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Why a Strong Loonie Doesn’t Mean Better Prices





This is a guest column by Robb Engen, one of the bloggers behind Boomer & Echo

It upsets me to hear my fellow Canadians complaining about paying higher prices than our neighbours to the south just because our dollar is now hovering above par.  Most of us grew up with the Canadian dollar valued between 60 and 80 cents U.S, but now that the loonie is soaring we seem to believe that we are entitled to lower retail prices.

The problem with Canadians thinking this way is that it’s taking a very complicated economic formula and making the answer too simplistic.  Getting mad at your local retailer doesn’t help.  I’m going to show you the reasons why you shouldn’t expect Canadian retail prices to decline just because of the high Canadian dollar, as well as some of the ways that you can take advantage of our strong currency.

What Caused The Consumer Rage?

On September 28, 2007, the Canadian dollar closed above the U.S. dollar for the first time in 30 years, at US$1.0052. And on November 7, 2007, it hit US$1.1024 during trading, a modern-day high.

Suddenly consumers began to notice the disparity between Canadian and American retail prices and demanded to know why they were still paying sometimes 30 or 40 percent higher prices for the same goods.

Books, cards and magazines were the biggest offenders since they publish both prices right on their product.  And by comparing the retailers’ Canadian and American websites, consumers were able to quickly determine that they were getting screwed by shopping in Canada.

So Canadians fled to the border in droves looking to save money on everything from cars, motorcycles and snowmobiles, to televisions, furniture and appliances.  We petitioned the government to do something about the outrageous prices offered by our local retailers.  Some retailers chose to lower prices amidst the growing pressure, but most ignored the issue and hoped it would go away.

But then a funny thing happened.  By November 30, 2007, the Canadian dollar was once again back at par with the U.S. dollar, and on December 4, the dollar had retreated back to US$0.98.

Exchange Rates Aren’t That Influential on Prices

In the short term, prices in Canada may not respond to exchange rate movements for a number of reasons. For one thing, prices reflect both the cost of the manufactured goods and the sellers’ margin. This margin is not tradable to the same degree as manufacturing products. Therefore, Canadian retail prices may not respond immediately to fluctuations in the exchange rate.

Canadian prices, especially for tradable goods, may reflect U.S. prices in the long term, but they tend to react very slowly to exchange rate movements.  Currency is very volatile, so to make long term pricing decisions based on short term movements would be detrimental to business.  After the loonies’ mighty rise to US$1.1024 in late 2007, its value plummeted below US$0.80 just one year later.

The relationship between a stronger dollar and consumer prices becomes even more complex, considering that Canadian producers also rely on imports to produce goods sold to Canadians. This indirect impact of a stronger loonie involves more moving parts and is likely to take longer to reach consumers.

Why Goods Are More Expensive In Canada

Even if cheaper imports tied to the U.S. dollar could have a direct impact on consumer prices in Canada, there are many other factors influencing price differences between Canadian and American store shelves.

  • Higher labour costs in Canada
  • Higher Canadian taxes
  • Import tariffs (Canadian book importation regulations under the Canadian Copyright Act allow American publishers to tack a 10 per cent mark-up on top of the U.S. price of a book sold in Canada)
  • Higher freight costs (The population of Canada is about the same as California but its geographical area is roughly that of the continental U.S.)
  • Bilingual labeling requirements
  • The time and cost to update price listings and catalogues
  • Import contracts are often signed weeks or months ahead of the product’s arrival on store shelves.

Another factor is the tendency for retailers and wholesalers to simply absorb profits or losses due to changes in the exchange rate.  For this reason, the fact that cheaper consumer goods are arriving from the United States or China does not mean their price will automatically fall for Canadian shoppers.

So How Can You Take Advantage of the Strong Loonie?

While you shouldn’t expect Canadian retail prices to fall dramatically in comparison to our American neighbours, there are still many ways that you can take advantage of the purchasing power of the Canadian dollar.

