CANADA-U.S. TRADE SPECIAL REPORT
No shortage of challenges for cross-border trade
By KATHLYN HORIBE
June 30, 2008
The North American Free Trade Agreement, which marks its 15th anniversary in October, was in the news recently but not because of the celebrations. To garner votes in Pennsylvania, Democratic presidential hopefuls Barack Obama and Hillary Rodham Clinton blamed NAFTA for job losses and vowed to “fix” the agreement for American workers. When the campaigns shifted to Montana and South Dakota, which benefits from NAFTA agriculture exports, their strategies changed.
“The Canada-U.S. Free Trade Agreement was an essential step toward securing the prosperity that Canadians enjoy today,” said David Emerson, minister of foreign affairs. “This agreement has provided tremendous economic growth, surpassing the most optimistic predictions. It remains, to this day, a platform for Canada’s growing economic competitiveness in the world.”
Since the agreement, two-way trade between the countries has tripled, increasing from $116.9 billion in 1988 to $398.4 billion in 2006 and accounting for 7.1 million American and 3 million Canadian jobs.
“Inflationary pressures, such as the rise in fuel costs, can have a collateral benefit on the NAFTA region as it can be more competitive from a logistical cost standpoint – excluding labour costs – to produce and ship within the region as opposed to producing and importing from another region of the world,” said Eduardo Lamazares, director, international programs and international Americas trade lane strategy, for DHL Express USA.
According to the Canadian Trucking Alliance, NAFTA hasn’t lived up to its expectations “at all” for the trucking industry. “NAFTA was supposed to create this continental trucking market,” said Ron Lennox, vice-president, trade and security, for the CTA, “and introduce efficiencies by allowing trucking companies to move into Mexico and open up the whole U.S.-Mexico market to Canadian truckers. But 15 years after the agreement, that hasn’t happened.”
The American government is stalling because of domestic pressure to keep the border closed to Mexican trucks. Though a pilot project is taking place, “it’s a little tiny, tiny step forward, but Canadian carriers aren’t a part of it,” Mr. Lennox said. “Trade between Canada and Mexico has grown substantially as a result of NAFTA and some of that trade is moving by Canadian trucks as far as the Mexican border to deliver and pick up freight, but it’s miniscule compared to Canada-U.S. trade.”
U.S.-Mexico surface transportation totalled $23.6 billion in March, according to the U.S. Department of Transportation. The value of imports carried by truck from Mexico was 8.8 per cent lower in March than in March 2007, while the value of truck exports to Mexico was down 2.3 per cent.
Mexico seeking damages
Due to the United States’ refusal to allow cross-border trucking as required by NAFTA, Mexico’s principal trucking group, Cámara Nacional del Autotransporte de Carga, or Canacar, said its members have lost more than $2 billion annually since 1993 and announced in May it is seeking damages through arbitration.
Last year, the trade partnership – not always a happy marriage – hit another rough spot. Canada requested the World Trade Organization to intercede regarding excessive U.S. agricultural subsidies from 1999-2002 and 2004-2005. Its concerns are shared by Brazil, which also requested a WTO dispute settlement panel on the same subsidies.
“Canada believes that the United States has breached its international obligations by providing agricultural subsidies that exceed the levels allowed by the WTO,” Mr. Emerson said.
Despite the discord, 49 per cent of manufacturers across North America indicated their businesses expanded both within and outside North America due to NAFTA. Forty-one per cent reported NAFTA had a neutral or slightly positive effect on their businesses, with 10 per cent indicating a negative impact. The survey was conducted by the National Association of Manufacturers, the Manufacturing Institute, Canadian Manufacturers & Exporters and Deloitte firms in Canada, U.S. and Mexico.
“Over the past year, we’ve seen some increase in demand for cross-border services,” said John Ferreira, president of DHL Express (Canada), Ltd. “DHL has very strong cross-border business operations and, at the end of last year, we added a new daily air service between Vancouver, Calgary and the U.S. to meet increased demand.”
DHL Express USA also recorded an increase last year. “We expect to continue to invest in our service capabilities,” Mr. Lamazares said, “and, as a result, also expect cross-border volumes to continue trending positively.”
When it comes to moving freight across the border, the biggest challenge for trucking companies last year was lineups. “It’s not every time you cross the border,” Mr. Lennox said. “It’s very unpredictable. It’s sporadic, but that obviously creates challenges particularly if you’re moving just-in-time freight. That level of certainty just doesn’t exist anymore.”
The major tieups occurred at the Blue Water Bridge between Port Huron, Mich., and Sarnia, Ont. “The Ministry of Transportation had to install port-a-potties on the highway accessing the bridge into the U.S.,” he said. “We tend to believe that it had to do with the types of checks on the people crossing the bridge.”
Cross-border security glitches
Mr. Lennox said another big challenge is “still adapting – and so is U.S. Customs and Border Protection – to the ACE (Automated Commercial Environment) truck e–manifest. Though it’s now fully rolled out right across the land border between Canada and the United States, we’re still experiencing technical problems. When it works, it’s great; it expedites the flow of traffic across the border. But we had all hoped and expected that by now most of the glitches would be out of the system.”
Regarding Canada’s version of an automated truck manifest, one issue of concern, discussed with the Canada Border Services Agency, is the release of all freight at the first point of arrival into Canada. “Our big concern, primarily for LTL,” Mr. Lennox said, “is that if one or two of the shipments are not properly marked or missing data, the truck will have to sit at the border until the problem is sorted out. It’s a concern not only for us but for just about everybody in the trade community.”
