Canadian retailers see potential NAFTA change as threat

A Canadian looking for a high-end men's shoe from can buy it from a major online retailer in the U.S. or get it for 25 percent less at the bustling Eaton Centre mall in downtown Toronto.

But that price advantage could end, potentially devastating Canadian retailers, if the U.S. gets one of the major changes it seeks while it renegotiates the North American Free Trade Agreement with its two neighbors.

To protect its domestic companies, Canada currently imposes duties on any goods worth more than $16 in U.S. currency. Officials want to raise that duty-free limit to $800, vastly expanding the number of untaxed consumer goods flowing north.

It's a relatively little-noticed aspect of negotiations to recast the trade treaty, which enter a third round this week in Ottawa, but it's hugely important to store owners who fear it will drive more customers to larger U.S.-based online competitors.

"Canadian retail will become a showroom," said Larry Rosen, chief executive of men's clothing chain Harry Rosen. "People will go in and try on and find the things they like and then go home and order online without sales taxes or the duties."

Karl Littler, a spokesman for the Retail Council of Canada, said that raising the duty-free limit would be "an incentive to shop virtually anywhere but from Canada."

Rosen said it would be like competing with a giant duty-free store. He doesn't think anyone would be crazy enough to pay more for a Zegna suit in his stores in Canada if they could get them cheaper from U.S. companies that dominate the online marketplace.

Many Canadian consumers, however, are eager for lower prices and 15,000 have signed a petition in support of the higher threshold.

"I would do a lot more online shopping if the duties and taxes were removed," said Ken Chuba, a heavy equipment operator from Manitoba. "There are so many people I know that are in the same boat as me."

It's not just high end shoes that are far more expensive if you order online from the U.S. A Los Angeles Dodger baseball cap is 35 percent more if shipped from the U.S. compared to an in-store purchase at the Eaton Centre and a Toronto Blue Jays pullover hooded sweater is 20 percent more.

The duties range from to as much as 6 percent for books and up to 21 percent for apparel and footwear.

Peter Simons, the fifth generation chief executive of Simons, a 175-year-old family-run clothing retail chain based in Quebec, said the fact that waiving taxes and duties for U.S. online giants is even being considered is "a very sad commentary on how little understanding there is of how deep and profound a technological revolution we're going through."

Retailers of all kinds in North America are struggling as people shop less in stores and more online.

Simons argued that U.S. online giants like Amazon don't need the advantage of tax-free sales in Canada.

"Why are you going to give that advantage to the new economy? Because they're fledging little technology startups? Come on. These are behemoths," he said.

Amazon and e-commerce giant eBay have lobbied for raising the tax and duty free threshold in Canada, which is one of most stringent among industrialized nations. Both eBay and Amazon declined comment, but eBay previously released a statement saying the change would be a win for consumers.

Scotiabank economist Adrienne Warren said she doesn't expect sales taxes to be included in the final text of any new NAFTA agreement because it would put Canadian retailers at a considerable disadvantage and Canadian negotiators are unlikely to accept that. "I can't see that really occurring. You are looking at a 5 to 15 percent advantage given to U.S. retailers over Canadian retailers," she said, referring to the sales taxes that differ from province to province.

Scotty Greenwood, a former American diplomat who heads the Canadian-American Business Council, said Canada is being hypocritical because the country often touts the benefits of free trade and expresses outrage when the U.S. takes a protectionist measure. She agreed that items shipped into Canada should be subject to sales tax, but said duties are unfair.

"If I'm in the United States and I want to buy a Harry Rosen suit I can buy it and I'm not penalized by my government, but if I'm living in Canada and I want to buy something from the United States that I can't get in Canada I'm penalized," she said.