Thursday 28 March 1991

Cross-border shopping



Chair: Wiseman, Jim (Durham West NDP)

Vice-Chair: Hansen, Ron (Lincoln NDP)

Christopherson, David (Hamilton Centre NDP)

Jamison, Norm (Norfolk NDP)

Kwinter, Monte (Wilson Heights L)

Phillips, Gerry (Scarborough-Agincourt L)

Sterling, Norman W. (Carleton PC)

Stockwell, Chris (Etobicoke West PC)

Sullivan, Barbara (Halton Centre L)

Sutherland, Kimble (Oxford NDP)

Ward, Brad (Brantford NDP)

Ward, Margery (Don Mills NDP)

Also taking part: Brown, Michael A. (Algoma-Manitoulin L)

Clerk: Decker, Todd


Anderson, Anne, Research Officer, Legislative Research Service

Rampersad, David, Research Officer, Legislative Research Service

The committee met at 1016 in committee room 1.


The Chair: I see a quorum. I think we should begin the morning's proceedings. This session of the finance and economics committee will be examining the question of cross-border shopping. To start us off with a general overview is Anne Anderson, who is researcher for the committee and has been looking into this topic for some time. So if you could begin.

Ms Anderson: As there has been a lot of media attention on the size of the problem, I thought I would start off with a look at the data to see whether it is just a recent anomaly or whether it is something that has been going on for some time.

Statistics Canada collects information on residents coming across the border, and in 1990, 31 million Canadian residents came back into Ontario from the US. That is an increase of 21% over the year before. If you want just to put that into a little context, you can remember that Ontario has a population of about 9.7 million people, so that is roughly three trips per person if you average it out. It is also a greater increase than happened nationally. When Canadians came back from the US, it was an increase of 17.6% nationally, compared with the 21% in Ontario.

All these people are not necessarily shoppers. They could be people who go on a business trip or to visit friends and relatives as well. But the surveys that I have looked at, anyway, seem to indicate that at least half the people who go to the US go to shop, and many of the ones who go for other reasons also shop while they are there. So I think you could consider a good proportion of the 31 million people as being shoppers.

Another way to look at it is to look at the number of travellers who go across the border and return on the same day and go by car. That, perhaps, is a more accurate reflection of the more recent concern with cross-border shoppers. For those people, in 1990, there were 22.4 million Canadians coming back through Ontario border points, and that is an increase of 25% over the previous year. That is roughly two thirds of the 31 million who come back from the US from trips of all durations, whether by car or by plane or by rail.

Now, I thought also I would like to put those figures for 1990 in some perspective and look at it over some time, so there are a couple of charts on page 3 that show the number of Canadians coming back through Ontario, which I am assuming really applies to Ontario residents, since 1980. You can see that it was pretty flat all the way through the early part of the 1980s, and it really started to increase after 1986 and it has been going up quite significantly from that time.

The bottom chart then looks at the annual change, and you can see that the three lines represent the total, and the people who came on the same day by car, which is what I am considering the shoppers, as well as the other people. In the last year, between 1989 and 1990, it looks as if it is just beginning to flatten out. So even though it increased very rapidly between 1986 and 1990, it is possible there may be a slowing down of the same-day shoppers.

Mr Sterling: Anne, if I can just ask a question. It seems in 1982, right around there, there was a big blip there. Is there any explanation for that?

Ms Anderson: I do not know that explanation on my own. There is a slight reduction just before that. I do not have an explanation for that one.

I also thought it would be interesting just to have a look at the other provinces, too, because if they had a similar pattern then it would have some implications on whether it was specifically Ontario policies or whether it was the policies that apply to all provinces in the country. And on page 4, there are the two charts. The bottom one is on a different scale from the top one just because of the size of the numbers, but you can see that Ontario as well as New Brunswick and British Columbia in particular, and to some extent, Quebec, have all increased their number of same-day trippers since around 1986-87.

On that chart, Ontario has the largest number of trippers, but you might expect that, as Ontario is also the most populous province. So I have also looked at it on a per capita basis to try to even that out and see what the relative impact is on each of the provinces. On page 5, it appears that the relative impact is actually greater for New Brunswick and British Columbia than it is for Ontario, when you look at it on a population basis.

Nevertheless, I think the charts all seem to show that there has been rapid growth in Ontario since 1986. It possibly might be slowing, although I am not sure there is enough evidence for that yet, and some of the other provinces, particularly New Brunswick and British Columbia, have experienced similar phenomena.

The same data from Statistics Canada that the earlier ones were based on, actually counting the number of travellers -- they also do a survey on the expenditure people make in the States while they are away. The latest ones I have are for 1989 and they indicate that $260 million was spent by people coming back to Ontario from same-day trips -- that is not from all trips, but just same-day trips -- and a national $557 million.

Mr Kwinter: On a point of order, Mr Chairman. Are we going to wait for our questions until the very end or can we ask them as we go along?

Mr Sterling: I think it is better to ask them as we go along, as long as we keep it short.

The Chair: Yes, whatever. Then you have a question, Mr Kwinter?

Mr Kwinter: I do have a question. One of the concerns I have: figures that you have of $260 million by Canadians, so much per day trip for Ontarians; I assume those figures represent recorded expenditures?

Ms Anderson: That is correct.

Mr Kwinter: I would think they would be minuscule in comparison to the actual expenditures.

Ms Anderson: Yes.

Mr Kwinter: And I would say that more people do not report their spending than do report their spending coming across the border. That is just a gut feeling I have. I cannot prove it, but it would seem to me that in the times that I crossed the border, there are far more people who just keep going through saying they have nothing to declare than who say they do have something to declare, and I cannot believe that that is the case. Is there any kind of anecdotal information about that?

Ms Anderson: I would agree with you that certainly it is the bare minimum that is shown here and is just what people declare and choose to declare in their surveys. I think some of the information that comes through later on, from surveys that different communities have done, will give you a bigger figure. I agree with you. I find that it is quite small as well.

Mr B. Ward: Just following on Mr Kwinter, these statistics were gathered through customs?

Ms Anderson: Yes.

Mr B. Ward: And customs would correlate these figures and this is where we are getting these statistics from?

Ms Anderson: The statistics on the number of travellers supposedly is the actual number of travellers, and it is collected at the border. A sample of those travellers is selected to fill in forms that give more information about the purpose of their trip and how much they spent and that kind of information. The expenditure information on this page is taken from that survey.

Mr Hansen: The other thing, too, is that when people do come across the border and say they bought $35 worth of groceries and declare it, there is no paperwork done on it so that has never been added in there. It is declared but not recorded.

Mr Kwinter: Following that, if you have expenditures on a trip basis of less than $100, you can just make a verbal declaration and go through.

Mr Hansen: That is not recorded, though.

Mr Kwinter: That is not recorded. Exactly.

Ms Anderson: Okay. Then I have taken those numbers on that basis and just tracked those over time as well, having deflated them just to take out the effect of inflation. Both the Canadian spending and the Ontario spending increase, as does the average spending. I think a point just to note perhaps in the average spending is that it dips down during the time of the last recession.

One aspect of the cross-border shopping is that it would not be of as much concern, perhaps, if there was as many US visitors coming to Ontario shopping as there were Ontarians going to the States, so I had a quick look at the number of American visitors to Ontario on page 8. For the first half of the 1980s, all the way through up to 1987, there were more Americans coming into Ontario than there were Ontarians returning from a trip to the US, but the rapid increase that Ontario has experienced has been accompanied by decline in the number of Americans coming through to Ontario, which aggravates the seriousness of the problem, I think.

A number of the communities that are affected have commissioned studies on the impact that cross-border shopping has had on the communities, and I cannot really speak for the studies beyond just reporting on what it is that they have found, so I will just very briefly summarize some of these. In 1989, Thunder Bay asked Ernst and Young, a management consulting firm, to do a study on outshopping in Thunder Bay. This was done on the basis of data collected at the border, as well as interviews with various affected people, and the consultants estimated that the outshopping through Pigeon River, which is the Thunder Bay border crossing point, was $15.4 million in 1988-89, which is an increase of about 60% over the previous year.

The number of travellers had increased by 30% in four years, and the number of people declaring duty to be paid increased 98%. They found that the products that had the highest value that were being declared were cars and motor vehicles, harvesters, lawn mowers and furniture, as well as some construction items like builders' joinery, and also auto parts. However, the greatest number of purchases that people made were for alcohol and petroleum. The reasons people gave for shopping in Duluth included lower prices, better service, greater variety and Sunday shopping. This was in 1989.

Mr Stockwell: Is that a priority?

Ms Anderson: No, it is just a list. The factors they identified as contributing to the outshopping were comparative taxes, retail pricing and service performance, retail costs, a vacation mentality, aggressive marketing from Duluth, the free trade agreement, exchange rate fluctuations and general economic prosperity.

In early 1990, the Committee for Fair Shopping, which was concerned with Sunday shopping, commissioned a study by John Winter Associates on outshopping from Niagara Falls, and they did their research on the basis of a survey. They found that half of the city of Niagara Falls had shopped in the US in the previous two months. The respondents shopped there almost once a week, and those who went shopping on Sunday did it almost every other Sunday. Twenty-five per cent had shopped in the US more frequently than the previous year, and the people who went tended to spend more money, have larger families and be younger than the people who were less frequent shoppers.

The main reason given for shopping in the US was lower prices, which were also affected by the value of the dollar. Highest average expenditure was for small appliances and items for the home, and again, most frequent purchases: groceries, gasoline and clothing. They also found that the probability of shopping in the US rises with income. They estimate that supermarkets lose somewhere in the region of 11% to 15% of their overall grocery trade to the US, and they extrapolate that to the region of Niagara to $155 million in sales, representing possibly over 1,000 jobs.


Mr Sutherland: On the comment about those with higher incomes shopping in the US in the Niagara Falls study, was there any information to support that in the other areas?

Ms Anderson: In one or two of the other studies I assume we will come to later -- there is particularly another study on Thunder Bay, where it seems as though the people who go to Duluth are middle-upper-income and are more educated people, and they associate that with general tourist behaviour. Going from Thunder Bay to Duluth, at any rate, is a much longer trip. It is a four-hour drive, so you do not just cross over to go and buy milk. People look on it more as entertainment value than just shopping, and it tends to get correlated somewhat with income.

Mr Sutherland: That is a great anomaly, that those who have the higher incomes and who can probably most afford to shop in the province are going across the border. You would think it would be some of the lower-income people who thought maybe prices are too high or do not have as much disposable income who would be doing that.

Ms Anderson: There is a comment in the Windsor survey that, although the higher-income people were the ones who were doing it now, the people in the survey who indicated they were going to shop more frequently in the future tended to be the lower-income.

Mr B. Ward: Following up on Mr Sutherland's comments, do you think that in the past, shopping in the States, particularly Niagara Falls, was approached as an entertainment type of event that people who had greater disposable income would perhaps look on as spending a day in the United States to do shopping, go out for supper, etc, whereas the lower-income groups or individuals very rarely went out for an entertainment event anyway? In the past, do you think that is one way that the statistics could be perceived?

Ms Anderson: I think that is one factor in it, yes. People would go for a trip or a day excursion and say, "Well let's go to the States, and while we're there, we'll do some shopping." I am not sure that that applies to the people who are very close to the border any more; it is people who are 15 or 20 minutes away who can go and save a lot of money. They go and fill up their gas tank and buy milk by crossing the border and coming back again.

Mr B. Ward: Yes, they are passing, say, away from St Catharines, which is a distance away, so to speak. They would have looked at it as an entertainment aspect.

Ms Anderson: John Winter Associates also did a study for Windsor of their downtown market, and there was one section that looked at shopping in the United States. They found, again, that quite a lot of Windsor sales were lost to stores in Detroit. As in the other surveys, groceries, gasoline and clothing were the most common items purchased, and two out of five consumers went across the border just to pick up one item at a time, which, again, is not the people who are going for entertainment. Those would be the people who would go for a particular item that is much cheaper there. Their survey indicated that 10% of the retail trade was lost from Essex county, which the is county closest to the border, representing about $60 million in sales and about 650 retail jobs.

They felt that cross-border shopping was likely to increase, and from farther away as well. Again, the main reasons given were price and selection, and the GST was expected to create an additional reason for people to shop across the border.

In their survey, the typical shoppers tended to be younger than average, large family, relatively high household income, but those who intended to shop more often in the US would have the lower-than-average income.

Mr B. Ward: In the study done by John Winter Associates for Windsor, the main reasons given for shopping in the US are price and selection. I have always assumed that we have had pretty well the same products available in Canada and in Ontario that they would have in Michigan or New York state. Did they define what selection was or was that just a feeling that there was greater selection?

Ms Anderson: I did not see the background data that went into that one but I think from some of the things that I have read elsewhere that some people feel there is a wider range of products available, there is a greater selection of certain things in the States than there is here. I have also seen studies that say it the other way, too, and I do not think that is conclusive at all. But my reading of that was that it was a greater selection there than here.

Mr Hansen: I do not know if everybody has had a chance to look at the John Winter Associates main brief and what it says: "What are the main reasons for shopping United States?" It is "lower prices, better value and savings" -- 65.7%. "Not too far away" is 7.6. I am just going to go down the first couple there: "better selection" was 7% and "lower gas prices" 5.9 and "stores are open on Sunday United States" 1.9%. You know all indications are that the stores are open on Sunday; that is the reason why. But when people take a look at it, overall shopping in the United States is only 1.9. It goes right down to the bottom, which is 0.3. I like the margin, but I think if you stand at the bridge and take a survey of people as they are going across, it is different from the survey that you actually take in the community. So I think sometimes we should take a look at where some of these statistics are coming from: at the bridge or in the community.

Ms Anderson: Right.

Mr Phillips: Just a really small point, but on the "two out of five go across just to pick up one item," I think the research says one commodity. It could be they are going to pick up groceries as opposed to one item. Because if it is just one item I would be amazed at that, but it is one commodity, I think.

Ms Anderson: Okay. One of the more publicized studies recently has been one that was done by Ernst and Young for the chamber of commerce in Sault Ste Marie, which was again based on border crossings; also Customs Canada information and a telephone survey. They found that between 1986 and 1989 there was a 74% increase in declarations at the border, 207% increase in the B15 forms, which are the ones you complete when you pay duty, and a 92% increase in verbal declarations. Only the verbal declarations increased at a rate greater than the national average. The 1989 cross-border shopping in the Sault is estimated at $39 million, which peaks in July and August of each year. Quite a lot of the cross-border shopping is quite seasonal and is different for different months. In the survey they did 36% had bought gasoline over the last 30 days and 27% had purchased milk and groceries. That seems similar to some of the other surveys. As a result milk sales per capita and also beer sales per capita have been declining in the Sault.