  • Vote with your feet – Retailers will continue to charge whatever the market will bear for their products.  One successful tactic that got some retailers to lower their prices back in 2007 was the number of Canadians willing to drive to the U.S. to go shopping.  If faced with enough pressure from declining sales, most retailers will discount in order to gain your business back.
  • Import a big ticket item Buying a car, motorcycle, boat, or snowmobile in the U.S. and importing it to Canada can save you thousands of dollars.  Be sure to do your homework first, as not all manufacturers will honour their warranties across the border.
  • Shop online – Maybe you can’t make it down to the U.S. in person.  One of the best ways to take advantage our high dollar is to simply shop online at American retail stores.  Many bargains can be found on sites like eBay, which lists products in USD.
  • Buy some U.S. assets – American stocks have rallied but there are still bargains to be had.  Take advantage of the low foreign exchange rates by purchasing some quality U.S. stocks for your RRSP.  And with the U.S. housing market still depressed, why not take advantage and pick up a cheap rental or vacation home?
  • Take a vacation – Not only is the loonie trading higher compared to the U.S. dollar, but it has also gained value on other currencies around the world.  Now is a perfect time to take the family on a vacation in the U.S. or abroad.

So instead of sitting around and complaining about how high Canadian prices are compared to our neighbors to the south and waiting for our local retailers to act, take matters into your own hands and use our strengthening currency to your own advantage.

About the Author: Robb Engen writes about Canadian personal finance at Boomer & Echo. Together with his mom, (she’s the Boomer, he’s the Echo) they offer their own unique perspectives on saving, investing and personal finance.





27 Comments, Comment or Ping

  1. We saved over $9300 importing our Subaru Outback. I don’t think we’ll ever buy a vehicle in Canada again if this price gouging trend continues.
    I still can’t see the justification of the price differences. What is it? 80% of Canadians live within 200 KM of the border? Or closer? And yet “transportation costs” are cited. To the Yukon, yes, this is valid. From Detroit to Windsor – no way no how.

    Fact is we get gouged on everything from bread to gasoline to books/magazines to vehicles. Even when you have to pay duty to bring an item across the border there are few products I can think of that make sense to buy locally – which stinks as I think most people would prefer to keep Canadian money in house but the “system” forces many to, as you put it, vote with their feet.

  2. 2. cannon_fodder

    I often travel to the US for business and stay a week at a time. There are many things that I find are cheaper in Canada than in the US. Others are almost identical depending on which state you are in, and thus what the sales tax is.

    I’m a little surprised the author didn’t go into more detail re: house prices. Many Canadians that have emerged unscathed from the recent downturn have been buying US property for vacation/retirement. Combining the drop in house values of 40% with a 20-25% appreciation in the dollar and you have one heck of an opportunity. Saving $10,000 on a car is one thing – saving $50k, $100k, $250k on a house is perhaps a once in a lifetime event.

  3. I agree with this wholeheartedly! It would be really nice to do all our purchasing at home to support local retailers and the local economy but the price differences are just too large.

    I recently had my first child and I did almost all of my shopping for baby stuff and baby furniture in the USA be pre-ordering online and having it shipped to the border. Almost everything was 50% cheaper in the USA and the dollar was fairly close to par at the time. I didn’t even bother to look for sales because the regular prices were so much cheaper anyway it just wasn’t worth the extra effort for me.

    Even with the best sales here in Canada, I wouldn’t have done nearly so well and it would have been a huge hassle to wait for/find all of those sales.

  4. 4. Echo

    @SPF
    For the people who live close to the border I can understand why they are outraged over the price differences, especially on cars in particular where the difference in sticker price is close to $10k. Definitely worth the effort in your case.

  5. 5. Echo

    @cannon_fodder
    Good point about house prices, there are definitely some bargains to be found,especially in vacation/retirement hot beds like AZ and FL.

    The main point of the article was focused around Canadians being upset over the price differences between Canada and the US. I don’t think many Canadians are outraged that their house is worth more than their neighbors to the south.

  6. 6. Echo

    @SavingMentor
    What about the different safety regulations when it comes to buying strollers, car seats, crib, etc? Were you ordering essentially the same product (like from Toys R Us)?

