Alan Fox, Joe Francois, and Pilar Londoño-Kent

1. Measuring Border Costs and their Impact on Trade Flows: The United States-Mexican Trucking Case Alan Fox, Joe Francois, and Pilar Londoño-Kent

2. Presentation Outline • The Problem • Objectives • Inefficiencies in the Border-Crossing Processes • Presentation of their Implication on the Trade Flows and the Economic Welfare of the countries • Conclusion

3. The Problem • Border crossing: theoretical efficiency vs. institutional barriers • The context: • World’s longest border between highly industrialized/developing economies • Language, culture, and history • NAFTA: • Expands trade • Eliminates tariff barriers, and minimizes non-tariff barriers • Rules guaranteeing the permanent access of domestic products • Recognizes and encourages the large and growing trade

4. Mexico-U.S. Trade 1987-1999 (billions of U.S. dollars) Year of NAFTA Agreement

5. NAFTA Scenario: • Crossing the Border South-Bound • Trucking the main mode of transportation between U.S. and Mexico

6. Current Situation Scenario: • Crossing the Border South-Bound

7. Objectives • Identify inefficiencies in the border-crossing process • Quantify inefficiencies in terms of time and cost • Present their implication on the trade flows and the economic welfare of the countries

8. Impediments to Free Trade Agreements:The United States-Mexican Trucking Case • Significant time and cost inefficiencies in border crossing processes at Laredo, the main border crossing • Generates costs in the form of congestion, pollution and lengthy delays • Favors specific economic interests by the revenue it generates • Creates local employment and economic activity • The sources: legal and institutional barriers that impede NAFTA’s assumed seamless border

9. Border Crossing Logistics, Cost and Time • Methodology: interview shippers, truckers, ITDS members, transport consultants; verify by examining invoices, observing times and movements, and calculating data from maps, traffic engineering, etc. • The next figure shows times and variable transportation cost for the Laredo crossing southbound by truck; excludes costs such as pedimento, duties, taxes and broker’s commissions, costs regardless the mode of transportation

10. Crossing the Border South-Bound • Southbound costs total between $287 - $636 per truckload • It typically takes from 2-5 days to cross the border

11. Crossing the Border North-Bound • Northbound costs total between $150 - $300 per truckload • It typically takes only a few hours to cross the border

12. Macroeconomic Effect of Border Crossing Inefficiencies • Review of literature on border effects • GTAP model appropriate framework for analysis • Micro effect of Laredo border inefficiencies apparently minimal: 1-2 percent money to brokers • Time is a more important variable: Hummels estimates that each day saved in shipping is worth 0.8% ad valorem for manufactured goods. 2-5 days are equivalent to 1.6% - 4%

13. Simulating Removal of Trade Frictions • Use GTAP version 6 to measure welfare and trade impacts • Two types of shock • Tariff reduction (- Δtms, - Δtxs) • Southbound brokerage cost treated as import tariff • Northbound brokerage cost treated as export tariff • Productivity increase (+ Δams) • Proxies for removal of iceberg tariff

14. Model Aggregation

15. Experiment Structure

16. Welfare Impact

17. Impact on Trade Flows

18. Conclusions • Reform could increase welfare: • For Mexico, $1.8 billion/year • For the United States, $1.4 billion/year • Other benefits not quantified: • Reduction in pollution, congestion, and demand for new infrastructure at the border • Improved efficiency of capital equipment use • Improved integration of the two economies • Increase in security