6. maí 2007

To reduce retail prices, make Internet shopping easier

Things cost too much in Iceland. Everyone here knows that, but nobody can do anything about it on their own. Many people were grateful a few months ago, when the government reduced VAT on food and books from 14% to 7%. Prices did, indeed, go down. But so many other things still cost too much. The camera that I bought for 14.000 kr. in the USA costs 29.000 kr. at Elko. A DVD that I bought for about 700 kr. in Germany will cost double or triple that here. And I noticed that the entire island went on a campaign of tattling and informing to ensure that Icelandic retailers really did lower their prices to reflect the lower VAT. It was as if the nation had to keep retailers in line with shame and moral exhortation, because they couldn't trust market competition to accomplish the same.


I predict that nothing will really change until Icelandic customers are given the chance to compete with retailers, by doing more of their own importing. This will, when it happens, be the third great revolution in recent Icelandic consumer history. The first was in the 1980s, when currency controls were relaxed and credit cards introduced, so that Icelanders could shop abroad and bring back their purchases in their luggage. The second was in the 1990s, when inflation was brought under control, giving consumers an incentive to save, inform themselves, and comparison shop, rather than spend all their money recklessly before it melted away. The third revolution will shift some of the power in the marketplace from retailers to consumers, allow Icelanders to take part in the blossoming Internet-based consumer culture that is sweeping America and Europe, and lower prices -- lastingly.


Customs bureaucracy keeps Icelanders from ordering by mail

The key change will be to relax the rules which make it difficult for individual Icelanders to order goods from abroad. Most consumer items in Iceland are imported, but different import "channels" are more open than others. In the old days, all power to import was in the hands of Icelandic retailers. The changes in the 1980s opened a new channel -- the suitcase -- which is still in very heavy use. Now, in the last few years, a new, worldwide market for goods has developed. This market has two pillars. The first consists of retailers who send goods by mail: the second-hand sellers on Ebay, Internet consolidators like Amazon, and of course the mail-order sales operations of businesses worldwide. The second pillar consists of information about what these retailers sell: the web sites they run, as well as consumer organizations, blogs, Google, Ebay, and anything else that helps you compare products and find what you need.


Our import rules hinder us from taking advantage of these innovations. If you live in Iceland, ordering something online catapults you into a nightmare of forms, charges, delays, and errands. It feels as if society has decided to punish you for the simplest and most innocent wants and needs, like a good book, a funny movie, a spare part or a comfortable shirt. Customs charges, VAT, service charges for collecting customs and VAT, delivery delays, and trips to the post office suck all the value out of participation in this new consumer culture and keep all the power in the hands of retailers.


Worse off than Europeans and Americans

Now it's true that other countries have these rules too. In Great Britain, for example, if you receive a package from abroad, you are also liable for customs duties and VAT. And the British postal system has just upped the processing fee for handling these charges from £4 to £8, which is considerably more than Íslandspóstur's 450 kr. But don't imagine that that means Icelanders have it good. Icelandic mail order customers suffer huge disadvantages that other European consumers escape.  Here are six crucial points:

  1. Since Iceland doesn't participate in reciprocal VAT collection schemes with any other countries, all mail-order imports are subject to expensive service charges. In Britain, if you order something by mail and the seller is located in another EU country, VAT will have been included in your purchase price and the package will enter the country unhindered. If you are in Iceland, this will never happen. VAT on all mail-order packages to Iceland is always calculated at the package's point of entry into Iceland and collected by the shipper -- whether that is Íslandspóstur, ShopUSA, or the local agents for companies like DHL, UPS, and FedEx. And they charge a lot for their collection service. Íslandspóstur charges 450 kr. per package. Private shippers sometimes charge much more.
  2. So much more of what we buy here in Iceland comes from abroad.  In Britain, instead of buying an obscure video from the USA or something on Ebay from Argentina, you might find the same item on offer from a domestic supplier. Or you might at least find a supplier in the "near abroad" of the EU, so that you wouldn't need to pay VAT on the package's arrival. In Iceland, one is rarely so lucky. The selection in Icelandic stores is limited, and there is no "near abroad" from where it's relatively easy to import. There is no other way to get certain things than to bring them in from the "real" abroad, and for that, you always have to pay a lot.
  3. In Iceland, we don't exempt low-value packages from customs or VAT charges. The European Union's rule (directive 2454/93, article 868) is that customs charges on incoming packages must be waived if those charges amount to less than €10.  Switzerland waives charges under CHF 5.  EU member states also normally exempt incoming packages from VAT if the value of the package is less than €22 (see directive 181/83, article 22). In Norway, the similar limit is NOK 200. But in Iceland, we have no such exemptions. Order a 100 kr. used book from Japan with shipping costs of 400 kr. for a total of 500 kr.; even though the VAT is only 35 kr., you will still have to pay it, plus the 450 kr. charge to have that VAT collected, plus the cost of your trip to the post office.
  4. We are an island in the middle of the North Atlantic. Average shipping costs to Iceland are higher than in other countries. Customs and VAT charges are calculated on the value including shipping, not the purchase value. Again, an item that costs 100 kr. to purchase may cost 500 kr. when shipping costs to Iceland are added. By relentlessly adding VAT and processing costs on top of high shipping costs, we Icelanders effectively penalize ourselves for our remote location.
  5. Icelandic retailers compete poorly with suitcase imports. Partly that's because the suitcase route avoids shipping, customs duties, and VAT, but partly it's because, in a small society like Iceland, monopolies and oligopolies develop easily. This means that it is in the public interest to put more importing power in consumers' hands, so that local retailers, and also customs clearance agents like ShopUSA, have an incentive to keep their prices low. The ability to be your own importer acts as a braking force on retailers' oligopoly power. It means that retailers cannot raise prices above the level where individual orders become a better option.
  6. Iceland has no system of encouraging the import of products with educational or cultural value. In some European countries, such as Norway, Britain, and Poland, books carry zero VAT and zero customs duty, so they pass through import gates unhindered. In the United States, there is a special, lowered postal rate for books and educational materials.