    I’ll have to keep that in mind for our next child…although now we have some hand-me-downs to use :)

  7. @Echo – If you read SM’s articles i’m thinking he did the research on whether or not the items were safe or not. SM brings the word “thorough” to a whole different level.

    I also don’t think it is just cars where the savings can be had. Electronics / computers as well. Or, if you’re like SM, a slew of items you make 1 trip to go pick up. Personally i’m not THAT close to the border (Peterborough – so we have to go to Buffalo or the Thousand Islands to cross) and both are over 3 hours away but if we know we’re going to make a number of purchases in the future we’ll likely just wait on them and do one massive shopping trip (+ some of the Diners Drive Ins and Dives places are near Buffalo, so good grub too! ;) )

  8. 8. Nathan W

    I think the largest factor would have to be simple supply and demand. As you said we have roughly the population of California. We just do not justify having the same prices, especially on cars, due to our low demand comparatively. Have you seen the size of the car dealerships in major US markets, let alone the volumes they push out.

  9. 9. Brendan

    Disagree with some of what you say.

    When our dollar was weak all that you mention (high transport costs, duty, etc) were already built into the price, and we were told that the price difference was due to the dollar.

    Therefore as our dollar strengthens prices should drop accordingly. Many prices have adjusted.

    I do agree with what you say about voting with your feet.

    I dont mind supporting local business, but Canadian, blah, blah, blah, but at the end of the day a dollar in my pocket is better than in someone else’s.

  10. 10. canabiz

    Guys, with the higher gas prices (cheapest is 116.1 a litre in Ottawa today), would it make more sense to simply shop online and have items delivered to your residence. I know Amazon will ship certain items to Canada and so do most major U.S. retailers.

    I think the shipping costs will be a fraction of the expenses incurred going down there…unless you are planning a vacation at the same time and/or don’t have to pay for gas out of your own pocket.

    If you guys are driving down south now (and in the summer) then are gas prices a concern or do you think the potential savings will outweigh said expense? Obviously it’s different if you live right across the border.

  11. 11. saveddijon

    One caveat to online shopping: be careful about duties and customs brokerage fees.

    If a product is manufactured in the US then it’s duty free, and all you pay is the sales taxes (PST/GST/HST) plus brokerage fees. Canada Post charges $5 for brokerage; UPS Ground will make up a number and stick you with it; the fee can be up to 50% of the cost of the purchase.

    If a product is not manufactured in the US then you need to look at the Canada Customs Tariff (a soporific 1000+ page document, but available online) to determine what duty is charged. Some products (e.g. headphones) are duty-free no matter where they’re made but other products (e.g. silk pajamas) will carry up to 18.5% duty. Add the taxes in, and you’re paying 35% in duty and taxes.

    If you shop in the US in person then you can save a bit on taxes and duty. Travelers have a customs exemption ($50 if you’re gone just for the day, but $750 if you’re away a week). There is no brokerage fee charged at the border and often you will be let go without paying anything (or alternatively, pay only the HST) because customs officials can’t be bothered to figure out the duty for each item you’ve bought.

