Canada-U.S. trade: Borderline insanity

How the U.S. obsession with security is crippling our economy.

Consider the predicament of Greg Bavington, CEO of Toronto’s National Rubber Technologies, a leading North American supplier of engineered products and materials derived from recycled rubber. The factory he runs is populated with machines so big, he says, they’re “anchored to the centre of the earth.” He can’t exactly move operations closer to his customers in the United States. As a result, the company is stuck in this country, where Bavington spends a lot of time protecting razor-thin margins from U.S. border-security measures. “The people we use to cross the border are sophisticated brokers,” he says. “But shipping 1,000 kilometres to the border is still significantly cheaper than driving 1,001 km and crossing it. The border costs us money. And for what? To stop guns coming this way and hydroponic drugs going south. That seems ridiculous if you’ve been to Europe.”

Those executives who, like Bavington, dream of a European-style common market for North America, with borderless trade and harmonized standards will, for the foreseeable future, just have to dream on. An indication of just how poor the state of free trade is came in early February. After months of negotiations, Ottawa and Washington belatedly came to terms on the so-called Buy American issue. Prime Minister Stephen Harper announced that he had won an exemption that will enable businesses to bid on contracts stemming from the American Recovery and Reinvestment Act. “We really have established the notion that Canada is fundamentally different,” Harper said, “and the relationship between Canada and the United States is fundamentally different.” Yet, with most of the US$787 billion in stimulus funds already spent, our late-stage inclusion seemed to show how low a priority the Americans are putting on trade with Canada.

A further blow to trade came on Christmas Day, when Umar Farouk Abdulmutallab narrowly failed to blow up a Detroit-bound jet with high explosives hidden in his underpants. He may have been a flop at terrorism, but he succeeded in helping to threaten the very prosperity of North America by making Uncle Sam even more paranoid about sharing continental accommodations.

With one stroke, Abdulmutallab compromised important border infrastructure investments by Canada and the United States as part of their economic stimulus programs. The plan was to ensure aging and insufficient infrastructure don’t hamper the $1.6 billion in goods that crosses our common border every day. As well, our politicians worked together to bail out General Motors and Chrysler, which produce vehicles on both sides of the border. Bridges may be built and tunnels dug, but they can still be blocked by ever-increasing security rules. Thanks to Abdulmutallab and his explosive underwear, America is once again clamping down on border activity, even at the vital crossings that link Windsor to Detroit, the jugular vein in North America’s body of trade.

The companies hurt most include the Detroit automakers that Canadian and U.S. taxpayers are borrowing billions to keep afloat. In Canada alone, taxpayers are spending an estimated $1.4 million for every auto job saved, because the survival of these manufacturing giants is considered crucial to the stability of the North American economy.

Indeed, as a joint American and Canadian Chamber of Commerce study pointed out last year, offshore auto companies require a single customs clearance to import one shipment of 4,000 cars. But delivering to market the same number of vehicles made in North America – where the assembling process often involves seven border crossings due to the integrated nature of our supply chains – requires about 28,000 customs and security clearances.

This despite the fact that anybody with a boat on the Great Lakes knows that trying to prevent bad guys from travelling between Canada and the States is an impossible task. “I shouldn’t tell you this,” New York Congresswoman Louise Slaughter told a border conference a year ago, “but if you want to cross the border in the state of New York, and do us harm, the dumbest thing you could do would be to cross a bridge. There are places where you can ford a stream. You can canoe. The whole idea of just having that bridge fortified to within an inch of its life makes absolutely no sense and costs an awful lot.”

According to a study commissioned a few years ago to promote trade-route redundancy, Ontario’s bill for a four-hour service outage at the Ambassador Bridge would total $7 million. Two days without the crossing would jointly cost Ontario and Michigan about $180 million, while a two-week shutdown would cost a whopping $2.3 billion. And the need to protect the Canadian and U.S. economies from temporary disruptions caused by terrorism is one of the reasons that an additional crossing between Windsor and Detroit is considered an absolute necessity by all levels of government on both side of the border. But fear of terrorism is slowing it down every day.

America’s willingness to treat Canada differently toppled along with the World Trade Center in 2001. The free flow of goods fell far behind security as a U.S. priority. Decades after the Europeans set out to create a common market with a single currency, North America is beefing up its borders, not eliminating them.

Not long ago, people could easily imagine Canada and the United States following Europe’s lead. In 1963, a Foreign Affairs magazine article called “Atlantica” even assumed a union between Europe and North America would eventually take place. And proponents of border reform have always hoped such big-picture thinking would return, especially when the Great Recession made economics the top issue for U.S. President Barack Obama.

Indeed, at the border conference attended by Slaughter, the mood among free traders was optimistic. Gordon Giffin, the former U.S. ambassador to Canada, recalled an obscure rural border crossing from his childhood, where his family didn’t bother to stop, unless it was night and the road was blocked. When that happened, Giffin told the conference, “my dad would stop, and I’d move the orange cone, and we’d go through, and I’d put it back. And, oh, you had to sign a book to let them know that you had been there.”

Giffin urged the gathering to renew the push for “perimeter policies” that would make the 49th parallel “less formal.” And he suggested they “do it quickly before the facts change on us again.”

