prevails. Duties and taxes are collected. We have the authority and a process for examination of goods arriving by courier as well.
The Chair: You see a parcel at the post office. Do you determine the value and send a bill to the person? Do you attach it to the parcel going out, saying, "In addition to this parcel, you should be sending us X dollars?"
Mr. Patten: That is close. Absolutely. In fact, all mail shipments pass by a border services officer who looks at the declaration. There is a declaration affixed to postal shipments. The officer looks at the declaration and determines the value of the goods or, if there looks to be some type of risk that requires an examination, they are sent into a CBSA area for processing where the duties and taxes are calculated or a secondary examination takes place. A form is attached to it indicating what the duties and taxes are, and then we turn that package over to Canada Post, which delivers it and collects the duties and taxes on our behalf.
Senator Marshall: When you made your opening remarks, you spoke about the $23 billion that you collect. Whose responsibility is it to maximize those revenues? You spoke about this relationship with the Canadian Revenue Agency and the Department of Finance. Would it be within your mandate to maximize those revenues?
Mr. Patten: I think we share that responsibility. There is no doubt the CBSA holds the responsibility for compliance with the legislation that we enforce at the border. We have a program in place not only to assess and collect the duties and taxes, but also to verify the compliance level of what has been reported to us for a lot of different reasons, including to ensure that the duties and taxes that were collected were appropriate. After the fact, we can go into businesses and conduct audits and evaluations and verifications on what they told us those goods were, the value of them and where they came from, from a duties and tax perspective, but also from many other regulatory elements that we enforce at the border. As well, at the border, the verifications and examinations we do to ensure compliance at the time of entry are conducted as well. That responsibility does sit with the CBSA.
Senator Marshall: If there is some recommendation to change the personal exemptions or change duties or taxes or tariffs, who has the information that can input those new assumptions and determine the impact on the $23 billion? Who does that?
Mr. Patten: From an exemption perspective, in terms of who has the information and who makes the call about what an exemption should be, it is Department of Finance. That is clearly their role and mandate to determine whether that exemption should be increased or how it should read. In regard to the individual tariff rates that make up how that $23 billion of duties and taxes on commercial goods is calculated, that is Department of Finance as well.
Senator Marshall: My next question was going to be who set the current rate and on what basis, but that would be a question for the Department of Finance.
Mr. Patten: That is correct.
Senator Marshall: My last question relates to any studies that may have been done by border services. Has there been a study to determine what revenues you may have been missing out on? We talked about the underground economy. I am sure Canada Border Services knows not everybody claims everything. Has there ever been a study done to determine what you are missing or could be missing?
Mr. Patten: In terms of a study, that is something I would have to look into, but to answer the question, we take the aspect of verifying the compliance levels for the importation of commercial goods and the accuracy of that seriously. Within our compliance and what we call post-release verification program, it is their job to determine what sectors we have to audit and what sectors we have to evaluate where we need to focus our efforts to determine where there may be areas of non-compliance or revenue missing, or responsibilities for health and safety concerns as well.
Within that activity and that program they have information and analysis about where we need to focus and, within that as well, how much revenue may be an issue. Within that area, that function that we deliver on, they would have that type of information.
Senator Marshall: That would be with Canada Border Services Agency, not the Department of Finance or the Canada Revenue Agency.
Mr. Patten: That is correct. That function of verifying what is declared to us and what is in the information that we base our decisions on to collect duties and taxes or other types of function is within our responsibility.
Senator Marshall: You do have some sort of audit function.
Mr. Patten: Yes, absolutely.
Senator Nancy Ruth: This is fascinating. I am delighted you came. This is really great. My first question is about guns and money and the next question is about the post.
You have talked about how you use the risk management principle of advance information to know who and what is coming before they arrive in Canada. Has the arming of guards had any impact on the 10,000 drug seizures, the seizure of 4,500 illegal weapons, the 46,000 seizures of prohibited plants, food and animals, and the interception of 15,000 people? If so, how have you measured it?
Mr. Patten: I do not have any statistics. I know that the agency has not looked at whether guns have had an impact on enforcement actions. Firearms were not provided to us to increase interdiction of commodities that are regulated or controlled. We could provide statistics pre-firearms and after firearms, but I am not of sure the correlation because, as I said, the purpose was not to increase interdiction. It was for different purposes.
Senator Nancy Ruth: I would like to see those numbers and I would like to know how many times guns have been pulled and used.
Mr. Patten: We can definitely get you those numbers.
Senator Nancy Ruth: About a month ago I was up in the Arctic and I was told that almost all the drugs there were coming in through Canada Post. Would you have any way of knowing whether they are coming from outside of Canada via Canada Post or whether it is domestic purchases?
Mr. Patten: I cannot comment on how all the drugs get in. We make drug seizures in all of our modes of entry. We seize drugs at all types of locations, including the post office. Drug interdiction is a key element of what we do at our postal centres, but it is a key element of what we do at all ports of entry. We could also provide information about the modes of traffic by drug seizures that we have with the agency.
Senator Nancy Ruth: Do you keep any statistics on where in Canada the bulk of these are going? Would you know the volumes going into the North or into the Greater Toronto Area or any other area? Is that statistic kept?
Mr. Patten: Not to my knowledge. Obviously from an intelligence perspective we would be very interested in that in terms of developing the tools that we have to assess risk. We would have that, but in terms of pure statistics reporting on where drugs are destined, I do not think we would have that. Again, we use different methods within the agency for sure.
The Chair: What percentage of an officer's time at a typical border crossing would go to safety matters and what percentage would go to collecting revenue?
Mr. Tallack: I am not sure that numbers are kept in that way. As was said in response to an earlier question, when someone presents himself or herself at the border and makes a declaration, the first thing the border service officer will do is determine who the person is, examine their identity documents and put them through our system before they worry about whether they have groceries or whatever. That is the first level of triage of what they will do. Everyone presenting himself or herself goes through that process.
The Chair: We can think of what might happen to the Canadian economy if we substantially increase the exemptions, but what would happen to your agency and your agency personnel is what I would be interested in hearing from you.
Mr. Tallack: That is difficult to say. I was thinking about that when that question was asked earlier. Raising the exemption may encourage more people to cross the border. It may not be an issue of dealing with duties and taxes, but there would be more traffic for us to handle. The secondary factor would be whether a higher exemption would mean there is less for us to worry about in terms of the goods they are carrying, but has the traffic increased such that we are now worried about who they are and safety issues. There would be some consequences if that choice were made.
The Chair: Unfortunately, our time is up. This has been an interesting discussion. I hope you will take back to your 8,000 colleagues that we very much appreciate the good work you are doing. We are appreciative of you being here this evening to help us understand it a little more.
(The committee adjourned.)