  12. 12. Capitalism

    Ya not a very strong argument.
    Labour costs are higher – Not at Walmart very much and the big box stores. I would rather pay a bit more and have a higher wage for avg people than have them work for low rates, part time work, no benefits, no pensions. A lot of the big box american store workers are not exactly the highest paid or benifits and pension plans. (But the owners are some of the richest in the world) (But this society needs poor people to make the rich)
    Higher Canadian Taxes- For personal, yes we get it hard. The Corporations are very comparable to the States in tax rates and any other country, they even got lower taxes recently. Also, it is the cost of doing business in this country, if they want to make money here, they pay the taxes here. If they do not, then they do not set up shop here.
    Import Tarrifs- What was all this talk about Free Trade Agreement? Seems to me it just makes the States better and the gov richer. Soft wood lumber fiasco, Free Trade is a joke. And a lot of books were about 40% more expensive and some still are, 10% is ok, but more is not justifiable.
    Higher freight costs- This is understandable to cost more, but not the amount that it is marked up. As someone else pointed out, I had a baby too and bought up here, but you look at the states and it is so much cheaper. Why, because they can. A baby swing was about 50% cheaper at walmart in the states (same company) and at that time our dollar was in the 90′s.
    Biligual, understandable for a 0.0x percent increase in price, maybe even less.
    Time and cost to upgrade listings- cost of doing business.
    Import Contracts- big box stores do it themselves, this maybe for smaller operations or others.
    People should not be paying 8,9,10 thousand dollars more (after all the tariffs and stuff) for vehicles, We make them here. I agree with supply and demand, but the companies understand they will not make as much money here as they will in the states as the population is roughly 10% of theirs. It does not mean they should jack the rates up to make a killing of a profit. But we allow them and we pay for it, so why won’t they. Also, take wood for example. The states gets a lot of good wood and even mills a lot now as they have taken down the forestry industry a lot. Raw materials, we have lots of and it is mined here and milled or refined in other countries sometimes. Gov need to step up and say if they want the goods, they refine the products here. Then, we would have all the refined products right here with low shipping costs, more jobs, more taxes, more money for gov.
    I agree that we could pay a little more for items because of these things, but its no wonder people go to the states for shopping. Even if we all shop here like they ask, nothing will change price wise or tax wise.
    Bottom line, the greedy companies can and will charge what they want, so will gov. This is so called democracy and capitalism at its best.

  13. 13. Echo

    @Brendan
    “as our dollar strengthens prices should drop accordingly”

    Unfortunately in most cases it’s not as simple that. It’s tough to estimate the true impact of the exchange rate on inflation. How do you determine what prices would have been without the appreciation of the Canadian dollar?

    The relationship between the exchange rate and Canadian prices is very complex. Many players’ decisions are reflected in the final price of goods and services: importers, wholesalers and retailers all make their own pricing decisions based on current and forecasted market conditions. The exchange rate is just one of many factors in these decisions.

  14. @Echo @SustainablePF

    Thanks for the kind words SPF! I definitely researched the safety regulations in regards to baby stuff between the USA and Canada. With most modern things there isn’t that many problems and, as you said Echo, I was buying identical items that were also on sale here in Canada. For instance, the crib we bought was selling for $360 here in Canada and $187 in the USA.

    The only thing we made sure not to buy was the car seat / travel system. Those do need to be certified with a Canadian sticker even if they are 100% identical. You can potentially still buy one in the USA if the manufacturer doesn’t have different packaging across regions and still sticks the Canadian sticker on it. I didn’t want to take any chances and just spent more at home for that important piece. Other items we saved on were changing table, bedding, mobile, infant tub, diaper genie + refills, clothes, toys, breast pump, etc.

    @savedijon

    I agree. I don’t recommend anyone buying from the USA and shipping to Canada unless they know EXACTLY what they are doing. You can get around all the problems by shipping to the border. Even if you do find a good place to buy from (i.e. reasonable brokerage fees), it only really works well for smaller items where shipping costs might be reasonable. There are exceptions, like Tires from JCWhitney … but again you need to do your research first.

  15. How does one “ship to the border”? Is there a designated address at each border crossing for this purpose?

  16. I’ve been thinking of flying down to Minnesota or one of the northern U.S. states and buying a car there when I do decide to upgrade, and then driving it back. If I can save even a couple thousand, it’ll be worth my time.

  17. 17. Fred

    “Bilingual labeling requirements “?
    A lot of things in the States have spanish labelling and spanish instructions.
    I don’t buy that excuse and I’ve heard that one before. My gut tells me that with an equivalent dollar things should be a little bit more expensive here in Canada for a lot of things but not horrendously more. We all need to be price concious and where it makes sense, ie.some big ticket items like cars, to buy where it is cheaper.

  18. 18. Echo

    @Money Smarts Blog
    No, you need to find a place to ship the item to on the US side of the border (friend, relative, PO Box) and then go down and get it yourself, paying only the Canadian tax when you cross.

