CANADA-U.S. TRADE SPECIAL REPORT
Lack of reciprocity, inconsistent regulations other issues
By KATHLYN HORIBE
July 6, 2009
With economic growth stalled by the ongoing global recession, a number of countries are instituting protectionism policies. Primary among them for Canada is the Buy America policy that’s threatening trade with the United States.
Contrary to President Barack Obama’s assurances, the US$787-billion stimulus package he signed into law on Feb. 17 includes the proviso that all iron, steel and manufactured goods for the “construction, alteration, maintenance or repair” of public infrastructure projects must be U.S. produced.
“This policy is severely impacting our members,” said Mary Anderson, president of I.E.Canada, the Canadian Association of Importers and Exporters Inc., “and some of them have been very visible in the news.”
One such member getting widespread coverage is IPEX Inc. of Mississauga, Ont. whose Made in Canada plastic pipes were ripped out at California’s Camp Pendleton marine base.
“The sense from IPEX is that they’re practically being shut out of the U.S. market because of the policy,” Ms. Anderson added. “Other companies have mentioned either directly or indirectly that they’re losing contracts. At the beginning, these were isolated instances but now U.S. distributors refuse to stock Canadian-made construction products strictly because they’re concerned they won’t get government contracts.”
What about the North American Free Trade Agreement in which one of the stated objectives was to “promote conditions of fair competition in the free trade area”?
Jayson Myers, president of the Canadian Manufacturers & Exporters, explained, “Although Canada and the United States agreed to international procurement obligations at the federal level under NAFTA and the World Trade Organization Agreement on Government Procurement, there are no international obligations at the state or municipality level. As a result, Canadian companies are ineligible to compete for Recovery Act funded projects. Meanwhile, U.S. companies continue to have unfettered access to our provincial and municipal infrastructure projects.”
In retaliation, the Federation of Canadian Municipalities voted in favour of a fair trade resolution, which shuts out any of the world’s suppliers from bidding on Canada’s infrastructure projects unless Canadian firms can bid on their contracts – last year’s capital projects totalled $15 billion. To allow both countries to resolve the issue, the federation won’t impose restrictions for another four months.
CME, on behalf of its members, is leading the fight against the Buy America restrictions. The organization along with 27 other industry associations wrote to Prime Minister Stephen Harper and all Canada’s premiers to urge them to avert the rising protectionism. CME membership accounts for 75 per cent of Canada’s total manufacturing production and 90 per cent of its exports.
As it is, Canada’s trade surplus with the U.S. shrank from $3.5 billion in March to $2.8 billion in April, as exports and imports dropped 4.4 per cent and 1.7 per cent respectively.
In June, Prime Minister Harper led a delegation to Washington and appeared on U.S. television to warn that protectionism could trigger a trade war with Canada.
“Canada’s competitiveness is directly linked to the strength of our relationship with the U.S., our largest trading partner,” said Perrin Beatty, president and CEO of the Canadian Chamber of Commerce. “Fostering this relationship must remain the government’s top international priority.”
And the situation is getting urgent. Similar Buy America provisions are showing up in other U.S. legislation, such as the Water Quality Investment Act.
“Section 608 of that bill repeats the Buy America provisions of the Recovery Act,” Mr. Myers said, “and U.S. business leaders are telling me that they fully anticipate a Buy America baseline will be inserted into most, if not all, U.S. appropriation and authorization legislation in the months to come.”
Over the next five years, the Water Act will fund US$13.4 billion for clean water improvements, and, according to CME, water and wastewater infrastructure requirements will generate up to US$500 billion in new spending, mostly at the municipal level. In Canada, that market totals more than $7 billion in annual sales.
Ms. Anderson confirmed that one I.E.Canada member in wastewater treatment is definitely losing contracts.
But that’s the tip of the iceberg. Other trade hindrances are threatening our relationship with our neighbour to the south, such as a new U.S. meat-labelling law that Canada has asked the WTO to resolve.
