# Presentation: 294348

## 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

**Notes:**
Secondary literature review
750 newspapers and trade magazine articles
45 border related reports
Multiple site visits to seven key crossings
Traffic data by crossing and in total from 1984 and including monthly data pre to post 9/11
Existing primary inspection transit time data from Canada Customs for both directions of travel for cars and trucks
173 personal interviews of key organizations/persons including carriers, manufacturers, brokers, trade organizations and federal inspection services (FIS)
Estimation of border related costs by impact category and by key crossing and in total
Analysis of security levels and implications for border

## 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

**Notes:**
The U.S. and Canada have annual merchandise trade of US$382 billion with US$235 billion moving by truck
Largest trade relationship in the world
Trade growth of 13.8%/year since 1989
A significant portion moves under JIT conditions intra-manufacturer
Considerable personal interaction as well
Traffic levels have fluctuated, however:
Truck traffic is up 122.5% since 1984 and by 186.7% at Michigan-Ontario crossings accounting for 35.9% of all traffic on border
Auto traffic is up 24.9% since 1984, but down 11.8% since 1995
Comparing pre 9/11 9 month period to same post 9/11 period for entry to U.S:
Land imports from Canada are down 10.8%
Truck traffic into U.S. is down 2.2%
Auto traffic into U.S. is down 15.0%   

## Prior Studies of Border Costs

- Pre 9/11study 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)

**Notes:**
Pre 9/11study of six major crossings by Battelle and Texas Transportation Institute found average delay times into U.S. and Canada of 16.0 and 8.1 minutes respectively
Canadian Manufacturers and Exporters Association estimates border adds 6% to the cost of Canadian manufactured goods
Former Prime Minister Mulroney estimates the border adds C$30 billion in costs to businesses in the two countries
Testimony before the Windsor Chamber of Commerce suggests that the border costs an amount equal to 2-3% of NAFTA trade levels

## 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 10-20% 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

**Notes:**
Cross-border freight rates also suggest a border impact on costs of business
We estimate cross-border freight costs are US$.94 to 2.35 billion higher than comparable domestic movement U.S. costs, with  a most likely cost penalty of US$1.59 billion
The following table summarizes the calculation of these costs
A number of interviewees indicated that cross-border rates average 10-20% higher than comparable U.S. rates
Some carriers have specific 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.

**Notes:**
Total border related cost impacts are in a range from US$7.52 billion to US$13.2 billion, with a midrange estimate of US$10.3 billion.  
These costs, at the midrange estimate level, represent some 2.70% of total 2001 U.S.-Canada trade in goods of US$382.0 billion.  
Specific truck related costs represent 4.02% of total truck based trade of US$235 billion in 2001.
Transit time and uncertainty costs, specifically, total US$2.52 billion to US$5.27 billion, with a midrange estimate of US$4.01 billion. These costs include carrier costs totaling a midrange level of US$1.87 billion and manufacturer costs of US$1.99 billion. 
The midrange cost estimate represents 1.05% of total 2001 trade in goods
Specific truck related costs represent 1.58% of truck based trade
The general border management related costs for federal staff, manufacturers and carriers totaled US$4.99 to US$7.92 billion with a midrange estimate of US$6.28 billion.  
At the midrange, these costs represent some 1.64% of total U.S.-Canada trade in goods 
Specific truck related costs represent 2.44% of truck borne trade 

## 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 |
|       Reduced Cycles/Other | 65.8 | 120.7 | 197.4 |
|       Driver Documentation/Fax Time | 133.5 | 250.7 | 400.9 |
|            Carrier Subtotal | 1190.8 | 1867.4 | 2374.1 |
|     Manufacturer Related |  |  |  |
|        Manufacturer Sourcing Benefits | 1007.0 | 1530.0 | 2000.0 |
|        Extra Inventory Carrying Cost | 229.0 | 458.0 | 686.0 |
|             Manufacturer Subtotal | 1236.0 | 1988.0 | 2686.0 |
|      Personal Traveler | 96.7 | 159.0 | 209.6 |
|            Transit Time/Uncertainty Subtotal | 2523.5 | 4014.4 | 5269.7 |

## 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

**Notes:**
One of the key cost categories relates to primary inspection transit time (backup time) costs for carriers
These 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
We used a sample of daily data from May 1 to August 31, 2002
The average backup times were used a sample an applied to annual traffic to arrive at total backup hours
Using a cost of $150/hour total backup costs were estimated
The following table summarizes the data for one crossing

## 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

**Notes:**
Secondary yard processing costs are a major part of total border transit cost
These costs apply to the 20-40% of trucks that are diverted into secondary yards
Average times in secondary of 1-2 hours are assumed depending on the crossing and direction of travel
These times are based on numerous interviews with carriers and drivers and reflect the fact that most trucks spend about one hour, but that some spend considerably longer in secondary
The following table depicts the calculations of these costs 

## General Border Costs and Grand Total

| Type of Cost | Minimum | Midrange | Maximum |
| --- | --- | --- | --- |
| General Border Costs      |  |  |  |
|      Carrier Related |  |  |  |
|         General Border Administration | 100.0 | 200.0 | 250.0 |
|         Cabotage | 100.0 | 150.0 | 333.3 |
|              Carrier Subtotal | 200.0 | 350.0 | 583.3 |
|      Manufacturer Related |  |  |  |
|          Brokerage Costs | 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 |
|          General Border Subtotal | 4993.3 | 6279.5 | 7919.4 |
|     Transit Time and Uncertainty Subtotal | 2523.5 | 4014.4 | 5269.7 |
|        Total U.S.-Canada Border Costs | 7516.8 | 10293.9 | 13189.1 |

