BUSINESS

Consumers’ choice

What free trade will mean to shoppers

D’ARCY JENISH November 7 1988
BUSINESS

Consumers’ choice

What free trade will mean to shoppers

D’ARCY JENISH November 7 1988

Consumers’ choice

BUSINESS

What free trade will mean to shoppers

When Kim Ripley has to buy milk, meat or beer, she rarely shops in her home town of St. Stephen, N.B., a community of 5,200, 106 km west of Saint John. Instead, Ripley, 37, the town’s assistant treasurer, says that she crosses the St. Croix River to Calais, Me., where tastier milk, fresher meat and chilled beer are available at much lower prices than at home. Every day, thousands of Canadians make similar trips to the United States for lower-priced food, gas, clothing and other consumer goods even though they must clear customs. Most retail industry experts concede that cross-border shopping will continue even if the Canada-U.S. free trade agreement becomes law. But they also say that the deal will result in more selection and slightly lower prices within Canada. Said Fredrik Eaton, president and chairman of the Toronto-based T. Eaton Co. Ltd.: “All the evidence points to the fact that prices will be lower.”

According to most industry experts, the elimination of tariffs over a 10-year period will increase the availability of imported U.S. consumer goods and force Canadian manufacturers to be more efficient and competitive. Alasdair McKichan, president of the Retail Council of Canada, which represents 5,500 merchants, says that imports and domestic productivity gains should combine to reduce prices by an average of five per cent over the 10-year phase-in period. Furniture and clothing prices are expected to fall marginally, but the prices of food and footwear will likely be unaffected by free trade. Canadian consumers could benefit from an influx of new retailers from the United States under free trade, several experts say. The elimination of tariffs will also make crossborder shopping increasingly attractive. But only U.S.-made goods will qualify for duty-free entry to Canada.

Even with the current duty and sales tax exemptions, which range from $20 worth of merchandise for a one-day visit to $300 for a seven-day trip, shopping in the United States is already enormously popular among Canadians. John Hensberry, general manager of the Factory Outlet Mall in the border community of Niagara Falls, N.Y., said that Canadians account for almost three-quarters of the mall’s annual sales, although he would not disclose any figures. The 75 stores in the shopping centre are all discount outlets for specific manufacturers and sell their goods at 30 to 70 per cent below regular retail prices, he said. An assistant manager for the mall’s Benetton outlet, which sells clothing designed or produced in Italy, said that Canadian shoppers frequently remove the price tags in order to avoid having to pay duty on their purchases. As well, they often wear their new clothes home and put the old clothing in the trunks of their cars.

Bargain hunters from the Vancouver area also drive across the Canada-U.S. border every day, primarily to buy cheaper gasoline and dairy products in Washington state. Thomas Low, communications manager for the 2,000member, Burnaby-based Fraser Valley Milk Producers Co-operative Association, said that the B.C. dairy industry is losing $50 million to $75 million in sales yearly to U.S. competitors. Low said that B.C. consumers can save 40 to 50 per cent by purchasing milk and cheese in Washington even after converting their money to American funds. He added that some supermarkets can keep a forklift operating all day moving crates of milk from trucks to store shelves in order to keep up with Canadian demand. Said Low: “You have to see it to believe it.”

Under the proposed free trade agreement, shopping in the United States will remain an attractive alternative for Canadians, said one federal official involved in the trade negotiations. The official, who asked not to be named, said that the current $20-to$300 traveller’s exemptions will remain unchanged. He said that the government will maintain a ceiling on the traveller’s exemption so that it can continue to collect duties even as they are phased out under free trade and to collect federal and provincial sales taxes after duties have disappeared. A Canada Customs official said that Canadian consumers will be able to bring back U.S. cigarettes and alcohol duty-free but probably will not save very much money once they have paid federal and provincial sales taxes. The availability of bargains on other types of consumer goods across the border will put pressure on Canadian merchants to reduce their prices as tariffs come down, said the trade official. He added, “Over the long run, I suspect a lot of the savings will be passed on to consumers.”

Besides lowering prices, the elimination of duties and some import quotas under the trade deal will also allow retailers to import products previously unavailable in Canada. Cary Deacon, executive vice-president of Toronto-based Simpsons Ltd., said that with the removal of existing quotas, retailers may begin importing high-quality American towels and linen bed sheets. Deacon also said that removing tariffs will probably have a greater impact on prices of top-quality merchandise.

