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Dead end for free trade

Globe and Mail | May 17, 2008


NAFTA was meant to deliver timely, unfettered access to Canada’s biggest trading partner. Instead, delays are longer, costs are higher, and business models are breaking down, Barrie McKenna writes

WINDSOR, ONT. — Peter Durant is getting edgy. The 41-year-old Ontario trucker should be on his way to Toledo, Ohio, to pick up a load of Oreo cookies for Kraft Canada.

Instead, he’s stuck at a truck stop outside Windsor, Ont. The U.S. Customs computer system that handles freight has crashed and can’t read his electronic manifest.

By the time the all-clear sign comes from his dispatcher an hour later, about 100 trucks are lined up on the U.S. side of the Ambassador Bridge. It will take him another 1½ hours to navigate the 13-kilometre drive through Windsor and clear customs on the U.S. side.

It’s another day at the busiest trade gateway on the planet — not a bad day; not a particularly good day. Just thick. Dense layers of security, designed to shield Americans from a world full of threats, have conspired to make life enduringly less predictable for everyone else.

"I can’t see this is an efficient way to move things across the border," observed Mr. Durant, who has hauled cargo across the border once or twice a week for the past 14 years. "This isn’t it," he said as he guided his rig through winding, rutted lanes beneath the bridge.

Call it thick, sticky or whatever you like. For the people and companies who ply the border trade, the new reality is an increasingly complex, time-consuming and costly experience. And we’re all paying the price.

The long-ago promise of the Canada-U.S. free-trade deal was about dismantling barriers — tariff and otherwise — along the world’s longest undefended border. But those benefits are being slowly eroded as companies absorb ever greater costs — anything and everything to keep trade moving.

Just-in-time inventory management has evolved into just-in-case.

Companies are stockpiling inventory in both countries to cope with the increasingly unpredictable border, wiping out many of the efficiencies of integrated supply chains, according to recent studies by the Conference Board of Canada as well as the Canadian and U.S. Chambers of Commerce.

Stockpiling isn’t the only coping mechanism seeping into everyday business. Disturbingly, businesses are reverting to behaviour that was common before free trade, a trend that is eroding the benefits of Canada’s open access to the U.S. market, the Conference Board concluded.

Companies now routinely preship orders, cross at night or on weekends, send empty trucks to make pick-ups or ship duplicate orders — anything to make sure a delivery arrives on time. All at a cost.

A load that doesn’t get to a customer can shut down a manufacturing plant, explained Robert Kee, managing director of Casco Inc., a Canadian-based maker of corn-based sweeteners.

"It’s a big deal," he explained. "A customer isn’t going to shut down their plant just because they feel bad for us. They are not going to tolerate that."

So when a shipment occasionally gets hung up en route by an inspection or some other glitch, Casco sends a second one, while eating the extra cost.

Casco was an early poster child of free trade. The U.S.-owned maker of corn-based feed, starch and sweeteners saw its tariffs go from nearly 20 per cent in the late 1980s to zero. During the 1990s, the company expanded from one to three plants in Ontario — in Brockville, Port Colborne and London — to tap burgeoning opportunities in the U.S. Northeast. Exports soared and the company prospered.

But the dream for Casco, and many others, may be silently slipping away. Longer and more frequent inspections, duplication, border congestion, mounting fees and rising shipping costs are chipping away at the company’s once impressive competitive edge (and that was before the Canadian dollar rocketed to parity). It’s U.S. Homeland Security, the U.S. Food and Drug Administration, the U.S. Department of Agriculture — part of a mushrooming security and safety bureaucracy at the border.

Casco’s trucks and plants are members of every trusted and secure shipper program going — at substantial hassle and expense. Its trucks, plants and drivers are secured, inspected and validated, sometimes by several U.S. agencies.

Yet delays triggered by the unexpected have risen every year since the 2001 terrorist attacks in the U.S.

"It’s not in anybody’s best interest — it’s not in the United States’ best interest and it’s not in Canada’s best interest to have a border that simply acts as an impediment to trade so that economic activity is halted," Mr. Kee said.

