How retailers in Canada are affected by retaliatory tariffs

BY DIANE J. BRISEBOIS, President and CEO, Retail Council of Canada

RETAIL Council of Canada (RCC) provided comments to the Government of Canada concerning the potential impact of retaliatory tariffs on retailers and the retail sector in Canada (dev-rcc.pantheonsite.io/sites/default/files/RCC_NAFTA_ Comments_June_15_2018_FINAL.pdf). While at the time of writing this article, the Government had not yet published the final list of imported products that would be affected by retaliatory tariffs, the following highlights some of your concerns.

Context Within NAFTA Negotiations

Retailers are strong supporters of the NAFTA agreement and have been actively engaged on both sides of the border in pressing for a renewal of the Agreement on fair terms. In meeting with the government, RCC also stated that it was appreciative of the resolve shown to continue to ensure a level playing field on the tax and duty treatment of goods purchased online and shipped to Canada by post or courier (de minimis).

Our industry deplores what it sees as the U.S. Government’s pressure tactics to conclude a lopsided NAFTA agreement. While it might be expected that retailers’ sole concern would be the potential impact of retaliatory tariffs, that is not the case. Early in the NAFTA renegotiation process, RCC commissioned a study on the potential impact of a trade war. The study examined both the cost impacts of higher tariffs and the effect on Canadians’ incomes of a trade war. Its conclusion was that for every 1% increase in across the board tariffs on imports from the U.S., Canadian retailers would see a $1 billion increase in cost of goods. The study also looked at the indirect cost of tariff increases, with reduced consumer spending, as Canadian household incomes would feel the effects of slower growth. The cumulative impact on retail sales of direct and indirect effects was estimated at between $4 billion and $25 billion, depending on the scenario.

While recognizing that the Canadian government’s goal is to avoid a broadening of the dispute and work toward a return to normalcy in Canada-U.S. trade relations, RCC nevertheless expressed concerns about the potential imposition of tariffs on several of the categories which included many consumer goods (see list of considered goods as of June 18: www.fin.gc.ca/activity/consult/ cacsap-cmpcaa-eng.asp).

Equitable Allocation of Retaliatory Measures

Based on 2017 annual data from the Canadian International Merchandise Trade (CIMT) database, an assessment of the items listed suggested that approximately $10 billion of retail goods imported from the United States were included.

While supporting the need to retaliate against unreasonable U.S. measures on steel and aluminum, RCC noted that the retail sector’s share of GDP was below those of manufacturing, natural resources and construction, all of which are major consumers of goods identified by the Government. In short, we stated that retailers’ and consumers’ share of the burden with respect to responding to U.S. tariffs should be equitable and demonstrably so.

Substitutability Challenges

RCC also noted that substitutability for some of the goods listed were, in our estimation, something of a mirage, especially in the near-term. In some cases, the challenge is sourcing an adequate supply. Many of the categories selected currently see U.S. import shares at 80% or even upwards of 90% of all imports to Canada. To presume that there is adequate near-term supply available domestically or from other countries may be unreasonably optimistic, depending on the category.

In addition, retailers have lengthy supply contracts for many of their goods and legal liability for the completion of those contracts. The supply chain is such that sources of goods cannot be switched so quickly or easily.

This problem is exacerbated for “private-label” products, or retailer-specific bulk products, for which there would be no other market for the goods and/or their packaging in the event that the trade dispute settles, and the retailer wishes to return to its original U.S. supplier. Vendors’ solution will be to seek enforceable long-term commitments, diminishing retailers’ flexibility on their product mix even after dispute with the U.S. is resolved. Lastly, it would be fanciful to imagine that in the face of increased demand from Canadian retailers and with diminished tariff free supply available, that domestic and foreign vendors would not increase their prices.

An additional and important concern is whether substitutable products are available in sufficient quantities on a tarifffree basis. There is little point in including items that may be substitutable if the alternative sources are subject to tariffs approaching, at or above the 10% tariff to be levied on imports from the U.S., as retailers and ultimately, consumers, would still bear a tariff impact on these types of goods, all of which were previously tariff-free under NAFTA when imported from the U.S.

In conclusion, RCC highlighted several category-specific concerns that needed to be taken into consideration before the Canadian Government’s retaliatory list was finalized. These are in addition to our overall concern that retailers and consumers not bear a disproportionate share of the burden of Canadian actions contra the U.S. tariffs on steel and aluminum. We also covered some of the challenges to presumptions of substitutability, among them vendor supply capacity, turnaround time, uncertainty, competing MFN tariff problems and operational issues, as well as the particular issues faced by retailers who offer private label or bulk products. RCC expects to see a well-reasoned basis and estimated cost impact for each category included on the final list, including assumptions about alternative sources of supply.

RCC will continue to advance the needs and concerns of our retail community during these challenging times. For updates, visit our web site at dev-rcc.pantheonsite.io.