They estimate that the loss of goods and services together in 1990 would be $104 million, and if you look at the indirect effect of that as well, they estimate a total loss of $141 million.

Mr Stockwell: When they do those estimates, they are doing it on the basis of what is declared?

Ms Anderson: Yes.

Mr Stockwell: So they are saying $104 million, but it could be $400 million, $500 million?

Ms Anderson: Yes, it is based on surveys; and they have an economic model, a community impact model that they ring through as well.

Mr Stockwell: These numbers are numbers. They are not very accurate, I would --

Ms Anderson: Not necessarily, no.

Mr Stockwell: I think almost conclusively they are not very accurate. You could talk 4 or 5 times that.


Mr Hansen: I think to get a better bearing on these statistics here, what we need is the number of cars that travelled and the number that declared, to show a percentage. I think this is what Mr Stockwell was looking at also: the number of cars that are travelling across that go through with this $40. To get an average declared amount that passes through the border, we need a better idea of exactly the total. I think you are right in the ballpark there at $400 million when $100 million is declared.

Mr Stockwell: I do not think we can get that figure. It is very high.

Ms Anderson: Yes. They are the only figures that very much are around. It just gives you some feeling for the minimums that are there.

Mr Stockwell: Not having your research, I understand. I do not think we need the figure.

Mr Hansen: It is very high.

Ms Anderson: Yes. So apart from those studies, it seems to me that it confirms what you saw before: that this cross-border shopping is happening with increasing frequency. There are very frequent purchases of milk, groceries and gasoline, and also of larger items such as cars, furniture and clothing. The reasons that come out from those surveys, I think, are the lower prices and the value of the dollar.

The Ministry of Industry, Trade and Technology will be coming here this afternoon to give a presentation, so I am not going to go into its examination very thoroughly; just to point out that it had looked at this in conjunction with a lot of the communities and had come out in the fall of last year with a marketing and action plan to help local communities counter the effects of cross-border shopping. In that action plan, they estimate that Ontario has been losing $340-$360 million a year in retail sales, with provincial revenue losses of between $40-$50 million.

The Chair: When did MITT develop this marketing framework?

Ms Anderson: They were doing it during the course of the summer and in the early fall. I think it came out around October or something like that.

What I have done so far is describe what people have found has been happening. I felt it would be useful to try to look at what might be some of the underlying causes.

Mr Phillips: Just one quick question. The $340-$360 million in retail sales per year -- what would that be as a percentage of total retail sales? Just a ballpark.

Ms Anderson: I was trying to get that on my way over here actually, and found that the relevant document was not in the library. But in 1985, total retail sales were, I think it is, $45 billion in Ontario. So it would be significantly more than that now.

Mr Phillips: So maybe somewhere between 1% and 2% of the retail sales, do you think?

Ms Anderson: It was $49 billion in 1985, and I will get the updated figure so that we can get some percentage.

One of the most frequently cited reasons for going over is lower prices, particularly gas and dairy products, as well as clothing and household items. Also mentioned had been the free trade agreement, Sunday shopping, and the tourist, the entertainment value of shopping. Sorry, that was not mentioned, but that is a conclusion that I looked at.

It seems there are several underlying causes for the price difference, and I am sure there are many more than I have listed, but this will be a start. There is the exchange rate, perhaps; lower US costs, which could come from lower taxes and a variety of sources; lower retail real estate or leasing costs; lower prices on foods that are not produced under supply management. There is also aggressive US advertising, non-collection of Canadian sales and excise taxes, including the RST, and also there is the growth of the discount malls on the other side of the border, which I think are attracting a lot of people over from Ontario.

Mr Sutherland: Just on the issue of the aggressive US advertising, I recently saw in one of the papers that they tried to do an analysis of how much money you actually do save by going across the border. They included your gas to go there, your toll and then that is on the declared items. I am just wondering how much thorough analysis has gone on in terms of deciding how much people are really saving versus the perception of what they are saving in terms of seeing the price in the ad. You know, the basic price of the milk is very cheap, but to do that -- is there any real analysis of what the costs are?

Ms Anderson: I have not seen anything on that line at all, and I think that is a very large part of it, actually. I think that a lot of people now feel that they are going to get a good bargain by going over because there has been so much publicity about it, and I do not know that anybody has really looked at that. I think it would be an interesting project.

The exchange rate: A lot of people have mentioned the exchange rate, so I have graphed the exchange rate between Canada and the US since the time when I had got the early data on the same-day travellers. You can see that the line is very similar since 1986, which is when the rapid increase in travellers to the US started, but it does not follow the same trend in the earlier part of the 1980s. In fact, in 1980 the value of the dollar was very similar to what it is now without any similar increase in cross-border shoppers. So I think it may be a factor now but it is not the only factor in drawing people over to the States.

Mr B. Ward: In the 1970s, when the Canadian dollar was relatively higher even than it is today, do we have any statistics that go back that far to see whether that had any impact on people shopping in the United States?

Ms Anderson: I did not look further back than 1980, but I know it goes back at least to 1975, the data they have, and I can look at that and see whether there is any relationship.

Mr Brown: Mr Chairman, I am interested in this graph. It would be interesting to see an overlay of Ontario's economic growth put on the same chart because I have a feeling, just looking at it closely, that this would show that our growth was at its peak when exchange rates were at the bottom. I do not really know what that means, but I would be interested to see the information.

The Chair: I am not sure that that would have anything to do with cross-border shopping, but it would be an interesting overlay.

Mr Brown: I am always looking for interesting overlays.

Mr Jamison: We have talked about certain impacts that really combine to put this cross-border shopping in the minds of people and then leave it there and really be attractive to people.

I know of people who cross the border particularly to buy the sin tax items such as cigarettes. It costs $42 a carton here for cigarettes, $18 at the border for cigarettes. It seems to me that that has not been weighted in. If you are a smoker, I am sure that is reason enough to go in the first place. Once you are there, then it is reason enough to do some other shopping, too. I think the alcohol-tobacco issue in itself is an attractive enticement to people to go across the border. The average smoker smokes a pack of cigarettes a day. That in itself is a tremendous potential saving for that individual. So I believe that as we tax those products to a greater level and a greater extent than what is happening in the United States, it naturally creates a magnetism to get over there and buy Canadian cigarettes at $18 a carton.

Ms Anderson: I think the same thing holds for gasoline and often for milk and for alcohol as well. They are the drawing cards that take people over there, and while they are there --


Mr Jamison: I just wanted to make it clear that thesin tax items are a major draw, in my mind. They almost turn the key and start the person's motor.

Mr Hansen: What Mr Ward brought up on the US exchange rate, the chart on page 8, travellers to Ontario from the US: you show in 1986, when the dollar dropped, the number of Canadians going to the United States sort of dropped also; but what you did see when the Canadian dollar did drop is an increase in American tourists. So if you are looking for an answer there, I think it does have a reflection on the dollar.

I may be jumping the gun a little bit here, but we talk about aggressive advertising, and this appears in the St Catharines Standard quite often. It says: "Attention Canadian shoppers. Beat the recession and the GST. Order your Canadian discount USA today and save hundreds and thousands of dollars." My wife says, "You know, the more you keep talking about this issue, the more you are selling people to shop in the United States, because it's a deal." I do not know where we stop, and the answers we are going to come up with. But this is Creative Investments, Promotional Marketing Dept, 4750 Valley Way, Niagara Falls, Ontario. For $27, including all taxes, you get this card to get 10% off in the United States. Just about a week ago in the St Catharines Standard there was a flyer, and it says right on it, "Printed in USA," and inserted in the St Catharines Standard. What we have to understand is that Canadian businessmen, to advertise in the United States, will not be getting the tax breaks on the advertising that is going on there. I think that is one area we have to take a look at to be on a level playing field. The American retailers are able to advertise in our papers and get a tax break, where our Canadian retailers do not get that tax break.

The Chair: I do not even think they can declare that tax break here in Canada as part of their costs.

Mr Hansen: But printed in the United States, they would write that off. Just an insert.

Mr Kwinter: I think there is a correlation between the products that are being bought the most in the United States and the need for those products. For example, if you are buying clothing -- and unless it is branded merchandise, it is very difficult to really compare -- you can go over to the United States and you can see merchandise that comes from Hong Kong or Taiwan or somewhere else. It may be marginally cheaper, but there is really a judgement call as to whether it is a good deal or whether it is not a good deal. Most people calculate that, when you add the exchange, when you add everything else, it is pretty well the same price.

But where you really see the difference is if someone is a smoker. Because it is an addiction and they have to smoke, they can see it right away. If I buy a package of cigarettes in the United States, it is going to cost me X; if I buy it in Canada, it is going to cost me Y. It is the same thing with milk; it is the same thing with beer or liquor. These are things that they buy on an ongoing basis and they can see the very significant savings that are there. I would also suggest that because the surveys do not take into effect the GST, that is really going to exacerbate the situation.

I spend my vacations in the United States. I have a place down in Florida. There are lots of Canadians and they all say the same thing, "Can you imagine if I had bought this?" They discount the state tax, which is relatively minimal. They say, "If I had bought this" -- never mind the price -- "automatically I would be paying 15% more just because of the retail sales tax and the GST." And as that hits home, there are going to be more and more people saying, "It pays to go to the United States."

There are organizations that are printing newsletters in Ontario, sending them to Ontarians, and not just in the border cities, but sending them to people in Toronto and people farther from the border states than Toronto. They are organizing buses to take these people over to the United States for shopping expeditions, saying, "The cost you are going to pay for the bus and everything else will be more than offset by your savings."

I think the situation is going to get worse long before it gets better unless we do something to counteract it. I would hope that this committee, once we get past the initial examination of the research, will start addressing those concerns.

The Chair: That is the stated goal of the committee, to try to come up with some recommendations that we can give the Treasurer or Revenue on this issue.

Ms Anderson: I wanted to turn to the price of gas. That seems to be one of the big drawing cards to get people to go over to the States, particularly the close ones. I have some information from the federal government, from the Department of Energy, Mines and Resources. They collect the average retail gas price for Canadian and US neighbouring cities, and you can see on page 16 that there are six US and eight Canadian cities, one of which is Toronto. These prices are a weighted average of both full service and self-serve stations. This particular one is for regular unleaded gas and it is the full pump price, so it includes taxes. In January of this year the average price in Toronto is 57.5 cents and in Rochester would be 41.8 cents. There is a difference of almost 16 cents a litre in that.

The Chair: Did they factor in the smaller American gallon?

Ms Anderson: Yes. That allows the exchange rate and converting to that.

Mr Hansen: Another thing, too, is when they say $1.04 for a US gallon, you have to realize that is a very low-octane gasoline they are quoting. Most people who go over to the States do not buy the lowest grade, but buy either the medium or high-test grade; I forget exactly what the octane is, but it is a lot lower than what you would buy over here. You would not put it in your average car.

Mr Phillips: It looks as if Canadian gas is about 50% higher than the US. Is that the kind of conclusion we should draw from this? I mean, I assume they are apples to apples here.

Ms Anderson: Perhaps not quite as much as that, but yes.

Mr Phillips: I just look at 40 cents to 60 cents across the board here generally. Anyway, it is between 40% and 50%.

Ms Anderson: Yes. I took the line that has the Canadian average and the line that has the US average and looked at the difference between those over a period of time. They have the information going back to 1985. 1 have not been able to get it further back than that at the moment, but if you look on page 17 you can see the difference between the Canadian and American averages, both with taxes and without taxes. It can very easily be seen that a lot of the difference is in the additional taxes in Canada. If you look in 1990, the difference was 20.7 cents a litre if you include taxes and 5.8 cents a litre if you exclude taxes.

Mr B. Ward: I could be wrong, but it is my perception that the Americans still import a large amount of our oil, which they refine for their gasoline. Does the oil and gas branch of Energy, Mines and Resources Canada have an explanation? When you take away the taxes, our costs are still higher than the American. Do they have an explanation as to why that would be?

Ms Anderson: I have not gone into that, although if you look on the next page, there is just a rough breakdown of the components of the price. On those two bars, the bottom is the crude cost, which actually looks to me as though it is very similar. The Canadian cost for refining and marketing is slightly higher and then the taxes are higher still.

If you want to look at it specifically in Toronto, on the next page, you can see the components for the Toronto price of gas. The crude cost is 26.5 cents a litre -- this is in December 1990 -- federal tax 12.3, provincial tax 11.3, refining and marketing 8.7, for a total of 58.8 cents a litre. The federal tax would be about 21%, provincial tax about 19% of that total price.


The Chair: Why would the refining and marketing costs in Toronto be so much lower than the refining and marketing costs in Calgary?

Mr Kwinter: Mr Chairman, I hate to take the time of this committee, but I think it is important. The Minister of Consumer and Commercial Relations, and every minister before and since me, always has to answer for gasoline costs. They have really nothing to do with it; it is a federal issue. But there is something that most people do not understand, and I listened to my colleagues in the House stand up and they are always railing about how come the costs in northern Ontario and eastern Ontario are so much higher --


Mr Kwinter: It is a common question, but I think you have to understand the issue of gasoline marketing. What happens is that the Toronto market, which is the most competitive market in Canada, is an unnatural market. There are guys -- and we had problems when we were in government -- who can go across to Buffalo and buy a tankload of gasoline on the spot market, bring it across and sell it through these unbranded stations; if the going rate is 45 cents a litre, they sell it at 41. They still make a very healthy markup. But they are jobbers: They do not refine it, they do not do anything. They just go and buy spot oil and bring it in and sell it. And people, in their buying of gasoline, and the same thing with cigarettes and milk and beer, that is why they go to the United States: They are very, very price conscious.

People are, in many ways, illogical. They will be driving along a road and they will see gasoline at 43 cents. They will drive four miles and see it at 45 and say: "Oh, my God. I missed that station." They will turn around and they will drive back to buy it at that 43 to save the two cents a litre, and they have spent more gas going back to get it than what they save, but they are very, very price conscious.

And the gasoline companies are very, very price conscious, and they want to try to keep their market share. So what happens is that these what they call renegades come in and sell it four cents below market. The next day, the gasoline companies decide, "We have to meet the competition," so they will take it down and they are, in fact, not earning the kind of money they normally would like to on their gasoline to get a fair return on their investment, but they are trying to meet the market, and as soon as this guy runs out of his gas and has to buy it through his regular channels and puts the price up again, they put their price up. So it is a very, very fluctuating market because of the competition.

