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article imageCanada move to cut retail price gap with U.S. seen ineffective

Louise Egan (Reuters).
article:370432:8::0
    Feb 12, 2014 in Business

By Louise Egan

OTTAWA (Reuters) - Proposed legislation to crack down on companies that unjustifiably charge more for goods in Canada than in the United States has raised eyebrows among experts on the issue as it is seen as being ineffective in lowering prices.

In Canada's federal budget on Tuesday, Finance Minister Jim Flaherty promised to give the country's competition watchdog more power to prohibit this sort of price discrimination, which has long frustrated consumers.

The news came as a surprise, particularly as it was not one of the recommendations made by a Canadian Senate committee that studied the trend at Flaherty's request and reported back in February 2013.

"To me it raises more questions than it answers. It's very difficult to imagine how they would enforce this," said Doug Porter, chief economist at BMO Capital Market. Porter has led studies showing items such as running shoes and barbecues are much more costly in Canada than the identical products are in U.S. stores, even when the two currencies were worth the same.

Flaherty's measure targets a practice called "country pricing", in which manufacturers, wholesalers or distributors may charge Canadian retailers more than U.S. retailers for the same goods.

Often the higher price is justified by higher operating expenses in Canada. But there are also cases of big brands using their market power to demand a higher retail price, which Flaherty said is "unjustified".

Just how the Competition Bureau would identify which prices are unjustified is murky.

Dan Kelly, president of the Canadian Federation of Independent Business, a small business lobby group, said the bureau needs years to mount an investigation and build a case against a company. Even then, it cannot necessarily impose penalties, as revealed by a recent case against the fees credit card companies charge merchants.

"I don't think this is going to have any major positive, nor any major negative impact here in Canada," Kelly said.

"This shouldn't cause any panic among merchants in Canada, or even among distributors."

The consumer outcry over the Canada-U.S. price gap first emerged years ago when the Canadian dollar rose to parity with the greenback, leading shoppers to expect prices to become roughly equal on both sides of the border.

The governing Conservatives, with an eye to the October 2015 election, said last year they would put a fresh focus on policies that affect consumers.

Statistics Canada estimated consumer goods cost 25 percent more in Canada than in the United States in 2011, after adjusting for the exchange rate and tax differences. Another study showed a price gap of 11 percent for electric toothbrushes, 32 percent for car tires and 114 percent for aspirin.

TARIFF CUTS

In 2013, Flaherty dropped import tariffs on baby clothes, hockey gear and a few other items in hope that the lower costs would be passed on to consumers. The government will know the results of that pilot project by yearend, and could do more.

Tariff cuts were one of four recommendations made by the Senate committee that investigated the price gap. Its report did not recommend resorting to the Competition Bureau. The committee chairman, Liberal Senator Joseph Day, said the senators spoke to the Competition Bureau and did not get any indication that the agency needed more powers.

"We didn't feel that we needed legislation, that in a free and open market there wasn't a need for legislation other than what we already have for price-fixing and that kind of thing." he said.

The Competition Bureau is an independent law enforcement agency that investigates price-fixing and other unfair market practices.

The timing of Flaherty's announcement is also a bit confusing. With a roughly 10 percent depreciation in the Canadian dollar in the past year, many goods sold in Canada are less expensive in U.S. dollar terms than they had been. This has reduced the incentive for shoppers to travel south of the border looking for deals.

All of this leaves some wondering whether the initiative is more about political maneuvering than substance.

"I found this very strange ... To me it frankly just appears as more of a populist issue, trying to make it seem as though we're trying to do something about price difference rather than actually addressing the problem," said Ambarish Chandra, a professor at the Rotman School of Management at the University of Toronto.

Country pricing is a consequence of market forces, and Flaherty should let the forces work, said Chandra, who was consulted by the Senate committee.

Kelly said any progress on the issue might boil down to verbal intervention rather than any real control on pricing, noting that Flaherty has used the "bully pulpit" in the past.

Porter agreed: "I suppose the way this could actually have an effect is if companies know that they could be investigated and that there could be a bright light shone on big differences, they might be mindful," he said.

(With additional reporting by Solarina Ho in Toronto; Editing by Jeffrey Hodgson; and Peter Galloway)

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