The Challenges Of A Thickening U.S. - Canada Border

Wednesday, October 1, 2008 - 01:00

Each and every day, $1.6 billion in trade crosses the U.S.-Canada border,making it the largest and closest bilateral economic relationship in the world. Bilateral trade between the two countries accounts for approximately 18 percent of U.S. trade, more than trade with China and Japan combined. Moreover, at a time when the U.S. economy is slowing down, where there is continuing concern about the loss of jobs to foreign locations, and 24/7 coverage of a presidential election focuses increasingly on a wobbly economy, there is no general commotion among the U.S. public about the extent of bilateral trade between the two countries. Even the persistent softwood lumber dispute seems to be relatively quiescent.

Much of this is easily explained by the nature of U.S.-Canada trade. Many North American companies, American as well as Canadian, have operations on both sides of the border. Bilateral trade is increasingly comprised of intermediate supply chain goods as the two countries' business communities become more integrated in each others' supply chains. This close relationship is hardly new. It dates back to various Defence Production Agreements in the post-WWII period, the 1965 Auto Pact that implemented free trade in the automobile sector, the 1989 U.S.-Canada Free Trade Agreement and the NAFTA in 1995. Each of these developments brought about a closer integration between businesses in the two countries. In short, trade with Canada is generally perceived in the U.S. as a mundane - even boring - matter. It is just part of the natural economic environment.

The benefits of this close relationship for both countries, however, are significant and well known in trade policy, business and political circles. Canada is the largest foreign trading partner for 37 of 50 states, and U.S.-Canada trade is directly responsible for 7 million American jobs.

Against this backdrop, and with growing competition from the BRIC countries (Brazil, Russia, India and China) and other emerging economies, the U.S.-Canada economic zone faces the double whammy of an aging border infrastructure and, since 9/11, the proliferation of border security measures designed to defend against threats from far-flung regions across the globe rather than neighbours with a 5,525-mile common border. For businesses that do not plan adequately, the prospects can be grim. Border wait times are up, paper work and transaction costs are up, and the volume of commercial vehicles and conveyances are down. In some cases, commercial border wait times have doubled since 2001.

The last few years have seen a slow and steady "border creep" resulting in successive layers of border measures, some well considered and others ad hoc , serving to reverse a decades long evolution toward seamless border crossing between the two countries - in other words, a "thickening" of the U.S.-Canada border. Senior officials and politicians in both countries are aware of the situation and have acknowledged that the thickened border's costs threaten North American economic prosperity.

Efficient movement of goods between the U.S. and Canada is the linchpin of the largest bilateral trading relationship in the world. Just-in-time delivery and factory-to-factory coordination of production schedules have facilitated efficient continental and global supply chains and contributed immensely to the growth and prosperity enjoyed by the U.S. and Canada during the 1990s and the first part of this decade. Today, however, that expansion is threatened by policy, regulatory and infrastructure impediments at vital international transportation gateways in both countries.

The impact of border thickening is clear: businesses absorb additional compliance and transaction costs, and face greater unpredictability at ports of entry. These risks, in turn, force changes in business procedures away from best practices that have evolved over decades and drive down efficiency and productivity. The thickening border is undermining benefits achieved through NAFTA and makes both countries less attractive destinations for foreign and domestic investment.

The problems associated with the thickening border are myriad and interactive. Infrastructure is badly outdated and insufficient relative to the volume of traffic. In most cases, infrastructure at the busiest border gateways has not been significantly upgraded in more than forty years. While massive investments in border administration have been made by both countries since 2001, fresh personnel and resource dollars have been overwhelmingly directed at deepening the security apparatus on both sides of the border, with inadequate consideration given to impacts on trade volumes or the need to improve infrastructure to accommodate security-related border delays, let alone the year-by-year increase in trade flows.

Indeed, many of the efforts that have been made to introduce "trusted shipper and traveler" programs have had the opposite effect of that intended for businesses and individuals alike. The result has been ever-changing layers upon layers of duplicative "expeditive" border programs, many of which do not complement one another, and all of which impose incrementally higher compliance costs and fees. User fees in each country differ, regulatory regimes are not harmonized, and regulatory and policy initiatives are implemented by each country with little or no notice to the other's administration or importing/exporting communities. In short, these poorly coordinated efforts have resulted in slower and more expensive border crossing.