The minute you get out of that market, and the minute you get into these remote areas where you do not have a service station on every corner or every three blocks or every six blocks, then they have a stable market and they say, "This is the price we should be getting to get our kind of return, and that's what we're charging." It is the competition, it is the market that dictates the fluctuation. They can decide, "Competition be damned; we're going to keep our price high," but they will lose market share. And the reason people go to the States -- most people could not care less what brand of gasoline is in their car, as long as the price is right. You cannot refine gasoline in your backyard obviously -- it is gasoline that is going to work. They go and buy it, and buy it strictly on price. That is what happens. As I say, when this thing came up when I was the minister, I visited all the gasoline companies and I was satisfied that is a fact of life.

Now, the federal government has set up, to my knowledge, at least three royal commissions to look into the pricing of gasoline, and every one of them has come back and said, as far as they can tell, there is no collusion, there are no artificially high prices. It is a problem because it is one of the few products that fluctuates so rapidly and there is the feeling that, how come everybody is at the same price? The reason for that is the competition, because if you drive down the street and one guy has it at one price at one corner and it is one or six cents or two cents or one sixth of a cent cheaper across the street, that is where you are going to go, unless you have a credit card only for that one guy. But generally, if you have a general credit card, you will go wherever the price is cheaper, and that is why they are always trying to match each other's price, so someone does not get a price advantage on it.

I am sorry for the lecture on gasoline pricing, but it is something I spent a lot of time on, and it is something that is very emotional, and people go crazy.

Just let me just finish with one other thing. When I was minister, the price of gasoline on one particular day went from 34 cents a litre to 42 cents, and everybody went wild. They were calling for public inquiries, royal commissions and everything else. And the main problem was the big jump overnight.

Very recently, within the last two months, the price of gasoline has been up to 62 cents a litre. It has dropped back again, but right after the Gulf war started, it went up as high as 62 cents. But it was a very gradual increase, and people were unhappy but they were not calling for anybody to do anything about it because it was gradual. It is the big jumps and the seeming collusion. How come they are all at the same price and they all change at the same time? The reason is very simple: They are meeting their competition because gasoline is so price-sensitive that people will go wherever they can get the best price.

Mr Sterling: Sounds good to me.

Mr Kwinter: The end of the lecture. Sorry.

Mr Sterling: What is the moral of all this, Mr Kwinter? We need more jobbers or more spot price people or what? We need them in eastern Ontario, I will tell you.

Mr Kwinter: The moral of the story is that the petroleum refining business has barriers to entry. As I say, the jobbers are buying excess gasoline on the spot market. But you cannot set up a refinery in your backyard. The cost of being in the refining business is billions of dollars, and the moral of the story is that unless we can get greater competition in the field -- which is what happens in Toronto and does not happen up in the north and in eastern Ontario, where there are far fewer gas stations and where you may have one or two in a 50- or 60-mile range -- they have a captive market. They charge the price they want to charge, and if you do not like it, you do not drive. It is as simple as that, whereas in a very competitive market, competition works. Competition is in there, and these guys do not make money, but they make money on everything else and they keep their market share for the time where they can increase the prices.

So there is a lot of pressure on the gasoline companies in the metro areas and in the border towns. If they try to get the gasoline prices as high as they can get them so they can make what they think is a legitimate markup, unfortunately the market works against them. I am not crying for the gasoline companies. I am just telling you the facts as they are.

Ms Anderson: The Ontario Border Communities Task Force on Cross-Border Shopping, when it came to the committee for pre-budget consultations, had some information about gas prices then. I believe they are coming to these hearings in two weeks' time, so I will not go into that in any great detail.

They just mentioned that the border communities, they estimate, lose 300 million litres annually in sales, and that the revenues lost as a result of that, $116.4 million, of which almost $34 million are provincial taxes. One of the solutions they are promoting is the use of graduated gas tax zones from the border, but I am sure they will go into that in more detail when they come.

Another item that has been mentioned as a drawing card is the price of milk. The federal government and Agriculture Canada have undertaken several studies to look at this in some of the provinces, as a result of people going over the border so much. They have already completed studies in British Columbia and New Brunswick. They have done one in northern Ontario, which I believe was in Sault Ste Marie, which is completed but not yet released, and they are apparently doing one for several border points in southern Ontario.

In the studies they did on the east and west coasts, they found that for the price of milk, if you take 2% milk in New Brunswick, it was 41% to 70% higher in Canada, and in British Columbia it was between 36% and 60% higher. They estimate that the two provinces are losing 4.2% of sales in New Brunswick and 7.6% of sales in British Columbia to the United States. There is a similar situation for cheese, although it is not as bad in New Brunswick as in British Columbia.


The next page just shows this graphically for the price of 2% milk. The difference is a little under half the price, I would think. This was in 1988, I point out -- not very current, but I do not believe it has changed.

Another factor cited quite often is taxation. I have not looked into this in any great detail at this stage. I just want to draw it to your attention. There is a study that the Canadian Federation of Independent Business has done on taxation and cross-border shopping, comparing two cities in Ontario and the US. I heard something on the news this morning, too, that they have done one, I think, between Quebec and a neighbouring state. They looked at the effect of total taxes, which would be wages, local taxes, income and capital taxes and commodity taxes, and they find that both large and small businesses in Toronto have a higher tax burden than their counterparts in Buffalo. You can see that demonstrated on the graphs on page 24, which I copied from their brief.

They attribute a lot of the difference, particularly in Toronto, to higher local taxes, particularly for the small firms. The situation is similar in Thunder Bay and Duluth, although it is not as severe. The Canadian Federation of Independent Business is also scheduled to appear here in a couple of weeks' time.

Another item mentioned is the non-collection of duties and sales tax at the border. Revenue Canada is responsible for the collection of federal customs and excise taxes. It does not collect provincial retail sales tax. In March this year the Minister of Revenue announced a new system to try to speed up visitors, or residents returning across the border from the US, and as a part of that program, that express lane, they have devised a system to expedite the payment of duties. Under this system, residents can apply to the government and give a VISA or MasterCard credit card number. They will receive cards which have different kinds of duties, different goods on them, with blanks to be filled in, rather like a lottery card would be, so when you return and cross the border, you can go through the express lane, put your card in a box and go right through. The cards are collected and duties are calculated, then charged to your credit card. This is happening in British Columbia at the moment, and they are planning to try it in Ontario, too. When I talked to Revenue Canada they were reluctant to say exactly where in Ontario they are going to try it. I heard they are planning to start it in May, but they are fairly noncommittal at this point.

I do not know now whether this will help or hinder the cross-border shopping, whether it will ensure more collection of duties or whether it will encourage smuggling more for having the express lane. We will have to see that. It certainly does not help the collection of provincial taxes.

Mr Phillips: Two things. One is just for your direction on the role this committee should be playing on cross-border. I think mail order is a growing issue, but I do not know whether you put some bounds around what we are going to deal with on this particular committee or not.

The Chair: We have not put any bounds on it. I think the issue primarily, though, is to investigate why people go across the border and shop.

Mr Phillips: I tend to think that is probably right. I just think that if we get beyond that, this could be bigger than life itself.

The Chair: I have not heard anybody really ask to look at mail order.

Mr Phillips: It is just that it is in here and I think it is going to be growing. But I agree with you; I think we would get into more than that. My detailed question then is, what are the kind of general duties on these things, just so I have some scope to think about and take

Ms Anderson: On things like milk?

Mr Phillips: Can you categorize groceries? I just have no idea personally.

Ms Anderson: Can I bring that back to you this afternoon? I have the tariff schedule, but it is in my office.

Mr Kwinter: Maybe I can be of help. Eighty per cent of all of the goods and services before the free trade agreement were duty-free. Twenty per cent of the goods and services that were dutiable or had a tariff on them averaged between 7% and 10%. The tariff ranged from a low of less than 1% to about 40%, but on average it was between 7% and 10%. That, of course, over the next five years and 10 years is going to be reduced to zero. It comes down one tenth per year for 10 years and one fifth per year on the five years. So that is the range we are talking about. Now with the specific items, I would imagine it is not just grocery; it would be meat products, dairy products, it would be those categories. It would all have a different thing, depending on the protections they are given. But the general, between 7% and 10%, is the tariff that is in place.

The Chair: The other thing, to refer to Mr Kwinter, is we have some very high standards in terms of fat content in our meat and so on that are not in the meat across the border. I guess if people go across the border and they see they are getting a deal, are they really getting a deal if 6% or 7% or 8% more of the meat they are buying is going to dissipate in terms of fat? So there area lot of factors here.

Ms Anderson: The next section was the free trade agreement, but I think it has almost been covered, except that I have a feeling that a lot of people had high expectations of lower prices when the free trade agreement came into place. And when those were not realized immediately, because of the longer implementation period, a lot of them have been encouraged to go across the border and get the goods at a lower price there. I think a lot of the effect of the free trade agreement at the moment is one that is perception rather than reality.

It will develop more as time goes through. But I think overall the effect on the duties at this stage is not great. I just have listed the schedule that Mr Kwinter was mentioning before. Just a couple of examples: The duties went off immediately on things like telephone handsets and skis and computers. They are coming down in five stages on things like coffeemakers, hairdryers. The slowest stage, the 10 equal annual stages would apply to, I think, things like milk, cheese and also clothing, which are items that are often bought in the States.

Distance from the border obviously has some impact on how often people go across. John Winter described a little model. There is a convenience zone that is within 15 minutes of the US border, where people just go back and forth very easily for milk and groceries. A larger one takes more like an hour to drive, and people will go and buy clothing and small appliances. About half the Canadian population lies within an hour's drive of the US, according to him. The third zone goes up to an hour and a half, where people would more likely go for the slightly bigger items such as electronic items. I have a feeling that those distances have actually expanded and that people even from an hour and a half will be going to buy clothing and not just for the big, infrequent purchases.

The Chair: Yes, in Ajax I had a phone call on the weekend and they indicated that they go down on a regular basis even from Ajax, and that is two hours. It is two hours to drive from where I live to Buffalo. What was really interesting was he said he was going down to buy a VCR. He said he could get it for $200 and I had seen a VCR in the newspaper for $249. I figured that with exchange rates it works out to be almost the same price. No, no, he is on his way down.


Ms Anderson: Finally, just to elaborate a little bit more on what we were talking about earlier on the link with tourism, how it seems as though people who come from further distances will go to the US as part of an excursion or a trip and do their shopping while they are there: There is a study going on at the moment in Thunder Bay. One half has been done, which was looking at a survey of people who go from Thunder Bay to Duluth, and the second half is under way at the moment for the return, people who come from Duluth to Thunder Bay. They also found that it was the wealthier and more educated residents who went down to Duluth, and almost all did shopping while they were down there; for 45%, it was the main activity they did when they were in Duluth. However, when they were asked to rate Duluth and its attractions in relationship to Thunder Bay, about half of them found it was as good as Thunder Bay was. The authors concluded that this supported the idea that people wanted to go just for the change and for the trip, not necessarily specifically to go and buy certain items.

I think Thunder Bay is slightly different from some of the other crossings because it is more isolated. It is further from the nearest big city and its closest city is in the States rather than in Canada.

Mr B. Ward: Within one hour's drive: they included Kitchener in that area. They must be going at a pretty good clip to make the border in one hour from Kitchener. I am assuming that when they did this study, they did the speed limits. I think Kitchener is more than one hour, because I think it is at least an hour from Brantford.

The Chair: It took us an hour and a half from here to Niagara.

Mr B. Ward: Yes. The consultant made the statement that almost half the Canadian population lies within one hour's drive of the US. Well, that would put that statement out of whack if they have used the wrong regions.

Ms Anderson: I would tend to agree with you. I think the idea was that there were kind of zones of distances and people would buy different things coming from those different zones.

Mr B. Ward: Perhaps they fudged to a degree.

The Chair: Moved the border?

Mr Phillips: No, no, lowered speed limits.

The Chair: We are beginning to get through this. I had thought about taking the bridges down and making them paddle across.

Ms Anderson: Another tourism study that relates to this somewhat is a competitive assessment between Niagara Falls, Ontario, and Niagara Falls, New York, that was done in 1989. They found that although Niagara Falls, Ontario, had a lot of natural advantages, these could be overcome by man-made attractions in New York. On the New York side, all the levels of government were working together to help give incentives for the development of things like the discount malls and other large packages that were attracting people into the New York side of Niagara Falls. They did find that there did not seem to be any major price or quality differences in accommodation or attractions except for alcohol and gas. So it seems as though Niagara Falls, Ontario, is beginning to be challenged more and more by man-made attractions in the US rather than --

Mr Phillips: Person-made.

Ms Anderson: Person-made. I am sorry.

Finally, one last study I saw was done by Americans looking at the effect of Canadian tourists in Washington, in the city of Spokane. They found that three quarters of the people from Canada who came to Spokane went there to shop. Almost 60% stayed for two nights. The majority, again, were middle income. They were worried about it because they felt this was not enough. They were comparing it, for example, to the Mexicans going over the border to Arizona, who spent $517 million in a year, whereas Canadians going to Washington spent only $17 million. So they were trying to go at it from the angle of trying to encourage more Canadians to go shopping.

Finally, those are just some of the issues and some of the underlying causes. There are many others that I have not begun to look at yet. One was alcohol, which has been discussed. Another is whether or not all goods are cheaper in the US or whether there are some here that are better. I have seen some surveys of food baskets, for example, where, when you add up the whole basket, it is actually cheaper in Canada than in the US. I think it would be interesting to know whether it is just a very few selected items that people are going down for and that the rest is of better quality or better price or not.

Look at reasons why the US are not coming up and spending in Canada, because, as I said, it would matter less that Ontarians were spending in the US if there was a reciprocal level of spending in Canada.

Then there is also effects on other industries as you go back through the production chains. There are effects on the agricultural industry, effects on manufacturing, as retail jobs get lost. I have not looked at that at all or the comparisons.

Then there is whether there are any links with the general economic cycle, too; whether it has been increasing as a result of the economic prosperity in Ontario in the second half of the 1980s and whether it will decrease as we go into a recession or not.

There is the growth of all the shopping malls and there is also cross-border advertising, which is being heavily promoted.

Finally, I would just like to mention that there is a video available in the library, if anybody is interested, of a Speaking Out program that was conducted in I think January of this year, either January or February, with Harry Brown as the host. It took place in Thunder Bay and he had a panel that included the chamber of commerce from Thunder Bay, John Winter, Professor Dilley from Lakehead University and Mark Adler, I think his name is, a man who has written a book encouraging people to go and shop in Buffalo. I cannot remember the title offhand. Anyway, that video is available in the library. It is an hour. The first half is panel discussion and the second half is questions from the audience.