In one case, dining room suites from North and South Carolina, where some of the world’s top furniture manufacturers are based, now sell for up to $10,000. Deacon said that prices for such goods could be cut by 20 per cent with the removal of tariffs. And retailers should be able to bring down the price of American designer clothing for women by similar amounts. He added that, with lower prices and new lines of moderately priced merchandise, Canadian retailers will be better able to attract domestic shoppers.

Said Deacon: “The amount of money [now] spent by Canadians in the United States is staggering, but we have no idea how much it is because we have never tried to get our hands on that information.”

But others express far less optimism that the trade accord will produce significant savings or benefits for Canadian consumers. Michael Teeter, executive vice-president of the Ottawabased Canadian Apparel Manufacturers Institute, said that the agreement does provide for the elimination of Canada’s 18to 25-per-cent tariffs on American clothing over a 10-year period. But Canadian and American garments with exterior fabric from third countries will not qualify for duty-free treatment, a concession demanded by the U.S. textile industry. American textile manufacturers, according to Teeter, were attempting to protect their share of the North American apparel market.

Teeter noted that about 40 per cent of Canadian-produced clothing, and 20 per cent of U.S. products, contain offshore fabrics. As well, third-country fabrics are an essential ingredient in the so-called fashion sector of the industry, which includes men’s suits and most women’s dresses. As a result, the prices of those garments will not be affected by the deal, Teeter said. He added that Canadian consumers should at least benefit from lower prices on a wider variety of cotton-based products, including T-shirts, underwear and men’s dress shirts.

The selection and price of shoes available to Canadians will also remain largely unchanged by the deal, according to both retailers and manufacturers. Sharon Maloney, president of the Toronto-based Canadian Shoe Retailers Association, said that Canada’s 22-per-cent tariff on U.S.-made shoes will be eliminated over 10 years. But third-country manufacturers, primarily in Italy, Brazil, Taiwan, Hong Kong and South Korea, control 70 per cent of shoe sales in Canada and 80 per cent of the U.S. market. Under the so-called substantial transformation rules in the trade deal, shoes from these countries would not qualify for duty-free treatment, even if assembled in North America, because most of the work on them is performed offshore. Because of that offshore dominance, domestic shoemakers in Canada and the United States do not have the product lines to take advantage of the elimination of tariffs against each other. Maloney noted that U.S. manufacturers do control one niche in their own market—high-priced shoes for men. As a result, they should be in a position to increase production and export some of their output to Canada.

With some exceptions, Canadian furniture manufacturers also foresee little advantage for consumers under free trade. Claude Jutras, president of the Canadian Council of Furniture Manufacturers, said that the 15-per-cent tariff on U.S. goods will be removed over five years. But he added that his organization foresees only a two-per-cent reduction in furniture prices over a 10-year period, which could be wiped out by inflation or tax increases because member companies will be forced to upgrade their equipment and reduce their product lines in order to survive. Jutras also said that the Canadian industry could be devastated if U.S. competitors begin exporting discontinued lines or otherwise unsold inventory to Canada, where consumers would certainly buy such goods at discounted prices. But any move to dump merchandise in Canada could result in an official Canadian government protest to Washington.

Canadian consumers may benefit from increased selection, new products and fresh retail concepts if American companies decide to move into the country under free trade. Gordon Arnell, president of Toronto-based Trilea Centres Inc., which owns 29 shopping centres across Canada, said that he has already talked to three American retailers who are interested in moving to Canada. He added that he has previously talked to other U.S. retailers who were interested in Canada but who dropped their plans after experiencing anti-American sentiments from Canadian nationalists. Retail council president McKichan said that shopping centre developers may try to lure U.S. specialty retailers to Canada in order to add some variety to their malls. Said McKichan: “It would add to the competitive mix and make life difficult for Canadian retailers.”

Although there are varying views on the impact of free trade on consumers, most manufacturers, retailers and industry analysts agree that selection will probably increase greatly, while prices will fell only marginally. Predicting price reductions is difficult because tariffs on most goods will be eliminated only over several years, and prices can also be affected by wages and exchange-rate fluctuations.

For his part, Robert Kerton, an economist at the University of Waterloo in Ontario and an adviser to the Consumers Association of Canada, said that the government was more concerned with guaranteed access to the U.S. market than with reducing consumer prices. As a result, most economic analyses of the agreement have failed to find major potential benefits to individuals, Kerton said. But others contend that the major benefits to Canadian consumers under free trade may be secure jobs and steady incomes rather than dramatically lower retail prices.

D’ARCY JENISH