Post-9/11 Border Security and Canada-U.S. Trade and Investment

Post-9/11 Border Security and Canada-U.S. Trade and Investment

Transportation Border Working Group, Montréal, QCOctober 24, 2007

Michael Burt Principal Economist

[email protected]

Outline

• Why is keeping the border open important?

• Effects of tighter border security on the volume of exports

• Assess what businesses have been experiencing at the border

• Discuss recommendations for business leaders and policy makers

www.conferenceboard.ca

Canada-U.S. Economic Integration• Long evolutionary path toward deeper North America economic

integration

• National Policy, 1880s -- high Canadian industrial tariffs, which encouraged U.S. FDI in Canada post-WW I

• Autopact, 1960s – free trade in autos and parts permitted integration of North American auto industry

• From FIRA to Investment Canada, 1985 – shift in attitude toward welcoming of FDI

• Free Trade Agreement, 1989 -- eliminated most tariffs for imports from U.S., allowed rationalization of production within North America


“Integrative trade”

• Reduction in global and regional trade barriers has seen emergence of more modern trade paradigm, which we call “integrative trade”

• Integrative trade is the development of global and regional value chains, driven by FDI, as firms seek optimum operating efficiency

• Also described as dynamic comparative advantage


Integrative trade: a Canada-U.S. context • Total Cdn trade now 80% of GDP (vs. 52% in 1990)

• 80% of Canadian exports to U.S. (vs. 75% in 1990, but 86% in 2000)

• Foreign content of Cdn exports 34% (vs. 27% in 1990)

• Foreign content of Cdn-made autos 63% (i.e. domestic content only 34%)

• Significant intra-firm trade – 40 per cent of total Can-U.S. trade

• Huge increase in flows and stocks of FDI in both directions

• Sales from Cdn foreign affiliates comparable to Cdn exports


The Can-U.S. Border: Canadian Objectives

• Secure, predictable access to the U.S. market• Permits optimal North American business platform • Contributes to Canadian prosperity• Necessary for integrative trade • Necessary to attract foreign investment to Canada

• Physical security • Both a goal in itself and a pre-condition for trade


Global and Regional Pressures

• Heightened security post-9/11 • Intense global competition • Small cost differences can have large effects

• Goods cross repeatedly• Production can be easily substituted• Competition in U.S. does not have border costs • Cost increases may dilute FTA gains • Border security approach matters


New Conference Board Researchon the Border

• Most extensive analysis to date

• Detailed econometric (i.e. statistical) analysis

• 60 interviews in fall of 2006• Cross-section of sectors and regions• Industry associations• Select government officials


Statistical Analysis

• Assess 9/11 impact on Canada’s export volumes to US

• At individual border crossings• For individual products

• Focus on post-9/11 border security • Measures real trade, not nominal• Accounts for relative prices and exchange rates• Controls for industry specific effects• Separates security from pre-9/11 border problems


Most Trade Occurs at Few Crossings

Truck Crossing By Port, 2006

Sources: The Conference Board of Canada; Transport Canada.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Win

dsor

Brid

ge

Sarnia

Fort E

rie

Niagar

a Fal

ls

Laco

lle

Pacific

Hig

hway

Lans

downe

Emer

son

Coutts

, AB

Philips

burg

Rock

Islan

d, Q

C

Alderg

rove

, BC

North

Por

tal

Win

dsor

Tun

nel

Woo

dsto

ck

0

5

10

15

20

25

30

35

40

Crossings (millions, L)

Share (per cent, R)

Major Export Commodities, 2005 billions of dollars

0 10 20 30 40 50

Fish Inorganic

Other Chem.Organic Chem.

Office MachinesOther Paper

NewsprintLumber

Telecom. Equip.Rubber &

Auto PartsAutos

Source: The Conference Board of Canada; Statistics Canada.

What We Found

• No evidence that export volumes were lower due to post-9/11 environment• Any changes due to other factors• Similar results for individual crossings, products• No immediate or sustained effect

• Can infer no import change as well, due to deep Can-U.S. trade integration


Fort Erie's Share of Total Exports (per cent)

Sources: The Conference Board of Canada; Statistics Canada.

10

12

14

16

18

20

22

24

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Canada's Share of U.S. Telecom Equipment Imports (per cent)

Sources: The Conference Board of Canada; U.S. Department of Commerce.