That is as far as I have gone at the moment.

The Chair: Are there any other questions at this time? No questions?

Mr Sutherland: This may be comment at this time. First of all, thanks to research this is a very good document and gives a good handle in terms of bringing some of the issues to the forefront. I certainly hope we will take some time in terms of dealing with some analysis, and hopefully some of the groups coming in will deal with the analysis of the perception of everything being cheaper in the States and the reality by the time you add up all the costs of going across to shop in the United States.

I know people like Ron, who are right there in the border communities, probably feel the impact on a far more regular basis, but I am very concerned at the number of people from my constituency who now go across on a regular basis, at least once a month, to the United States. This is only anecdotal information, but it seems to be increasing tremendously. In my riding we are two hours from the nearest border. It is really troubling and concerning, I think. I sit there and try to understand it, and it is very difficult for me to understand why these people are doing that in their sense that somehow in the long run they are saving money, when in many ways it would seem it costs more.

Mr Jamison: I would like to say that I also am aware that there are people as far away who are starting to think about cross-border shopping on an ongoing basis rather than every once in a while. My own belief is that many of the products that are over there are not significantly different in price. I think I have alluded to a couple of almost key items that people will refer to almost immediately, if you were to strike up a discussion with them, as examples to indicate that things are in fact less expensive in the United States. But having said that, we have to understand also that in our area of safety net and social programs, we offer more than the jurisdiction they talk about, and of course those things cost money also.


We, as have previous governments and governments as long back as I can recall, have always found it more acceptable, and of course in the public's eye it always has been more acceptable, to tax those products that have health costs to them in the form of sin tax and so forth, so people refer to those things immediately if you were to strike up a conversation with those people. At the same time, we have to understand that our system up here is different from theirs. That has an impact, I am sure, that most people when you really talk to them about the issue would realize, and most people I speak to respect that our programs up here are superior, our health coverage is superior, and so forth.

Having said that, there is an obvious bottom line there: It takes a great deal of money to fund those programs, and in the overall sense you are really talking two different systems.

Mr Hansen: I have to agree with Norm in that particular area, but another area we have to take a look at is the product that we are purchasing over there. For one thing, the product you purchase here in the appliance field is CSA approved. A lot of these drills you buy for $9.95 would not sell here in Canada because they are not properly insulated. It could be a Black & Decker drill, built in Mexico and sold in the United States or Canada, but there is a difference in the construction of that particular drill; a lot has to do with the CSA.

My wife is in the vacuum business. She took a look at a certain brand we sell over here and it was half price in the US in a flyer, but one thing you had to note though, it was a smaller motor. That motor would last about a year, whereas the ones we sold were larger. So you have to take a look to make sure the product is identical, and a lot of people are not buying the identical product in the United States.

The Chair: I would add, just on the CSA, that if you bought a toaster in the United States that was not CSA approved and you put it in here and it burned down your house, your insurance would not cover it. That is all.

Mr Phillips: It is a fascinating subject. Just a couple of things that would be useful for me, at least: Whatever we have in terms of understanding the consumer, there are a number of people out there, maybe a large number, for whom shopping is like a hobby.

Mr Sutherland: Born to shop. Shop till you drop. Madison Avenue has won out.

Mr Phillips: Some of us sail, some of us make model things, and for some people, believe me, this is the most important thing in their life. It is the "Born to Shop" or whatever it is bumper stickers. I do not think we can ignore it, because I think in the end we are going to have to deal with reality versus what we would like to be. Our solutions, I think, are going to deal with what actually will work versus what we would like to work. I think understanding the consumer, probably in the end, is going to be fairly important.

Second, wherever we can get a kind of comprehensive analysis: I think people will come to the committee with their own self-interest at heart, obviously. So we will see the Canadian Federation of Independent Business saying taxes are too high; we will see somebody else with some other one. We have to look, to the best of our ability, at totality. The example I always use is health care, where our tax is 2% on payroll. Maybe if you are in the US, you are paying at least 6% of payroll to purchase the same service in the US; but people only talk about the employer health tax, never about if you were operating in the US.

The third minor point I would make is: Somebody was kind of surprised that higher-income people were the people shopping in the United States. All the consumer research I have ever seen says the smartest shoppers are the ones with the higher income. Maybe that is how they got higher, I do not know, but any research I have ever seen supports that. People with lower incomes, for whatever reason -- they do not have the time, they have a big family to look after, they may not have the wherewithal to do it, etc -- do not. So I completely support, probably intuitively, the research that says that is who is doing it right now and would suggest it is consistent with my thesis that we have to understand the shoppers and realize they are not necessarily like all the rest of us, or maybe we are not like all the rest of them, or something like that.

The Chair: I am not going to get into that one.

Mr Sterling: As you may know, Mr Chairman, I was very much involved in talking about the same point Mr Phillips brought up as to high-income people who are doing the shopping. When I was looking at statistics related to the habit of smoking, if you had a grade 8 education or less -- these are statistics that are about three or four years old -- there was a 50% chance you were a smoker. If you had a high school education or less, there was a 35% chance you were a smoker. If you had post-secondary education, there was only a 20% chance you were a smoker. So therefore you would assume that the people who were better educated would not smoke and, therefore, I suggest that probably the better educated people are finding the bargains first because they are reading about it or whatever. At any rate, that was not the point.

You mentioned in your brief -- I just want to get this very clear in my own mind -- that if I am over in the United States for, I think it is, more than seven days -- it is not important, the actual time -- I can bring back $300 duty free. If I am over more than 48 hours I can bring back $100 duty free. However, if in fact all of the tariffs are gone in 10 years, 1 January 1999, do all of those prohibitions go away? What happens on 1 January 1999?

The Chair: I think Mr Kwinter has the answer to that.

Mr Kwinter: This was one of the greatest fallacies when free trade was sold. I would go out and talk to consumers and they got the impression that once the free trade agreement was passed, you could drive over to the United States, open up your trunk, fill it up with everything and bring it back. That will happen in Europe in 1992, because they really have economic union -- they are going to eliminate customs barriers at their frontiers -- but that is not happening in Canada. The free trade agreement does not provide for the elimination of customs.

In order to protect the economy, there is still going to be restriction as to what you can bring in. You can only bring in so much at a given time. The big issue is that some of them will have a tariff and some of them will not.

The other common misconception is that many of the attractive items that are purchased in the United States, like VCRs and TV sets and tape recorders and CDs, all that stuff, hardly any, if any, are ever made in the United States. Under the free trade agreement, in order for it to qualify it has to have at least 50% content of either Canadian going that way or United States coming this way, so there is not going to be any tariff reduction on goods that are not manufactured in the United States. So that is going to take care of that situation. The tariff will be reduced on those items that meet the content rules, but there will still be restrictions as to the amount of products you can bring in without an import certificate or without going through the whole business of being a regular importer. But for the person coming across the border, there will still be restrictions as to what they can spend when they leave the country.

Mr Sterling: I do not understand that, because I can go over there now and buy something and pay the duty on it. Let's say something has a 10% duty on it at this time. I am not restricted to $300. I am not restricted to $100. I can bring back whatever amount I want to bring back. But once that is gone, how are you going to restrict me in bringing back whatever I want to bring back on American-made manufactured goods? Let's say a US-made car: What is going to restrict me from bringing that back and just paying my GST and my PST as I cross the border? Is there going to be any restriction? Do you know, Anne, or can you find out for us?


Ms Anderson: I will find that out. I do not know that. I know there is the content problem; we will always create duties for that.

Mr Sterling: We are assuming the content problem is taken care of. I know it is an important consideration, as Mr Kwinter has indicated.

The Chair: Mr Kwinter was answering Mr Sterling's question and had his hand up for something else.

Mr Kwinter: I just wanted to comment on two things. I wanted to comment to Mr Phillips that being a sailor or being a shopper are not mutually exclusive. Just because you do one does not mean you cannot do the other.

The Chair: You could sail over.

Mr Kwinter: Yes. I do not think you can categorize shoppers. I think everybody is a shopper, regardless of what other hobbies they have, and it is something that has to be addressed.

The Chair: Some of us are not shoppers, Mr Kwinter. I can tell you right now some of us are not shoppers.

Mr Kwinter: The other thing that I think is important and it is unfortunate in that -- I want to address some of the things Mr Hansen said. You can make the argument -- I should not say you can; it is almost impossible to make the argument. You can try to make the argument that the quality of life is better here, that every time you buy something in the United States you are potentially putting a Canadian out of work because the product that is not sold in Canada means that worker who is making that product is not going to be around to make it. But it really falls on deaf ears. It is a difficult thing to sell, to tell people, "Don't go across the border and buy there because by doing it you are depriving maybe yourself or your family or your neighbours of a job, because every time you buy something there it means you are not buying it here and if it's manufactured in Canada and people aren't buying it, the plant is going to shut down and you are going to put them out of work."

I remember there was a huge campaign that went on in the late 1950s called "Buy Canadian" and the Ontario government had it and said, "Some things have to be bought somewhere else." They used the hippopotamus as their symbol, saying that if you need a hippopotamus obviously you have to go to Africa to get a Nile hippopotamus, but if you need anything else that is made in Canada you can buy it here and you should buy it here because it is in our economic self-interest to keep the purchasing power here because that means there are jobs here.

Unfortunately, it is a tough sell. How do you get that message across and how do you get people looking and seeing these ads and saying, "Gee, yes, but I better stay here and keep those jobs"? I do not know how you do it. I think that is one of the things that we as a committee are going to have to address, because it is a significant problem and unfortunately too few Canadians realize the result of this cross-border shopping. It is more than just economic. It is economic in the broad sense, but it is more than just saving the dollars and cents now. It could impact on the whole economic structure of the province.

Mr Hansen: On Mr Sterling's question on the importing of cars, the one thing I would like to see, if Anne can take a look at it, is the GST being applied against a car that comes in duty free which is seven years or older. I know that when you go to register it at the licence bureau you will pay the 8%. Is anybody straight on that, that you pay your GST at the border if it is duty free? You do not?

Interjection: No.

Mr Hansen: Okay. This is one area. The other thing is that I met with the Lincoln Chamber of Commerce on Tuesday night and, bringing up cross-border shopping, all of a sudden Lincoln is a border town. In the paper it was Welland, St Catharines, Port Colbourne, Fort Erie and Niagara Falls, but all of a sudden we wind up getting out a little bit farther and they said, "What is a border town?" I think a lot of people come from Hamilton. I do not know where you draw that particular line. I think Mr Ward earlier had stated Kitchener as being a border town also within one hour.

The other thing is that we are talking about appliances, we are talking about radios, CD players, but one of the businesses in Beamsville, part of Lincoln, is a block plant. I can tell you the owners of the block plant were quite upset to see cement blocks coming into Beamsville to build a house, which were brought in from the United States, so it is not just radios, CDs and that. I had one person come up to me saying he bought the panelling for the outside of his home, which is made by Canfor, in the United States and saved $30 a sheet -- imported into the States. So we have a lot of areas to take a look at. I think when I was talking to Mr Sterling earlier about different things in our last meeting there was the point: why is there a price differential in particular items? We will have to take a look at that.

Mrs Sullivan: One of the things that has really struck me about the whole issue of cross-border shopping is the fundamental question of the price of products, whether they are made locally, whether they are made in Canada or the US, whether they are imported to those places. There still are enormous differences in the price cross-border.

I think it might be useful for us if we are able, through our research phase, to actually look first of all at what the economic impact of retailing is on particular communities, and then, second, look at what the input costs are on one side of the border in comparison to the other. I am thinking of things like the usual overhead costs, the cost of space rental, telephones, whatever; the kinds of market sizes that are appealed to; the kinds of advertising and promotional commitments that are made in those communities; whether the retailer is purchasing in volume to meet a larger market or whether in fact in our border communities we are finding that the retailer is making smaller purchase decisions of inventory to meet what is in fact a smaller or perceived to be smaller market; the cost of goods.

It has always been a puzzle to me why, for instance, a product which is manufactured in Japan with exact specifications -- Mr Hansen has talked about products with different safety and efficiency specifications -- still can be sold in the United States for less money than it is sold in Canada; the impact of retail sales tax versus the state and municipal taxes, once again on the input; the impact on employee costs, whether it is for salaries, benefits, whatever.

I think that there is more to this price differential than we have seen in the studies that have been done, and I think it would be useful to look at those things. When you are looking at market research that tell us that 84% or 85% of people, in no matter what circumstances, are saying they are going there for the bargain, period, then some of the other matters are less important for us to look at than why the bargain exists. It may be of great use to us in terms of coming to terms with some changes that we may want to recommend or to say this is the way it is.

When I was a kid, I can remember people from my farm community going to Buffalo -- oh, gosh, not all the time, but there would be a little trip where the car was organized and the people in the community would go down to buy linen, the cotton goods and so on. That is why they went. Now people are going for very different products. They are still picking up cotton goods, but it is a very different kind of a product where there is a substantial price advantage. So I think we should look at some of these other input costs.

The Chair: Thank you. I think those are good questions.

Mr Jamison: I still believe there is a perception that has been created through various means out there in the public's eye that really overstates the case for cross-border shopping. Yet it is a reality in the public's eye. There are certain key factors out there, and we talked about them all here today: gasoline prices, prices of alcohol and tobacco products and so forth.


There is also another kicker there. People understand that we are supposedly into a free trade agreement. I think Monte Kwinter has really outlined very well that there is not a tremendous amount of difference in what was there before and what is there now. Again, we are dealing with, I believe, a perception in people's minds that things have changed dramatically in the last two or three years. They really have not, and I guess part of that promotional state of mind, as far as promoting that in people's own minds, dealt with that thing we called the free trade deal, which really did not change a lot. Eighty per cent of the commodities traded freely, and so forth.

Again, this is something that is not new, because I know that it is just a matter that people seemed to have picked up on this in a tremendous way, and especially, I think, the GST has had an effect. If you were to look at this particular ad, for example, it says, "Beat the recession and the GST." When advertisers are advertising that fact, people say: "Yes. Dam right. It is 7% more in the tax it costs me to purchase anything. That is 7% more of a reason to go."

The Chair: They should be paying that at the border, though.

Mr Hansen: Well again, it tends to speak too about what kind of job is being done at the border in assessing the type of goods that are coming in. All those questions are very difficult, we understand, and that is why the committee is here. But we are dealing, I think, as much as anything with that enhanced perception in people's minds that things are now more different than they ever were, and I do not believe they are.