Experts have dubbed this phenomenon a "thickening" of the border. To Mr. Kee, it’s simply time and money. The company exports tens of thousands of shipments a year to the United States, accounting for 20 per cent of its sales. He conservatively estimates that unnecessary delays add an hour to each shipment — costing him at least $1-million a year.

"It’s insidious and it’s subtle because none of us who buy food products see that the price has been increased by ’x’ per cent," Mr. Kee said. "But it’s there ... We understand and fully accept security of food safety and people. The challenges we face are not ones that are doing anything to increase security or food safety."

Mr. Kee cites the example of random checks by the Food and Drug Administration (FDA), mandated by a post-9/11 bioterrorism law. Typically, shipments are cleared electronically and sail cleanly to their destination.

But a small number of trucks are held up at random, pending release by FDA inspectors. The hitch is that inspectors aren’t always on duty. So shipments, particularly at night and on weekends, can be held up for hours and even days, waiting for an inspector to "release" the load with the click of a mouse. The FDA inspector never actually looks at the cargo.

When those delays occur, Casco sometimes opts to send a back-up shipment to the same customer, who might otherwise have to shut a production line because it’s missing a key ingredient. Dispatching an extra truck can double the company’s shipping expense.

It’s the antithesis of free and just-in-time manufacturing. And America’s food supply isn’t any more secure, Mr. Kee said, because the loads aren’t actually inspected.

Canadian authorities, prodded by increasingly panicked business leaders, are no longer hiding their frustration with what they see as an indifferent and intransigent U.S. government.

On a recent visit to Washington, Canadian Industry Minister Jim Prentice complained bitterly that the border is becoming a "two-headed monster" — neither safe, nor efficient.

"We want security and prosperity," he told a high-powered audience that included top U.S. officials. "Instead, we make it difficult to have either."

One of the problems with enhanced security is that the people who enforce the rules are rewarded for vigilance, not efficiency, according to Gary Hufbauer of the Peterson Institute for International Economics in Washington.

"The mindset is: ’If I delay a shipment, I’ll cause a hassle, but I’ll keep my job,’ " remarked Mr. Hufbauer, a former top U.S. trade and treasury official. "The incentives are skewed to being supercautious."

Trade thrives on predictability. Instead, the border has become inherently unpredictable. "That volatility is as important as the time and cost," Mr. Hufbauer added.

How the U.S. turned free trade with its biggest trading partner into an obstacle course for exporters is simple, and yet intractable. Long before Mr. Prentice’s rant, Canadian officials lost a fundamental argument in Washington as they fought to mitigate the economic damage from the post-9/11 security ramp-up, according a former Canadian diplomat, who spoke on condition of anonymity.

Canadian officials failed to convince key U.S. decision makers, most notably Homeland Security czar Michael Chertoff, to trust what they could not control, the source said.

"There’s a mentality of mistrust," the diplomat explained.

When Mr. Chertoff took over at Homeland Security in 2005, co-operation between the two countries faltered. "Chertoff represents that feeling that ’if we don’t control it, we can’t trust it.’ " The success of two pivotal security deals between the two countries — the 2002 Smart Borders initiative and its 2005 offspring, the Security and Prosperity Partnership (SPP) — depend on intense bilateral trust.

Under the SPP, Canada, the U.S. and Mexico agreed to co-ordinate their border-related security policies, while mitigating economic harm by targeting high-risk people and goods.

Most Canadian and U.S. officials quietly acknowledge the SPP has stalled. Smart has become thick.

It’s telling that in spite of those deals Ottawa has lost repeated rounds with determined U.S. officials. As a result, Canadians were hit with more stringent U.S. border measures, including new passport rules, increased inspections and a devastating two-year ban on Canadian cattle and beef as a result of the mad-cow scare.

In 2006, it lost a battle to preserve a long-standing exemption from hefty U.S. animal and plant inspection fees. And last year, Canada and the U.S. scrapped a pilot project to relieve border congestion by moving U.S. customs inspections onto Canadian soil at the Peace Bridge crossing to Buffalo, N.Y., and elsewhere.

These setbacks are an ominous sign for the Canadian economy, for which the U.S. market is its lifeblood. More than 70 per cent of Canada’s exports go to the United States ($313-billion last year), generating a quarter of Canada’s gross domestic product and sustaining three million jobs.

