Finance Minister Jim Flaherty is prepared to look at reducing tariffs and to use "informal persuasive powers" if needed to bridge the Canada-U.S. price gap on consumer goods.

The finance minister told the opening of Senate committee hearings on the issue Wednesday night that he regards the exercise as more than just posturing.

"If the committee recommends that we change this tariff or that tariff, we'll look very closely at what's feasible," he told reporters after his brief testimony.

"We've reduced, eliminated a lot of tariffs, they are protectionist and we're believers in free trade," he added.

Finance Minister Jim Flaherty told a Senate finance committee hearing Wednesday that he did not have the answers as to why prices remain stubbornly higher in Canada compared with the U.S. ((Adrian Wyld/Canadian Press))

In testimony, Flaherty said he has other tools, including persuading retailers to lower prices.

"We have ways of encouraging good behaviour through the tax system," he said.

The finance minister told the senators he did not have the answers as to why prices remain stubbornly higher in Canada — on average about 20 per cent more according to an April comparison survey by the Bank of Montreal — despite the fact the loonie has steadily risen against the U.S. dollar over the last five years.

The dollar has traded near or above parity for extended periods twice within than period, in 2007-2008 and for much of the past year. It closed at 98.02 cents Wednesday.

The Retail Council of Canada, which is expected to testify later this fall, calls tariffs a major factor in the persistent price gap, saying some duties are as high as 18 per cent.

Flaherty said he did not know if tariffs were a major issue, but in later testimony other government officials downplayed the impact.

"It certainly is an issue that merits looking at but in general the tariff rates are actually quite low," said Jim Haley, general director in the Economic and Fiscal Policy Branch. "Ninety per cent of goods enter the country duty free. In 2010, $360 billion of $400 billion in total imports came into the country duty free."

Officials also noted that tariffs apply on the landed price of goods, not the higher retail price.

The issue of pricing for a domestic market is complex and can involve manufacturers "exercising market power" by discriminating up or down in pricing in rich markets, or to maintain a market share, officials added.

Flaherty, who asked the Senate national finance committee to look into the issue in September, said Canadians are rightly annoyed when they see different prices for the same item.

And he says he hears often from Canadians complaining about the price differential.

'Canadians are rightly annoyed and perplexed'

The strong Canadian dollar has presented challenges for Canadian manufacturers, exporters and the economy, he said, at the very least Canadians should get benefits in terms of lower consumer prices.

"Canadians are rightly annoyed and perplexed," he said. "When they spend their hard earned money they deserve to pay a price that reflects the strength of our dollar."

New Brunswick Senator Pierrette Ringuette, who lives near the U.S. border, said she is mystified why there are large differences on some items and none on others.

She compared prices for the Camaro and Dodge Charger — both automobiles made in Canada — and found $4,000 and $4,600 difference in price respectively across borders. On some other vehicles, she found no or little difference, she said.

Flaherty had no explanation, but hoped the senators would get to the bottom of the matter and provide an answer to Canadians.

The hearings, which are expected to last for weeks, will look into a variety of issues, including the impact of tariffs, transportation costs and market size differentials between the two countries.