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July 1, 2011

Northern Crossing

Why is it so costly and complicated to get goods across the border with our most valuable and loyal trading partner?

For a problem so significant, the remarkable thing is that there is really no disagreement about what's wrong with the U.S.-Canada border these days.

Nor is there any disagreement about what can fix it, and how relatively inexpensive those fixes would be. There is especially no dispute whatsoever about how valuable that border is for manufacturing in the United States and Canada, or for their economies now and in the future.

“We've been talking about all this for years, and even more so since 9/11,” says Margaret Irwin, director of customs, immigration and cross-border operations for the American Trucking Associations. “And have we done anything about it? Well not much, no.”

“We've been telling both governments for some time now that things need to change,” says Jean-Michel Laurin, vice president of global business policy for the Canadian Manufacturers & Exporters. “We've all done so much work and there are so many good ideas, but too little has happened. This is making North American manufacturing less competitive. Our goal is to create jobs.”

Certainly plenty of jobs already depend on this border and what the Canadian Chamber of Commerce calls a “staggering volume of bilateral trade.” The U.S. Department of Transportation said surface trade across the two borders totaled some $471 billion in 2010, up 22% from 2009.

This means that every day, from Vancouver to Quebec, the northern border handles more than $1.3 billion in trade and more than 300,000 travelers. Obviously the United States is important to Canada. Just as obvious, Canada is extremely important to the United States. Canada is the largest export market for 35 of the 50 states.

Yet, says a Canadian Chamber study, “The true importance of the Canadian market to the U.S. is often underestimated. Canada buys more from the U.S. than Germany, Japan, China and the United Kingdom—combined. In fact, the Canadian market for U.S. products is larger than that of the entire European Union (EU), the population of which is more than 15 times that of Canada. Eight million jobs in the U.S. and three million in Canada depend on continued bilateral trade.” More than that, the United States is the largest foreign investor in Canada and the most popular place for Canadians to invest their loonies.

No surprise, then, that the border is humming. It is widely acknowledged, for instance, that more trade flows between Windsor, Ontario, and Detroit, Michigan, than through any other border crossing in the world. Only six border crossings handle an estimated 75% of trade by truck between the two countries.

Busy as it is, the financial crisis and recession in the United States—both of which largely missed Canada—have cut border traffic and the flow of manufacturing goods. Exports from Canada to the United States by truck, by far the major vehicle for this trade flow, were down one-third in 2009. From the United States, that trade was down 27%. But as manufacturing has begun to drag the United States out of its economic doldrums, the border has naturally perked up. Crossings of the Ambassador Bridge, the main connection between Windsor and Detroit, increased 26% in the first half of 2010, the most recent figures available.

The Thickening Border

With so rich a relationship and so much at stake, one would think both governments would be doing everything possible to make border crossings smooth, fast, efficient, and, most importantly, cost effective. Unfortunately, one would be largely wrong. “It is much more difficult to cross today in terms of money, time and effort,” says James D. Phillips, president of the Canadian American Border Trade Alliance and a 20-plus year veteran of crossing issues and negotiations. Since 9/11, the border has “thickened,” he says.

The actual wait time varies, says truckers' advocate Irwin: On a bad day at a busy crossing like Ambassador it can be three to five hours. On a good day, 25 minutes. “It is a growing problem and only going to get worse as economies improve,” she says.

But, as Phillips explains it, the problems with the “thickened” border reach far beyond drivers sitting in their vehicles waiting in line for inspections, paper clearance or an open customs booth. This term “thickened” applies much more to data and information these days—the time and cost to prepare to cross, dealing with multiple conflicting regulations and clearance programs.

“The cost to cross is huge,” he says. “The Canadians just finished a study that put the [cost] at CAD$30 billion, including the wait time and delay time.” If those numbers are anywhere near correct, for the United States it would be another $45 billion, he says.

Why so expensive? The Canadian Manufacturers and Exporters, which does not doubt that number, lists some of the additional border processing costs since 9/11. These include direct costs at the border, such as delays and user fees, and the capital costs, such as developing electronic information systems, reporting and security systems. Add the processing costs, including staffing, training, consulting and facilitation; the waste from unnecessary reporting, system complexity, errors, repetition, inconsistencies and unnecessary information requirements; and the late deliveries and associated operational costs including additional inventory, storage, transportation and fuel.

One result: Melissa Mathew, manager of customs compliance for Con-way Freight, a big cross-border truck operator in Ann Arbor, Michigan, says the company now has a customs resource center staffed with 10 people 24/7 to monitor traffic, help with compliance forms and issues, track shipments and help drivers. That cost? “In the hundreds of thousands of dollars,” she says.