More than a quarter of two-way trade — $122-billion worth and three million trucks — passes through Windsor. That’s more than any other land border in the world and more trade than the United States does with Japan.

The FTA, and the later North American free-trade agreement, accelerated a trend to economic integration between the two countries.

Companies located plants on both sides of the border, buying from suppliers wherever it made the most economic sense, and selling to customers in either country. As much as 40 per cent of Canada-U.S. trade is within companies.

The model of integration is the auto industry, where parts and cars cross the border multiple times. And the trend has spread to aerospace, machinery, mining, energy, food and agriculture.

Quantifying the impact of added security, delays and hefty new fees isn’t easy. The border is just one of other powerful forces at work, most notable of which is the rise to parity of the Canadian dollar, and now the slowing U.S. economy.

Canada-U.S. trade slumped in the aftermath of the Sept. 11 terrorist attacks, as the North American economy suffered a mild recession.

After a brief recovery, Canadian exports to the U.S. have slowly, but steadily fallen since 2005 - declining 2 per cent in 2006, 1 per cent last year and 5 per cent in the first three months of 2008. U.S. exports to Canada, meanwhile have climbed every year since 2003.

Economists Steven Globerman and Paul Storer of Western Washington University in Bellingham, Wash., concluded in a recent study that heightened security has added costs to cross-border trade. Their econometric research suggests U.S.-bound Canadian trade may also have become permanently impaired.

There’s little doubt truck traffic across the border is down, though the U.S. economic slump and the currency are likely responsible for much of that.

Mr. Durant, the trucker hauling cookies for Kraft, said the frequency of his cross-border runs has dropped in the past year. His employer, Kriska Holdings Ltd. of Prescott, Ont., diverted part of its fleet to busier Canadian routes because of ebbing cross-border business. Trucking industry officials say many drivers don’t want to ply the route because of all the hassles and delays.

The volume of truck and car traffic from Ontario into the United States fell 4 per cent in 2007, and the trend has accelerated this year.

Between January and April of this year, the volume of trucks going back and forth between Ontario and the United States has fallen 5.6 per cent, according to figures cited this week by the Ontario Trucking Association.

Falling traffic has coincided with an explosion of new rules and requirements - features that often vary slightly from one border post to another. Combined with new programs designed to expedite trusted freight, a shipper’s life has become a maze of paperwork, new technology and confusing acronyms.

"I don’t even know half of them," Mr. Durant acknowledged. "I have to read them up all the time."

He, like his truck and the customer he’s hauling for, are members of the Free and Secure Trade program, or FAST, a joint Canadian and U.S. initiative designed to speed known cargo and haulers swiftly through customs. That means his truck can use designated express lanes for low-risk cargo. Mr. Durant carries a FAST card, which shows his citizenship, confirms he’s cleared criminal background checks and also tracks his recent movements across the border.

His truck is also equipped with a $5,000 global positioning system that allows the company to track where he is at all times, send him alerts and make electronic customs filings.

Then, there’s the U.S. Customs Trade Partnership Against Terrorism (C-TPAT) — a voluntary program that requires shippers to seal their cargo, and to secure and fence in pick-up and drop-off locations. Canada has its own program, with slightly different requirements.

The U.S. has also introduced a new computer system to track freight — the Automated Commercial Environment, or ACE — the bug-prone program that was down when Mr. Durant attempted to cross the border.

The greatest fear in the Canadian business community is that the border will become a reason not to invest in Canada - that businesses will set up shop on the U.S. side of the border, specifically to avoid the logjams and uncertainty.

"When is enough, enough?" complained Ron Lennox, vice-president of trade and security for the Canadian Trucking Alliance. "We’ve seen program after program rolled out and we don’t know where the next one will come from."

Canadians officials are hoping that a new U.S. president and a new Congress next January will provide an opportunity for a fresh start.

They’re pining for a Homeland Security secretary in the mould of Mr. Ridge, the likable former Pennsylvania governor who headed the department in the first years after 9/11, rather than another hard-nosed prosecutor like Mr. Chertoff.

Former foreign minister John Manley, who was put in charge of the security file after 9/11, said Mr. Ridge understood the border and rejected the notion that security trumps the economy. "Mr. Chertoff came in with a much more law enforcement approach," Mr. Manley said.

