Category Archives: Trade

Supply management: a costly endeavor

SM.pngSource: Trevor Tombe, Twitter @TrevorTombe

By Alex Whalen, AIMS Operations Manager

The viability of supply management has come into discussion lately due to the new Trump Presidency. Dalhousie University’s Dean of Management, Sylvain Charlebois, a food expert, recently issued a press release examining the potential effects of Trump policy on the Canadian Dairy Industry.

Following Dr. Charlebois’ announcement, AIMS President Marco Navarro-Génie appeared on the Sheldon MacLeod Show. Dr. Navarro discussed the economics of supply management and why they are prejudicial against consumers. The simple explanation is that in Canada some industries, dairy being most prominent, have a restriction on production. The result is more profit for the producers at the cost of a higher price for everyday consumers.

This leads one to wonder: how do producers get away with such a scam? The answer lies in the distribution of costs and benefits. The costs of supply management are large in the aggregate, but relatively small on any individual purchase. A few extra pennies per transaction is not enough to outrage the public, even if the total costs are enormous. On the other side, the benefits of supply management are large and distributed among a small number of vocal, organized, and politically strong producers.

This phenomenon is analogous to the issue of inter-provincial trade, which has made it into the public lexicon only sporadically. The costs of not allowing Quebec beer into New Brunswick, for example, are small on a per-transaction basis, but large in the aggregate. The benefits accrue to a single entity, NB liquor, and in other cases, to Quebec’s SAQ, the LCBO, etc.

Recent trade deals reveal just how bad things have gotten. While we see occasional lip service paid to abolishing supply management, the provisions included in actual deals are paltry. For example, the recently negotiated CETA allowed for just 2% of the Canadian cheese market being opened up to foreign producers. Such reforms are merely symbolic and do not match the intensity of the problem.

For economists, demolishing inter-provincial trade barriers and phasing out supply management are as close to consensus items as you may find. However, the problem is not economic, it is political. The answer to these issues lies in the broader consumer base realizing it is being conned to the benefit of a select few. Such anti-market interference is unjust and consumers should demand better.

Tax-free U.S. retailers. Coming soon to your community?

LLBean

By John Williamson, Vice-President, Research

Since border enforcement and protection is a federal responsibility it is Ottawa’s responsibility to set the tax and duty limit exemption on consumer purchases entering Canada.  The limit is currently $20 but Ottawa is being pressured to boost it to $80 or even $200 for online purchases from the United States and overseas.

Increasing the tax exemption limit means online order destined for Canada won’t be charged HST or even U.S. state tax.  Consumers would rejoice.  Yet, it would treat two similar transactions differently and put domestic Canadian retailers at a competitive disadvantage since HST would continue to be applied on purchases made within Canada –  both locally at a neighbourhood store and online from Canadian-based shippers.  This is bad tax policy.

My recent AIMS column, which appeared in the Telegraph Journal and the Financial Post [click here to read] discussed why it is essential to maintain the neutrality of the HST on all consumer purchases.  It is also important for the provinces to enter this debate since any change would reduce provincial HST revenues.  New Brunswick along with Newfoundland & Labrador increased the HST over the summer.  Prince Edward Island will soon follow.  Nova Scotia did so several years ago.  These provincial governments say they need added tax revenue.

The Retail Council of Canada estimates the tax loophole would reduce provincial HST revenues in New Brunswick by $40-million.  Finance Minister Cathy Rogers was asked about the impact on the provincial treasury.  She opted to remain more or less neutral since it is a decision for Ottawa.

It is wrong for provinces to stay quiet about a federal tax change that would exempt the HST only on online sales made by foreign retailers after provincial governments hiked the tax on local Canadian retailers.  The change would give foreign vendors a sizable 15% tax advantage in Atlantic Canada, particularly when stores like Maine-based L.L. Bean ship to Canada for free.  Minister Rogers, along with other provincial finance ministers, should take a position.