In the dark, by choice

As things stand, we Icelanders have closed ourselves off from entire sections of the worldwide marketplace. We largely limit ourselves to the products in local shops, and the knowledge in local sales clerks' minds. We have little incentive to become informed consumers, because we have no way of putting that information to use. We force every single Icelander to suffer retail prices that we all know are too high.


The many foreigners who live in Iceland, often brought here as the spouse of a native Icelander, are effectively exiled from their home countries' cultures. We deny them their most elementary pleasures -- a Thai book, a Polish movie, an Italian shirt. We deny their children toys, videos, books, and thus, effectively, the languages of their second homelands.


ShopUSA (www.shopusa.is) holds out hope in this darkness. The promise of ShopUSA is that Icelanders can order anything from America, and have ShopUSA take care of the shipping, customs clearance, and domestic delivery. You have your purchase sent to ShopUSA's warehouse in Virginia and they bring it from there to your home. There are only two problems. One is that ShopUSA works only for purchases from the USA -- not from Europe, Asia, or anywhere else. The other problem is that I have to confess that, despite frequently checking the price calculator on their website, I have yet to complete a purchase through ShopUSA. In every case, I've preferred to use direct mail-order, to buy from an Icelandic retailer, or to use the suitcase channel. Perhaps I haven't wanted to buy the types of goods on which ShopUSA would save me the most (large items like cars seem very popular). But I suspect that ShopUSA also doesn't have enough competition, and that just like Icelandic retailers, they need more of an incentive to lower their prices to the minimum.


Easy steps towards lower prices

So here's what we need to do to free Icelanders to take part in the world consumer marketplace:

  • Move a certain amount of importing power into customers' hands so that retailers (and customs clearance agents) have an incentive to keep prices down.
  • Find a way to encourage Icelanders, including those born elsewhere, to import cultural and educational products from other countries.
  • Reward Icelanders for becoming educated consumers.
  • Avoid magnifying the effect of our remoteness; it's strong enough already.


In terms of specific actions, we need to:

  • Negotiate agreements with EU and EFTA countries (at least) so that online retailers can include appropriate VAT on purchases shipped to Iceland.
  • Exempt low-value packages from VAT and processing charges.
  • Reduce or eliminate VAT and customs charges on cultural and educational materials.


Even though these changes will shift only a fraction of Icelandic consumer purchases on-line, they will force retailers to choose between lowering prices, or losing the business of net-savvy Icelanders.


Iceland's future: creative, not fearful

If we don't act, our high prices will keep us way behind Europe and America in competing as a destination for tourism, business, education, immigration, and most of all, as a location for our very own dreams and projects! We will become an anachronism, a sort of Swiss valley of the far North, a country which has built high seawalls to guard against creativity and knowledge. We will tempt our own brightest citizens overseas, where they can build lives with the diversity and freedom that we deny them at home.


The alternative view is of a creative Iceland which is open to the world, which lets foreign influences strengthen the Icelandic marketplace, which encourages those Icelanders who have traveled and learned abroad to bring back what they know, which takes the best from both American and European life, which trades on the new worldwide market -- and takes advantage of its efficiency and freedom.


Which do we want? My guess is that the only people who favor the former view are those few whose livelihoods depend on controlling Icelanders' choices rather than broadening them.


See also my article "Múrar bókaþjóðarinnar," on the specific problem of book imports in Iceland, in Lesbók Morgunblaðsins, 28 October 2006.


Ian Watson (www.ianwatson.org),

member of the icelandic Consumer Spokesman's Advisory Council.


Í næsta talhorni skrifar talsmaður neytenda, Gísli Tryggvason, um helstu áskoranir (nýrrar) ríkisstjórnar í neytendamálum.




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