What’s needed now is effort "from the top" to fix the border, according to Mr. Manley. "Getting it back on track can only come at the level of heads of government," he said.

Many experts are skeptical a change of government alone will change the "security first" mentality in Washington. If anything, a Democratic president, backed by a Democratic Congress, could prove to be even more protectionist, security conscious and less willing to back off trade-restrictive policies, argued Christopher Sands, who studies Canada for the Hudson Institute in Washington.

"The pressure to keep moving in this direction — to greater security — isn’t likely to change," Mr. Sands said.

In addition to next year’s new passport rules, the U.S. is gradually moving to a system of exit controls to track when and where people leave the country. It isn’t yet clear how this would be accomplished at the land borders, without causing traffic chaos. U.S. Customs is also working on a system to screen and inspect 100 per cent of all container cargo. This could vastly complicate rail, truck and ship trade by requiring costly, duplicative inspections.

Back at the border, Mr. Durant is bound for home, with 9,280 cases of freshly baked Oreo and Chips Ahoy cookies on board.

Mr. Durant had hoped to get to Toledo, pick up his load, deliver it to Brampton, Ont., and then get back to his home in Spencerville, Ont., outside Ottawa — all in one day. But the morning’s border glitch means he’ll exhaust the maximum hours of driving he’s allowed under U.S. and Ontario transport laws before he gets there.

It’s all part of an increasingly unpredictable life. But Mr. Durant is still upbeat as his truck rumbles across the Ambassador Bridge and back into Canada. "No matter how often I cross this border, I always feel good when I see that," he said pointing to the maple leaf flying over the Canadian customs checkpoint. "It’s home."

On this day, at least, his is the only truck waiting to enter Canada. A female customs agent swipes his ID card, scans her computer screen to see what he’s hauling and waves him through. All in less than 30 seconds.

Building barriers

The impediments to Canada-U.S. trade have grown since 2001.

Western Hemisphere Travel Initiative (WHTI)
Under WHTI, U.S. authorities have been gradually raising requirements for the documentation needed to enter the U.S. Passports are now mandatory for air travellers. As of Jan. 1, all Canadians and returning Americans must show government-issued ID plus a proof of citizenship when they enter by road. And by June of next year, passports or other approved secure documents will be mandatory at all land borders.

Truckers and individuals face more and longer inspections. Truck inspection times have tripled since 2000.

Aging and inadequate infrastructure
Both Canada and the U.S. share responsibility for inadequate approach roads, bridges and inspection facilities. Billions of dollars have been spent already, but much more is needed, including a $5-billion second bridge downstream from the Ambassador Bridge, which links Windsor and Detroit. When there is a lot of car traffic, trucks can’t reach the express lanes designed to expedite trade.

Customs Trade Partnership Against Terrorism (C-TPAT)
The voluntary program was created in November, 2001, to speed up clearance of low-risk or "trusted" truck shipments. The idea is that drivers and shippers agree to background checks and other supply chain security enhancements in exchange for fewer inspections and access to express lanes at key border crossings. Users, however, complain it’s expensive and that inspections and wait times have only grown worse.

Bioterrorism Act of 2002
The law is one of several measures that have greatly expanded the reach of the Food and Drug Administration at U.S. borders. The result has been more testing, more inspections and longer delays for food shippers.

Automated Customs Environment (ACE)
U.S. Customs is rolling out a new secure computer system to track trade. It allows shippers and brokers to file forms and pay duties and electronically. But its introduction has been dogged by technical problems.

10+2 Initiative
U.S. Customs has proposed new regulations that would require shippers to supply hundreds of millions of new data points, imposing costly new requirements on importers.

Animal and Plant Health Inspection Service (APHIS)
Until last year, Canadian cargo was exempt from fees to cover fruit and vegetable inspections. That changed last year, and now all trucks and airline passengers must pay, putting an extra $78-million (U.S.) into U.S. coffers.

Department of Agriculture health certificates
In 2005, the USDA began requiring that Canadian meat and poultry producers put veterinary certificates on each case, rather than on pallets.

Barrie McKenna

 source: Globe and Mail