- (Millions of US$)

## 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

**Notes:**
Insufficient number of open primary inspection booths is the biggest cause of problems:
Problems with staffing available booths is the biggest problem
In some locations additional booths are also needed 
Congested ingress roads with insufficient capacity and too many obstructions to free flow such as traffic lights, stop signs, cross-traffic, etc.
Windsor and  Niagara areas, and Calais are some leading examples
U.S. exit checks in the Niagara area lead to some congestion on plazas
Crossing roadbed capacity is one of the least important causes of problems:
Can be a problem when lanes are out of service for maintenance
Calais-St. Stephens needs more capacity
Peace Bridge may need additional capacity

## 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

**Notes:**
Secondary yard processing time is a major cause of long transit times and uncertainty
Problem is greatest for LTL’s and others with multiple loads (“trap loads”) because they then must enter secondary regardless of “line release” type programs they participate in.  Programs like FAST are designed to eliminate routine need to enter secondary
Insufficient FIS staff can lead to backups inside thecustoms building and we have seen lines as long as 30 drivers
Parking space can be a problem, especially when X-Ray operations use some spaces.  Port Huron and Buffalo have major limitations
Broker locations too distant from parking spaces, hours of operation and quality of staff available at night and weekends, a lack of adequate attention to processing PAPS and PARS faxes so that trucks can clear at primary all contribute to long waits
At Ambassador Bridge in Windsor some brokers are a long distance, and at western crossings trucks entering the U.S. park in Canada and must walk across border to visit U.S. brokers, and then walk back into Canada and drive up to primary inspection booths in U.S.
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

**Notes:**
Increasing FIS staff levels, a process well under way, and systems to assure enough booths are staffed in a timely manner
Full implementation and participation in customs clearance systems such as FAST that will allow carriers with multiple consignments to avoid routine need to enter secondary because of “trap loads”
Expansion of plazas to allow more primary and secondary inspection areas, and dedicated lanes for approach to NEXUS and FAST dedicated booths
Expansion of ingress/egress road capacity and elimination of traffic lights, etc. Through use of grade separations
 Use of off-site second stage inspection areas at locations where existing plazas cannot be expanded sufficiently
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

**Notes:**
Broker processes and relationships with drivers also need improvement including:
Location of offices closer to truck parking at some crossings
Faster processing times in general
Improved nighttime and weekend operations and assurance that sufficient trained staff are available
More attention to processing PAPS or PARS faxes so as to assure trucks can clear at primary
Better working relationships between drivers and broker fron line staff
TV camera monitoring of crossing backups and communication of images/information to FIS and local police
Shipper/carrier participation in various “safe and secure” type FIS programs needs to increase significantly.
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???

**Notes:**
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
Move towards an “external perimeter” strategy that: 
Focus security efforts at first point of entry to Canada and the U.S.
While switching the U.S.-Canada border to random and intelligence based inspections with extensive post-audits and severe penalties for violating each countries laws

## 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

**Notes:**
Total border costs of US$10.3 billion have a significant impact on the two economies – some 2.70% of total merchandise trade or, after adjusting out non-truck related costs, 4.02% of truck borne trade
These costs relate to border security and control measures which were designed, primarily, 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 respectively at staffed crossings making security difficult
At some crossings truck drivers freely cross the border in an unsupervised way
The GAO recently reported on a lack of simple identity checks and the ability to walk across the border through border parks unchecked
A very small percentage of trucks actually have doors opened
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?

**Notes:**
New security measures to impose some minimal level of protection will be costly and have the potential to dramatically impact the level of border congestion and delays
Entry – exit check systems now in law and scheduled for implementation have the potential to cause gridlock at key crossings
A recently withdrawn draft U.S. Customs proposal called for 4-24 hour advance notice of imports and exports to/from Canada – an almost  impossible requirement for the auto industry where the border is part of the production line
A recently enacted law will require advance notice on food imports from Canada – a measure which would make produce and other food imports more expensive
Additional inspection infrastructure and staff will have costs in the billions
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

**Notes:**
A European Union like “open border” system is one option being talked about increasingly in Canadian policy circles
Such a system would: 
Be implemented slowly over a long time period
Require Canada to adopt tougher security measures against undocumented refugees primarily, and a general tightening of immigration controls
Rely on random inspections at the border, extensive post audits by Customs, and severe fines and even prison terms for violations of each countries rules
Rely on tougher Customs and Immigration controls on the external border
Likely spur a push for additional harmonization of rules and elimination of remaining quotas and duties
This kind of system could allow for most of the US$10.3 billion in border costs, or 2.70% of the value of trade to be saved, and could free up considerable FIS staff for potentially more productive intelligence, post audit, and external border control
While there is increasing support in Canada, obvious issues in the U.S. relate to:
Border security concerns and misconceptions about the degree to which the current system can provide security
 How to deal with Canada without immediately offering the same option to Mexico