The U S Canada Border Border Economic Costs

The U. S. -Canada Border: Border Economic Costs, Their Causes, and Alternative Border Management Strategies Prepared for: U. S. Department of Transportation Talking Freight Seminar Series by John C. Taylor and Associates Seidman School of Business Grand Valley State University October 15, 2003

Ambassador Bridge – Detroit, Michigan – Windsor, Ontario

Blue Water Bridge – Port Huron, Michigan – Sarnia, Ontario

Methodology • Secondary literature review • Multiple site visits to seven crossings • Traffic data from 1984 and monthly data pre to post 9/11 • Primary inspection transit time (backup) data from Canada Customs for both directions • 173 personal interviews of key organizations/persons • Estimation of border related costs by impact category and in total • Analysis of border management options

Extent of Trade and Traffic • The U. S. and Canada have annual merchandise trade of US$382 billion with US$235 billion moving by truck • Traffic levels have fluctuated, however: – Truck traffic is up 122. 5% since 1984 – Auto traffic is up 24. 9% since 1984, but down 11. 8% since 1995

Prior Studies of Border Costs • Pre 9/11 study of six major crossings by Battelle and Texas Transportation Institute • Canadian Manufacturers and Exporters Association estimates border adds 6% to the costs • Former Prime Minister Mulroney estimates the border adds C$30 billion in costs • Testimony before the Windsor Chamber of Commerce indicates border costs equal to 2 -3% of NAFTA trade levels • A U. S. Manufacturers Alliance report estimated border crossing costs at “up to 13%” (Magner 2001)

Macro Indicators of Border Costs Cross-Border Freight Rates • Cross-border freight rates suggest a border cost impact • Interviewees indicated that cross-border rates average 1020% higher than U. S. domestic rates • Cross-border freight rates are an estimated US$1. 59 billion higher than comparable U. S. domestic rates • Some carriers have border crossing surcharges of as much as C$20 per consignment

Macro Indicator of Cost Impacts – Reduced Sourcing From Canada

Detailed Cost Estimates • Total cost impacts are estimated at US$10. 3 billion. – These costs represent 2. 70% of total 2001 U. S. -Canada trade in goods. – Specific truck related costs represent 4. 02% of total truck based trade. • Transit time and uncertainty costs, specifically, total an estimated US$4. 01 billion. • Trade policy related costs totaled an estimated US$6. 28 billion.

Transit Time and Uncertainty Related Impact Summary (Millions of US$) Type of Cost Minimum Midrange Maximum Transit Time/Uncertainty Costs Carrier Related Primary Inspection Transit Time 275. 3 324. 2 351. 8 Secondary Yard Processing 602. 5 755. 4 908. 3 Excess Plan Time 113. 7 416. 4 515. 7 65. 8 120. 7 197. 4 133. 5 250. 7 400. 9 1190. 8 1867. 4 2374. 1 1007. 0 1530. 0 2000. 0 Extra Inventory Carrying Cost 229. 0 458. 0 686. 0 Manufacturer Subtotal 1236. 0 1988. 0 2686. 0 96. 7 159. 0 209. 6 2523. 5 4014. 4 5269. 7 Reduced Cycles/Other Driver Documentation/Fax Time Carrier Subtotal Manufacturer Related Manufacturer Sourcing Benefits Personal Traveler Transit Time/Uncertainty Subtotal

Primary Inspection Transit Time Costs • A key cost category - primary inspection transit time (backup time) costs • Costs were estimated using transit time data collected by Canada Customs. This data is: – – Collected six times a day at all key crossings For both directions of travel For cars and trucks separately Represents average backup minutes at that point in time • Sample of daily data from May 1 to August 31, 2002 • Average backup times were used a sample and applied to annual traffic to arrive at total backup hours • Using a cost of $150/hour total backup costs were estimated (Maring and Lambert 2002) • US$324. 3 million in costs

Secondary Yard Processing Costs • Secondary yard processing costs are very important • Costs apply to the 20 -40% of trucks • Average times in secondary of 1 -2 hours are assumed depending on the crossing and direction of travel • Processing times are based on numerous interviews with key parties • US$755. 4 million in costs

