Supply management under the gun - again

Thursday, May 8, 2014

by JIM ALGIE

Relatively high Canadian tariffs on imported food  particularly on agricultural commodities which are supply-managed in Canada  and less competition among Canadian manufacturers explain part of this country’s higher retail prices when compared with the United States, a C. D. Howe Institute commentary says.

To reduce retail price differentials between the two countries, the federal government should “eliminate existing tariffs and supply management policies that are responsible for the largest price gaps,” University of Toronto economics assistant professor Nicholas Li says. He’s the author of an article, Sticker Shock: The Cause of the Canadian-U.S. Price Differential, published May 2 by the Toronto-based public policy research group.

However, veteran economist Al Mussell of the Guelph-based George Morris Centre criticized Li’s conclusions about supply management as “trite” during an interview today. Mussell cast doubt on Li’s calculations about comparative food expenditures between the United States and Canada.

“The challenge here is we can come up with such simplistic policy prescriptions,” Mussell said.

Li’s paper comes atop recent criticism of Canada’s supply management system for dairy and poultry production from the Conference Board of Canada. In March, economists for the Ottawa-based Conference Board recommended scrapping dairy supply management in favour of seeking stronger export markets for milk.

In effect for almost 50 years, the supply management system for milk and most poultry commodities limits production while guaranteeing farm costs and imports by tariff. Li’s commentary argues those tariffs on supply-managed, food products account for some of the difference between relatively high Canadian retail food prices and lower U.S. prices.

Li cites particularly a study he did comparing retail and wholesale prices between 2004 and 2007 for 600 identical goods sold in 25 stores in British Columbia and 39 stores in nearby Washington state. He tracked everything from dish detergent to batteries to olive oil. Regarding dairy products, however, where identical products aren’t available across the border, he was forced to calculate product indices.

“Food products in supply-managed industries tend to feature the highest Canadian-U.S. price gaps and the greatest increase in Canadian-U.S. price gaps between 2005 and 2011,” Li’s paper says.

Mussell cites data from the report showing alarming price differences totalling 57 per cent. The study fails to take account of retailing practices such as featured and loss leader sales, Mussell said.

“What really stuck with me is the idea that somebody thinks food is 57 per cent more expensive in Canada than in the U.S.; that isn’t right,” Mussell said. “And if it were right, it would beg some very deep questions,” he said.

Li agrees that the 57 per cent differential seems high. It relies on Organization for Economic Cooperation and Development (OECD) data for 2011 for food cost comparisons among nations. It’s the most recent OECD study on the subject and coincided with a relatively high value Canadian dollar, Li said today. The same study conducted today may show comparatively lower costs because of Canada’s comparatively weaker dollar, he said, estimating a difference of between 10 to 15 per cent. However, he defended the general thrust of his argument.

As well, in Li’s Washington-British Columbia comparisons for 2004-07, state and provincial taxes roughly balance. There are some U.S. states without sales tax and Li estimated roughly that higher Canadian taxes might explain as much as seven per cent of the price gap.

The Howe Institute commentary comes at a time of active public debate about the future of supply management at least partly because of pending trade agreements with Europe and the Trans-Pacific Partnership. Mussell, a senior researcher with the Morris Centre said the subject needs “thoughtful, careful analysis.”

“Some authors that write on this would like to make it seem that there’s a lot of fat cat, dairy and poultry farmers that got together and found a way to bilk consumers,” Mussell said. “I see this issue very differently and particularly being much more complicated and rich than that,” he said.

Li’s paper addresses specifically federal government concerns for cross-border differences in North American retail prices as expressed in its most recent budget. It refers directly to the government’s stated objective that Canadian consumers should not pay more “except for legitimate higher costs.”

In response to the question “What can it do to reach that goal?” Li says “reduce costs for consumer goods by lowering or removing tariffs and by relaxing the supply management restrictions on products such as cheese, chicken, eggs, milk and yogurt.” The paper also recommends Canada “raise the maximum volume of goods that Canadians can bring into the country without paying duty.”

Mussell says Li’s paper lacks sufficient context to explain some of its findings. As well, he cited U.S. Department of Agriculture data comparing average household expenditures which show food represents about 6.6 per cent of household expenses in the United States and 9.9 per cent in Canada.

That works out to a difference of about $400 annually, Mussell said. “With all due respect for low income people . . . for a lot of us $400 is no big frigging deal,” he said.

Li said today he agrees that Canadian governments may be justified in making policy decisions about protecting parts of the domestic economy. The point of his paper is to point out that at least some price differential between Canada and the United States “is enabled by government policies.” BF