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«Economic Analysis (EA) Research Paper Series How Much Thicker Is the Canada–U.S. Border? The Cost of Crossing the Border by Truck in the Pre- and ...»

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Catalogue no. 11F0027M — No. 99

ISSN 1703-0404

ISBN 978-0-660-02527-8

Economic Analysis (EA) Research Paper Series

How Much Thicker Is the Canada–U.S.

Border? The Cost of Crossing the Border

by Truck in the Pre- and Post 9/11 Eras

by W. Mark Brown

Economic Analysis Division

Release date: July 24, 2015

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Economic Analysis Research Paper Series The Economic Analysis Research Paper Series provides for the circulation of research conducted by the staff of the Analytical Studies Branch, visiting Fellows, and academic associates. The Economic Analysis Research Paper Series is meant to stimulate discussion on a range of topics, including the impact of the new economy, productivity issues, firm profitability, technology usage, the effect of financing on firm growth, depreciation functions, the use of satellite accounts, savings rates, leasing, firm dynamics, hedonic estimations, diversification patterns, investment patterns, differences in the performance of small and large firms and of domestic and multinational firms, and purchasing power parity estimates. Readers of the research paper series are encouraged to contact the authors with their comments and/or suggestions.

The primary distribution medium for the papers is the Internet. These papers can be accessed for free at www.statcan.gc.ca.

All papers in the Economic Analysis Research Paper Series go through institutional and peer review, in order to ensure that they conform to Statistics Canada's mandate as a government statistical agency and adhere to generally accepted standards of good professional practice.

The papers in the series often include results derived from multivariate analysis or other statistical techniques. It should be recognized that the results of these analyses are subject to uncertainty in the reported estimates.

The level of uncertainty will depend on several factors: the nature of the functional form used in the multivariate analysis; the type of econometric technique employed; the appropriateness of the statistical assumptions embedded in the model or technique; the comprehensiveness of the variables included in the analysis; and the accuracy of the data that are utilized. The peer group review process is meant to ensure that the papers in the series have followed accepted standards, in order to minimize problems in each of these areas.

Acknowledgements

The author wishes to thank John Baldwin, William Anderson and Rob Petrunia for their helpful comments, as well as participants at the North American Regional Science Meetings, the Western Regional Science Meetings and the Canadian Economics Association Meetings for their comments.

Table of contents

Abstract

Executive summary

1 Introduction

2 Data development

2.1 Trucking Commodity Origin and Destination Survey

2.2 Trucking price index

2.3 Data description

3 Econometric model

3.1 Specification

3.2 Model set-up

3.3 Results

4 Ad valorem trucking costs

4.1 Calculation of ad valorem costs

4.2 Ad valorem transportation cost tariff equivalents

5 Conclusion

Appendix

References

Economic Analysis Research Paper Series -4- Statistics Canada – Catalogue no.11F0027M, no. 099 Abstract In the aftermath of 9/11, a new security regime was imposed on Canada–U.S. truck-borne trade, raising the question of whether the border has ‘thickened.’ Did the cost of moving goods across the border by truck rise and, if so, by how much, and have these additional costs persisted through time? Building on previous work that measured the premium paid by shippers to move goods across the Canada–U.S. border by truck, from the mid- to late 2000s, this paper extends the time series back to 1994, encompassing the pre- and post-9/11 eras. The analysis shows that the premium paid to move goods across the border rose, from 0.3% of the value of goods shipped prior to 9/11, to about 0.6% after 9/11, with these higher costs persisting through to the late 2000s. Whether these additional costs are imposed on the export or import leg of the cross-border journey depends on the balance of cross-border trips, with the export leg bearing these costs until about 2005, and increasingly the import leg thereafter.





Keywords: border costs, international trade, transportation costs.

Economic Analysis Research Paper Series -5- Statistics Canada – Catalogue no.11F0027M, no. 099 Executive summary Building on previous work that focused on the mid- to late 2000s (Anderson and Brown 2012;

Brown and Anderson 2015), this paper extends the period of analysis back to 1994. This much longer period was marked by substantial changes in the Canada–U.S. trading relationship. It encompasses the terrorist attacks on 9/11 that ushered in a new and evolving security regime and a switch in the balance of Canada–U.S. truck-borne trade. These changes had potentially two countervailing effects on the rates charged to transport goods to the United States by truck.

Following 9/11, increased delays at the border and additional border regulations may have increased the costs borne by trucking firms when shipping goods to the United States, putting upward pressure on prices. However, in the ensuing years, falling relative demand for the U.S.bound leg of the cross-border round trip put downward pressure on prices.

Statistics Canada’s Trucking Commodity Origin and Destination Survey is used to assess the degree to which it costs more to cross the border in the pre- and post-9/11 eras. On a shipment basis, it measures the revenue of trucking firms and, by implication, the cost borne by shippers for both domestic and cross-border shipments. By comparing these, it is possible to measure whether trucking firms charge a higher price to ship goods to and from the United States and to assess whether those prices have changed over time.

