Finance Committee on Nov. 21st, 2007

[The Chair, Conservative, Rob Merrifield]

This part of the meeting is the second session of our pre-budget consultation on this item, which is the impact of the appreciation of the relative value of the Canadian dollar.

We have with us now, from the Canadian Chamber of Commerce, Mr. Perrin Beatty.

We have a couple of witnesses who are coming. They're on their way. We'll start with you, and then I'll introduce the others as they come.

The floor is yours. We look forward to your presentation.

[Perrin Beatty, President and Chief Executive Officer, Canadian Chamber of Commerce]

Thank you Mr. Chairman, ladies and gentlemen.

I would like to thank the committee for having giving me the opportunity to present the viewpoint of the Chamber of Commerce of Canada on this important topic.

The Chamber of Commerce of Canada represents some 170,000 companies. Its members face numerous challenges every day. Most of them are affected by the appreciation of the Canadian dollar.

In a letter that I sent yesterday to the Prime Minister and to Canada's premiers, I proposed a number of immediate measures that can be taken to strengthen Canada's economy and to help our businesses grow and prosper. Many of our members face unprecedented challenges that grow daily. Fierce competition from emerging economies like China and India, weaker demands south of the border where 77% of Canada's merchandise exports go, and the stunning appreciation in the Canadian dollar since 2002 have created a perfect storm for export-oriented businesses and for companies facing competitors here at home. Canadian manufacturers are on the front line.

Since late 2002, over 330,000 manufacturing jobs have disappeared, more than 80,000 so far this year. The loss in competitiveness is evident in the rapid escalation of unit labour costs, which are the costs of wages and benefits of workers per unit of economic output. Unfortunately, Canada's productivity is rising too slowly to negate the lost competitiveness, and more challenges lie ahead. The Bank of Canada predicts that the Canadian dollar will average 98¢ U.S. through 2009, and Canada's economy will grow by 2.3% in 2008 and 2.5% in 2009. The Department of Finance and the Bank of Canada have stated that the risks to the Canadian economy are tilted to the downside.

Given the challenges that I have just mentioned, it is important to put in place competitive policies that would have a direct impact on our countries's productivity and prosperity and on that of all Canadians.

The Canadian Chamber of Commerce calls for immediate action. The government must put policies in place that encourage flexibility and adaptability, and lay the foundations for a more competitive economy. In our view, the federal government must work with provincial and territorial governments in a number of key areas.

The first area is to lighten the burden of regulation. Overlap, duplication, and fragmentation are time-consuming and costly, and they hamper Canada's ability to compete.

Second, we need to cut interprovincial trade barriers. Internal barriers keep firms from growing large enough to compete effectively in foreign markets, cause investors to look elsewhere, artificially raise prices, and increase the cost of doing business.

Third, as a nation we need to better utilize skilled immigrants through better recognition of foreign credentials, and improve labour market access and integration. Employers across the country are facing major labour shortages. Many foreign-trained professionals and tradespeople cannot put their skills to work. Employers also report long delays in the processing of people whom they've identified for specific jobs.

Fourth, we need to keep the Canada-U.S. border open for legitimate travellers and business. Border delays and complications harm productivity and jeopardize jobs. Additionally, rapidly escalating border compliance costs are wasting hundreds of millions of dollars each year, putting domestic producers at a serious disadvantage relative to their offshore competitors.

Finally, we need to ensure a competitive tax environment. The 2007 budget and the recent economic statement contained a number of positive developments to help business people compete, but more needs to be done. Significant economic benefits can be realized by eliminating provincial capital taxes, by harmonizing provincial sales taxes with the federal GST, and by making permanent the accelerated capital cost allowance for investment by manufacturers and processors in machinery and equipment.

Mr. Chairman, the Canadian Chamber of Commerce believes these measures provide an important first step toward a more competitive Canada. They should be implemented now as a means of helping Canadian businesses respond to urgent and growing pressures. To delay would risk the jobs of Canadian workers and the prosperity of communities across our country.

Mr. Chairman, I thank the members of the committee for their hospitality. I'd be delighted to answer questions and to respond to any concerns that they would want to raise.

[The Chair, Conservative, Rob Merrifield]

We want to thank you very much for keeping it in time and for being very succinct in your information. You must have had a lot of experience at this. This is great.

[Perrin Beatty]

My trait, Mr. Chairman, was to speak much longer than this.

[Some hon. members]

Oh, oh!

[The Chair, Conservative, Rob Merrifield]

We have next with us the Canadian Federation of Independent Business.