This optimism survived the death last summer of the Security and Prosperity Partnership, intended to make sure U.S. security concerns do not hamper the free movement of people, capital and trade across NAFTA borders. The secret trilateral initiative was actually a serious headache for U.S. politicians, who were accused by patriots and nuts alike of planning a European Union-style merger. But hope for reforms died on Christmas, when Abdulmutallab slammed shut the window for rethinking border security.

According to John Manley, head of the Canadian Council of Chief Executives, the U.S. government is “truly delusional” if it believes increased national security can be gained by thickening its northern border and patting down “grandmothers and babies.” He insists tighter security is the last thing the border needs, because it already suffers the tyranny of small differences. “The border simply does too much. We are all trying to achieve the same things in terms of health and safety, but we don’t do it the same way, and we use the border to enforce the differences.” Add tighter security measures, and you get “the chaos and lineups we sometimes have at the border.” But, Manley notes, “Politics is often more about perception than reality.” The Obama administration “is constantly fighting a battle against being perceived as soft on security.”

Christopher Sands, a border expert with the Hudson Institute in Washington, also suggests politics is in play. “They say Nixon could go to China because he was a tough anti-communist,” Sands says, adding President Obama didn’t enter the White House with the anti-terrorist standing required to take extraordinary measures to facilitate Canadian commercial access to the U.S. market. And “the recent terror incident makes is less likely that any kind of breakthrough on U.S.-Canada border security will occur in 2010.”

Not everyone considers the thickening border a threat to trade. Contradicting her own PR people, who claim the Abdulmutallab incident “could result in longer wait times and complications at the border,” Renate Jalbert, FedEx Canada’s managing director of customs and regulatory affairs, doesn’t see any problem with U.S. security measures. According to Jalbert, technology has replaced paper-based border security systems over the past decade, making shipping to the U.S. as fast and easy as it was before 2001, at least for companies that spend the time and money required to enrol in pre-clearance programs.

Then again, the FedEx official freely admits the border could become a serious problem if U.S. authorities start to treat Canada like Mexico – which is exactly what Uncle Sam plans to do. “We need to be sensitive,” U.S. Homeland Security secretary Janet Napolitano told last year’s border conference, “to the very real feeling among southern border states, and in Mexico, that if things are being done on the Mexican border, they should also be done on the Canadian border.”

Furthermore, the Chamber of Commerce study states, the time and money required to gain pre-clearance could soon become “an unmanageable burden” for many companies, threatening 10 million jobs. It found that becoming a trusted shipper with access to fast-tracked border lanes can require more than $100,000 in upfront costs and take more than two years to accomplish. Full-time staff are then required to ensure compliance is maintained. And border lineups can be so long that trusted shippers can still hit major delays before they actually get to their special priority routes. As a result, just-in-time manufacturers have been returning to the outdated practice of stockpiling.

Border wait times, of course, are not what they were back in August 2007, when the Ontario Ministry of Transportation was forced to place portable toilets along backed-up roadways to make life easier on delayed travellers. But there has also been a sharp drop in vehicle volume at the border owing to the recession. In January 2009, two-way trade between Canada and the United States totalled $29 billion, down 31% from the same month in 2008. The Chamber of Commerce study notes delays could soar to record levels when economic activity rebounds.

“Anybody who thinks the border hasn’t cost Canada anything is ignoring the auto sector,” says industry analyst Dennis DesRosiers, who insists border uncertainty is probably behind recent decisions to shutter some local assembly plants. “It has certainly been at the root of dozens of suppliers failing.” According to DesRosiers, the border is “a nightmare” that limits investment in the auto sector, which accounted, directly and indirectly, for one in seven Canadian jobs before 9/11. He’s convinced Canada will never see automotive employment numbers like it had a decade ago. But if anything could change that outlook, he admits, it would be a customs union.

Wall Street economist Robert Brusca thinks greater North American integration would deliver substantial economic gains, especially in periods of high-priced energy, which makes trading with overseas partners more expensive. But Brusca can’t see closer integration happening, noting Americans would never, for example, accept the official use of French. “Why not mandate Braille and Spanish,” he says, “especially for street signs? Yeah, stop the car, get out and rub the sign for directions. I have strong feelings about a single language for any market.”

According to Manley, there may have been an opportunity to eliminate or dramatically loosen North American borders before 9/11. But he now says, “I don’t think it will happen in my lifetime. The politics aren’t there.”

Robert Pastor, director of North American studies at American University in Washington, believes greater North American economic integration would have much greater support if Canadians, Americans and Mexicans understood the benefits, especially just how much money they could save by eliminating rules-of-origin procedures, which determine which goods can obtain reduced or eliminated tariffs under NAFTA. As things stand, he estimates adding 9/11 border restrictions to existing infrastructure issues could be costing North America as much as 10% of trade.

Pastor, of course, doesn’t see Abdulmutallab or the failure of the Security and Prosperity Partnership as a major set back, but that’s “because neither Canada nor the U.S. demonstrated the imagination or competence to undertake reforms.” Visionary politicians. Only in Europe, eh? Pity.