Understand the differences between U.S. and Canadian vehicle prices
While Bob Barker is currently more closely associated with wanting to spend close to one million dollars to ship two elephants from the Metro Toronto Zoo down to an elephant sanctuary in California than he is with the game show that he hosted for 35 years, that game show nonetheless provides an excellent title for this article: the price is right.
In mid-April I was asked to appear before the Standing Senate Committee on National Finance which had been set up by the federal Finance Minister to look at what the government could do to address price discrepancies between similar products sold in both the Canadian and U.S. markets.
Powerful loonie, no price breaks
With a loonie that has appreciated some 50 per cent against the greenback over the course of the last four years, the suggestion has been made that Canadian prices on a wide variety of consumer goods have not been adjusted downwards as quickly or by the quantum that one might expect given the strength of our dollar against its American counterpart.
To date, the Senate Committee has heard from a number of association representatives, academics, economists and even the Governor of the Bank of Canada, Mark Carney, to try and get a read on why Canadian prices would remain higher in Canada than the United States even with a dollar that has strengthened appreciably.
Most of the witnesses offered similar explanations which included the size of the Canadian market for starters. The Canadian market for cars or most other products is about one-tenth the size of the U.S. market so it is not too difficult to understand that a market that moves ten times the volume of product is likely going to be able to purchase it from the supplier at a better price to begin with.
There are other issues that have been cited like transportation costs in Canada, higher real estate and occupancy costs, higher wage rates, the fact that we are a bilingual country necessitating the need for different packaging of consumer goods. Recent assessments have suggested that structural costs in Canada keep prices somewhere between 15-20 per cent higher here than they are in the United States.
Prices are sticky
Prices in Canada have also been described as “sticky” across a variety of consumer products, meaning that when the currency fluctuates, prices do not tend to follow as quickly as one might expect and tend to remain at a certain level for a period of time before adjusting.
In the case of automobiles, consider a few years back when the currency was falling with some rapidity against the U.S. currency. You did not see vehicle manufacturers and distributors rushing to increase the prices of their vehicles to cover the currency devaluation because it was both impractical and not very consumer friendly. Likewise when the loonie started its appreciation towards parity, prices did not come down significantly in Canada compared to those in the United States. This prompted a major consumer outcry at the time and sent vehicle importations from the United States sky-rocketing with about 240,000 vehicles being imported from the United States in 2008.
Many vehicle manufacturers responded publicly, usually during model year change-over, with announcements of the new model year vehicle either having more standard equipment or being priced lower than the vehicle it was replacing, or a combination of both.
Canada has higher costs
Also, in the case of automobiles, while our safety and emission standards have been converging since the mid-1960s with the signing of the Auto Pact (North America’s first sectoral free trade agreement) the fact of the matter is that there are still differences between vehicles that are produced for the Canadian market and vehicles produced for the U.S. market.
Bilingual labels, owners manuals and other marketing materials represent costs that must be spread over a lower volume of vehicles in the Canadian market. The industry fully embraces bilingualism but it needs to be understood that there is a cost associated with it.
Likewise things like daytime running lights, immobilizers (theft protection), and speedometers and odometers which use metric measurements instead of imperial measurements, are uniquely regulated for vehicles being sold in Canada and add additional cost. That said, efforts are currently being made under the auspice of the Regulatory Cooperation Council established in 2011 by the Prime Minister and President Obama to further address regulatory differences between products sold in Canada and the United States — including automobiles.
If we accept that there are structural costs that generally make prices for vehicles or anything else higher here than the same product would be in the U.S., I don’t think it necessarily follows that you cannot find some products or vehicles cheaper in Canada than in the U.S.
Different models more popular
For instance, our passenger car market in Canada is highly skewed towards compact and sub-compact vehicles which comprise about two thirds of all passenger car sales. Logic would dictate that in such an important and highly competitive market, pricing would be very aggressive.
When one considers the various incentives and sub-vented finance rates on display in the pages of any newspaper, then the final transaction prices on a number of vehicles may well be cheaper here.
There are a number of things the government or anyone else may not be able to do anything about with respect to structural costs for the Canadian market, however one thing that Canada could do is either unilaterally eliminate its 6.1 per cent tariff on imported vehicles or at least bring the tariff down to the U.S. level of 2.5 per cent. If we are looking at aligning our standards and our regulations with the U.S. in the name of efficiencies and cost savings, why wouldn’t we take the same approach with our external tariffs?
The difference on a vehicle with a value for duty of $30,000 is about $1,100 between Canada and the United States. The elimination or reduction of the tariff would allow for price reductions in the Canadian market and the tariff is something that is certainly within the control of government.
In looking at this issue it is also interesting to note that last year at least six manufacturers had their best sales years ever.
Likewise last year there were just under 140,000 vehicles imported from the United States, which is a decrease of over 40 per cent from the 2008 levels. So despite everything else, these two factors suggest to me that prices may not be that out of whack in Canada — the price of vehicles in Canada vis-à-vis the U.S. may be just about right.
