North American Border Trade in a Heightened Security Regime

Abstract This study focuses on the impact of more stringent border security measures implemented in the aftermath of the September 11, 2001, terrorist attacks on the U.S. border trade with Canada and Mexico. Utilizing trade model based on a simple gravity equation, the impact of this heightened border security regime on merchandise trade is quantitatively analyzed. The results confirm the initial hypotheses: trade with Canada was more negatively impacted than trade with Mexico; imports experienced a sharper decline than exports; trade via trucks was more severely affected than rail traffic; and inherently dangerous commodities and goods conducive to housing destructive devices experienced greater downturns in trade volume. Introduction A vital component of U.S. foreign trade consists of merchandise trade with Canada and Mexico, where goods shipments must pass through border checkpoints and security infrastructures. The relevance of U.S. trade with these NAFTA (North American Free Trade Agreement) participants is vividly reflected in the following salient statistics: With respect to Canada: ** the largest U.S. trading partner with peak trade exceeding $400 billion in 2000, tapering off to about $380 billion in 2001 due in part to mutual sluggish economies. ** 83% of Canadian exports go to the U.S.--equivalent to approximately 38% of Canadian GDP. ** 72% of Canadian imports originate from the U.S.--equivalent to about 30% of Canadian GDP. ** the U.S. provides 64% of foreign direct investment in Canada. With respect to Mexico: ** the second-largest U.S. trading partner, surpassing Japan in 1999. The value of merchandise trade peaked at about $248 billion in 2000, before tailing off to approximately $233 billion in 2001--again partly due to soft mutual economies. ** 84% of Mexican exports go to the U.S. equivalent to about 21% of Mexican GDP. ** 68% of Mexican imports originate from the U.S.--equivalent to about 18% of Mexican GDP. ** the U.S. provides 84% of foreign direct investment in Mexico. Additionally, of the total North American trade in 2001,72% was transported by truck, followed by rail (17%), and pipeline (5%) (with air and water transport comprising the remaining portion). Unquestionably, the heightened and intense border security measures imposed in the wake of the September 11, 2001, terrorist attacks particularly impacted truck trade (although rail traffic was also affected), and consequently generated significant negative repercussions with respect to the overall trading volume of the NAFTA participants. Excluding the immediate period of severe curtailment of border trade in the weeks following September 11th (henceforth designated as simply 9/11), a period of unprecedented trade distortion occurred in the January through August eight-month period, with U.S. trade with Canada in 2002 down by 6.43% relative to the comparable eight-month period of 2001 (prior to the September attacks); and U.S. trade with Mexico was off 2.87% in these identical comparison periods. (These percentage trade reductions are based on data provided by the U.S. Census Bureau, Foreign Trade Division for 1-digit SITC commodities.) This deterioration of trade post 9/11 is particularly striking since in the 1994 through 2000 post-NAFTA period, U.S. trade with Canada grew at an 8.9% average annual rate, and U.S. trade with Mexico grew at a robust 16.0% average annual rate. Note that trading volume had already slowed in 2001, mainly due to the sluggishness of the economies in all three countries--merchandise trade with the U.S. between 2000 and 2001 was off4.9% for Canada and Mexico combined, with Canadian trade falling by 5.1%, and trade with Mexico dropping 4.7% (data from the Bureau of Transportation Statistics). Of course, a portion of the 2002 downturn in border trade can be attributed to the lingering effects of these 2001 slowing economies, but each of these economies had returned to modest GDP growth in 2002 (expected 2002 GDP growth: U. …