Opinion | Even in a tariff world, local competition is king

Andrew Paulley is a PhD student in Economics at the University of Toronto and a CAMP fellow.

The world trade environment looks a lot different for Canada than it did six months ago. As the August 1^st deadline for a trade deal between Canada and the U.S. approaches, Canadians are rightly concerned about when the outcomes of this disruption will begin to show up at the checkout line.

But while COVID supply chain shocks and Trump’s tariffs have rightly increased the focus on global supply chains, the last stop on that chain, the surprisingly local markets consumers shop for and purchase goods in, remains as relevant as ever.

In many ways, tariffs can be abstract to the average consumer as there can be many steps along the supply chain between a tariff being paid at the boarder to a final product being purchased for a household. What the consumer ultimately sees at checkout is the sum of a layered and interlocking system that crosses global borders. But how consumers interact with the economy is still fundamentally local. May’s release of Statistics Canada’s 2023 survey of household spending showed that upwards of 70% of household consumption is spent locally, including housing, transportation, food, and recreation.

The local economy, and the strength of local competition in the economy must still be a focus for policymakers even in a time of tariffs and global uncertainty. This is particularly the case in three important everyday markets for Canadians – groceries, financial services, and housing.

Groceries

In 2019 the average Canadian household spent $7,536 on groceries, and by 2023 that number had jumped up by 15% to $8,659. Shopping for groceries is inherently a local activity, and while grocery delivery is becoming more popular in major cities, most food is still bought in person, especially in rural and remote areas. Grocery stores with limited local competition have the ability to raise prices, and do, because of how much consumers care about distance for their weekly grocery shop.

Economists have documented the relationship between grocery store prices, distance to other stores, and distance to communities in a variety of settings. Their findings will not surprise you. Consumers with few nearby grocery options pay higher prices and have less selection because they value a closer store even if traveling further means lower prices and more variety. The distances that matter are likely shorter than you think. Research shows that the locality of competition from consumers’ preference for staying close to home can be as small as four kilometres, even in rural areas.

Banking

While grocery stores have rightly captured much of the popular focus on competition, locality of competition is also important for some of the biggest ticket items on a family’s monthly budget – mortgages, car loans, and insurance. The demand for financial services is local, and the banks know it. There’s a reason you usually find the branches of major banks all on the same intersection. Researchers find that consumers choose banks closer to them even when they could get a better interest rate by going to a branch of another bank that is further away. They also find that when customers do switch banks they are twice as likely to switch to a bank just as close to them instead of one further away.

Betraying the usual assumptions of economists, studies show that banks “over branch” beyond what would be cost efficient to ensure consumers have close access to cater to these consumer preferences. But don’t worry, banks make up for that added expense in the form of higher rates on lending and lower rates on savings: Canada’s banks remain some of the most profitable in the world.

Housing

The banking oligopoly is an important input into a market that has generated the lion’s share of economic anxiety in recent years: housing. An overlooked piece of this puzzle is the degree to which neighbourhood attachment reduces the scope of a homebuyer’s choice set. A recent working paper found that 50% of renters who move do so within a mile of their last address. What does this mean for the price of housing and renting? In the words of the author, since renter’s preferences for where to live are very localized, landlords do not need to own property throughout the city to have additional pricing power, only enough property in a single neighbourhood. The result is that neighbourhoods with landlords that hold a large number of units in said neighbourhood experience higher vacancy rates and higher rents, even if those same landlords do not have a sizeable number of units throughout the rest of the city. 

This pricing power appears most pronounced when it comes to corporate landlords. University of Waterloo scholars found that in Toronto’s rental market, corporate landlords, that is, real estate investment trusts (REITs), real estate operating companies (REOCs), asset managers, and private equity, charged upwards of 40% more than non-financial landlords.

Rather than arguing about whether this constitutes so-called “financialization” of housing, the real question is how can these corporations fill units while charging more for effectively the same stock? The answer is the market power gained from strategically purchasing swaths of units in the same neighbourhood, giving them a degree of control over hyper local rent prices.

Our recent rapt attention on international trade negotiations is warranted, but we can’t lose sight of the markets right in front of our faces. Rather than suggesting people drive further, move more of their shopping online, or be more willing to change neighbourhoods, we should take steps to build local markets that better serve Canadians. When discussing competition, prices, or options, from tariffs to development charges, we need to remember that local matters because it matters for consumers.

Canada’s competition policy needs to reflect this by paying attention to how ownership feeds the ability to control options and prices and take a strong stand against consolidation at the local level. We need more competition in our own neighbourhoods as much as we need it globally.