Mr Phillips: Just a quick point. Mr Hansen has his finger on a challenge, I think, for us and that is: What is a cross-border town? I think the Solicitor General said today that he was going to allow or encourage, or whatever it is, cross-border towns to open on Sundays and close everything else. That will be one of our challenges. Is Lincoln a cross-border town? That is why I sort of half kiddingly said we will be able to tell which ones are open on Sunday; it is where the cross border is. So I think that will be one of this committee's challenges as we get into the discussion.

Mr Jamison: I do not know if he spelled that out as his intention. He said he would look at that particular situation. I do not think he has indicated that he has made a final decision on that.

Mr Phillips: I may have misread it today.

Mr Hansen: Commenting on that, I think it was about two months ago when we had a short discussion here before I left, on what is a border community. Before, St Catharines was not a border community or Welland was not a border community or Port Colborne was not a border community, but I read in the paper that it is now a border community, and that is why the constituents in my riding are saying, "What about Fonthill and Beamsville and Grimsby and Smithville?"

An hon member: Where is the line?

Mr Hansen: Yes. What has happened, though, is a lot of these small communities are hurting, because what you had for a period of time was the large malls opened in the larger centres in the Niagara area, which drew business away from the rural community, so the small store closed down. But now you are having the mall close down and a lot of stores closing, and it has had even more of an effect on rural Ontario, especially in the Niagara Peninsula. The services are not there any more. The garages closed up, and you drive to town and the garage is closed on Sunday and Saturday night at 6 o'clock. So what we have done is eliminated a lot of the service in rural Niagara.

Mr Sterling: I have a supplementary point I would like to make. One of the studies we have looked at today was Thunder Bay, which is 200 miles from the border. If we take everything which is 200 miles from the border in Ontario, we have 95% to 98% of Ontario as border towns, so we are going to have wide open Sunday shopping, I guess, in this province.

Mr Phillips: Well, not in Moosonee. Where is Moosonee?

Mr Sterling: No, no. They would be safe.

Mr Sutherland: Maybe it is just me, and I just must be a naïve individual but --

The Chair: But you are young.

Mr Sutherland: Maybe that is it. But it would seem that those people who are receiving most of the benefits from Ontario society and from Canadian society and those people who receive benefits of our occupational health standards or the fact that they do not have to pay directly for health care and that; that those people would somehow develop some sense of the values that make us Canadian and should be willing to spend their money here in this province. We talked about values and we got the constitutional debate going on and yet it would seem that in some ways people are not willing to pay the price -- the collective price, not individually -- of being Canadian and being Ontarian. In some ways that seems very discouraging. But I guess it is just me. I am just naïve enough to believe that people would still be willing to spend their money here and pay that extra price to be in Ontario.

The Chair: Way to go.

Mr Phillips: I never shop at sales and stuff like that.

Mr Kwinter: I just want to respond to that. Where you have the problem is that a lot of Canadians and a lot of Ontarians feel they are paying the price for this through their taxes, and now what they are trying to do is mitigate that by going out and getting something back, which is the problem. And to say to them, "You are paying taxes," and then on top of that, "Restrain yourself from saving some money by going somewhere to buy it cheaper," is a tough thing. Idealistically, it is a great thing to talk about, but good luck if you think you can sell it.

The Chair: Okay, this committee is adjourned until 3:30 this afternoon.

The committee recessed at 1158.


The committee resumed at 1538


The Chair: I see a quorum. I think it is time to begin the afternoon session. This afternoon we have the Ministry of Industry, Trade and Technology: Peter Friedman, director of Small Business Ontario; George More, manager, small business development; and Rena Blatt, small business research adviser. This is a very important topic, as we found out this afternoon in the House, so if you can help us out, we would certainly appreciate what you have to say.

Mr Friedman: Thank you very much for inviting us.

Mr Kwinter: On a point of order, Mr Chairman: Can we have the same procedure as we had this morning, that if we want to question we can do it as we go along, or do you want to wait until the end?

The Chair: I think if the questions are short and responses are short, we can do it that way. If the questions get a little long and the answers start getting a little long, then we may not get through the document they have prepared for us.

Mr Kwinter: I have no guarantee on the answers, but I can give you the assurance on the questions.

The Chair: All right.

Mr Friedman: For those of you who are not familiar with Small Business Ontario, we are a branch of the Ministry of Industry, Trade and Technology responsible for the province's advisory services to new small businesses across Ontario, to arrange financing programs for new and existing small business, for programs relating to growth in the technology areas and support of entrepreneurship education in the schooling system. We are also involved in advising our minister on small business issues in the province.

We have prepared the brief you have in front of you to reflect our understanding as a government group involved in small business on a daily basis of the cross-border phenomenon.

I think it is interesting for us to mention to you that the reason we are involved in this particular issue is that it is felt that one of the important elements of this problem or phenomenon involves the small business owners in the border communities and the effects this is having on them.

The brief we have outlines our involvement to date and some of the responses to the issue we have seen from other governments and from the Canadian business community. I will not read it to you but I would like to highlight some of the points from it.

As you are all aware, this cross-border shopping phenomenon has been with us in Ontario and in Canada for many years. It has been going back and forth, dependent to some extent on the value of the dollar and so on.

It got into high gear in 1989 when the value of the Canadian dollar went to around 87 cents and when the free trade agreement was passed, which in fact made consumers believe that the border disappeared, and in fact they are able to more easily cross the border.

Our particular involvement in the issue on small business in Ontario dates to the fall of 1989 when a study was done in Thunder Bay that highlighted the problems that were brought to our attention then. In particular, this northern community was suffering significantly from this issue.

Mr Kwinter: Mr Chairman, the reason I asked my first question is that the first line I read on the page raises a problem for me, and now that Peter has talked about Thunder Bay he has given me the opportunity to talk about it.

I am concerned, and we have expressed a concern this morning. Thunder Bay, I think, is 200 miles from any border, and yet it is considered a border community. Toronto is 100 miles from the border. People go to Buffalo every weekend. They have buses and everything else. My concern is that you have identified 10 border communities when, in fact, any community within 200 miles, which means most of the communities in Ontario, are really impacted or could be impacted by this cross-border phenomenon.

I was just wondering why would you selectively pick Thunder Bay as a border community, when it is nowhere near the border, and not include Hamilton or anywhere in the Golden Horseshoe or anywhere that is close to the border, within 100 or 200 miles.

Mr Friedman: It guess it is not so much that we have selected Thunder Bay as the community at the border. It is they have selected themselves as a community that is being highly affected by this phenomenon. We did not select these communities; these communities came to us and said, "We believe this problem is affecting our community and our situation." Toronto I am sure is affected; I suppose Hamilton and others as well. But they do not see it as clearly, whereas these communities I think see it more clearly. So my answer to you is, we did not go to Thunder Bay; it came to us. I am using Thunder Bay only as an example. They happen to be the first people who noticed this phenomenon happening. That is the only answer I can give you, basically, on the question.

Once we recognized the problem we met with a number of communities, the first one being Thunder Bay. Once it became known, then the various other communities came to us. Sarnia, Windsor, Kingston, Cornwall, the Niagara region began talking with us on this phenomenon.

I think it is important to realize that the problem seems to be accelerating at staggering rates. It is very difficult to keep a tab on how fast it is happening. One measure we have seen is that there was a 60% increase this year over last year in terms of the number of people paying duty at the border, coming across in cars paying duty.

There are a number of other measurements, and I do not want to tell you that we have all the measurements. We do not have all the measurements to put this phenomenon in precise terms exactly, because it is changing rapidly. You are all aware that in the last couple of weeks in the Buffalo and the Niagara region borders there are two-, three-, four-hour lineups. So the problem and the situation is growing at staggering rates. Why? We have some answers to the why.

The next set of answers, I guess, from our standpoint came from a survey that was done in Sault Ste Marie, again at the request of the town of Sault Ste Marie, done by Ernst and Young in the fall of 1990. They asked a number of consumers in Sault Ste Marie: Why are you going across the border to purchase? The answers those consumers gave are price, selection, service and friendly people. By far the largest factor in this is price.

The next piece that came out of the study is, how much? At that time, what is the ballpark of this phenomenon, at least in Sault Ste Marie? The study indicated that it was in the $100-million ballpark for the Sault Ste Marie trading area. That is how much money was going out.

The third piece of information that came out of that study was what kind of products people were buying. The study indicated the main products were gasoline, groceries, clothing and alcohol. Those are the main products that were being purchased by the people who were interviewed in the Sault Ste Marie study. Along with that, the point was made, and has been made to us in most of the communities that gasoline seems to be the trigger mechanism that makes people go across the border. Whether this in fact is exactly precise we do not know. It has certainly been made: the consumers are saying it and many people from various other communities where we have not had studies done are also saying that gasoline seems to be the trigger point.

At this point I would like to mention that our perception is that cross-border shopping is a symptom of our competition problem. There exists in Ontario, Canada, a complex series of problems that are reflected in some major price differences between Canada and the United States. These differences are in our distribution systems, our costs of real estate, wages, social costs, the value of the Canadian dollar, interest rates, and so on. These are a complex series of interwoven factors that at this point, as far as I know, no one has been able to totally analyse. The federal government has a study going on right now, which it will unveil on 22 April, that will try to get a little better understanding of these pieces of the puzzle that relate to the price differences.

However, beyond the price differences, over and over again we are hearing that there are other factors that are important in this particular phenomenon. These, as I said in regard to the Sault Ste Marie survey, are selection, innovative marketing techniques, customer service, the shopping environment and convenience. As you see in the outline, some of these are unfortunately perceived to be better in the United States. I want to use that point, perceived versus real, because I would like to get back to some of the marketing efforts we are doing in the communities to emphasize that it is not necessarily true, but it is definitely perceived as being true.

Our strategy in Small Business Ontario, where we have been a catalyst in this, has been to get the various players to address the various pieces of the problem. We have talked with the federal government people and suggested that interest rates, value of the dollar, customs and excise, gas tax and GST enforcement are important issues in this particular phenomenon that they should be looking at. I know they are aware of it. They are doing studies on the various aspects of this phenomenon. I cannot tell you, frankly, whether very shortly you will see moves on this area. I know they are aware of all these factors in terms of the problem.


We in small business Ontario have been concentrating on forming community working groups in each of the seven communities that have come to us and said their particular community is being affected by this phenomenon. There are at present in place in the seven communities working groups involving most parts of the community, and we have worked with them and formed a border communities task force on cross-border shopping. So we are meeting with all the community task forces on a regular basis and trying to work with them on what they are doing in their communities to deal with this problem.

The task force determined that there is a requirement to do a marketing strategy for the communities, so we undertook to finance a community marketing framework study, which we developed, completed in October of 1990, submitted to all seven communities. It is a fairly in-depth study of what can be done or should be done by local communities and local retailers and local components of the community to deal with mostly the non-price items involved in this particular phenomenon. The communities have embraced this framework fairly well and we have also assisted three communities across Ontario to implement this particular framework, that is, in Cornwall, Niagara and Sault Ste Marie. We have assisted them financially in helping them implement the various suggestions and recommendations outlined in the study.

The task force also identified gasoline prices and harmonization of GST and PST as issues it wanted to talk with the Ontario government about. As you are aware, they made a presentation to this committee a month ago or a few weeks ago, in essence bringing their points of view on those two important issues forward to the committee.

We have continued meeting regularly with these task forces and with this overall task force to help them implement the community programs. It is also important to know that various other players are getting involved in this particular phenomenon. The Retail Council of Canada has begun doing some work and has some studies going on because retailers are one of the main players affected in the border communities by this phenomenon. So they are working and getting some studies from their standpoint in terms of what they see as potential problems or improvements they would like to see. The chambers of commerce, the Canadian Chamber of Commerce and the Ontario Chamber of Commerce, have brought forward suggestions from their standpoint. The Canadian Federation of Independent Business has also done some work on this particular issue and has presented a brief and a study to the Ontario government. The Canadian Council of Grocery Distributors is also doing some work. The downtown business improvement areas are working on this issue; the shoe retailers. And recently, I understand, there has been a mayors' committee formed from the seven so-called border communities, which is looking into some of the aspects of this phenomenon.

Through the year or so that we and others have looked at this, some innovative suggestions have been brought forward, not necessarily, frankly, to solve the problem, because I do not believe there is any one easy solution. But, for instance, in Trail, BC, the local merchants and the local banks developed an innovative concept where the banks would loan local residents $1,000 at no interest and the residents would use it to purchase products from the local merchants. My understanding is that that worked extremely well. It was particularly highlighted for the past Christmas season and it had quite a significant good effect. I should tell you that Trail in British Columbia has a bigger problem per capita than we are having here in Ontario, so it is a serious problem in British Columbia as well as here.

So Kingston and Sarnia are looking at this kind of mechanism to see if they could, as a group, bring this kind of initiative into their own communities. Quebec, a few months ago, implemented a gasoline tax reduction scheme at their border points, which included Ontario and New Brunswick. They have pricing zones where at certain distances from the borders the prices are lower. We are trying to get exact information on how effective that has been. To date we have not been able to get extremely good data. We are trying to get that information from Quebec. Other provinces have projects on the go. New Brunswick, which is also being hit very hard, has some interesting, innovative projects again, dealing with other items, not necessarily the main one, which is the price promo.

Our own local communities are making headway with their marketing concepts. They have quite active programs in Cornwall, Sault Ste Marie, Niagara and I believe are beginning to make some headway in this arena, although I cannot tell you that the problem is disappearing by any stretch.

In summary, I would like to conclude by reiterating that this is a highly complex problem for which there is no single easy solution, in our opinion. We are making some headway in some of the areas that relate to the non-pricing issue and continue to work with the communities, trying to get a better understanding of the fundamental aspects of the pricing problems. I will be happy to answer any questions.

Mr Stockwell: Any problems with people in American cities crossing over to shop Canadian? Do you know of any problems where American citizens are crossing the border to shop in Canada at any serious number?

Mr Friedman: Our understanding is that that has diminished some. There is definitely still going on --

Mr Stockwell: But not like it used to.

Mr Friedman: Not like it used to, no. In Fort Erie, for instance, there is still some of that going on. It certainly has not disappeared. There are certain items that are not more expensive in Canada, in fact that are cheaper; higher quality merchandise, brand names, in fact are not more expensive. So people are coming over, for instance, I understand, to buy higher quality suits, shoes and so on.

Mr Stockwell: Not any huge number or disproportionately higher than it used to be or anything along those lines?

Mr Friedman: Definitely not higher than it used to be.