The paper finds the following:

• At the micro level, there is evidence that border compliance costs are reflected in prices.

After 2001, fixed costs per shipment rose more rapidly on exports. Much of this rise occurred in 2004, coinciding with the implementation of new border regulations imposed by the United States. There is less evidence that prices rose in reaction to delays at the border in the immediate aftermath of 9/11.

• From 2004 onward, line-haul costs (costs that vary with distance) on exports rose at a slower pace than those on imports and domestic trade, and this occurred at a time of declining demand for the export leg and increasing demand for the import leg of the cross-border trip.

• Between 1994 and 2000, it cost on average 16.3% more to ship goods across the border than to ship the same goods the same distance domestically. The premium on crossborder shipments remained at about the same level until 2000, after which it rose to 25.1% in 2005 and remained relatively high thereafter.

• The leg of the journey that bears these extra costs switched between 2005 and 2009, reflecting changing relative demand for the export and import legs. In 2005, the premium on the export leg was 30.0%, while the premium on the import leg was 20.3%. By 2009, the premium on the export leg had fallen to 17.1% and risen on the import leg to 25.6%.

• The ad valorem tariff equivalent of the premium on cross-border trade over the 1994 to 2000 period averaged 0.33%, but almost doubled to 0.62% between 2005 and 2009.

While the tariff equivalent is relatively small, its effect will be magnified for goods such as auto parts that pass over the border several times as they move through the various stages of the production process.

The costs measured here are only part of the total cost of shipping goods across the border.

The institutional costs borne directly by exporting firms for matters like customs administration have been estimated to be as great as or greater than the costs passed on to them by freight carriers (Taylor, Robideaux and Jackson 2004). Furthermore, increased variability in bordercrossing times may cause shippers to maintain buffer inventories on the other side of the border, which would not be reflected in carrier revenues (Anderson and Coates 2010).

Economic Analysis Research Paper Series -6- Statistics Canada – Catalogue no.11F0027M, no. 099 1 Introduction After 9/11, a new security regime was imposed on the movement of goods across the Canada– U.S. border, which led many to ask whether the border has ‘thickened.’ That is, did the cost of moving goods across the border rise, and, if so, by how much? The purpose of this paper is to assess the additional cost of moving goods across the border by truck in the post-9/11 era, compared with the pre-9/11 era. Trucks are the primary mode by which goods cross the border, transporting half of the dollar value of exports to the United States and just over two-thirds of imports. 1 This paper builds on previous work that measured the premium paid by shippers to move goods across the Canada–U.S. border by truck, from the mid- to late 2000s, by extending the time series back to 1994, encompassing the pre- and post-9/11 periods (Anderson and Brown 2012; Brown and Anderson 2015).

The costs of crossing the border can be divided into three basic types: formal tariff barriers, nontariff barriers, and the cost of the transport system itself. The latter is the focus of this paper—in particular, the border-related costs incurred by trucking firms that are passed on to their customers through higher prices. 2 These costs may stem from increased wait times or their changeability, and from the cost of complying with additional border regulations often aimed at speeding passage across the border (e.g., implementation of a series of security protocols required for participation in trusted-trader programs).

To date, considerable work has been undertaken to examine whether the post-9/11 security regime has had a detrimental effect on Canada–U.S. trade (see Globerman and Storer [2008, 2009], Grady [2008], and Burt [2009]). These studies assess the impact of the new security regime by observing the volume of trade prior to and after 9/11 using standard gravity-style trade models. An unaccounted for drop in the volume of trade is seen as evidence that border thickening resulted in higher delivered prices and a concomitant drop in the quantity of exports demanded in the United States. The evidence from these models is mixed, with Globerman and Storer (2008; 2009) and Grady (2008) finding evidence of a drop in the volume of trade, while Burt (2009) finds little evidence of this effect.

While the costs borne by carriers in the wake of 9/11 may be reflected in prices, so too will other factors that influence the Canada–U.S. trading relationship in the 2000s. One of the most important factors is the balance of Canada–U.S. truck-borne trade, which determines which leg of the cross-border round trip constitutes the ‘backhaul.’ Carriers, when they take a contract, “…must commit to the maximum transport capacity required for a round-trip and, therefore, face a logistics problem: there is an opportunity cost associated with returning empty (‘backhaul problem’), and that opportunity cost depends on the shipping direction.” (Behrens and Picard 2011, 281) The backhaul problem is well known (see Felton [1981] and Jonkeren et al. [2011]). If the truck is empty on the return trip, the opportunity cost of that leg is zero (Behrens and Picard 2011).

1. In 2009, goods shipped by truck accounted for 47% of the value of Canada’s merchandise exports to the United States and 70% of the value of imports from the United States. Consequently, trucking costs may affect the overall degree of integration between the two markets. U.S. Department of Transportation, Research and Innovation Technology Administration, Bureau of Transportation Statistics, North American Transborder Freight Database (2011). http://www.bts.gov/programs/international/transborder/TBDR_QA.html (accessed May 10, 2011).



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