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Introduction
To what extent have governmental policy and economic factors,
such as trade treaties, sales taxes, recession, inflation, and
exchange rates, influenced cross-border tourism and shopping
patterns of Canadians in the United States over the 10-year
period 1985-1994? This paper analyzes macro-level economic and
political variables, and explores the implications for cross-border shopping and tourism.
Cross-Border Tourism Defined and Measured
Essentially, two travel populations are represented within the
definition of "tourist." They are the traditional tourist who
visits the United States to recreate, to "winter over" in the
south, or to engage in heritage visitations. Then there is the
more recent phenomenon of Canadians visiting the United States
primarily to shop. We can refer to these shoppers alternatively
as day trippers or as same-day visitors.
To this end, the tourism industry is defined here to address
these two tourist streams through the use of five selected U.S.
Standard Industrial Classification (SIC) codes and associated
expenditures. They are defined as follows:
1. The traditional cultural/recreational tourist -- SIC 5947:
Gift, Novelty, and Souvenir Shops; SIC 70: Hotels, Rooming
Houses, Camps, and Other Lodging; and SIC 79: Amusement and
Recreation Services.
2. The shopper -- SIC 53: General Merchandise Stores, including
department stores, variety stores, outlets, and malls.
An expenditure made by both groups -- at least one time -- before
returning to Canada during a visit to the United States is
SIC 554: Gasoline Service Stations (Kemp, 1992). Collectively,
these five SIC codes are used to measure sales taxes (of various
types), employment, and payroll. The traditional SIC code 58,
Eating and Drinking Places, is excluded because nonresident and
resident activity are too confounded to segment.
The unit of analysis for this study is the U.S. county. Two
types of counties are identified: pass-through and destination.
A pass-through county is contiguous to the Canadian port of
entry, whereas a destination county is further removed from the
border and may have the attraction of either a recreational or
shopping experience. Both traditional tourist and shopper are
channeled through border ports of entry.
In some cases, there is no pass-through county because the
destination is within the county contiguous to the border. In
this study eleven counties are defined as destination counties,
and eight as pass-throughs. Eight border states are analyzed,
consisting of Maine, Vermont, New York, Michigan, Minnesota,
Montana, North Dakota, and Washington, and nineteen counties
contained therein. Canadians returning to Canada are counted at
fourteen ports of entry located in six border provinces: New
Brunswick, Quebec, Ontario, Manitoba, Alberta, and British
Columbia.
National and Economic Policy: A Ten-year Retrospective
In the ten-year period represented by this study, many policy
factors contributed to changing the cross-border environment in
which tourism occurs. However, which political and economic
factors appear to be most influential? To answer this question,
the following developments have been examined: the Free Trade
Agreement (FTA) between Canada and the United States, which
became operative January 1, 1989; the North American Free Trade
Agreement (NAFTA) between Canada, Mexico, and the United States,
which took effect January 1, 1993; and issues involving
recession, inflation, and currency exchange rates.
An additional factor arose on January 1, 1991, when a Canadian
manufacturers' sales tax was replaced with a national value-added
tax of 7%, referred to as the Goods and Services Tax or more
popularly as the "GST." It was designed to move Canada's broad-based National Sales Tax from the point of origin of a good to
the point of destination of a good, that is from producer to
consumer, and to tax services as well. It was also intended to
make Canadian manufactured goods more competitive through zero-taxing exports. Finally, it sought to tax imports at the same
rate as domestic products. The GST is collected at the border
upon re-entry to Canada. As the term GST implies, the tax is
also placed on services.
Similar to the GST, as a value-added tax, is the Provincial Sales
Tax or "PST" -- which each province, except Alberta, had in place
before passage of the national GST. Unlike the collection
procedure of the GST, an honor system of payment was initially
employed, with the consumer volunteering payment of the tax, for
example, upon arrival at home sometime after crossing the
international border. But with the flood of shoppers to the
south in the early 90s and with apparent traveler under-reporting, provincial and federal revenue authorities began
conferring in 1992 with the intent of empowering federal Canadian
custom officials to collect (along with the GST) the PST, which
varies by province. Although nine of Canada's ten provinces have
a provincial sales tax, only three have that tax collected by the
federal government: Manitoba, New Brunswick, and Quebec.
Negotiations are currently under way with the province of Nova
Scotia for federal collection of the PST. If agreement is
reached, among other implications, cruise ships which operate
between the Maine ports of Portland and Bar Harbor on the one
side, and Yarmouth, Nova Scotia on the other, are likely to see
some slight decrease in Nova Scotian tourist expenditures in
Maine. Undoubtedly, collection of these duties, along with
anticipation of searches and seizures at the border, has a
dampening affect on Canadian expenditures in the United States --
particularly on a regional basis.
