TVO: Why the U.S. wants to let Canadians buy more stuff duty-free

The Trump administration says Canadians should be able to buy more from the U.S. without paying customs duties. But who will that really benefit?

  Earlier this week, the U.S. released a list of broad goals for a new NAFTA. (Sean Kilpatrick/CP )

Earlier this week, the U.S. released a list of broad goals for a new NAFTA. (Sean Kilpatrick/CP)

The U.S. Trade Representative office earlier this week released its list of demands for the upcoming NAFTA negotiations. Among its 100-plus objectives are to abolish the independent tribunals that settle trade disputes, to increase U.S. procurement in Canada and Mexico (while retaining the right to enforce “Buy American” provisions), and to secure better market access for American industries such as agriculture, telecommunications, and financial services.

But one demand stood out as unusual for Toronto trade lawyer Cyndee Todgham Cherniak: that Canadians be allowed to buy more from U.S. companies duty-free.

“It’s never been in a trade agreement as far as I know,” says Todgham Cherniak, who studied more than 100 free-trade agreements as part of a 2007 project for the Asian Development Bank. “I’ve looked at a lot of them since then,” she says, “and I’ve never seen it.”

What’s the deal?

Countries set limits on the amount individual consumers can spend on cross-border purchases without incurring duties, called de minimis thresholds. Canada limits the value of any cross-border purchase to $20 before duties are imposed, while the U.S. lets consumers spend $800.

In the summary of objectives for the NAFTA negotiation, the Trump administration wants Canada to match America’s $800 limit.

“There is this desire, especially on the part of big companies like Amazon, for Canada to increase the limit at the border,” Todgham Cherniak says. “They want it to go up to $800 so that Canadians can buy more online and aren’t penalized at the border by paying duties.”

Who would benefit if the threshold were raised?

Consumers would be clear winners if they could buy more from the U.S. without paying duties — it’d be cheaper to buy from American retailers. Shoppers would also save on brokerage fees, and their packages wouldn’t get held up in border processing.

The federal government could stand to gain, too. A 2016 report by the C.D. Howe Institute found Canada makes $39 million a year on the current $20 limit — but collecting those duties costs $166 million. Increasing the de minimis threshold would be “fiscally neutral or even positive for the federal government,” the authors say.

Canadian small and medium-sized businesses are another story. Some retailers argue they won’t be able to compete with the scale of big U.S. firms and their dominance in online shopping. The Retail Council of Canada contends “the consequences for investment and employment could be catastrophic and given that retail employs one-in-eight Canadians, the Canadian economy overall would suffer.”

If the de minimis were raised to $200 in Canada, for example, goods costing less than that could be shipped here free of provincial or federal taxes as well as duty, the RCC says, while local stores would still have to charge tax and pay levies on imported goods. The group says it does not understand “why the Government would ever want to confer a tax and duty advantage on a U.S. warehouse seller, who employs few if any people in Canada, at the cost of a Canadian employer who creates jobs and economic activity here, whether in bricks-and-mortar stores or online.”

Even so, a 2016 Nanos poll found that 76 per cent of Canadians want to raise the threshold to $200, to match what travellers can bring back with them after 24 hours in the U.S. A petition to “dump the duties,” spearheaded by the Canadian American Business Council, which represents businesses on both sides of the border, gathered 15,257 signatures and was presented to the House of Commons last fall.

“It is time to increase the limit,” Todgham Cherniak says. “Twenty dollars is a little ridiculous. However, going up to $800 may cause harm to Canadian retail stores. So don’t give everything that’s being requested — but I think it’s about time. You can’t buy much for $20 anymore.”

While the increase would help American retailers, she says, manufacturers wouldn’t be so lucky: Canadians pay duties only on products that don’t originate in the U.S. “This is primarily helping Amazon and other companies that buy from China, and clothing companies that buy from Indonesia and Thailand and Turkey,” she explains. “It’s only non-NAFTA items that you end up having to pay duty on, not originating goods. So the irony of this is it’s not helping U.S. manufacturing — it’s not making America great again.”

What’s next?

The U.S. House of Representatives will provide the Trump administration with feedback on its demands before talks begin with Canada and Mexico, which are expected to start mid-August.

The Trump administration might have set its sights high in the expectation that Congress would moderate its wish list. “I think this is the more extreme position, but I also believe, by putting the shopping list together of asks and wants, they are backing themselves into a bit of a corner to get most of it,” Todgham Cherniak says. “The negotiation may be viewed from various Trump constituencies as being unsuccessful if they don’t get everything that’s on the list.”