CBSA’s automated system has also plagued carriers. “About a month ago, there were huge problems with their major computer system for 24-36 hours, which caused havoc for northbound freight,” Mr. Lennox said.
Another program that hasn’t lived up to expectations is FAST (Free and Secure Trade). “Don’t get me wrong; it’s a good program and it’s beneficial to both carriers, importers and shippers,” Mr. Lennox said, “but it’s heavily concentrated in a couple of industries. We had hoped that it would become a more broad-based program. Basically it’s impossible to take advantage of the program if you’re a less-than-truckload carrier because every single shipment on that truck must be destined for a U.S. C-TPAT (Customs-Trade Partnership Against Terrorism) importer. The chances of that happening are virtually nil so it’s become a truckload program.”
A report by the Government Accountability Office, a U.S. congressional watchdog organization, recently identified weaknesses in the validation and record management of C-TPAT. GAO also published a critical report in 1995.
Another challenge for trucking is dealing with in-transit movements, specifically south of the Great Lakes between Eastern and Western Canada. Much of the freight is transported via this more direct route because the winter is less severe and the highways are in better condition.
“With the implementation of the U.S. Trade Act and ACE,” Mr. Lennox said, “the U.S. now demands a lot more data and information on those shipments that carriers, especially LTL, can’t supply, so a lot of the freight that used to move south of the Great Lakes is staying in Canada, which is adding to costs.”
“New security measures are the reality that all market players have to deal with,” Mr. Ferreira said.
On average, businesses expended almost US$100,000 a year to participate in C-TPAT, according to a survey conducted by U.S. CBP and the University of Virginia.
“To DHL, the cost of doing business means constant investment in developing our global network,” Mr. Ferreira added, “and new services and solutions that result in improved cross-border efficiencies like €300 million invested in opening a new hub in Leipzig, Germany, to better connect North America, Europe and Asia.”
“In terms of our capabilities,” Mr. Lamazares said, “DHL has invested over US$3 billion in infrastructure over the last several years, of which cross-border programs have also benefited and shown positive return on investment.”
Though there’s no denying the glitches, the good news is efforts are being made to harmonize supply chain security programs, such as the U.S.’s C-TPAT and Canada’s Partnership in Protection. “Both governments are working toward mutual recognition of their respective programs,” Mr. Lamazares said. “This type of reciprocity is much needed and it will help in lessening some of the burdens on businesses, while not compromising security.”
Harmonization efforts
One association active in the harmonization process is I.E.Canada, the Canadian Association of Importers and Exporters. “In June, Canada and the U.S. signed a mutual recognition agreement to recognize our Partnership in Protection program with C-TPAT,” said president Mary Anderson, who recently toured Canada to obtain feedback from members regarding security initiatives. “For our members, that’s good as there will now be recognition of the supply chain security programs currently in place and those that can be part of future programs.”
Another program on which I.E.Canada provided input is the 10 + 2 program. With passage of the SAFE Port Act of 2006, the U.S. Congress mandated CBP to compile data on every import prior to shipment.
“Often we are impacted by U.S. regulations or changes in programs,” Ms. Anderson said. “From an industry perspective, we’re becoming mindful on how we have to provide insight to the U.S. Government on how the programs impact their largest partner.”
Product safety is another area of collaboration with the United States. Canada recently instituted Bill C-51-C-52 for consumer goods and food products. I.E.Canada is working closely with the American Association of Exporters and Importers and a Washington-based coalition to harmonize regulations in both countries. “We want to facilitate the flow of goods so they aren’t slowed down at border crossings,” Ms. Anderson said.
The slowdown in the economy is another challenge for trucking. A decline in southbound freight, particularly in Central Canada, has affected the industry’s equipment utilization. “Carriers still have to get freight northbound so there’s this juggling going on to fill those trucks heading south, or spotting empty equipment in the States to service those clients northbound,” Mr. Lennox said.
According to the Public Border Operators Association, truck crossings from Ontario, where the bulk of the freight moves, declined 5.6 per cent in January-April compared to the same period in 2007. Approximately 16,000-18,000 trucks cross the border daily, Mr. Lennox said.
The strong Canadian dollar is the reason. “It’s made it challenging for our members to remain competitive with others that supply the U.S. market,” Ms. Anderson said, “which has resulted in an increase in diversification of markets – looking at other partners to facilitate products – a good thing for both sides realistically.” Surprisingly, she said the strong dollar has not resulted in greater exports from the U.S. to Canada.
Another way to facilitate trade would be to improve the infrastructure along the border, especially at Windsor. “It doesn’t make sense to send trucks down a city street to keep the economy of Canada and the U.S. moving,” Mr. Lennox said. “The sooner they get that fixed, the better.”
The Ontario budget issued in March reiterated the province’s funding of its share of the proposed road link between Highway 401 and the border crossing. The Detroit River International Crossing Study is expected to provide recommendations shortly on a new crossing and access road at Windsor. “Construction is scheduled to begin in 2009,” said Ontario Finance Minister Dwight Duncan, “and is anticipated to be concluded in 2013.”
As for the next year or so, issues of concern for the trucking industry, Mr. Lennox said, include the requirement for drivers accessing American ports to purchase a Transportation Worker Identity Credential card by April 2009 when they already have a FAST card and the implementation of the Western Hemisphere Travel Initiative. The U.S. law requires the presentation of a valid passport or other secure document to enter the country. For land and water travel, the law takes effect June 1, 2009.
“The key challenges over the next business cycle for DHL Express USA,” Mr. Lamazares said, “will centre on maintaining margins through a tough competitive environment.”