International Trade Minister Stockwell Day said, “Recent instructions from the U.S. Secretary of Agriculture encouraging the U.S. industry to use very strict labelling practices have removed the flexibility previously envisioned in the legislation and this affects the ability of our cattle and hog exporters to compete fairly in the U.S. market.”
And softwood lumber is once again a bone of contention – disputes have percolated for more than 20 years. In April, the U.S. imposed a 10-per-cent tariff on imports of softwood lumber products from Ontario, Quebec, Manitoba and Saskatchewan until it has collected US$54.8 million for Canada’s failure to comply with the Softwood Lumber Agreement.
Softwood lumber is one of Canada’s largest exports to the U.S., with 21.5 billion board feet of lumber, worth $8.5 billion, shipped in 2005.
Working together
In March, I.E.Canada led a delegation to Washington to discuss the challenges affecting importers and exporters with U.S. congressmen and regulators. Rather than focusing solely on the Buy America issue, Ms. Anderson said, “We talked about how we can create more of a North American competitive framework by reducing some of the impediments.
“We attempted to reassure them that we value their business and that there are often under recognized relationships between their respective states and Canada and that these relationships are very positive ones. We tried to create an awareness of the integrated trade between the U.S. and Canada and, if we continue to work on that framework, how we can preserve jobs.”
“Given the disparity in the relative size of our economies,” Mr. Beatty said, “moving the Canadian agenda forward requires framing our issues in a manner that resonates in the U.S.”
Meetings were also held with key U.S. associations, such as the National Association of Manufacturers, American Trucking Association, American Association of Exporters and Importers and U.S. Chamber of Commerce. “There was a willingness to look at opportunities to share priorities and align initiatives,” Ms. Anderson said.
Another law that’s “unintentionally” affecting Canada’s exporters, she added, is the Lacey Act. In May 2008, the 100-year-old legislation that prohibits trafficking in illegal wildlife was amended to protect a wide range of plant products.
“Originally it was set out to protect those products from illegal logging,” Ms. Anderson said. I.E.Canada in its submission said, “It is apparent that … members of Congress did not appreciate the broad range of products that would be impacted, estimated to fall within 80 of the 97 chapters of the U.S. Harmonized Tariff Schedule.”
“There needs to be more analysis of U.S. laws being enacted that can affect Canadian companies,” she added. “Our goal is to work more closely with U.S. associations so that we can collaborate on submissions.”
One emerging issue, she warned, is export controls. “If a product has a U.S component integrated into a Canadian product that’s shipped to another jurisdiction, there needs to be trace back to that component as a U.S. product because it’s still subject to U.S. export control requirements. So the U.S. government has the ability to enforce export controls even into Canada.”
Border issues
In spite of the trade barriers, Ms. Anderson said that the I.E.Canada delegation was warmly received and Jayson Ahern, acting commissioner of U.S. Customs and Border Protection, “expressed a willingness to implement the best ideas that we could bring forward.”
Mr. Beatty said, “A major concern is that not all border booths and inspection areas are operational during peak commercial times at major crossings, increasing wait times and negatively impacting the North American supply chain. We recommend that Canada Border Services Agency, CBP and other government departments with border mandates make a priority of offering 24/7 border services at all major crossings, including the operation of border booths, secondary inspections and border-related support services.”
At airports, border service hours can be increased effective April 1 thanks to CBSA’s new Air Services Policy Framework. The policy will enable the agency to assess, on a case-by-case basis, whether the addition or expansion of publicly funded border services at a requesting airport is “viable and sustainable.”
“Our economy is highly dependent on international trade and tourism,” said Jim Facette, president and CEO of the Canadian Airports Council. “(This policy) tells Canadians that the CBSA understands the economic importance of border services to Canadian competitiveness.”
In spite of the more open policy, Canada is being shut out not only in America but also in other countries. “Protectionism is rearing its ugly head in many jurisdictions,” Ms. Anderson said. “It’s sometimes subtle and sometimes not so subtle.”