General Border Costs and Grand Total (Millions of US$) Type of Cost Minimum Midrange Maximum General Border Costs Carrier Related General Border Administration 100. 0 250. 0 Cabotage 100. 0 150. 0 333. 3 200. 0 350. 0 583. 3 372. 8 462. 9 552. 9 Duties, Border Fines, and Fees 1337. 6 1605. 1 1872. 3 Customs Administration 2630. 0 3290. 0 3950. 0 Manufacturer Subtotal 4340. 4 5358. 0 6375. 2 Federal Inspection Services Staff 452. 9 571. 5 960. 9 4993. 3 6279. 5 7919. 4 2523. 5 4014. 4 5269. 7 7516. 8 10293. 9 13189. 1 Carrier Subtotal Manufacturer Related Brokerage Costs General Border Subtotal Transit Time and Uncertainty Subtotal Total U. S. -Canada Border Costs

Key Causes of Long Transit Times • Insufficient number of open primary inspection booths • Congested ingress roads with insufficient capacity and too many obstructions to free flow traffic • U. S. exit checks at key crossings • Crossing roadbed capacity is generally not a major cause of problems

Key Causes of Long Transit Times • Other problems relate to broker locations too distant from parking spaces, hours of operation and quality of staff at night and weekends, and a lack of adequate attention to processing PAPS and PARS faxes. • Poor documentation preparation and uneducated drivers are an additional major problem

Possible Short/Medium Term Solutions • Increasing FIS staff levels, a process well under way, but they must be put in booths • Full participation in customs clearance systems such as FAST that will minimize secondary visits • Expansion of plazas to allow more primary and secondary inspection areas, and dedicated lanes for approach to NEXUS and FAST • Use of off-site second stage inspection areas at where existing plazas cannot be expanded • Use of full off-site secondary inspection, joint facilities and reverse inspections

Possible Short/Medium Term Solutions • Broker processes and relationships with drivers also need improvement • TV camera monitoring of crossing backups and communication of images/info to FIS and local police • An option might be to require licensing of carrier/drivers in order to be allowed to conduct cross-border trucking

Possible Long Term Solutions • Increase security and/or trade processing capacity: – At major border crossings: • Major investments in additional roadbed crossing capacity • Major investments in plaza expansion • Major increases in FIS staff – Along the entire border: • Major investments in remote monitoring technology • Increases in Border Patrol staff • Are there alternatives? ? ?

Consider The Present Situation • Total border costs represent 2. 70% of merchandise trade • Costs relate to border security and control measures which were designed to collect duties which don’t exist in most cases • Border congestion on the Canadian side, from backups related to entry to the U. S. , are causing major concerns in Canada • Given the level of interaction across the border, security is difficult – Processing times for cars and trucks average 30 and 75 seconds • A very small percentage of trucks actually have doors opened • GAO recently reported on a lack of simple identity checks and the ability to walk across the border through border parks unchecked – Most border “crossings” are unstaffed along the 5300 mile expanse of the border and entry is relatively easy

Proposed New Security Measures • New security measures to impose some minimal level of protection will: – Be costly – Have the potential to dramatically impact border congestion and delays • Examples of new security programs include: – Entry – exit check systems – U. S. Customs proposed rules for advance notification – New advance notice law on food imports from Canada • And it is unclear that security can be significantly enhanced given trade and travel volumes • Is their a better approach?

“External Perimeter” Strategy Discussion • A European Union like “open border” system is one option • Such a system would: – Be implemented slowly – Require Canada to adopt tougher security measures – Rely on random inspections, extensive post audits by Customs, and severe fines – Rely on tougher Customs and Immigration controls on the external border – Likely spur a push for additional harmonization of rules • This kind of system could free up a significant portion of the US$10. 3 billion in costs • Could actually increase security by freeing up resources for high risk priorities • While there is increasing support in Canada, obvious issues in the U. S. relate to: – Border security concerns – How to deal with Mexico