Programs such as Free and Secure Trade (FAST), Customs-Trade Partnership Against Terrorism (C-TPAT), Partners in Protection (PIP), Customs Self-Assessment (CSA), e-Manifest, and the 24-hour advanced cargo manifest rule often require individual approval and certification. Certification costs have expanded exponentially, and many importers/exporters now spend hundreds of thousands of dollars to certify themselves across a range of programs. Small defects in certification or failure to certify can stymie their cross-border movement of goods.

Expedited trade and security programs have been announced with insufficient implementation time, meaning that the U.S. and Canada's respective customs administrations' systems and technology are inadequate or unavailable at program startup - resulting in further implementation delays and costs to business.

Consistent evidence of increasing border wait times resulting from security-based notification and inspection initiatives indicates that these costly border programs have had no beneficial impact, and have actually resulted in additional costs attributable to border delays. Delay and the cost of errors can be greatly reduced by seeking competent expert counsel at the outset. However, even this is primarily a defensive measure the main purpose of which is to mitigate the impact of these regulatory measures on business operations.

There are several new initiatives underway to begin addressing the thickening border. The Canadian Government recently announced the largest single injection of border infrastructure dollars in over two decades, with $2.9 billion targeted at improving land ports of entry and the West Coast sea ports. Similarly, the U.S. Government has devoted additional funds to improving border infrastructure, including opening additional laneways at key border crossings. Even so, infrastructure upgrades such as the direct highway link to and the twinning of the Ambassador Bridge between Detroit and Windsor are still in the planning stage and will not be ready for many years. More to the point, however, this new spending does not address the root causes of the thickened border, which are primarily regulatory.

In view of the events of 9/11 and the current international environment, the need to improve and maintain border security is a given. However, the approach taken to date has failed to rationally distinguish between risks of widely varying intensity. Border security risks arising from containers traveling from the Malacca Strait or the Middle East are not the same as those for a truck-load of parts traveling in a same afternoon between two GM plants on opposite sides of the Michigan/Ontario border. Yet, the design of border security measures begins with the former and takes little if any account of the unique circumstances that apply to intra-company supply chain linkages between neighboring communities.

Canadian and U.S. Customs administrations are taking small and incremental steps to integrate trade and security into a coherent organizational plan. The Security and Prosperity Partnership framework initiated in 2005 provides a forum for closer communication between the two countries' customs and border security agencies as well as between business and political leaders at the highest levels, yet progress is painfully slow.

Nevertheless, regulators are realizing that many of the enhanced security measures adopted during the past few years cannot be easily implemented in the time-frames originally allocated. Thus, implementation of the Western Hemisphere Travel Initiative at land and sea ports has been delayed until 2009 to ensure that it will be "people and trade friendly" when it comes on line. Likewise, new security procedures for container shipments have also been delayed until 2009 to ensure that radio frequency identification (RFID) technology is available at high volume border crossings.

In the short term, the cost of compliance with the implementation of the disparate security measures on both sides of the border can be substantial, and errors resulting in administrative penalties and fines are significant. Even more important, however, are the supply chain benefits of "getting it right" the first time. Firms that invest in developing and updating their trade compliance procedures and in providing timely and thorough compliance training for their supply chain professionals can expect substantial bottom-line savings from more efficient logistics.

In the longer term, getting the U.S. and Canadian governments to strike a workable regulatory balance between effective border security and facilitating cross-border trade for American and Canadian businesses that have proven themselves committed to strict compliance with border security measures, should be a strategic priority for businesses and their trade associations. Effective security is not inconsistent with efficient trade. On the contrary, a successful and vibrant economy is much more able to sustain the costs of robust border security in the long term.

Jesse Goldman is a Partner of Bennett Jones LLP in Toronto. He represents international and domestic clients in relation to international trade matters, including customs compliance and enforcement, border security, trade remedies and other regulatory issues that affect cross-border trade.

Milos Barutciski is a Partner of Bennett Jones and chairs the firm's International Trade and Investment practice. He advises clients on all aspects of international trade and investment law.

Please email the authors at goldmanj@bennettjones.com or barutciskim@bennettjones.com with questions about this article.