Will cross-border shopping take off?

The supercharged Canadian dollar is sparking fears that Canadians are poised to re-enact the shopping frenzy of the late 1980s when millions of them poured across the border into American malls. Given the proximity of the United States, Canadians have always been frequent cross-border travelers, but the rapid growth of the practice between 1985 and 1991 alarmed Canadian retailers and a repeat performance would cause concern.

The barometer of cross-border shopping is the number of Canadian residents returning from the U.S. in same day automobile trips. In 1982, with the Canadian dollar trading at about 81 cents U.S., Canadians made 22.1 million same day automobile trips. Even as the Canadian dollar lost value during the early 1980s, the number of trips nevertheless rose and when the dollar began to rise in the late 1980s, the number of trips took off like a rocket. Between 1985 and 1991, the value of the dollar rose from about 73 to 88 cents U.S. and the number of trips grew from 25.2 million to 59.7 million--a 137 percent increase!

The cross-border shopping mania affected all Canadians but the largest cross-border shoppers were Ontarians due to a unique geography making southern Ontario a peninsula jutting into U.S. retail space with multiple border crossing points. Whereas Ontario accounts for about 38 percent of Canada's population, it was accounting for about 43 percent of same day automobile trips. Northern Ontarians also took advantage of cross border opportunities with annual same day auto trips in 1991 reaching 91,000 at Pigeon River near Thunder Bay, 377,000 at Fort Frances and about 1.2 million at Sault Ste. Marie.

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Along with the rising dollar, other factors driving the cross-border surge were the onset of the GST in 1991, high gasoline prices, a higher cost Canadian retail sector, a lack of consumer choice relative to the U.S., and rising Canadian incomes. The recession of the early 1990s and the decline of the Canadian dollar led to a collapse in cross-border shopping whose swiftness paralleled its rise. Between 1991 and 2000, the value of the dollar went from 88 to 67 cents US and then dropped to 63 cents before beginning an ascent that has brought it to parity. Between 1991 and 1995, the number of same day auto trips dropped almost 40 percent to reach 36.4 million. The decline continued unabated and by 2000 same day auto trips had reached 27.2 million and then hit 22.5 million in 2005. Interestingly enough, in Northern Ontario, same day auto trips remained robust for several years after 1991. The Thunder Bay numbers in particular kept rising peaking in 1999 at about 147,000 same day auto trips before dropping to 84,000 in 2001. The numbers at the Sault began to drop after 1994 and reached bottom in 2003 at about 485,000 after which they began to rise.

While the Canadian dollar has appreciated by almost 50 percent since 2000, the national number of same day automobile trips remains well below the total in 2000. During the first six months of 2007, the national number of trips actually declined slightly relative to the first six months of 2006. Despite recent media attention over the increased number of cross-border shoppers over the last few weeks, there may have been a shift in Canadian shopping behaviour making it less sensitive to the exchange rate.

Ontario residents remain the biggest cross-border shoppers and since their same day auto trips have declined at a slower rate than the rest of Canada, Ontario now accounts for 56 percent of same day automobile trips. In Northern Ontario, the Pigeon River crossing has experienced a 59 percent increase in same day auto trips between 2001 and 2006 compared to six percent at Fort Frances, while the Sault saw a 10 percent decline over the same period. Thunder Bay residents seem particularly attached to crossing the border.

Will there be a similar cross-border shopping surge this time? Well, we are now in the post 9/11 world and crossing the border is not the relatively footloose and fancy-free experience it once was. Border security has resulted in long lines that may make many Canadians think twice about crossing the border as an investment of their precious vacation time. Gasoline prices are also a lot higher than they were in 1991, which can serve as a disincentive to drive. More important, however, is the structural shift in Canadian retail during the course of the 1990s that has brought Wal-Mart and many big-box American stores into most Canadian urban centres. The fact is that shopping in the U.S. is not as unique an experience as it once and most purchases can be made here. The main draw of a trip to the U.S. is now primarily as a getaway experience rather than a source of cheaper commodities not available here. Price is still a factor, but you can always shop in the U.S. on the Internet and save yourself a trip--an option not available in 1991. A changing world means that despite the high Canadian dollar, we are probably not about to witness Canadians behaving as shopping refugees any time soon. However, much depends on just how frustrated Canadians get if they start to feel that exchange rate savings are not being passed down to them at the retail level in Canada.

Livio Di Matteo is Professor of Economics at Lakehead University.

www.economics.lakeheadu.ca