U.S.-Canada transportation and logistics: border impacts and costs, causes, and possible solutions

Transportation Journal, Fall, 2004 by John C. Taylor, Douglas R. Robideaux, George C. Jackson

Abstract

This article examines the levels of trade and transportation on the U.S.-Canadian border, and the cost impacts that border and bilateral trade policies impose on that trade. More importantly, the article focuses on the causes of those impacts, and suggests a number of short- to medium-term approaches to reducing these costs. Finally, long-term strategies, including a North American "external perimeter" approach, are reviewed and discussed. Border and related trade policies are found to be costing the two economies US$10.3 billion per year, or 2.7 percent of total 2001 merchandise trade. The primary cause of the delay and uncertainty related portion of these costs is found to be institutional and staff related, and not infrastructure related. Consequently, solutions need to address many of the institutional causes before long-term investment in new infrastructure is addressed. An alternative to major investment would be movement towards an "external perimeter" strategy that would de-emphasize the physical U.S.-Canadian border. The research provides insights into the savings that might accrue if an external perimeter border management strategy were adopted.

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Since passage of the Canada-U.S. Free Trade Agreement (CUSFTA) and North American Free Trade Agreement (NAFTA), the U.S. and Canada have witnessed explosive growth in trade and increased specialization and integration of the two economies (Canada-U.S. Partnership 2000, 11). However, while the agreements liberalized trade and investment policies, they did little to facilitate free flows across the border, and actually increased the processes and paperwork required for bilateral trade (Prokop 2003, 252; Zuckerman 1995, 18). These processes serve as an impediment to the free flow of transportation, and the resulting costs are in effect another form of non-tariff barrier that drives up logistics costs (Brown and Anderson 2002, 101-104).

The transportation literature recognizes the importance of reliable borders and the potential border cost impacts on traders' logistics systems (Heavor 1992, 63-72, Taylor and Closs 1993, 6-11). For instance, Stank and Crum (1997, 31), speaking about the U.S.-Canada border, observe that "Border crossings create delays in transportation and add uncertainty to transit times as customs clearance, traffic congestion, and other operating procedures are often highly variable with respect to time."

Reliability of transportation is of course critical to modern logistics management practices such as JIT and make-to-order (Rao, Grenoble, and Young 1991, 105-122; Harper and Goodner 1990, 22-31; Anderson and Quinn 1986, 68-87; Bookbinder and Dilts 1989, 50-65). Any impediments to this reliability serve as a "tax" on the flow of people and goods and contribute to the "border effect" on bilateral U.S.-Canada trade reported on by a number of economists (Globerman and Storer 2003, 6-10; Brown and Anderson 2002, 99-120; Hillberry 1998, 1-17; Helliwell 1998, 115). This "border effect," observed in comparisons of inter-provincial vs. provincial-U.S, trade levels, suggests that U.S.-Canada trade is several times lower than might be expected given the level of provincial trade flows. Post-9/ 11 tightening of the border could contribute to an enhanced border effect and reduced trade growth.

Deeper integration of the two economies will require several issues to be addressed, including, according to Hart and Dymond (2001, 5), "the costs of compliance at the border, and the potential costs created by delays." But what are these costs, and what is the size of the overall "tax" on cross-border flows? And, more importantly, what are the causes of, and possible solutions to, the cost impacts from the border? The purpose of this article is to report on research aimed at determining the costs of the U.S.-Canadian border, the causes of these cost impacts, and options for reducing the cost impacts. (1) An understanding of the information and options presented in this article could be useful to transportation and border management policymakers as they consider future border management strategies.

THE U.S.-CANADA RELATIONSHIP: TRADE AND TRANSPORTATION

The U.S. and Canada have the world's largest trading relationship. For 2003, merchandise trade between the two countries totaled US$393 billion. However, following strong double-digit growth in bilateral trade throughout the '90s, there was little year-over-year growth in trade from 2000 to 2003, and the 2003 figure was actually down US$12 billion from 2000 (U.S. Department of Commerce 2004, 1-2). Nevertheless, the U.S. is still Canada's most important market, and Canada is the destination for 23 percent of U.S. exports. The U.S. and Canada are also major sources of foreign direct investment for each other, and travel between the two countries is extensive. This activity results in a large volume of border crossings. Table 1 indicates that in 2003, 60.4 million personal vehicles crossed the border, along with 13.5 million trucks.