Canadian Ports of Entry, and U.S. Counties of Destination
Canadian Visitors to the United States. Visitor counts to the
United States increased from 1985 to a peak in 1991, and have
declined through 1994. Canadian visitors in 1994 numbered 54.3
million, having declined 25 million or by about a third from the
1991 level of 79.3 million. They were crossing the border at
levels earlier attained in the 1988/1989 time period. Both the
peak of Canadian visitors to the United States (79.3 million) and
the highest value of the Canadian dollar (U.S. $0.8726) occurred
in 1991. And in 1991, as the FTA was first implemented, both
Canada and the United States came out of recession. Since that
year, both nations have avoided recession, and the FTA continues
its tariff reduction schedule. Despite the border enforcement of
GST and PST, Canadian visitors to the United States at 54.3
million in 1994 number 45.1% more than they did in the beginning
of the study period at 37.4 million. Although travel to the
United States has peaked (at least for the time being), the count
of north-to-south visitors remains historically high.
Figure 1, which compares Canadian visitor counts to the United
States with the exchange rate of the Canadian dollar, indicate a
direct relationship between the exchange rate of the Canadian
dollar and visitors to the United States. That is, the higher
the exchange rate of the Canadian dollar, the greater the number
of Canadian visitors. Earlier economic literature supports this
finding (for example, DiMatteo, 1993). During the period 1985-1994 both values peaked in 1991, with 79.351 million cross-border
visitations and an exchange rate (U.S. dollar per Canadian
dollar) of $0.8726.
Shoppers: Same-Day Visitors. Looking at national data produced by Statistics Canada (Figure 2) in the ten years represented in this study (which uses the classifications of "Same-day," "Overnighters," and "Total"), Canadian visitors to the United States peaked in 1991. Although increasing, "traditional" recreational/cultural tourists have demonstrated a more moderate growth rate than have same-day shoppers. I suggest that trips of more than one day are planned in advance, and therefore are less sensitive to short-term change in economic factors such as exchange-rate fluctuations. In terms of visitations, same-day trips, as a surrogate measure of shopping, are still more important today than they were in 1985. While some drop has occurred from the 1991 peak because of exchange rates, GST, and federal collection of PST, the economic impact of shopping continues to be a major factor in the activity patterns of Canadians in the United States. This is true even with the development of other factors, including the price of gasoline approaching a condition of cross-border parity and of tobacco prices dropping with the new Liberal government of Canada.
Selected Regional Changes in Canadian Visitor Patterns. The central/eastern province of Ontario and the far western province of British Columbia are the least impacted by the exogenous economic and political factors discussed above. Other regions have done less well, as indicated by the ports of entry sampled. In the east, for example, the port of entry at Rock Island, Quebec, experienced a cumulative ten-year slide to where cross-border counts were down by 31% from 1985. St. Stephen, New Brunswick (the primary port of entry between the Maritimes and New England), continues to experience a downward trend from 2.1 million visitors in 1991 to 1.5 million in 1994. In each of these two provinces, the PST is collected at the border. Another factor is the relatively high PST rates of the Maritime Provinces. If further PST-collection agreements are entered into with the federal government, for example, by Nova Scotia, tourism activity to the south will at least be marginally impacted.
Economic Impact of Canadian Visitors in the Unites States
Canadian travel southward has employment implications on the U.S. side of the border. This study has investigated those effects on employment, associated with the previously mentioned five SIC codes. In the analysis, I use 1,535 observations, or data points, of employment in nineteen U.S. counties over nine years. These data are profiled in Figures 3 and 4.
Macro-factors and Tourism: Some Observations
Ten years of data demonstrate that the most important factor affecting cross-border trips to the United States is the value of the Canadian dollar, which as of late 1995 appears to have stabilized. Other factors also affect cross-border trips and associated expenditures. For example, the FTA may have increased Canadian awareness of U.S. goods and services. Tax policy in the form of the GST in 1991 modified an invisible manufacturers' tax into a visible sales tax, thus encouraging Canadians to go south to shop. Federal collection of the PST has also affected the amount of cross-border visits -- and may more so, if additional federal/provincial agreements are written. Particularly impacted by federal collection of PSTs is the northern New England region, which shares a border with two of the three provinces that have PSTs federally collected, and with the possibility of a third province -- Nova Scotia -- being added. In essence, tax and monetary policies are countering the intentions of free trade agreements. Regional income, too, has a role. Those populations in regions that have the greatest concentration of income are the most likely to travel to the United States, particularly from Ontario and coastal British Columbia.