Mr Stockwell: The question that seems to keep popping up, and I can see it as an obvious problem, is price. Are we looking for a complicated answer when a very simple one stares us right in the face? Being a retailer, I know, quite frankly, if you are selling the same piece of merchandise next door to an individual who is selling the same piece of merchandise, if your price is lower you will sell more than he will. I see the report says 82% feel the US has better prices, which seems to be very significant to me. How much further do we have to look and would we be better off looking at figuring out why it is cheaper and what we have to do to reduce the cost?

Mr Friedman: I would like to go back to the statement I made that sometimes it is not an actual versus a perceived cost.

Mr Stockwell: Well, gas is actual.

Mr Friedman: Gas is actual, yes, but groceries overall can be perceived. For instance, there was a study done where a Niagara supermarket compared a basket, the average basket of groceries with an American supermarket and, taking into account exchanges, the prices came out to be even. What is happening is that consumers, as they should be, are becoming very price conscious, and certain products are very much cheaper. Milk, for instance, as far as the groceries go, happens to be an item that is cheaper in the United States. Some other items are not. But when you go in to buy milk and you are in the supermarket, you have a tendency to buy other things as well.

So what we are trying to do in our consumer marketing in our communities is highlight that not everything is cheaper, that certain items are not and that you should not have this idea that everything is cheaper. Now, as far as analysing the price elements -- as I mentioned, the federal government is now doing that. We are waiting until the middle of April to get a better understanding of the elements of the pricing structure, where then we will be able to see if there is anything we can do. We know the distribution mechanism. For instance, sharp retailers are now turning to use American distribution mechanisms to buy their materials, which are making them more competitive.

There is an element here that I talked about a bit. One of the elements that we need to work on -- this is where the marketing element comes in -- is that our retailers are having to become more competitive in their purchasing, in their avenues, and they are now beginning to do that, and also in their methods of merchandising and in their methods of selling.

Mr Stockwell: What about taxes?

Mr Friedman: Taxes definitely play a role, but I think it is --

Mr Stockwell: We had a report in the finance committee saying specifically that state tax on gas, compared to provincial tax on gas, was the sole discrepancy between the gas prices. That seemed pretty clear to me. Have you done any studies to indicate whether our taxes are simply higher than the bordering state?

Mr Friedman: Gas is, for sure.

Mr Stockwell: Gas, okay. Sin taxes we will agree with, but others?

Mr Friedman: The others are somewhat higher, but they are not the only, or even the main contributor to the price differences. Real estate costs, interestingly enough, are a very big contributor. Distribution mechanisms are a big contributor. When people begin to use the American distribution system to purchase their materials, they are able to compete.

Mr Stockwell: Last question is: You have suggested the hook is the gas prices. That hooks a lot of people down there and then they continue on from there. If we did in fact reduce our gas prices, and I guess the sin taxes would be the ones like liquor, cigarettes and so on, which I imagine would be a bit of a hook as well, as stated earlier today -- what if we got a little more competitive in those? Would you see that as resolving some part of the problem?

Mr Friedman: The communities are telling us yes. The communities are telling is that if we can equalize the gas pricing to some level -- it does not even have to be exactly equal, but so that the differences are close -- that would eliminate a fair amount of the day shopping. Mr Kwinter talked about the Toronto people going to Buffalo, Detroit, wherever. I do not believe it would eliminate those problems. People who go for the weekend from Toronto are not going only because the gas prices are lower. They are going because there are social elements and there are other things they wish to purchase. But the border community people, the day trippers, I believe the message we are getting from the local people is that that would in fact be reduced significantly.

Mr Stockwell: And those are those people who will be shopping back in the communities?

Mr Friedman: Yes.

Mr Stockwell: Exactly those people they need to get back. They are not worried about the Torontonians. They are worried more about -- thank you.

Mr Kwinter: I just want to follow up with what Mr Stockwell was saying. I am old enough to remember when, as a teenager, a lot of Torontonians went to Buffalo for the weekend. They went there for very valid reasons. You could go to the movies on Sunday, which was totally unheard of in Ontario. It was something you never even thought you would ever be able to do. They had the opportunity to buy products that were advertised extensively on television that were not available in Canada. They had the opportunity to buy products that were cheaper and they had the opportunity to do things like go to nightclubs and see name entertainers, things of that kind. It was quite common for people who wanted to make a major purchase to go to Buffalo for the weekend. That was something that you would talk to everybody and say, "I'm going to Buffalo to do that."

Then of course, Toronto and the Golden Horseshoe started to expand. We have Toronto, which is a major metropolitan area, and Buffalo went into a real decline. As a matter of fact, Buffalo was the butt of jokes. People talked about Buffalo being the armpit of America. Nobody went to Buffalo. There was no reason to go to Buffalo; as a matter of fact, northern New Yorkers were coming to southern Ontario. It was very common. They used to come to Toronto and they loved it because of all the things we had and because they could then get their entertainment, they could buy quality goods, they could get the quality of life that we enjoyed. They could share in it for the weekend.

In the last five or six years, the pendulum has swung and now it is going back the other way. It seems to me that the key is strictly price. Even though these things are important and people may have these perceptions, I do not think someone is going to go to Buffalo because they think the service is a little bit better in a restaurant. That to me is not a motivation. That is a plus. It is a benefit if they perceive that, but I cannot see someone travelling all the way there when that is the only advantage. So it would seem to me that the advantage has got to be strictly price.

And when you talk about your task force or your recommendations and you say, "We don't really address the costs or the pricing; we are talking about the marketing," I think you have to be a pretty good marketer to convince somebody, "You should be paying twice the price for gasoline in Ontario that you are paying in New York because of all the great benefits that are going to accrue to everybody, and we are going to show you that this is something." It cannot hurt, but I really do not think it is going to help.

I do not think you are going to really convince people so that they will not pursue their economic interests. If they can save money, particularly when times are tough, particularly when people are being laid off, where they have to make their dollar extend as far as it can, they are going to be enticed -- which is really the word -- by all the activity that the merchants in northern New York are disseminating to the people in southern Ontario to attract them there. I mean, they think they have literally died and gone to heaven, because suddenly here is this bonanza, here are these people coming over, lining up to get there, filling up their cars with merchandise and then going back to Ontario.

To suggest that we have to do a better public relations job -- as I say, I do not think it hurts, but I cannot see how it is going to really change it unless we get to the basic root problem, and that is our competitiveness. It is not just price. When you go into the States, there is merchandising, there are products that just are not available here, there is innovative marketing, there are all sorts of things. I love to go into hardware stores and things in the United States and see some of the products they have that you just cannot get in Canada. They are inexpensive, but more important, they are really innovative. There are really interesting things that you just do not seem to see here, and the reasons for it are many-fold. One, we have a very small market, and in many cases it does not pay for a manufacturer to ship into Canada or Ontario because there is not a large enough market for them.

These are the problems we have to address. As I say, I do not in any way deny that public relations and a marketing plan to try to extol the virtues or the benefits of doing things in Ontario are important, but I still think it gets to the bottom line. You can do all the marketing you want, but if a guy says -- and I was talking to Mr Sterling.

Why fill up my car in Ontario? It usually takes, if it is really empty, about $40, give or take $3 or $4. It is about $40 to fill up my car. I was in Florida two weeks ago. I have a large car and it was down low and I went into a service station and I filled it up. It does not matter whether you are talking imperial gallons, US gallons, litres, the exchange on the dollar, you could fill up your car for $16. You can compute it any way you want, with exchange and everything else. All I know is there is a gas tank that has the same capacity and it cost me $16 to fill it up there and $40 to fill it up in Canada.

That is the issue. It is an issue where when you go across the border you do not have to worry about it. They are not going to come with a dip stick and say, "How much gas have you got in your car?" You go in and you fill it up and you come back and you can do that every single day or whenever you need the gas. That is the main thrust why people do it. There is an incredible saving, if it is not too inconvenient to do.


There are other things like that where it is the economic drive that is attracting those people there because, all things being equal, and I am not trying to be a hometown supporter, I think you cannot compare the amenities, the quality of life, the entertainment packages that we have in Toronto vis-à-vis Buffalo. So it cannot be that. It cannot be that people are saying, "Wow, Buffalo is just fabulous, you know; we're going to go down and watch some fires" or something. It is just not going to happen. It has to be a situation where it makes sense to go to Buffalo because we are going to save some money.

Mr Stockwell: Remember when these questions were going to be short?

Mr Kwinter: No, no. That was before.

The Chair: Compared to what I have heard some of his federal fellow Liberals doing in some of the other committees, this is really quite short yet.

Mr Kwinter: Thank you, Mr Chairman.

The Chair: There is a question in there somewhere.

Mr Kwinter: The question is: Do you not think the issue is dollars and cents as opposed to marketing, public relations and projecting the right image?

Mr Friedman: I guess it is price on gasoline. I do not believe it is price on everything. That is the point I am trying to make. I was trying to make that. We know, you yourselves already said, there is interesting, innovative retailing in the United States that is catching the attention of the people, which we have only started to do here. Factory outlets are a very big phenomenon around the border towns where we are going. People go to those places because there is a shop-till-you-drop concept of shopping --

Mr Kwinter: Yes, but the bottom line is price. If you have Gucci in there, and you could have all the fancy stores you want, people will go and look but they will not buy. The bottom line is, there has to be an economic reason why they are going to shop. They are not going to just shop because it is there.

Mr Friedman: Let me complete my answer. For instance, let me give you an example. Sporting Life in Toronto, an innovative retailing operation, is not a low-price operation. You go to Sporting Life on Saturday and the place is mobbed. What I am saying to you is that when we begin doing innovative marketing with a combination of discounting, which is what the Americans are doing, with the concept of selection, which you yourself mentioned is important in going shopping, along with using the distribution mechanisms that the Americans are using so our retailers can buy the products that their American competitors are buying, I think we will be able to counter on some products.

I cannot argue with you that on certain products, commodity products like gasoline, like milk and other things, you cannot dress it up. There is only so much you can do. But I do not believe that that is the sum total of the situation. Our big worry is not so much on the milk and on the gas, a big volume item, and there is a difficult arena in dealing with price, but we are more concerned about higher-value goods: consumer electronics, household wood products, large appliances, which are being advertised by Americans in our arenas. We think we can fight against that concept by becoming innovative and by doing things differently.

So my answer to you is that on certain products I cannot argue. How are you going to argue on commodity pricing on certain products? But I do not believe it is as simple as price only. We are trying to get our retailers and our communities to fight some of the elements now and deal with the prices by the distribution and other elements to try to reduce the prices as much as possible so they can compete with their American counterparts.

Mr Phillips: I have four quick questions. I will give you all four of them but I would like your thought on this. A very ominous thing is that I think part of the solution, which you have kind of articulated because you are working with retailers, is better sourcing of stuff to sell. You have used the term "the same distribution network as the US." To me, that says buying more in the US.

One of the things that in my judgement is going to happen very quickly because of the US border shopping is that retailers across Ontario, in order to survive, are going to increasingly look to sourcing their stuff out of the US. I think you are looking at that as a solution, but as I say, I think it is because you are heavily represented by retailers, and it will only be a period of time, I think, before the manufacturers will be to this committee saying, "The solution you are proposing is going to dramatically impact on us." I believe that strongly.

Let me give you my four questions: If that is the solution you used, I am interested in whether you see any downside to it.

The second thing: I would not mind you just telling me what might be in the price study, because I like to deal with the facts, and when the federal government comes out with its study, what will be in that to help us determine fact from fiction? It should be very easy, by the way, to determine all that stuff, I would think.

The third point I have is that I think many of us think the Canadian dollar is going to drop versus the US -- 80 cents or something like that -- over time. But the other thing that is ticking away is the reduction of the tariffs, and to the extent that we are seeing this cross-border phenomenon now, with some tariffs still in place, I am wondering if we may not see the tariffs reducing the price of US goods almost as quickly as any forecast of the drop in the Canadian dollar? Can you can help me on that? I just do not understand the terms well enough.

My fourth question is the one that was said earlier and that is: Do we have any evidence of what is a cross-border? I know that you have determined it on the basis of who came to you. But are there any facts about what are the cross-border cities or towns in Ontario in terms of surveys at the border of where you come from? I think it was Mr Hansen this morning who said that it looks like the border of cross-border is moving further from the border. It is going to be fairly important for us to determine what is a cross-border city and what is not.

Those are my four questions.

Mr Friedman: The answer to your first question: I think you are right. I guess our strategy is a short-term, long-term strategy. We are trying to combat the phenomenon in a relatively short term, while in the long-term our manufacturing competitiveness comes into line.

I guess our view is that we are trying to change a consumer habit and we are trying to do that by any realistic short-term means possible, while the longer term competitiveness issue has to be dealt with. I do not argue with the fact that eventually our Canadian companies, our Ontario companies, will have to be competitive with their American and European and Japanese competitors, but I think that is a longer term situation.

We are trying to dampen this cross-border shopperconsumer phenomenon in the short term as much as we can and then hope that the long-term situation will right itself, which I believe it will. I am confident that in the long term our manufacturers are going to be able to compete. They will have to. In the end, we will. It will take a while to do that because we are right now, I believe, in the transition period.

Mr Phillips: Can I just complete the thought just so I make sure? The short term can compete by sourcing more of their goods from the US?

Mr Friedman: The US or wherever the products come from. It does not have to be from the US.

Mr Phillips: But outside of Ontario.

Mr Friedman: Many of the products come from outside: Europe, Japan, etc. They come from different sources, basically.

Mr Phillips: But sourcing outside of Ontario, increasing --

Mr Friedman: Well, wherever the cheapest or most effective mechanism is. I am sorry, I have forgotten all the questions.


The Chair: Can I just have a point of clarification on a matter? Are you saying that if a Sony that is made in Japan can be put into a Canadian retail store more cheaply by using an American distributor, that is what we will have to do?

Mr Friedman: We will not have to do it; the retailer is going to have to do it if he is going to stay in business.

The Chair: Okay, so that is what you are talking about when you are talking --

Mr Friedman: Yes, that is what I am talking about in the distribution mechanisms. In the short term, that is one of the ways that our retailers will be able to compete.

Mr Phillips: The other three questions were: the price study, what will it include? Will the tariff reductions offset any benefits we get from the reduction if the Canadian dollar is reduced, and where does MITT feel the cross-border border might be?

Mr Friedman: In terms of the study, it is trying to deal with the various aspects, all aspects of pricing, and we will be happy to provide you on 22 April with a copy of that, but it takes down the retail costs and the wholesale costs and the various elements of the thing as much as possible.