One area of discrimination is occurring in the interpretation of regulations by some Latin American countries in the application of duty rates and even international agreements established by the World Customs Organization.
“They’re really pushing the envelope,” she said. “There’s also a lack of transparency in the interpretation of customs processes in other countries, such as the European Union and Asia.”
Lack of reciprocity
For freight forwarders, protectionist policies are not affecting them as much as the lack of reciprocal agreements between Canada and the U.S. on container inspection.
There are several examples of delays, said Ruth Snowden, executive director of the Canadian International Freight Forwarders Association. One container identified for inspection by the CBSA at the Port of Prince Rupert was delayed for three weeks. It got held up again when it was re-examined in the U.S.
“Our government is promoting the Asia-Canada Gateway and Corridor initiative,” she added, “as well as the Atlantic Corridor initiative where American containers are brought in over Canadian ports, then down our rail system and into the United States. A lot of Canadian freight forwarders are involved in that business and it’s really great business. But double examinations, double delays, double fees are really detrimental to the promotion of Canadian ports for American cargo.”
Inspections are also affecting Canadian exporters. A container examined in Vancouver missed two sailings and incurred a $7,000 cost because it was already in the stacks. When the vessel called at Seattle, Ms. Snowden related, “the Americans wanted to look at the container even though it was FROB (Freight Remaining on Board) and they took it off the boat.
“Because we have no reciprocal agreement with the U.S.,” Ms. Snowden said, “these inspections are adversely impacting Canadian exporters and our Canada Pacific Gateway initiative.”
Trucking
The slumping North American economy has also affected cross-border truck traffic at the border’s busiest crossing. The Ambassador Bridge between Windsor and Detroit recorded 2.8 million crossings in 2008, a decline of 15 per cent from 2007, according to the Public Border Operators Association. At Sarnia’s Blue Water Bridge, the second-busiest crossing, traffic dropped by more than 2 per cent to approximately 1.6 million trucks. Truck transport accounts for 70 per cent of Canada-U.S. trade.
Meanwhile, plans to improve the cross-border link are mired in controversy. The first plan had been to “twin” the bridge. Now the Detroit International Bridge Company, the company owned by U.S. billionaire Manuel Moroun and owners of the Ambassador, wants to build a brand new bridge.
The Michigan Department of Transport alleges the DIBC unilaterally altered the agreed upon plans, while the city of Detroit took it to court for contravening zoning laws. The DIBC alleges Canada has reneged on its promise.
“The Canadian government has not made good on its 2002 pledge to invest $300 million to better connect the Ambassador Bridge to Interprovincial 401 in Ontario,” the DIBC said in a press release. “The application (for approval) was submitted in 2006 but the Canadian government has not demonstrated a commitment to process the project in a timely manner.”
Michael Wilson, Canadian ambassador to the U.S., stated in a recent letter to Michigan state leaders that the DIBC has not submitted an analysis of the project’s potential environmental effects to Transport Canada and the Windsor Port Authority. This information, requested 18 months ago, was not contained in the original environmental assessment documents.
Other infrastructure projects are also being held up – this time by the Harper government. According to a recent Canadian Press report, little work is being done on 12 infrastructure projects worth $462 million that were outlined in January’s federal budget. Subject to the government-imposed 120-day deadline for stimulus spending, all of them are within federal jurisdiction and matching funds are not required from the provinces or municipalities.
Border crossings promised federal funding included $13.5 million for Blue Water and a total of $45 million for three crossings in British Columbia.
In spite of the decrease in trucker demand, perennial problems exist at the border for the industry, said Doug Switzer, vice-president, public affairs, of the Canadian Trucking Alliance and the Ontario Trucking Association.
“Cross-border security programs and growing protectionist sentiment in the U.S., which is manifesting itself in so-called security programs that are really trade barriers by another name, are certainly a cause for concern. We haven’t necessarily seen any of that yet, but certainly the new director of Homeland Security Janet Napolitano has been making musings. What that’s going to mean for the future of Canada-U.S. trade is certainly a concern. That’s a big dark cloud on the horizon.”