Same-day trips south for the primary purpose of shopping are not likely to increase, and in fact may continue to show a slight decrease. The data show that both same-day shopping and overnight traditional tourism shopping activity will continue to decline, but that the rate of decline is likely to be greater for shopping than for the more traditional recreational and cultural activities. Those places likely to continue to be most impacted are represented by shopping malls, and towns or cities with a large concentration of factory outlets. Those places which provide services other than shopping are likely to continue to experience some continued growth in gasoline sales, small retail (souvenir/gift) sales, lodging sales, and recreational and cultural sales.
"Ten years of data demonstrate that the most important factor affecting cross-border trips to the United States is the value of the Canadian dollar...."
If Canadian and provincial government debt were not reduced, the value of the Canadian dollar would decrease. This would probably result in decreased visitations to the United States for recreation and for shopping -- and with obvious implications for borderland tourism-related businesses in the United States. Perhaps too, if the question of Quebec sovereignty were to be resolved, then too the Canadian dollar would gain ground -- and with similar implications for cross-border visitations to the United States. While the government of Canada has no doubt realized a reduction in purchases by Canadians in the United States through rigorous enforcement of the GST, PSTs, and liquor and tobacco duties through border collections, these taxes do not have as much of an impact on a decrease in visitations to the United States except on a regional basis, as does the exchange rate. This is particularly true with both the New England states (especially the northern ones) and the Maritime provinces, which continue to trail in the recovery from recession of their respective nations (Carr, 1994).
Replacing the Manufacturers' Sales Tax with the GST was based on a two-part rationale: to increase Canada's broad-based tax collections, thus negating a need to increase income taxes, and to draw down the federal debt without having to resort to international borrowing. In 1991, when this tax replacement occurred, the Canadian dollar was trading at a high of U.S. $0.8726. This provided the impetus to go south to avoid the GST. Subsequently, the government of Canada moved to enhanced revenue collection methods at the border. It had no choice. American dollars being spent by Canadian shoppers were, in large part, dollars borrowed with interest in international financial markets. It was a downward spiral. Thus, over time, a condition approximating parity between two border states is a sine qua non of a sustainable border economy.
"In essence, tax and monetary policies are countering the intentions of free trade agreements."
Moving more towards a condition of exchange rate parity would constitute a much more complex political and economic process than would be either a reduction in the GST or PST rates, or an altogether elimination of border collections. From the perspective of policy, a need exists for a cross-border dynamic which is roughly in balance. Continued cross-border trade is a condition of an ascending economy. For it to continue, economies on both sides of the border need to remain competitive. And such competition needs to be conducted within a context of cross-border political collaboration on matters of trade and tourism.
References
Boisvert, Michelle, and Wayne Thirsk. "Border Taxes, Cross-Border Shopping, and the Differential Incidence of the GST." Canadian Tax Journal 42 (1994): 1276-1293.
Carr, Thomas. "The Northern Forest Economy," in The Future of the Northern Forest, ed. Christopher McGrory Klyza and Stephen C. Trombulak. Hanover, N.H.: University Press of New England, 1994.
DiMatteo, Livio. "Determinants of Cross-Border Trips and Spending by Canadians in the United States." Canadian Business Economics (Spring 1993): 51-61.
Kemp, Katherine. "Cross-Border Shopping Trends and Measurement Issues." Canadian Economic Observer (December 1992): 5.1-5.13.
New England-St. Lawrence Valley Geographical Society. Proceedings of the Seventieth Annual Meeting, Burlington, Vt. (November 1995).
Revenue Canada. Customs, Excise, and Taxation. Federal/Provincial Relations and Tax Policy. Travellers Directorate. Memorandum D 2-3-6. Provincial Tax Collection Program, Draft (June 27, 1995).
Statistics Canada. International Travel. Tables 3A, 3B (Special run: June 21, 1995).
U.S. Bureau of the Census. County Business Patterns: Maine, Michigan, Minnesota, New York, North Dakota, Vermont, Washington. Washington: USGPO, 1985-92.
pp. 7-8: Ten years of data demonstrate that the most important factor affecting cross-border trips to the United States is the value of the Canadian dollar. . . .
p. 8 In essence, tax and monetary policies are countering the intentions of free trade agreements.
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