Cross-border shopping a $20B economic drain

Cross-border shopping is costing the Canadian economy much more than believed and new rules raising duty-free limits will only make matters worse, says a new report by the Bank of Montreal.

The assessment of costs comes from the bank's deputy chief economist Doug Porter in his latest price-gap comparison between consumer goods in Canada and the U.S.

Porter said Thursday that although the price gap has narrowed to 14 per cent on average from the 20 per cent he found in last spring's survey, the phenomenon appears to be intensifying.

"A culmination of factors is likely to unleash a wave of Canadians cross-border shopping this summer in numbers not seen in two decades," he said.

"There are already more than 50 million visits to the U.S. by Canadian residents annually ... [and] those numbers are poised to swell when Ottawa increases the duty-and-tax free limits on June 1."

As part of March's budget, next month will see the duty-free limit on stays longer than 24 hours rise to $200 from $50, while the limit on stays longer than 48 hours rises to $800, from the current two-tiered levels of $400 and $750, depending on the length of stay.

Porter takes issue with the Bank of Canada's recent testimony before the Senate banking committee that estimated cross-border shopping at less than two per cent of total consumer spending.

'We are talking over $20 billion a year.' BMO economist Doug Porter

He says that doesn't take into consideration that Canadians don't always report everything they buy in the U.S. when they return. He says a better estimate is up to 10 per cent of spending for items that can be transported.

"Even at aconservative estimate of five per cent, we are talking over $20 billion a year," he said.

"If correct, that represents a real drain on domestic retail sales, employment and government revenuesa drain that looks [likely] to deepen."

The Senate banking committee is expected to report later this year on the causes of the persistent price gap between the two countries, despite near parity in the value of the U.S. and Canadian dollars in most years since 2007.

In recent testimony, the Retail Council of Canada blamed multinational distributors that charge Canadian retailers more than those in the U.S. for brand items as the main reason for the gap. Other factors that have been cited include federal duties, less competition in Canada and higher transportation costs.

The new survey of consumer goods by the Bank of Montreal suggests the gap has narrowed, in part because this week the Canadian dollar has been trading slightly below par, while during last spring's survey the loonie was worth $1.02 US.

"There hasn't been a big change, but the gap has narrowed somewhat," he said. Porter cautioned that with only 18 items sampled, his findings are not necessarily representative of the average price difference between the two countries

But Porter said with few exceptions, prices have become more competitive in Canada over the past year, yetthe dramatic appreciation of the Canadian dollar toward parity since 2007 has had a drastic impact on shopping patterns, tourism and trips from residents on both sides of the border, he points out.

Porter said there are now 2.7 Canadian visits to the U.S. for every visit the other way, whereas in the 1995-2005 period, the ratio was one-to-one.

"There has never been more Canadians heading south than now. On the flip side ... overall visits by Americans [to Canada] are now running at the lowest level in more than 40 years," he said.