Mr Phillips: Would that show a Heinz ketchup in Buffalo --

Ms Blatt: It is not going to deal with food, because the Department of Agriculture is doing a separate study on food items, which will be coming out late April, early May. This study is being done by the Department of Industry, Science and Technology, and they picked three areas to look at: women's sportswear, personal electronics and household linen. They picked those as items that come across on customs forms very often. So that is how they made the decision. What they are going to do is pick items in each of those categories that are manufactured either in Canada and the United States or that are imported and then track them from the point at which they leave either the import point or the manufacturing point to see what happens to them as they go through to the consumer.

Mr Phillips: So maybe 300 items or something, we can compare of Canada and the United States.

Ms Blatt: I do not think there are going to be that many. I think they are going to look at something like nine. We did not have any input into this. They sat down and decided this is what they were going to do, but it is a fairly complicated thing to do, because they have to look at different mechanisms of distribution and different mechanisms of sale, because you cannot compare women's retail from a factory mall and from Holt Renfrew. You have to find comparable kinds of retail outlets as well and then comparable systems along the way.

Mr Friedman: As far as the tariffs are concerned, most of the tariffs are fairly low in the areas we are talking about, so I do not believe the tariffs will be a major factor in this phenomenon.

Mr Phillips: When you say low, just give me a hint.

Mr Friedman: I think most of them are 5% or less, so I do not think the tariff is going to be a big factor.

Mr Phillips: That is why we are looking at reduction of the dollar, though, about a 5% or 6% reduction in the dollar.

Mr Friedman: Yes. I guess I can only tell you that I do not believe that tariffs -- the dollar, I think, will have an interesting effect, although in some areas not as large as others. For instance, the gasoline pricing is a particular example: It is not going to be a particularly important factor. In some areas where the pricing is reasonably close, I think it will be a factor.

As for the distance from the border, that is an area we are just beginning to study. We cannot tell you. We only know about the seven specific border points. How far and to what per cent the phenomenon is reaching beyond St Catharines and the Hamilton-Dundas and the Niagara area and others, we are just beginning to take a look at. So I do not have a good answer to tell you.

Mr Phillips: When will you have an answer on that?

Mr Friedman: Probably in three or four months.

Mrs Sullivan: There are a couple of things that are just observations in the beginning. The issue has been identified by retailers as being a problem in a recessionary period as well, which may be a factor in some of the difficulties here, and I do not think we have talked about that very much. We have talked about the impact on the retailers themselves, the fear of going out of business. We have talked, to a certain extent, of the economic impact on the community. But we have not at all talked about the social impact on the community, and I would like to come back to that, because I think it is quite significant in some of our towns.

When you talk about the distances that are affected, the merchants in my town and in the towns I represent tell me that this is a factor, that is, Oakville, Burlington, Milton. So that is some distance moved in. Mississauga people tell me that it is affecting their retail operations as well. It seems to me that where people used to shop for specialized merchandise and were prepared to travel distances for that merchandise, say, going out antiquing for an afternoon or to a model train store, whatever, you would be willing to travel, say, from my community to Oshawa or to North Bay or wherever as an outing, but within Ontario. Now what I am seeing, even in Ontario shopping, is people willing to travel distances, say, to go to a price club -- which is an American concept and in fact ownership -- to go to Cambridge for the specialized prices on men's shoes, to go to Acton for the leather and so on. And people know precisely where those places are located, where you can get the bargains and are willing to travel the distance to do that, even within our own borders.

When the travelling decisions are made, I think, to go to American outlets, they are made for the same reasons. The fact is that there are bargains, and people are finding bargains. You are suggesting that maybe pricing is not the big reason. In my community, people make return visits because they find there is an advantage -- and they have done all the analysis, I will tell you -- just for the same reasons that they go back to the price club to buy their groceries instead of going to the local greengrocer or the local Loblaws which is down the street.

In Quebec, the tax reduction in terms of the distance affects a very different community than it affects in Ontario. If you look at where the gas tax reduction is, it is basically through the eastern townships into a distance that is substantially away from the border towns where people are doing their shopping. Their analysis says that people in fact are moving far greater distances to go into the American towns for shopping than in fact we have identified so far in Ontario, and I would just like you to comment on that.

I am interested in your comments about innovative marketing, because the innovative marketing ideas so far that appear to be to have been looked at tend to the factory outlet, the loaded-down operation and so on. I will tell you, the downtowns of our communities are going to be extraordinarily and negatively affected if that is the major kind of retailing operation that will suck the breath out of the downtown retailers. That is an economic factor that somehow has to be built into these discussions. Oakville is already suffering, for example; Burlington already suffering. We could go into the Oshawas and Whitbys. They have already identified a problem, and the cross-border shopping, the retailers there feel, is simply adding to it. I think the business improvement areas have probably identified that as a factor. The historical societies in fact are identifying it as well, because they are seeing downtowns destroyed because of the kind of retailing that tends to occur in the older downtowns. I do not know if you have factored that in. I guess it is something else I wanted to throw in, relating to, once again, the distances that are affected and the various kinds of effects on communities that are involved in this problem. I guess that is it.


Mr Friedman: Let me begin with your first comment, which talks about the recession. I think that is a very interesting point. When we first started looking at this phenomenon, there was not a recession, or at least people did not perceive there to be a recession. An interesting factor was that in many of the border communities that we have identified most people were not working on the problem because, in fact, retail sales in most of the communities were still up 5%, 8%, because consumer spending in the fall of 1989 was very good. So they knew the phenomenon was happening, but no one was doing anything.

Thunder Bay happened to be an unusual community, which was affected by it or interested and so on, but in most of the other communities we visited and talked with there was not a great panic about this issue in the fall of 1989, not by the retailers, not by the municipal politicians, not by most of the economic development people in those communities.

The panic, or at least the attention, if you want to call it that, started to develop as 1989 came and as the recession began to take hold and consumer spending began to dry up. Then people began to say, "Holy smokes, there are serious problems here." Cross-border shopping is one of the things we could put our hands on to say, "Look, this is something that is hurting." To be honest with you, there are more things hurting than cross-border shopping.

We already talked about the lack of innovative moves by many of our retailers. Some of the problems are that our downtown merchants have not been upgrading, updating. So it is a complex problem. It is easy to put your hand on cross-border shopping because it is visible. But the reality is that change is what we are talking about. Unfortunately many of our business people were not keeping up with change as quickly as they might have.

Now we are using the cross-border shopping issue as a way of focusing the people to take a look at this rapid change. It is not only factory outlets. Factory outlets are the way the Americans started to do it a few years ago. We would like to look at the next wave -- we should be looking not at the factory outlet wave -- but what is the next wave that is coming in retail shopping, and let's get on to that before the Americans get on to that.

So that is really what we should be looking for, to be innovative and looking for what is coming down the pike next year and the year after, not only copying the Americans or the other people. And the other people are even ahead of the Americans in retail in many parts of the world.

I guess what we are saying is that the important elements are to be innovative, to keep ahead of the change, to understand what consumers want: price, convenience, quality, all those things; value, really. When we are able to do that, whether it be in the downtown cores or in the outlying cores, that will remain to be seen, I guess, and what are the new kinds of things one wants to do.

The other important point, I think, which I did not talk about when Mr Phillips talked about the manufacturing, is that it really is not only a retailing phenomenon in the concept. It is really an integrated mechanism, where the retailers have to work with distributors, with the manufacturers. The whole concept has to be innovative. Another example I could use is IKEA. IKEA is an innovative retailing concept because it is an innovative manufacturing concept.

It is those kinds of mechanisms we have to work towards to keep ahead of the game and be able to compete with our American cousins and anyone else. I do not know whether that answers your questions or not.

Mrs Sullivan: When you talk about moving away from the factory concept -- I was very interested in looking at the Sealy operation that went under at Steeles and 427. That company went under. It was bought out in a liquidation by another operation. Within two weeks of that company closing down -- and it had been selling its merchandise basically through the large department stores -- it was doing $1 million worth of business a day, and people were travelling hundreds of miles to make their purchases there. Now, some of that is management, some of it is distribution, but there have to be other factors as well. That is one situation that has occurred here, where the merchandise was not going out to the community; the people were coming in there.

Mr Friedman: I think you are right. Again, I go back to convenience, value. That involves delivery, it involves having good stock on hand, it involves a lot of factors that make consumers happy, and that is what we have to be striving for. I guess my own view is that we have the capacity and capability of doing that. It is a matter of being motivated, and I think we are not motivated.

Mrs Sullivan: Just to my last point, are you looking at the effect of this phenomenon on the economic viability of downtowns?

Mr Friedman: We are certainly working with BlAs to look at -- the downtowns are being devastated very much in those communities, There is no doubt about it. Even Windsor. Certainly Sault Ste Marie is feeling it, not just because of the cross-border shopping but because of Algoma. The Niagara region certainly is feeling it, and Cornwall and Kingston. All of them are feeling it in the downtown core, no doubt.

Mr B. Ward: I recognize this is a very complex issue that has a number of factors all playing together one way or the other, interacting. I would like to focus on the real estate cost for a moment. I do not know for sure, this is just what I have heard, that land in Buffalo -- and a local manufacturer used it as an example -- is dirt cheap compared to what it is in Ontario and Canada. Recognizing that perhaps there is some economic devastation occurring along our border towns in the core areas in the retail sector, if our land was more expensive in the past, should not market forces have some play into the cost? If no one is willing to buy or lease space in Ontario border towns, obviously the cost should be coming down. At present, do you think the cost of real estate is playing a role in the price of a product that you can purchase in the United States compared to Ontario?

Mr Friedman: I think you make a very good point. However, there are many people in existing shopping malls paying huge prices on long leases. So I think you are right in new facilities or many facilities that are now being developed. I think the prices in fact have come down dramatically, the real estate prices, but they are still higher than they are in the United States.

The interesting part, which we did not really get into very much on this issue, is that prior to 1989, the Americans really were not doing very much to promote this issue; it was happening, but they were not promoting. Since 1989, the Americans have gotten significantly more interested in this, and two things have happened:

One, major shopping malls have been positioned at each border point, so now in Cornwall you will be able to go to a very sophisticated shopping mall just across the border, where prior to that there was nothing; the same with Sarnia, and certainly in the Niagara region they are improving their situations.

Two, they are doing a significant amount of promotion in Canadian newspapers, so they are wisening up from their perspective and doing significant marketing to the Canadian scene.

These new malls are coming in and they are very huge malls, many of them, 800,000 square feet and so on. They are not incidental little malls they are putting in; they are very large. And because of that, they are providing some elements.

In terms of real estate, I think the prices have come down, but where people are on long-term leases it is a problem.

Mr B. Ward: They are stuck with them.

Mr Friedman: So it is improving, but by no means equalized.


Mr B. Ward: I have two other points I would like to focus on. The aspect that these super malls are locating in very close proximity to the border points, does that more or less give you, in your opinion, the fact that some American retailers are no longer focusing on the American consumer but are focusing on the Canadian consumer to a greater degree and, in fact, that is what they are relying on for their business growth?

Mr Friedman: Exactly. I think that is certainly true. In many of these situations the Canadian side is bigger than the American side. In Sarnia, in Cornwall, in Sault Ste Marie, the Canadian side is larger than the American side. So they definitely have a campaign to get the Canadian shopper to come, and what I am saying is that is a more recent phenomenon. It certainly happened to some extent prior to 1988-89, but now it is sort of a conscious effort, which is not helping our problem. I think that is certainly adding to our problem.

Mr B. Ward: The third point I would like to get at is that Canada has always been a safe society; we have always played it safe. We invest in Canada savings bonds, the traditional banks, whereas the Americans invest in stocks and bonds, seem to be more risk-takers from a capital standpoint than Canadians, traditionally. The fact that the Americans seem to be outhustling us when it comes to retail along border points, innovations -- they have already gone through the phase of the discount factory malls, and now we are kind of looking at that as an option, when you say we should be looking to the future. Other than long-term marketing, how do we instil the innovation that is necessary for our retailers to begin to look to the future and say, "We can compete head to head"? It has to come from inside, I think. We need risk-takers, people who are willing to take a chance, and how do we overcome the fact that we are Canadian?

Mr Friedman: That is one of the things that our marketing strategy and community involvement are trying to do. We are trying to get our retailers to begin, or continue, some of them, being innovative. With communities, groups of communities looking at the issue, I think we are beginning to do that. I think some areas will be faster than others, but I think what is happening, and the reason I said that, is that necessity is now forcing people to do this. Entrepreneurs are entrepreneurs. They do not like to be out of business and they will become just as aggressive, just as innovative as their American cousins are if they are required to be that way. I think we are beginning to see that in some areas; we are starting to see that phenomenon happening more and more. I think it can be done. It is a matter of how fast, and it certainly will not be across the board simultaneously.

Mr Hansen: I guess I do not have to give Mr Kwinter any history lessons. I think he has been there before I have been, but I know in the early 1960s, most young people went to the United States just to grab a beer because the age was 18. That was your shuffling off to Buffalo.

At that time you did not dare bring anything back across the border with you because they would impound your car. There was that fear of coming back, if you were going to smuggle something in, and there was not the openness of saying that you could purchase this and you could purchase that, even right up until 1980. I took a look at the chart in here and my experience coming back from the Buffalo Zoo. One of my children bought a small item at the zoo. It cost $3. I wound up paying, I think, 78 cents duty on it. So it was a lot different in 1980 from what started in 1987. In 1987 we hear the rumblings of free trade coming up. More people are starting to go over. In 1989 they get the impression that free trade is here, that the consumer can walk over. At the borders now there are so many people they cannot stop me. Look at the lineup. They just push and push and push through. So nobody ever thinks about your car impounded now because there are so many waiting behind. A lot of attitudes have changed. People do not fear that any more.

The other thing I wanted to mention also is the service over there. We talked about service. Buy something in the United States, you know where you take it for service? Back to the United States. You cannot take it to your corner dealer. They cannot honour the warranty here in Canada because it is a different division of a lot of the companies.

The other thing I want to mention -- and they are more comments to maybe take back -- is that for years our businesses have invested in our communities. The American businesses are not investing in Vineland, Fonthill, the small towns. This is what I brought up earlier. If we are going to have business investing, we have to patronize these businesses in our small communities. I think this is a point to tell people: that these businesses have supported ball teams, supported the hospitals, supported all these different activities that we have in our small communities. If we stop dealing with some of these businesses locally, just because we are talking about a dollar or two, we are going to lose out with what we have in our communities. It is not a question, but it is a point. Listening to all the questions here I think there were quite a few that came out. These are my feelings living in the Niagara area.

We own a business there in Welland and we do have Americans come over to buy our central vacs, which are better quality than what they can buy in the United States: 5% of our business; it is not all of our business. We depend 95% on local people to purchase from us.

