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Post-9/11 Border Security and Canada-U.S. Trade and Investment

Post-9/11 Border Security and Canada-U.S. Trade and Investment. Transportation Border Working Group, Montréal, QC October 24, 2007 Michael Burt Principal Economist burt@conferenceboard.ca. www.conferenceboard.ca. Outline. Why is keeping the border open important?

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Post-9/11 Border Security and Canada-U.S. Trade and Investment

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  1. Post-9/11 Border Security and Canada-U.S. Trade and Investment Transportation Border Working Group, Montréal, QC October 24, 2007 Michael Burt Principal Economist burt@conferenceboard.ca

  2. www.conferenceboard.ca Outline • Why is keeping the border open important? • Effects of tighter border security on the volume of exports • Assess what businesses have been experiencing at the border • Discuss recommendations for business leaders and policy makers

  3. www.conferenceboard.ca Canada-U.S. Economic Integration • Long evolutionary path toward deeper North America economic integration • National Policy, 1880s -- high Canadian industrial tariffs, which encouraged U.S. FDI in Canada post-WW I • Autopact, 1960s – free trade in autos and parts permitted integration of North American auto industry • From FIRA to Investment Canada, 1985 – shift in attitude toward welcoming of FDI • Free Trade Agreement, 1989 -- eliminated most tariffs for imports from U.S., allowed rationalization of production within North America

  4. www.conferenceboard.ca “Integrative trade” • Reduction in global and regional trade barriers has seen emergence of more modern trade paradigm, which we call “integrative trade” • Integrative trade is the development of global and regional value chains, driven by FDI, as firms seek optimum operating efficiency • Also described as dynamic comparative advantage

  5. www.conferenceboard.ca Integrative trade: a Canada-U.S. context • Total Cdn trade now 80% of GDP (vs. 52% in 1990) • 80% of Canadian exports to U.S. (vs. 75% in 1990, but 86% in 2000) • Foreign content of Cdn exports 34% (vs. 27% in 1990) • Foreign content of Cdn-made autos 63% (i.e. domestic content only 34%) • Significant intra-firm trade – 40 per cent of total Can-U.S. trade • Huge increase in flows and stocks of FDI in both directions • Sales from Cdn foreign affiliates comparable to Cdn exports

  6. www.conferenceboard.ca The Can-U.S. Border: Canadian Objectives • Secure, predictable access to the U.S. market • Permits optimal North American business platform • Contributes to Canadian prosperity • Necessary for integrative trade • Necessary to attract foreign investment to Canada • Physical security • Both a goal in itself and a pre-condition for trade

  7. www.conferenceboard.ca Global and Regional Pressures • Heightened security post-9/11 • Intense global competition • Small cost differences can have large effects • Goods cross repeatedly • Production can be easily substituted • Competition in U.S. does not have border costs • Cost increases may dilute FTA gains • Border security approach matters

  8. www.conferenceboard.ca New Conference Board Researchon the Border • Most extensive analysis to date • Detailed econometric (i.e. statistical) analysis • 60 interviews in fall of 2006 • Cross-section of sectors and regions • Industry associations • Select government officials

  9. www.conferenceboard.ca Statistical Analysis • Assess 9/11 impact on Canada’s export volumes to US • At individual border crossings • For individual products • Focus on post-9/11 border security • Measures real trade, not nominal • Accounts for relative prices and exchange rates • Controls for industry specific effects • Separates security from pre-9/11 border problems

  10. Most Trade Occurs at Few Crossings

  11. Truck Crossing By Port, 2006 Sources: The Conference Board of Canada; Transport Canada.

  12. Major Export Commodities, 2005 billions of dollars Source: The Conference Board of Canada; Statistics Canada.

  13. www.conferenceboard.ca What We Found • No evidence that export volumes were lower due to post-9/11 environment • Any changes due to other factors • Similar results for individual crossings, products • No immediate or sustained effect • Can infer no import change as well, due to deep Can-U.S. trade integration

  14. Fort Erie's Share of Total Exports (per cent) Sources: The Conference Board of Canada; Statistics Canada.

  15. Canada's Share of U.S. Telecom Equipment Imports (per cent) Sources: The Conference Board of Canada; U.S. Department of Commerce.

