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Canada's Economy Hit by New Tax

Retail sales drop and shoppers go to US, but some economists support goods-and-services levy

CANADA'S Goods and Services Tax (GST) has driven retail sales down, and has Canadians driving over the border to shop in the United States. The exodus of Canadian shoppers has further hurt Canadian store owners.

Retail sales in January dropped 5.3 percent, according to figures released in late March by Statistics Canada, the government's statistical branch.

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"The GST is the biggest reason for the drop, although there were other factors, including the recession," says John Winter, a retail analyst in Toronto.

Higher taxes - and high prices - in Canada meant shopping trips to the US turned into a stampede in January. One-day shopping trips over the border were up 15 percent in that month. And a big reason is the new tax.

"If you shop in Windsor you pay 7 percent GST and 8 percent Ontario sales tax; across the river in Detroit you pay 4 percent Michigan sales tax. It is easy to see why people are shopping in the United States," Mr. Winter says.

Lineups at busy border points have Canadian Customs officials experimenting with an honor system where the customer fills out a declaration, drops it off without an inspection, and receives a bill in the mail.

"On a long weekend like this past one the lineups can be an hour or more," says Paul Morrison, Canadian Customs superintendent at the Rainbow Bridge at Niagara Falls. He says the one-day shoppers have kept his staff "very busy since the big increase in traffic started last year."

The slump in retail sales dragged down the overall Canadian economy; it shrank by 0.9 percent in January. The service sector fell by 1.1 percent, the biggest drop since the recession of 1982.

Across Canada, the new tax is being blamed for the slump in retail sales and the droop in the gross domestic product. "The GST really did a number on the service sector. It really slammed retail trade," says Fred Morley, an economist with the Atlantic Provinces Economic Council in Halifax, Nova Scotia.

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But the chief economist with Canada's largest bank, the Royal Bank of Canada, says the GST and the cross-border shopping spree are unrelated phenomena.

"First, we feel the GST will be a positive for the economy overall and the price hikes in January are a one time thing," says Edward Neufeld, the bank's executive vice president for economic and corporate affairs. "The drop in retail sales is largely due to people buying in anticipation of the GST being applied."

HE says a number of factors, from a high Canadian dollar to low American gasoline prices, are drawing Canadians south. Gasoline prices in southern Quebec are the equivalent of US$2.40 a US gallon; a 15 minute drive over the border and gasoline is US$1.20 a gallon.

"Combine cheap gasoline prices with the high value of the Canadian dollar [86.4 US cents] and you have people shopping in border areas. The retail distribution system is more efficient in the United States, so some items are cheaper," says Mr. Neufeld.

The Goods and Services Tax has made some items cheaper: appliances and automobiles for example. "Auto sales were up like a rocket in January," says William Robson, an economist with the C. D. Howe Institute in Toronto. He predicts an early end to the recession. "While those January figures were gloomy, it's April now and I think we're out of the worst of the recession."

Clothing, shoes, and electronics have been hit hard by the GST and cross-border shopping. Until Jan. 1, when the GST came into force, there was no tax on shoes and clothing in Quebec, which has about a quarter of Canada's population. This was an effort to promote local manufacturers. Now there is a 15.5 percent tax.

Cameras, videocassette recorders, and televisions are all cheaper in the US and are on the shopping lists of Canadian day-trippers.

And retail analyst Winter says the Persian Gulf war hurt January retail sales. "I was doing research in a major mall when the war started. It cleared in 15 minutes and people stayed home and watched the war on television."

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