A study released earlier this year titled, “Border Delays Re-Emerging Priority: Within-Country Dimensions for Canada” by Canadian economics professors Trien T. Nguyen at the University of Waterloo, Ontario, and Randall M. Wigle at Wilfrid Laurier University in Waterloo, found evidence of an “alarming trend” in trading behaviors. “For example, producers on both sides of the border resorted to stockpiling inventory as a hedge against the risk of late shipments due to border delays,” said the study. “They routinely held higher inventories and doubled ship orders to avoid costly out-of-stock situations. Some even built backup warehouses on the other side of the border . they chose to forgo the efficiency of a 'just-in-time' inventory strategy in favor of the redundancy of a 'just-in-case' safe bet.”

Security Trumps Trade

The professors blamed these trading behaviors on post-9/11 and “the re-emerging priority of new security-driven barriers to trade at the border.” Certainly, as the U.S. Department of Homeland Security absorbed the Customs and Border Protection Agency, its tighter border procedures have caused a lot of trucker and shipper agony. Delays got so bad at one of the Michigan crossings in those early days that customs brought in porta-potties for the waiting drivers.

There are those that argue northern border problems are the result of an American over-reaction in the name of border security, generally, and the furor over illegal immigration and violence along the U.S. border with Mexico. More than one American border official has been quoted as saying “security trumps trade.” And there is no denying that new electronic freight inspections systems and increased documentation for shipments at each port (the truck entry points are called ports) have added new layers of potential delay.

But Phillips, among others, says that argument is far too simplistic and in fact the new border procedures may actually have made things better in a number of ways. “No money was spent in 15 years—not a single customs agent was added to northern borders—prior to 9/11,” he says. “Then we got a lot of new money and technology. So in some ways, the border is a lot more efficient—money- and tech-wise—in terms of giving service. Memories fade. But back in 1999, half the booths were never manned on the border. The lines were a lot worse than now.”

Meanwhile, both governments have developed at least a dozen electronic alphabet soup programs—ACE, ACI, NEXUS, FAST, C-TPAT, PIP and CSA, among others—that certify shipments, anticipate inspection problems and expedite crossings. Together, these make up the so-called Trusted Shippers programs that are supposed to make it easier for legitimate businesses to trade across the border. The Canadian Chamber of Commerce estimates that getting certified as a trusted shipper can take years and cost up to $100,000.

Trucks crossing into the United States are now required to file their manifests with Customs and Border Protection an hour before they arrive at the border. Those that cannot, and do not, face delays. And Phillips says even though customs can thus tell a shipper in advance if the papers are not in order, the agency still cannot tell that shipper why. “The e-filing program was not set up to be specific in that regard,” he says, “which leaves the shippers in the dark and often delays them. Customs is working on that now.”

On the Canadian side, electronic advanced filing has been voluntary and will only become mandatory next year. Even at that, the forms will be different and require different information. “The Canadians are interested in different things than we are,” says Irwin. “We want to know a lot more about the drivers, for instance, than they do.”

Can a Border Be Too Secure?

All this is driven by an understandable concern for keeping terrorists and other crazies from blowing up the United States. But specifically along the U.S.-Canada border, it is fair to question how extensive the danger really is and what is actually necessary to differentiate the real threats from the imaginary.

“From a security perspective, experience at the border since 9/11 has been generally satisfactory,” said a report late last year by the CD Howe Institute, a Canadian think tank. “There have been no significant security breaches of either the Canadian or U.S. side. There have been a number of high-profile arrests, the most prominent being that of Ahmed Ressam by U.S. officials at Port Angeles; his conviction and subsequent incarceration stand as a clear example of the benefits of cross-border police and intelligence cooperation.” Ressam was arrested on Dec. 14, 1999, even before the tougher 9/11 restrictions were in place. Commissioner Alan Bersin, of Customs and Border Protection, has estimated that only 1% of border traffic is “high risk that matters.” Port Angeles in Washington State is an actual seaport and not one of the northern border crossings.

No wonder the catch of criminals has been small and not at all security-related. “The latest report by the U.S. CBP for the fiscal year 2008-2009 pointed to a total of 15 individuals denied entry for security reasons, out of 21.3 million passengers, 8.2 million autos, 1.4 million trucks and 41,660 buses processed at 17 border crossings in Central Canada. In addition, 212 fugitives were arrested for crimes including kidnapping, negligent homicide, dangerous drugs and mortgage fraud,” the Howe study says.