  16. www.conferenceboard.ca So, No Need to Worry? • Does this mean no post-9/11 harm to Canadian economic interests? • The reality: exporters must get goods across to stay in business • Especially time-sensitive products, just-in-time inventories • Therefore, not really that surprising that no change in exports due to post-9/11 security • But: what happened to business costs?

  17. www.conferenceboard.ca Interviews with Exporters and Experts • 60 interviews on effect of post-9/11 border security policies • Heightened border scrutiny • Alphabet soup of new border policies -- FAST, CSA, PIP, CTPAT, ACE, ACI • Fast-tracking pre-approved traffic • Advance notification policies • Policy layering – new programs, program changes

  18. www.conferenceboard.ca Summary Interview Results • Heightened border security is having an effect on business costs • Competitive situation is forcing companies to internalize these costs • Potential benefits of increased security are slow to materialize

  19. www.conferenceboard.ca Direct Compliance Costs • 75 per cent of respondents reported direct cost increases as a result of post-9/11 environment • Mostly increased transportation and freight insurance costs • Both one-time and on-going costs • Companies assumed voluntary costs • In order to reap benefits or not lose advantage

  20. www.conferenceboard.ca One Company’s Added Costs • Purchased new technology • Re-trained staff • Assessed security requirements • Upgraded employee and visitor ID system • Prepared a procedure manual for new border programs • Developed an employee awareness program • Upgraded existing exterior lighting • Upgraded or installed closed circuit television capabilities • Repaired faulty access control (e.g. better locks) • Created new fencing • Created a special area for drivers with restricted plant access • Improved surveillance • Hired a third party security consultant to audit plants and third party warehouses

  21. www.conferenceboard.ca Costs of Changed Delivery Patterns • Warehousing on U.S. side • Pre-shipping goods • Shifting to other crossings or modes • Idling to allow for 1-hour advance notice

  22. www.conferenceboard.ca Costs of Uncertainty • Shifting policies create uncertainty • Tendency to first announce policies, then change or add to them • Inconsistent treatment at border • Lack of clarity on border resumption if another terrorist event

  23. www.conferenceboard.ca Delays: Recent Improvement • Interviewees said that delays were: • Routine from 2001-2004 • Much reduced in 2006 • Confined to rush hour/ certain crossings • 2007 data backs this up • Why fewer delays? • Infrastructure improvements • More agents • New border policies • Port Shifting

  24. Border Crossings(millions) Sources: The Conference Board of Canada; Statistics Canada.

  25. www.conferenceboard.ca Benefits As Well • Interviewees have invested to: • Protect competitive position • Make their business profile known to customs • Get faster, predictable, secure market access • Are we there? • Where FAST works, more efficient crossings • But FAST does not always work as intended • Infrastructure constraints • Harmonized policies not harmonized • May have improved since interviews • Unexpected benefits • Resulted in reduced waste • Improved internal systems

  26. www.conferenceboard.ca Summary of Key Findings • Export trends have not changed due to post 9-11 border • Firm behaviour has changed • Costs have gone up • Delays have recently gone down • Goods still getting across, but at increased cost to firms • But, some see costs as opportunity to fast-track border and reduce waste

  27. www.conferenceboard.ca Reaching a Tipping Point? • For most, cost of access to the U.S. is higher • Have benefits of access to the U.S. been eroded? • Or, can we seize this new border environment as an opportunity?

  28. www.conferenceboard.ca Advice to Policymakers • Modify and coordinate programs to fully realize efficiency benefits • Ensure infrastructure allows for FAST crossing • Harmonize or mutually recognize Canada and U.S. FAST programs • Provide a FAST-only crossing? • Provide enough resources on both sides of the border • Have a clear plan for border resumption in event of attack • Take pressure off the border – pre-clearance, etc. • Minimize new rules and changes to policies • Officials to become one-stop portal and information brokers for businesses

  29. www.conferenceboard.ca Advice to Business Leaders • Accept some cost increase as price of access • View the post-9/11 border as an opportunity • Reduce waste, improve firm security, enhance access • Smaller businesses might want to wait until FAST benefits are proven • Establish flexible contingency plans for sensitive supply chain elements

  30. www.conferenceboard.ca www.conferenceboard.ca Where to Find the Research http://www.conferenceboard.ca/ITIC

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