Mr Jamison: I have two questions for you today. I would like to ask you for your information or background on the one vital area for small business, that of course being interest rates and how a small business carries its debt. I would like a comparison of what it would cost a small business in Buffalo or in any border community to carry the outstanding cost of doing business compared with the cost of a small business borrowing from the bank here in Canada, and what kind of impact that would have on your ability to compete. That is my first question, and I have a second question after that.

Mr Friedman: Certainly the interest rates are an important factor. The interest rates vary between Canadian and American by four or five percentage points. So carrying costs on merchandise definitely are a vital component. It is very difficult for me to tell you what percentage that component is. That will be looked at in the pricing mechanism that we are looking at. But it certainly is an important factor, no doubt, because it involves more than just the working capital that you need to operate, it involves other kinds of capital costs that you have to borrow money for. So it is certainly an important factor, no doubt.

Mr Jamison: Okay. You do not have any real information about the actual cost, but what you are saying is that you are going to develop that information.

Mr Friedman: Yes. We know the differences are around 4% or 5% between the Canadian and American interest rates, but what factor that is on each product is not a simple thing to determine. On each product you have to analyse, and some of that analysis will be done when they look at these various products.


Mr Jamison: The second question: I have a perception that over the recent months there has been a tremendous increase in the number of people who are cross-border shopping, and I think it has proven out here from what has been said already. Myself, I really feel that once the GST was implemented, it was almost like a backlash, that people said: "Well, that's it. I have had enough." It is almost as if it were an automatic response to cause that quickening of the pace of cross-border shopping. Do you find in any of your studies that the introduction of the GST may have played a role in heightening the response of people to go across the border more readily?

Mr Friedman: Rena has some data. I can only tell you that it is early in the game as far as the GST goes. It is a contributing factor and we may be able to tell you how much it is, but it is a continuing phenomenon. It certainly has not helped and has probably accelerated the situation, but it is a continuing curve that has been going on very heavily since 1989. It has certainly added to that phenomenon on certain products.

Mr Jamison: Just so I am getting the message clearly across to you, I wonder if we could look at that from the time of implementation of the GST -- because there was a standard date on implementation -- to see if there is any increase. I know that is a lot of work; I know you are doing a lot of work, and you are doing, in my opinion, a very good job of trying to get a handle on this, but I think there was a reaction in the general public that basically said: "Hey, enough is enough. If I didn't have a reason for going, now I do."

Mr Friedman: We will certainly be very happy to come back to you and get the January-February statistics as soon as we can and let you know just what added effect that had on the issue.

Mr Kwinter: I would like to talk briefly about an issue that we really have not touched on. It was alluded to when we talked about Sony, but we really have not explored it, that is, how you overcome -- and I am looking to you, Peter, for some solutions -- the economies of scale and that fact that you have a 270-million-person market in the United States and you have a 27-million-person market in Canada. A company like Pharmor, which is a combination of Consumer's Distributing, K-Mart and all that stuff, can go to Sony and say: "We will order from you 10,000 Sony Walkmans and use it as a promotional item. What is your best deal?" In fact, they can buy it and, in most cases, they can sell it cheaper than the Canadian retailer can buy it, and even at the promotion price make more money than the Canadian retailer can make on it. This happens all the time.

One of the Toronto papers -- I do not remember which one it was -- had a comparison of branded merchandise, not one with smaller engines but identical, saying, "If you bought this in Buffalo, this is what it would cost you; if you bought in Toronto" -- factoring in everything, factoring in GST, factoring in the tax. Some of them were kind of comparable, I think a couple of them were even cheaper if you bought it here, but by and large most of them were significantly cheaper in the United States than they were here.

That has nothing to do with marketing. It has nothing to do with competitiveness. It is the power of being able to buy it, the clout that an American Sears or another American company would have with its vast customer base and its ability to buy in the tens or hundreds of thousands, depending on the item, and negotiate that kind of price. We do not have that consumer base here to do that. How do you deal with that?

Mr Friedman: I guess my answer is that, in certain areas, to deal with those giants is going to be difficult. I think it is a matter of marketing mechanisms. Quite often those situations look for the lowest quality product, or quite often the low line of the area, and in that area you probably will not be able to compete. But if you are getting up to the higher line areas, which is where perhaps we may want to concentrate -- but that is where the merchandising mix comes in and how you might look at it -- we might be able to compete, because they are not going to be buying perhaps quite as large a number of those areas.

In some areas, where you are competing against a huge volume in a huge situation, you probably will not be able to compete directly. But maybe people are not interested in the lowest-priced consumer electronics. Maybe they are interested in buying one that is better quality. For instance, Bay Bloor Radio is in business; it is not selling products that are at the lowest in the market and it is selling things very effectively. Again, it is through a merchandise and product mix. We will not be able to compete in every area, but we might be able to compete in parts of the market. We have big retailers as well here. We have Eaton's; we have Simpsons. Those people can buy fairly large volumes.

As I say, in the short term, these people and the people at the border communities are going to begin looking at those same distribution mechanisms and those same ways of buying big volumes. We know products, for instance, that are sold in Canada in those fields cheaper than in the United States, even electronic products.

I guess my answer is that selectively, I think we can compete -- not on everything, so we have to choose our products and educate our consumers that sometimes the lowest-priced product is not always the best value.

Mr Kwinter: Let me give you a case history of something that happened to one of my constituents. He came in to see me about it; he knew I used to be the minister of industry and trade. He took some pride, and he is a professional man, which was kind of interesting. He wanted to buy a Lifecycle, you know, one of these things you ride and it has all the computer printout and everything else. He went to one of the major chains in Toronto and I think -- I cannot remember the exact figure but it was in excess of $3,000 -- $3,200, $3,300. He had three of his friends who wanted to buy it as well. These guys are very, very sharp, and they said, "This is ridiculous; that's too much money." So they took a look at where it was manufactured. It was manufactured in the States, and they called the manufacturer located in the Midwest. He told them who he was; he told them he is a doctor. He said: "I would like to get this thing and I have three colleagues who want them. Can you tell me where in northern New York you sell them?" They gave him the address of a company in Buffalo. They called from Toronto and said: "We've talked to the manufacturer. He gave us your number. Could we get four of these pieces of equipment?"

First of all, he called up and asked if they had it. He did not say four; he asked them how much, and was told US$1,500. He said, "Oh, great, do you have them in stock?" They said, "Oh, we have lots of them." He said, "What about four?" They said: "Well, if you want four, I can really give you a deal. I'll give them to you for $1,200." So he said: "Fine, we'll take four. We'll be there this weekend to pick them up."

They got into a van, they drove to Buffalo, they paid US$1,200. They came to the border, and the total with everything, the GST, the works -- because they are not manufactured in Canada, I do not think there was any tariff on them -- cost them $70 plus the exchange. He came home and said, fabulous, they love it.

That is being duplicated every single day, where people are taking a look at their economic opportunities and saying, "A dollar in my pocket is as good as a dollar in some retailer's pocket and I am going to go where I can save myself some money." And they become very ingenious about it and they really work at it. This is just a casual kind of thing. They look at it and say: "You know, it pays us. We can go down there and, collectively, do you know how much money we are saving just by taking a trip to Buffalo?" That is the problem we have to address.


Mr Hansen: It was four people who went?

Mr Kwinter: No, they just sent one guy down to bring back the --

Mr Hansen: Because they ask at the border: Is it for your own personal use? Normally, you would not bring anything in unless you were an importer.

Mr Kwinter: Maybe the four of them did, I do not know. The four of them may have gone down and got them.

Mr Friedman: I guess the only comment I can make -- and that may not help -- is I believe that our consumers are much more innovative today than our retailers. I think the name of the game is that when our retailers become as innovative as our consumers, then some of these opportunities are going to change. I understand what you are saying, but our consumers seem to be extremely innovative, and they are becoming more innovative by necessity. Doctors do not necessarily have to be innovative. The reality is that they could have probably bought it for $3,000. But being innovative and looking for opportunities seems to be what many consumers are doing.

Mr Kwinter: If I could just make one comment. The point is that the consumer has the option to take a look at the options that are out there. Unfortunately, a lot of our retailers do not have that option. They cannot be as innovative as the consumer because they do not have the option. They cannot pick and choose where they are going to be selling or where they are going to be. They are stuck where they are and they have to deal with the people who walk in their door. The consumer can go anywhere he wants to where he thinks it suits economic advantage, and that is the problem.

Mrs Sullivan: I wanted to provide a supplementary to Mr Ward's comments relating to interest rates, because they are a factor in several ways, including cost of interest on land purchase or, if that happens to be a phenomenon, cost of borrowing for inventory, and then the other side of it is the cost of credit.

In fact, I just looked at a bill -- the American credit laws require disclosure on monthly and annual basis of cost of credit to the consumer -- that I had on an American credit card. The cost of credit there right now is running 16.6%, yet if I look at a comparable store in Ontario the cost of credit is 24% to 26%. So it is clearly a factor both from the cost of the overhead and cost to the consumer. Just to say you are right; it is the first time I have agreed with the NDPs since they were elected.

Mr Stockwell: I talk to some people occasionally and they talk about the retail business. Right now, I think you would have to have rocks in your head to go into the retail business. Clearly, the taxes, locally, provincially and federally, are killers. I do not know whether you have investigated it or not, but in my humble opinion, if you look at these things, your tax rate as a small business person is absolutely ridiculous. You are paying taxes that you never paid before now and you have to pick up exceptionally high costs to operate a small business. I am not suggesting interest rates are not part of it and I am not suggesting there may be some build in for GST, but when you pile health tax -- they are talking about worker protection tax on top of that tax -- and your local tax, your business tax, your corporate tax, etc, and you compare it to your American counterpart, I think you will find one of the largest discrepancies of all.

Mr Friedman: I would like to answer that because that is one of the most interesting phenomena of all. One of the things we are finding, interestingly enough, is that the rate of new business starts in Ontario is just as high as it is in the United States. Even in the present recession, we are getting 40,000 to 50,000 new businesses being started in Ontario.

Mr Stockwell: How about closing?

Mr Friedman: The closings are definitely up, but you are making the point that people perhaps would not or should not or are not starting businesses. The interesting part is that people are in fact starting businesses.

Mr Stockwell: I am not disagreeing with you. I think they are starting the businesses; they are just not staying in business.

Mr Sutherland: Is that retail or all businesses in general?

Mr Friedman: No, no. All businesses are about that. About 70% are service, 6% are manufacturing and the rest are retail. So there is a fair number of retailers starting now, as there were last year, as there were the year before. I think that is another element, frankly, that is interesting, that will help our competitiveness: that there are a lot of people starting businesses. That is one of the reasons that I am optimistic about what may be happening in Ontario.

Mr Stockwell: But that is the most misleading figure of all. I am in my mall, where I am. There are lots of people starting businesses and they are coming into business and they are going out far quicker than they ever were. They are opening and closing sometimes in months. I do not think that is indicative. If you are going to look at openings, look at closings as well.

Mr Friedman: We are looking. We have looked at closings and they are up --

Mr Stockwell: Dramatically.

Mr Friedman: I do not know about dramatically. But from my perspective, as long as we have a lot of people starting businesses, it is a very healthy sign. The Americans, by the way, are also going out of business. Failure rates in the United States are almost as high as they are in Canada, so one of the interesting parts about the overall elements of small business is that we are not worse than the Americans. We are in the same basic situation. We have just as healthy a business startup situation. The failure rates are no higher in Canada and in Ontario, particularly, than they are in the United States, and that is the good sign. I mean, that is really what is exciting. People are still starting, and a percentage of them are going to grow and a percentage of them are not, so there are various people out there who are going to be innovative, are going to find new ways of doing things, and they will certainly not overcome all the barriers.

Many of the things that you have said, and Mr Kwinter and others, are real barriers, and no one is going to say that some magic wand is going to eliminate them, but nor, on the other hand, are we doomed to failure and it is all over and everybody is going to go to the United States. I do not believe that either. So there is a sense of balance that seems to be, at the moment, tilted this way, which I think we can neutralize some more, and that is really what the point is all about.

The Chair: Just in closing, I think it might be useful for the committee to have copies of your marketing strategy. Can we get that? I believe you said that in early May Agriculture Canada is bringing in a study that it has done. Will you be getting copies of that, and can you forward that to us as well? And could you also forward to us studies about what you are talking about as being the next wave in terms of retail marketing? And any other studies that are corning in, perhaps you could share them with this committee as they come in so we can be updated. Thank you very much for coming. For the rest of the committee, we have one last item to do.

Mr Kwinter: Peter, well done.

Mr Phillips: Solve this problem.

The Chair: That's right; we have the answers to the questions.

Miss Anderson has done some research for us and has another item for us today that she would just like to say a few words about.

Miss Anderson: This morning people had asked about different tariff rates coming into Canada, and also about limitations, and I just happened to get this in the mail today, this article, and from page 7 onwards, it gives you different tariff categories that are applicable to goods coming across the border now; also on page 10, the limitations that exist at the moment, that you can only bring 20 kilos of meat in per person and certain other things like that. So I will continue to get the staging categories for you, but it gives you some initial information anyhow.

Mr Phillips: I think that is almost all I need. When I looked at those, actually it seemed different than the impression the MITT person left with us, that it is a minimal 4% or 5%.

Mr Kwinter: If I could just explain: What you are talking about is that it just happens that those items are on that level. As I said to you this morning, the tariff ranges from as little as less than 1% to as high as 40% but, on average, it is between 7% and 10%. Now, it just depends. In these particular categories there, it is 18%, 16%, 6%, whatever it is, but overall, the average is between 7% and 10%.

Mr Phillips: I am just saying the MITT. You are not MITT. The MITT person said around 4% and, to me, as I eyeballed these things, just thinking about a typical car coming across the border, it seemed higher than 4% or 5%.

Mr Hansen: What they do is average it at the border at 12%. So they do not break it down. You have a case of beer, you have some groceries. They usually just say 12% for the total purchase.

Mr Phillips: I think judgementally that 12% is probably closer than 4%, and therefore my own feeling is that the hope that the dollar move from 86 cents to 80 cents is going to solve a lot of this stuff -- I think the tariffs are going to go down faster than the dollar. That is all I am saying.

The Chair: Yes, but just remember that from 86 cents to 80 cents is somewhere in the area of 9 percentage points in terms of exchange rate. It is calculated differently. It is not a one-to-one relationship.

Mr Phillips: Let's say it is 7% or 8% and let's say it is 12% of the tariffs. I am just saying that that ain't going to be the solution. That is all.

The Chair: Thank you. This committee is adjourned until next Thursday, 10 o'clock in the morning.

The committee adjourned at 1712.