As the U.S. and Mexico get ready to finalize a new trade deal that may lead to the scrapping of the North American Free Trade Agreement (NAFTA), Canada is under pressure to follow suit or be left behind.
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On Monday, U.S. President Donald Trump announced a new trade pact with Mexico and said it would be sent to Congress on Friday, suggesting Canada has a few days to negotiate its way into the agreement.
In the new tentative deal, the U.S. said Mexico agreed to raise its duty-free level from US$50 to US$100. That means Mexican consumers ordering U.S. goods do not have to pay a duty or tax on products that are $100 or less.
If this is part of the new trade deal, does that mean Canada will also raise its duty-free level, which currently is at C$20? It still may be too early to to tell, but here is what is may look like.
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Canada’s current duty threshold
Canada has set its de minimis threshold – the maximum value of an item that Canadians can order from a foreign country without paying duties or taxes – at $20, which has not increased since 1985 and is one of the lowest in the world.
By comparison, the U.S. has a US$800 threshold that is applied to e-commerce.
Of course Canadians can save some money by making a trip across the border — but that takes time. You have to stay at least 24 hours to qualify for an exemption of $200. That exemption climbs to $800 before duty and tax is applied if you stay 48 hours or more.
Will the new trade agreement change Canada’s duty-free exemption?
At the start of the NAFTA negotiations last year, the U.S. made it clear that it wanted Canada and Mexico to raise their minimum shipping thresholds.
The U.S. requested that Ottawa raise the value of goods that Canadians can buy online —without paying import duties and taxes — to US$800 (C$1,011 ), up from its current level.
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This would of could be great news for consumers, Maryscott Greenwood of the Canadian-American Business Council, said. It would save consumers money and time.
“Canadian consumers would benefit quite a lot from an increase in the level,” she said. “Lets say you live in a remote area in Canada, and you can’t get what you need so you shop online … it is a convenience and a reality of our modern economy.”
Greenwood added that Canada’s $20 limit is “generations old” and does not reflect the e-commerce economy.
A higher threshold for e-commerce imports would also benefit Canadian businesses, she said. It would lower costs for small companies that ship goods from the U.S.
So what could Canada raise it to?
Although the Trump administration asked Ottawa to raise the duty-free exemption to $800, Greenwood said that number may be unlikely.
Because Mexico seems to be raising its threshold to $100, that may be a more realistic level.
“The U.S. will push to get it to $200. But $100 would still be a step forward for Canadians,” she said.
It benefits consumers, but what about Canadian retailers?
Canadian retailers, many of them represented by the Retail Council of Canada, have been pushing back strongly against the idea.
“Changing the de minimis levels would be disaster,” Diane Brisebois, CEO of the Retail Council of Canada said. “It would immediately put Canadian businesses as a disadvantage. They would have to pay sales tax and duty, while the U.S. online seller would not have to. It does not make any sense whatsoever.”
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A 2017 study by the Retail Council of Canada found that an increase in Canada’s de minimis level to either $200 or $800 will result in a loss of sales in the retail sector, “which will affect the Canadian economy in terms of decline in GDP, labour income and employment.”
The study found that if Canada raised the duty-free threshold to $200, it would shed more than 300,000 jobs by 2020.
Even changing the duty-free level to $100 could have a huge impact on Canadian retailers, Brisebois said.
She added that she’s talked to retailers in Mexico who are very “disappointed” in this decision; she now suspects Mexico will realize it’s made a mistake the same way Australia did (the country eliminated its $1,000 threshold at the beginning of July).
She said she hopes “common sense” will prevail when Foreign Affairs Minister Chrystia Freeland arrives in Washington on Tuesday to discuss and potentially sign a new trade agreement by the end of the week.
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Although retailers are pushing back on raising the duty-free level, a 2016 study released by the C.D. Howe Institute (and commissioned by eBay), argued that raising the duty-free threshold would benefit consumers, businesses and the government.
The report modelled the impact on public revenues of raising the limit from $20 to $80, $100 and $200 and found that all three scenarios would have a negligible effect and might even result in a small boost for government coffers.
That’s because assessing small parcels that might be subject to duties is very expensive. By holding the threshold at $20 instead of $80, for example, “the government collects $39 million in additional revenues, but at a cost of $166 million,” the authors noted.
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— With files from Global News’ Erica Alini and the Canadian Press
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