Strong dollar means cross-border shopping heavily influenced by exchange rate

Even a one cent increase in the exchange rate causes a disproportionate number of Canadians to go cross-border shopping, according to a new study from a team of researchers that included Professor Ambarish Chandra of the University of Toronto Scarborough and Rotman School of Management.

“When the home currency is strong, as is the case in Canada at the moment, even a slight jump in the exchange rate makes a big difference because it expands the set of goods they can find cheaper in America,” says Chandra.

The impact of a slight increase in the exchange rate is greater now than it was 10 years ago because the loonie is near parity with the American dollar, the researchers found.

“It wasn’t even on the radar for most Canadians because when the loonie was weaker, even a significant jump in the exchange rate wouldn’t have made much of a difference,” says Chandra.

Using data collected by the Canadian Border Services Agency from 1972-2010 in seven provinces, the researchers showed it’s mostly Canadians living close to the border who will cross for single-day shopping trips when the loonie appreciates.

Chandra (pictured left) notes while the median Canadian lives 81 miles (130 km) away from the border, the median single day-trip shopper lives only 18 miles (29 km) from the border. And Canadians are more likely to cross-border shop than their American counterparts because they tend to live closer to the border.

The authors took into account seasonal patterns and the changes in the security environment at the border following 9-11. They also found that cross-border shopping is more than twice as responsive as international trade to changes in the exchange rate.

“International trade follows consistent patterns established over a longer period of time, but individuals are far more flexible,” says Chandra. “If an individual consumer sees an increase in the exchange rate, they can hop in their car and drive south to shop right away.”

Being able to better identify and understand these short-term patterns of cross-border travel is also important information for policymakers regarding taxation, infrastructure planning, border security and controlling the spread of infectious disease, adds Chandra.

The research, which included collaboration with Professor Keith Head and Assistant Professor Mariano Tappata from the University of British Columbia, was supported by a grant from the Social Sciences and Humanities Research Council. 

It will be published in the upcoming edition of the journal Review of Economics and Statistics.