“We completely understand the American concerns about terrorism. We get it,” says the CME's Jean-Michel Laurin. “But most of the cross-border traffic is shipped by a few companies. Their sales are between related companies that do this all the time and are already members of every trusted shipper program. Some of those are very sophisticated programs, so they have vetted the companies and their customs and accounting procedures, they have a trusted trader relationship.”

“Thirty-five percent of the traffic is intracompany, GM to GM and IBM to IBM, and another 30% is secure supply chains, trusted shippers, companies that are ultra-careful,” says Phillips. “So 65% of the trade is as safe as can be, yet the U.S. Customs people apply every policy and procedure to them that they do to Charlie Jones who [they] don't know.”

“We need to work on how to deliver more value to companies that have these trusted shipper relationships,” says Laurin. “Many [companies] say [trusted-shipper arrangements] are not now worth the time and cost. Where stuff is safe and low risk, it should be expedited and cleared easily. Which will, of course, mean that both countries will have more resources to dedicate to higher-risk shipments. We want to make it easier to make things in North America.”

The Nguyen-Wigle border delay study highlighted the disadvantage that security-inspired multiple inspections place on North American automakers compared with importers as one notorious example. “Many auto part subassemblies cross the border more than once,” the economists said. “Brake pads made in Canada can be assembled in Michigan into brake assemblies that are subsequently incorporated into a vehicle built in Ontario.”

The result: “Whereas finished manufactured goods like motor vehicles imported from Asia are inspected only once,” the study said, “the parts and subassemblies of vehicles assembled in Ontario may have been subject to an additional five to six inspections due to back-and-forth border crossings.”

Doug Goudie, director of international trade policy at the National Association of Manufacturers, estimates that cross-border auto manufacturing is 25% to 30% of the traffic.

This is hardly a new problem. Six years ago, the Coalition for Secure and Trade-Efficient Borders, one of the larger business groups in Canada, reported, “The automotive industry is so integrated that the production of 4,000 vehicles in North America may involve over 28,200 customs transactions. These customs rules and border delays could easily add an extra cost of CAD$800 per vehicle compared to imported vehicles.”

“It is more work to get things across the border, than to ship them in from China,” says Irwin. And not just because of heightened security considerations.

A Mess—Uh, Mass—of Regulations

“The surge of imports from offshore countries to the U.S.—the inferior drywall from China, the tainted baby formula and lead-based painted products—has produced regulations that are less than ideal for us,” says Laurin. “Congress feels the need to put up compliance measures at the border to deal with offshore imports so that products are tested and inspected, so they come with declarations that they meet U.S. requirements. We are seeing a multitude of food safety and product safety measures being imposed at the border aimed at offshore problems. We have these regulations that are targeted at other countries, but that are hurting Canadians.”

He points to the Lacey Act, which is designed to keep endangered plant species and illegally harvested wood out of the United States. “I have members who are making custom furniture, but they have all these paperwork requirements to certify where the wood comes from and what kind it is, when it is all from here. Some of them tell us they need to hire a couple of people just to fill out the paperwork. Things like that increase the costs of compliance unnecessarily.”

Other regulations seem to be more of a simple shakedown. “We now have an agriculture fee levied against every product that crosses the border,” says Phillips. This was the result, some years ago, of a few companies in Canada taking foreign fruits and vegetables and marking them as grown in Canada. There had never been an agriculture inspection at the border. This mismarking by a few companies caused a bad infestation of insects in fruit. “So we had to start inspecting and to pay for it, we had to put in an inspection fee. But now even steel has to pay,” he says. The Canadian Chamber and U.S. Chamber estimate this costs their members more than $78 million a year. Not to mention considerable aggravation.

“Some commodities out there customs just has to look at,” says Jevon Jamieson at ABF Freight System Inc. in Fort Smith, Arkansas. He is chair of the American Trucking Associations' Cross Border Operations Policy Committee. And though he thinks customs has been doing a relatively good job, “They are the final authority for other agencies, maybe two dozen or so, and that complicates things.”

Actually, customs has to juggle even more agencies than that. When the Border Policy Research Institute, in Bellingham, Washington, counted in 2009 it found more than 40 government agencies involved in regulating the flow of materials across the border. This, too, creates dozens of different reporting requirements to various agencies. And even though many of those reports can be done electronically, “with this bunch of different agencies and departments, and export and import control requirements, we want to send them electronically but many of these departments do not have the platforms to make it work, or they have different formats,” says Laurin. “We need to get these laggard agencies to modernize and streamline.”