    Friends of ours have a PO Box in Sweet Grass, which is just on the AB/MT border. Other people I know have a cabin in MT and have items delivered there before they head down for a long weekend.

  19. What an awesome post. Thanks so much for outlining why we get “Gouged” in Canada for retail items. I grew up shopping in the states. My parents always drove us down there to get school clothes and supplies every summer. As an adult I seem to order a lot of what I need from the USA on line. I wish I could support more of the Canadian economy but things are just so much more expensive here.

  20. 20. Howard Hare

    We are LOVING it in Lakeland, Florida with a strong loonie, NO H.S.T, and 70 % OFF Sales, plus extra discounts becuse we got old.

    $20 for 18 holes including cart, and a Golfers Special $5 lunch.

  21. 21. Jeff

    This article seems to ignore the fact (and actually incorrectly states otherwise) that the cost of doing business is typically cheaper in Canada than the United States. Canadian corporate tax rates in particular are lower here than the US.

    http://bit.ly/hMywFY

  22. @Money Smart Blog

    Just do a search for my site name + “Cross Border Shopping” and you will see some companies that provide listings of places that will accept your packages. I just found a place at my local border that accepts packages by googling around and they are ultra cheap $3 per package no matter the size (including a set of 4 tires – can you believe it?).

    Also remember that many stores offer shipping to the store. For instance, Walmart.com has free shipping “site to store” and they will hold your package for several weeks until you pick it up. This worked out really well with the baby stuff because the local store didn’t care at least 50% of the stuff we wanted to buy but we could buy it on Walmart.com and have it shipped and held there for free until we could pick it up. That way you also don’t have to worry about them running out of stock or not having the colour you want, etc.

  23. 23. BadCaleb

    Why not complain AND shop across the border. I remember during 2007 folks complained about the price of books when the Cdn $ was around par. Walmart Canada sold their books at the US listed price and Indigo gave discounts as well. People complained and some retailers listened. Don’t know if this practice continued or not cause I get my books from the library.

  24. The best suggestion I have heard is to buy good, reasonably priced U.S. companies (shares that is). JNJ immediately comes to mind. The payback over time will be well worth it, as the company benefits from a cheaper U.S. dollar (resulting in higher earnings internationally), and you benefit if the U.S. dollar strengthens (and your dividends increase in Canadian dollars).

  25. 25. saveddijon

    A couple more points:

    1. Taxes are higher in Canada. Not quite. Unless you are traveling and using a customs exemption, the PST/GST/HST is the same whether you buy the item in the US or buy it here, because you must pay the tax when you import it. Income taxes may be higher in Canada for the workers but I doubt it. Add in FICA and US health plan costs to the US workers’ salary and you can easily exceed what’s paid here.

    2. One poster asked about NAFTA. NAFTA only helps if an item is manufactured in the US, or made from raw materials that are predominantly American. Otherwise, if an item is made offshore, then the US wholesaler/retailer has paid duty to US customs upon import, and the Canadian retailer will pay Canadian duty upon importation to Canada. Yes, the item is dutied twice. Worse: [GPH]ST is charged on all of that duty!

  26. I guess as an American I should stop whining about our prices. Transportation is a little strange to me, it’s not like you guys are an island, and it seems this applies to even highly populated areas. I know there is more snow, but along the border none more so then on the other side. That said there were a lot of other factors listed. Interesting read. I’m not afraid to admit that I did not even know what a “loonie” was before reading this.

  27. 27. specialfx3000

    Re: “How does one “ship to the border”? Is there a designated address at each border crossing for this purpose?”

    Many US entrepreneurs open ‘mail services’ in border towns. I am in Vancouver and there are a number of them in Blaine or Point Roberts. Quite easy to set up. Personally, I use Hagens of Blaine.

    $12-$15 annual fee and $2.50 per package. You get about 2 weeks to pick it up once they email you that the package has arrived or you can check your own Tracking Number.

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