0

2

4

6

8

10

12

14

16

98 99 00 01 02 03 04 05

So, No Need to Worry? • Does this mean no post-9/11 harm to Canadian

economic interests?

• The reality: exporters must get goods across to stay in business• Especially time-sensitive products, just-in-time inventories

• Therefore, not really that surprising that no change in exports due to post-9/11 security

• But: what happened to business costs?


Interviews with Exporters and Experts

• 60 interviews on effect of post-9/11 border security policies • Heightened border scrutiny• Alphabet soup of new border policies -- FAST, CSA,

PIP, CTPAT, ACE, ACI • Fast-tracking pre-approved traffic• Advance notification policies• Policy layering – new programs, program changes


Summary Interview Results

• Heightened border security is having an effect on business costs

• Competitive situation is forcing companies to internalize these costs

• Potential benefits of increased security are slow to materialize


Direct Compliance Costs

• 75 per cent of respondents reported direct cost increases as a result of post-9/11 environment

• Mostly increased transportation and freight insurance costs

• Both one-time and on-going costs

• Companies assumed voluntary costs• In order to reap benefits or not lose advantage


One Company’s Added Costs• Purchased new technology• Re-trained staff • Assessed security requirements • Upgraded employee and visitor ID system• Prepared a procedure manual for new border programs• Developed an employee awareness program• Upgraded existing exterior lighting• Upgraded or installed closed circuit television capabilities• Repaired faulty access control (e.g. better locks)• Created new fencing• Created a special area for drivers with restricted plant access• Improved surveillance• Hired a third party security consultant to audit plants and third

party warehouses


Costs of Changed Delivery Patterns

• Warehousing on U.S. side

• Pre-shipping goods

• Shifting to other crossings or modes

• Idling to allow for 1-hour advance notice


Costs of Uncertainty

• Shifting policies create uncertainty• Tendency to first announce policies, then change or add

to them

• Inconsistent treatment at border

• Lack of clarity on border resumption if another terrorist event


Delays: Recent Improvement • Interviewees said that delays were:

• Routine from 2001-2004• Much reduced in 2006• Confined to rush hour/ certain crossings• 2007 data backs this up

• Why fewer delays? • Infrastructure improvements • More agents• New border policies • Port Shifting


Border Crossings(millions)

Sources: The Conference Board of Canada; Statistics Canada.

40

45

50

55

60

65

70

75

99 00 01 02 03 04 05 06

12.4

12.6

12.8

13.0

13.2

13.4

13.6

13.8

Automobiles (L)Trucks (R )

Benefits As Well• Interviewees have invested to:

• Protect competitive position• Make their business profile known to customs • Get faster, predictable, secure market access

• Are we there?• Where FAST works, more efficient crossings• But FAST does not always work as intended• Infrastructure constraints• Harmonized policies not harmonized• May have improved since interviews

• Unexpected benefits • Resulted in reduced waste• Improved internal systems


Summary of Key Findings

• Export trends have not changed due to post 9-11 border

• Firm behaviour has changed

• Costs have gone up

• Delays have recently gone down

• Goods still getting across, but at increased cost to firms

• But, some see costs as opportunity to fast-track border and reduce waste


Reaching a Tipping Point?

• For most, cost of access to the U.S. is higher

• Have benefits of access to the U.S. been eroded?

• Or, can we seize this new border environment as an opportunity?


Advice to Policymakers• Modify and coordinate programs to fully realize efficiency benefits

• Ensure infrastructure allows for FAST crossing• Harmonize or mutually recognize Canada and U.S. FAST programs• Provide a FAST-only crossing? • Provide enough resources on both sides of the border• Have a clear plan for border resumption in event of attack

• Take pressure off the border – pre-clearance, etc.

• Minimize new rules and changes to policies

• Officials to become one-stop portal and information brokers for businesses


Advice to Business Leaders

• Accept some cost increase as price of access

• View the post-9/11 border as an opportunity• Reduce waste, improve firm security, enhance access• Smaller businesses might want to wait until FAST

benefits are proven

• Establish flexible contingency plans for sensitive supply chain elements


Where to Find the Research

http://www.conferenceboard.ca/ITIC

www.conferenceboard.cawww.conferenceboard.ca

Documents

Post-9/11 Border Security and Canada-U.S. Trade and Investment