Unfortunately, as with so much in government these days, there is less and less money available to make anything happen. Despite another widely acknowledged need—that is, for more agents and technology staff and better training for all—the budget for Customs and Border Protection was cut 2% in fiscal year 2010-2011. Hardly draconian, but also hardly responsive to the problem.

Wanted: Better Infrastructure

There is also a real need for real money—along the entire border—for more and better customs plazas, control booths, access lanes and highway connectors. “We are just talking sheer numbers here,” says the ATA's Irwin. “Whenever you have a lot of traffic coming to a place with a funnel, you get that inevitable funnel effect, which means backups and delays at peak hours.” At some crossings there are just not enough customs booths. At some, there may be lots of booths, but they are fed by a two-lane access road that needs widening. At others, the FAST lanes for electronic pre-cleared traffic, do not go back far enough, so trucks wait at narrow access points. “These kinds of problems are at every large border crossing,” says Irwin.

And this is mainly on the American side. “The biggest delays are coming into the U.S.,” says Z. Kris Wisniewski, executive director of the Eastern Border Transportation Coalition, an association of eastern states and Canadian provinces devoted to overcoming trade barriers. The Canadians have been steadily upgrading facilities over the last few years, spending CAD$4.4 billion since 2001, says Paul Robertson, the country's economics minister.

In a presentation prepared for a September 2010 Canadian American Border Trade Alliance forum, Ralph Scalise, head of the General Service Administration's National Office of Design and Construction, described U.S. efforts to upgrade the northern border. He says that $1.6 billion had been authorized since 1999, including an estimated $720 million most recently in Obama administration stimulus funds. But Scalise put the overall need at $6 billion. And he bluntly told the forum that “only $150 million a year is anticipated for the next several years.” Doing the math, he concluded, “at current levels it will take decades to modernize our inventory.”

And that congested tale does not even include the busiest single trade crossing in the world, the Ambassador Bridge at Detroit-Windsor. It is not only the busiest, but also, as such, the crossing most in need of additional capacity. And therein lies a baroque tale of government aspiration and private ownership working at cross purposes, mixed with allegation of lying by all involved about costs and funding, toll revenue and how profitable a new bridge might be and how soon.

The Canadian authorities and the Michigan state government want to build a new span across the Detroit River that will cost a bit more than $5 billion. The Canadian government has offered to help Michigan with its share of costs. It says toll revenue, at an estimated $70 million a year, will pay off the construction bonds and make it sustainable. Newspaper accounts of leaked memos by Michigan legislators have questioned those amounts and declared that government subsidies would be needed to keep the bridge solvent.

The 82-year-old Ambassador Bridge is the only privately owned crossing on the northern border. It is the property of trucking billionaire Manuel “Matty” Moroun, who understandably wants to build his own new bridge and not have any government competition for his existing span. It is not clear as of this writing how this will end. It is clear, though, that this single, elderly and cramped crossing will continue to handle some 25% of all northern border traffic for several years to come.

What's to Be Done?

Every person interviewed for this article agreed that apart from improving infrastructure, the United States and Canada must harmonize trade practices. They all want the two countries to adjust their standards and regulations to reduce the number of inspections and duplications in customs and security compliance requirements. In February, President Obama and Prime Minister Harper jointly announced a broad “new vision” for border trade initiatives to achieve exactly those goals. They set up two main efforts, one aimed at improving the inspection and pre-clearance processes and the other a regulatory cooperation council, to propose ways to better synchronize the countries' regulations.

Even Jim Phillips, who has been arguing to deaf ears for more than 20 years, was impressed. “For the first time I am seeing a political will that was missing in the past,” he says. “I think there is a real commitment, real belief and intent, and I am very pleased. And the new election gave Canada stability for the first time in four or five years. But you know, this is self-defense. We better get this right for all our sakes.”

The first of the working groups were scheduled to release recommendations and action plans in June. Phillips and others watching the process say that the May Canadian election, which re-installed Harper, has likely delayed those announcements.

“I can't recall a prime minister and a president doing something similar,” says Laurin. “We have never had both leaders come up with such a bold agreement. And I know they both want to leave this as one of their legacies.”

Legacies are nice of course. But growing, competitive economies are even nicer, which is one reason why Phillips called a new trade accord self-defense. Or, as David Bradley, president of the Canadian Trucking Alliance put it: “Canada and the United States, alone or in partnership, cannot hope to compete with the emerging economies and/or other trading blocs unless we have a predictable, reliable and efficient supply chain. We need results, not discussions.”