Ted Mallett, director of research, the floor is yours. You have five minutes.

Thank you.

[Ted Mallett, Director of Research, Canadian Federation of Independent Business]

Good afternoon, and thank you very much.

My name is Ted Mallett. I'm VP of research and chief economist for the Canadian Federation of Independent Business. On behalf of our 105,000 small and mid-sized business owners across Canada, I'm here to convey our perspectives and the recommendations we have on the economy and specifically the impact of the Canadian dollar on their operations.

This follows our written correspondence with MPs of October 31. We will be following this with other pre-budget recommendations in the coming weeks.

The value of the dollar is certainly one of the major factors, but it's only one of the factors, that businesses must deal with on a day-to-day basis. Those most affected are the ones that are trading directly. Our best and latest estimates are that approximately one-third of small to mid-sized businesses are directly affected by currency swings either as direct importers or direct exporters.

Another 15% or so are next in the production line in terms of selling or purchasing from direct importers or exporters. So roughly half our membership is either directly or mostly indirectly affected by trade, and therefore the other half are certainly less affected or insulated by these swings.

The dollar has been appreciating against the U.S. since 2003, but this latest surge in September and October has caught everybody by surprise. Normally, currency appreciation reflects good news. It means people are buying Canadian dollars. Good Canadian fiscal fundamentals, commodity and oil price strength, and an upbeat consumer and business sector have really contributed to this.

At this time, however, we're also dealing with a U.S. weakness, and it's one of the occasional instances, maybe not permanent, where we have a decoupling of the Canadian economy versus the U.S.

CFIB has been covering this issue explicitly since 2001. We have distributed a copy of our most recent business barometer to the members of the committee. It is a study we've conducted every quarter since the end of 2001. On one of the pages, page 5 specifically, we ask our members where they would prefer to see the Canadian dollar with respect to the operations of their business. It's really the only source of information that tries to get some neutral perspective on whether this is doing good work for their business or creating some hindrance.

Typically we find that 27% of our members would prefer to have a lower dollar, 21% would like to have a higher dollar, and the other roughly 52% would feel it has no huge impact on their businesses. But when you look at it by sector, you see a very different picture, or the picture is a little clearer.

The agricultural sector and the manufacturing sector are clearly more interested in a lower dollar. A few businesses are perhaps more domestically interested, but they are also sourcing products from the U.S. Therefore they would be benefiting from where the currency is now, but not the majority of manufacturers. But there are businesses like transport where 25% want to see it higher, 25% want to see it lower, and for the other 50% it's a toss-up. So not every business sees things the same way.

What's also interesting is that we've been asking this question since 2001, and these numbers haven't changed a whole lot. In 2003, for example, 32% wanted to have a lower dollar, 24% wanted to have a higher dollar, 35% said it had no impact, and 8% said “don't know”. This is when we had a 76¢ dollar.

So the good news from this is that normal can change: it's not an absolute measure, it's a relative measure. The issue here for small and large firms is the speed at which the currency changes and whether there is any forewarning about what's happening. This is where small firms are caught off guard. They've got long-term contracts, they've got inventory on the shelves that has already been priced, and they also have to look ahead six months. Where's the currency going to be in the future? So these are the kinds of challenges they have to deal with.

We certainly support the notion of the independence of the Bank of Canada; there's no measure the government can do directly to affect monetary policy. Monetary policy is a challenge in itself because we have two economies: one very strong out west and one somewhat weaker in the east. Monetary policy has to find that middle point, and it's very much a knife edge. So it's difficult at the best of times.

The recommendations that we have followed are the same ones we've recommended for years. They are investment orientation, let's get productivity enhancement in the Canadian economy, a reduction of regulations, relief of the more onerous forms of taxation, so that you can give a sense to businesses that things will get better in the future so that the marketplace can actually ensure that a business is succeeding or not. So government is essentially a neutral or a facilitating or supporting party, as opposed to a direct interventionist, in the marketplace.

I'd be happy to answer any questions of the committee, and once again, thank you very much for the invitation.

[The Chair, Conservative, Rob Merrifield]

Thank you very much for coming in and sharing with us. We'll be engaging you, I'm sure, in the questioning.

Now we'll move on to the president and chief executive officer of the Retail Council of Canada, Diane Brisebois. The floor is yours for five minutes.

[Diane Brisebois, President and Chief Executive Officer, Retail Council of Canada]

Thank you, Mr. Chairman.

While the Retail Council of Canada submitted pre-budget policy recommendations some time ago, which recommendations we would be pleased to discuss in more detail at a later date, I've chosen to spend the time allotted to us today to discuss the Canadian dollar and its impact on the retail industry in Canada.