Also looming on the horizon is the issue of EOBRs (electronic on-board recorders), which replace logbooks for monitoring hours of service compliance. “That particular issue is being driven by a lot of pressure from the U.S.,” he added.
Some years ago when the American government wanted to change the industry’s hours of service regulations, it also looked at changing enforcement. “In some meetings we’ve had recently in Washington,” Mr. Switzer said, “it’s been made clear to us that this administration is interested in pursuing EOBRs. So we’re encouraging the Canadian governments to equally become engaged because we want to be policy makers not just policy takers.”
Labour shortage
One major challenge when the recession dissipates will be driver shortage. “The fact that there are an inadequate number of drivers is masked by the fact there isn’t much demand for service right now,” Mr. Switzer said. “When the economy booms again, one of the barriers to us ramping up capacity quickly will be finding enough drivers to service the increased demand.”
Skill shortages are also affecting the marine industry. “Most seagoing nations have addressed crew shortages by allowing a portion of national flag crews to be foreign,” said Aldert van Nieuwkoop, president of Great Lakes Feeder Lines. “This issue needs to be addressed by the government as the growth of companies is being stunted under domestic flag and ultimately hurts the existing seafaring employees as Canadian vessels are being reflagged or are simply not brought under Canadian flag due to the high labour costs and the shortage of qualified officers.”
With power plants and the steel and construction industries affected by the economy, less bulk cargo is being carried by the ships operating in the Great Lakes, St. Lawrence River and eastern seaboard, said Bruce Bowie, president of the Canadian Shipowners Association.
One of the biggest impediments to fleet renewal is the 25-per-cent import duty on new foreign-built ships. “It makes it very difficult for us to justify embarking on a renewal program,” Mr. Bowie said, “when you have to pay $10-15 million per ship for no purpose really. We’re hopeful the government will recognize that the key to the future performance of the marine transportation system is to remove the duty.”
He added, “In the long run, the key to improving our environmental performance is to bring on-board the latest environmental technologies as opposed to continuing to deal with 35- and 40-year-old technologies, which is the average age of our ships. The (two) issues are very much connected.”
As for the environment, there’s “a plethora” of environmental regulations coming mainly from the U.S. states. “It’s the inconsistency of the regulations,” he said, “which makes it very difficult to convince boards (of directors) to make investments in the future of this industry.
“What’s hitting us right now,” he added, “are a whole bunch of individual states coming up with regulations that impact trade. From Montreal to Thunder Bay, you have to go through New York waters and you’re captured by the whole regulatory framework in New York and that has a tremendous impact on our ability to even service our own domestic traffic.”
Government needs to take more of a holistic view of the regulatory framework they’re developing, Mr. Bowie added. “If you have one regulation that requires ships to burn a fuel that’s twice as expensive, you’re in effect doubling our fuel costs and making it much more attractive to use surface modes, creating anywhere from two to ten times more GHGs to move the same amount of traffic.”
Other issues Mr. van Nieuwkoop said include, “Third-party costs such as icebreaking fees and pilotage fees that create an uneven playing field compared to trucking and rail.”
“As a marine industry,” Mr. Bowie said, “we pay Seaway tolls, we pay for Coast Guard navigational fees. In other words, we pay for the maintenance of our infrastructure. In order to respond to the government desire to get more traffic moving on an environmental preferred mode they’re going to have to look at the whole revenue and cost equation to level the playing field.
“It’s a tremendous challenge for us as a marine industry to communicate with all of the governments involved about the benefits of marine transportation,” he added, “and the need to take a much broader view of the regulatory processes.”
“It behoves us as a country to seek ways to increase the opportunities rather than diminish them,” Ms. Anderson said. “Companies need to be more cognizant of the rules and regulations of doing business internationally and what to do to be compliant. Compliance professionals are the key to Canada’s future competitiveness.”