RCC speaks for an industry that is vital to the daily lives of all Canadians, and numbers relating to the industry are huge. There are more than 227,000 retail locations across the country and we employ over 2.1 million Canadians.

Reports in the media comparing Canadian and U.S. retail prices for various products have given consumers the impression that with currency parity comes price parity. There are a large number of factors that can create differences in final retail prices between jurisdictions, and many of these tend to push prices higher in Canada, as much as we would like to ignore it. Some reflect fundamental structural differences between the two countries; some reflect policy differences; and some reflect competitive factors. However, as you know, the general realities are that the Canadian market is one-tenth the size of the U.S. market. The cost of doing business in Canada is higher, given our higher labour costs, transportation and logistics costs, and so on. We're very grateful for the many benefits that come with being Canadian, but they do come at a premium.

From an operational perspective, retailers often purchase merchandise up to 12 months before it appears on shelves. This means that many of the products on the shelves this holiday season were purchased when the Canadian dollar was valued at 85¢ American. This presents a challenge for retailers in delivering prices for Canadians that fairly reflect the value at which they purchased the product.

Contrary to popular belief, the great majority of retailers, regardless of size by the way, purchase their goods through Canadian manufacturers, subsidiaries of North American household brands, distributors, and wholesalers. That means that they purchase in Canadian dollars. Thus they have not benefited from the currency exchange, unless those savings were or are being passed through by the manufacturers.

Prices for consumer goods have risen more slowly than those for consumer services and many categories, such as electronics and clothing, have experienced absolute price deflation. We believe that will continue in 2008.

This rise of the Canadian dollar and retailers' shift to offshore sources of supply have played a major role in restraining prices in those categories. Again, we suspect that we will see more and more retailers go offshore to source their products. However, retailers in Canada pay significantly more by way of import taxes to bring goods to market.

As I noted a moment ago, many of our retailers will outsource or will go to China, Asia, or Europe to import products. There is a huge deficit in looking at how retailers pay in Canada and how retailers pay in the United States. For example, generally to import from Asia a pair of steel-toe boots, a retailer in Canada pays a 17.5 % duty versus 8.5 % for a retailer in the U.S. To import cribs, Canadian retailers pay 6 % duty versus zero in the U.S. To import pads for hockey or soccer for sports for children, retailers in Canada pay 15.5 % duty versus zero in the United States. A retailer in Canada pays a 5 % duty on a very popular product that seemed to be in the media quite a bit lately, and that's an MP3, an iPod. A retailer bringing in that product, an equivalent product from Asia, pays a 5 % duty in Canada versus zero duty for retailers in the U.S.

There are hundreds upon hundreds of similar examples that put retailers in Canada--and, I would suggest, importers as well as manufacturers in this country--at a significant disadvantage to their American competitors.

The RCC wants to work with the federal government to help level the playing field here for retailers--small, mid-sized, and large. We urge this committee and the government to eliminate those duties that put businesses in Canada at a disadvantage, and obviously an even greater disadvantage for our small entrepreneurial merchants across the country who are also importing products.

Ladies and gentlemen, I'd be pleased to answer any of your questions.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

For the committee's information, we have two witnesses who have not quite arrived, but we expect them any time, so we'll start our questioning. We'll try eight minutes—you can split the time between parties, if you'd like—and we will interrupt when they come in order to hear their five-minute testimony.

Is that fair?

Yes, we'll limit the NDP.

We'll start with the Liberals.

Mr. McKay, go ahead.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Previous witnesses have suggested that, on the monetary front, the most useful thing to do is to encourage the Bank of Canada to lower interest rates. If in fact you lower interest rates, in an environment where we already have full employment, or low unemployment, if you will, generally that would act as a stimulus in the economy. If it acts as a stimulus in the economy, that's going to, in turn, put upward pressure on wages, which in turn presumably makes us somewhat less competitive in the very industries that you represent. Does that analysis resonate with you? Does it make sense?

Secondly, in terms of the fiscal responsibility on the government side, wasn't the latest GST cut essentially a waste of the stimulus space that's available? If you put in an interest cut and the GST cut, you have two stimulating effects on what is essentially a full-employment economy, and that in turn might exaggerate the inflationary impacts on the economy.

I'd be interested in comments from all three of you on that. Thank you.

[Ted Mallett]

I'll go first.

On the first question, with respect to the stimulus or reducing interest rates, what certainly happens is that an interest rate reduction will have impacts throughout the economy. It's not just wages that would be affected. Wages are an indirect result of other things happening with respect to things like business investment. Really, the idea is that the interest rate cut would encourage investment in equipment, fixed plant, and therefore, the productive capacity of the economy increases, and therefore, wages are able to increase because of productivity.

On balance, certainly the idea that an interest rate cut would be stimulative would not necessarily harm the economy. We think it would be of benefit, on average. The difficulty is that we have a red-hot economy in some parts of the country, and a very cold economy in some other parts, but we have only one interest rate. The idea that we can deal only with one segmented issue is very difficult, and it's a challenge for the Bank of Canada governor to get that measure just right. So there certainly is pressure, or certainly with the latest news of price reductions or easing of inflationary concerns in Canada, there now is some more room for interest rate cuts.

Getting to the GST issue, whether you reduce GST by a percentage point or you apply that to, say, a personal income tax rate cut, it will be more or less the same thing. Personal income tax is just as effective as the GST, in our view, because largely, home ownership is exempt, or capital gains are exempt, as well as RSPs are tax exempt.

So the impact of GST versus personal income taxes is roughly equivalent in terms of how they would work in the economy. They were needed because we have a large fiscal surplus at the federal level, and it's important to bring that back to the government.

[The Chair, Conservative, Rob Merrifield]

Thank you.

Mr. Turner, you have four minutes.

[Garth Turner, Liberal, Halton, ON]

Thanks very much.

My question is to Diane, from the Retail Council of Canada.

The Minister of Finance, as we all know, had a press conference recently at which he held up a Harry Potter book and talked about the differences in pricing between Canadian and American editions. He gave a strong indication that Canadian businesses are to blame for gouging consumers. The minister suggested that prices could and should come down, and it was the responsibility of corporations to do that.

Did the Minister of Finance actually exacerbate the problem? Is he creating an expectation on the part of consumers that because our dollar goes up, prices should automatically go down; and does that damage your industry, your sector?

[Diane Brisebois]

There's absolutely no question.... I'm not sure if the minister's comments damaged as much as misled consumers into believing that if the Canadian dollar goes up, prices will go down immediately. I think the challenge here for retail in Canada is that a great majority of the products are bought from Canadian distributors, which is the irony here. They are not bought directly from the U.S. In fact, even the largest retail companies in this country cannot buy a multinational brand from the U.S. brand owner. They must go through a Canadian distributor, and there is such a thing in Canada as country pricing.

[Garth Turner, Liberal, Halton, ON]

Yes, I understand that.

I'm quite interested in this because the Minister of Finance is in a very influential position in our society. He influences consumer's attitudes, he gets massive media, he called a press conference on purpose, after meeting with you and other industry representatives. Did that press conference accurately reflect what happened in your meeting, or was the Minister of Finance freelancing with his own agenda?

[Diane Brisebois]

The press conference did not reflect the discussion that took place. I think that would be the honest answer. The retail industry was to meet with the minister, it was not the other way around, and we were there to talk about the pressures of the Canadian dollar.

So saying that, we--

[Garth Turner, Liberal, Halton, ON]

If I could just jump in for a minute, you're saying the press conference did not reflect what happened in the meeting. Well, why did the minister say what he did, then? Was he not listening to you?

[Diane Brisebois]

I think the minister was listening to the industry. I think the minister was trying to reflect the mood of consumers. I think, though, that what we were hoping would happen was to ensure that this was not a sound bite, that this was explained clearly. It's taken some time...and we suspect that the message is clearer today.

It has not helped the sector, if that was the first question you asked; it did not help the sector.

[Garth Turner, Liberal, Halton, ON]

It has not helped the sector. So what the minister said and did in his press conference actually made it more difficult for you in the sector, and perhaps accelerated job loss if you have problems in the sector?

[Diane Brisebois]

No, it did not. I don't think the minister would be responsible for job losses. However, what it has done is to create an enormous amount...or a great challenge for independent merchants across this country, especially the independent merchants--

[Garth Turner, Liberal, Halton, ON]

How about cross-border shopping? Has it accelerated that?

[The Chair, Conservative, Rob Merrifield]

I'm sorry, that's all the time Mr. Turner has. We'll move on to the Bloc.

Mr. St-Cyr.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Perhaps we can first hear the testimony of Mr. Laliberté.

[The Chair, Conservative, Rob Merrifield]

Yes, we can do that. We have another individual to testify, but we certainly can break at this time and hear the testimony from Pierre Laliberté.

The floor is yours for five minutes, please.