The tipping point: effects of Post 9/11 Border Security on Canada-United States Economic Competitiveness.

• Author: Martin, Margaret

Session Chair--Margaret Martin

Canadian Speaker--Paul Storer

United States Speaker--Gary Hufbauer

INTRODUCTION

MS. MARTIN: Hi. Welcome back to the last session of the day. My name is Margaret Martin, I am an assistant professor at the University of Western Ontario in the Faculty of Law. The topic of this afternoon's session is "The Effects of Post-9/11 Border Security on Canada-U.S. Economic Competitiveness."

Now, the first question I think we have to ask is whether 9/11 has had a negative impact on trade between our two nations. And as we will see in our first presentation, answering this question is no easy task because there are so many detailed variables that have to be analyzed. And after we understand the past, only then can we begin to make recommendations for the future, and this will be the topic of our second discussion. So at least partly we will deal with the future policy recommendations.

Now, today's talk is particularly pressing because we cannot just sit back and be passive about this issue. If we do not make policy recommendations to our different governments, then we will not have healthy trade relations in the future. So this is why I am thrilled to announce our distinguished speakers, Paul Storer, who is our first speaker, and Gary Hufbauer.

Paul Storer is a professor and chair of the Economics Department of Western Washington University. (1) He is a member of the board of directors of the Pacific Northwest Regional Economic Conference. (2) And this is his latest book; I thought I would plug it for him. It is excellent. I read it recently. And it is entitled The Impact of 9/11 on Canada-U.S. Trade, and it was co-written by Steven Globerman, (3) and I recommend it.

And then our second speaker is Gary Hufbauer, and he has resumed his position as Reginald Jones Senior Fellow in 1998. (4) Previously he was Marcus Wallenberg Professor of International Financial Diplomacy at Georgetown University, and served in the U.S. Treasury Department from 1974 to 1980. (5) And he was very prolific last year, he had two co-authored books. The first one entitled Economic Sanctions Reconsidered, (6) third edition, and the second entitled U.S. Taxation of Foreign Income:

CANADIAN SPEAKER

Paul Storer *

MR. STORER: Thanks, Margaret. Thank you to the organizers for inviting me to the conference and for putting the two economists at the end of the day.

Thank you for the plug on the book, too. The book has the same title as my presentation, no coincidence. I felt we maybe should have renamed the book "The Audacity of Despair" due to my despair over what is happening to the relationship that Canada and the United States have built over time. I am concerned by the extent to which those gains may be getting eroded by a variety of factors, some of which may be around the nexus of security. The impact of these developments on trade and competitiveness are some of the issues I am going to be addressing in this presentation.

The reference to audacity comes in because we needed a dose of audacity back at the time when people in Canada took a leap of faith in negotiating the Free Trade Agreement with the United States, and that kind of audacity of thinking does not seem to be in abundance presently in terms of moving forward. Whether it should or should not be I will leave Gary to talk about, so we will move through this.

Let me just tell you again about the focus of the presentation. I am going to try to talk about not just the evidence that Steve and I have, but other evidence that I will mention about the actual factual quantitative evidence related to how border security problems affected the trade between Canada and the United States since 9/11. Now, if I was not an economist, I would probably just show you this graph and be done and then turn it over to Gary.

Looking at a graph of Canadian exports of goods to the United States from 1996 to 2005, the eyeball is drawn to what looks like a significant decline after 2001. The shaded period shown in the graph on the screen is the post-9/11 period where we see a sharp drop-off in the amount of the Canadian surface export (rail, pipeline, and, predominantly, truck) flows to the United States from Canada. And you can see why it seems like a precipitous drop-off after the second quarter of 2001.

Now you would be tempted of course to just ascribe this decline in exports to security events, but it could be other things are going on. We have the usual suspects, which we will address more carefully later. The list of suspects includes changes in the level of economic activity in that we know there was a slowdown, changes in the exchange rate, or changes in other economic factors such as tariffs on lumber.

Being economists, what Steve and I have done is to rely on a statistical method known as linear regression to tease out the contributions of those other "usual suspects". Anything that is left over after looking at other things, we ascribe to post-9/11 security effects. So I cannot stop the story with the graph on the screen, I have to show you more analysis. But I was supposed to be multidisciplinary, too, so I will give you a little bit of history in the next slide.

We have already had a reference to the Smoot-Hawley tariff escalation from the time of the Great Depression. We all want to avoid repeating the errors of Smoot-Hawley today. For the Canadians in the audience, we should also talk about avoiding the errors of the National Policy. (8) The last time that Canada built a policy wall at the border was in the late nineteenth century in response to fears that American manufacturers would take away the prosperity of Canadian manufacturing workers and farmers. On the screen you see an election poster from this period and we see Sir John A. Macdonald benevolently smiling down at his protected charges-the manufacturers and farmers sheltered behind the tariff wall of the National Policy.

This cartoon is reproduced from Michael Hart's excellent book A Trading Nation, a comprehensive history of Canadian trade policy. (9) Michael provides a fascinating description of the state of the Canadian auto industry just before the Canada-U.S. Auto Pact came into effect in the mid 1960s. (10) Michael cites studies from the period which found car prices much higher in Canada than in the United States (11) while at the same time wages in the Canadian auto industry, which was a domestic protected industry, were lower. (12)

So prices were high and wages were low in Canada and to make matters worse the choice of models available in Canada was incredibly limited. (13) What happened after the Auto Pact, which moved Canada and the U.S. into an integrated North American market for the auto industry, is that economies of scale and the ability to specialize were realized through binational production. The automotive sector is the poster child for a binational model of shared production that Stephen Blank describes as "making stuff together" As a result of the Auto Pact, Canada moved to a situation where wages went up, profitability went up, prices of cars went down, and model choice went up. (14) And of course those are also the types of outcomes that we were expecting from NAFTA and Canada-U.S. Free Trade Agreement. These broad agreements were supposed to bring all those benefits realized by the auto industry and extend them to the all sectors of the economy.

One of my particular causes of despair is the fear that those benefits from trade liberalization that should have spread throughout the economy have failed to achieve their promise. In particular, smaller businesses are less able to shoulder the costs of dealing with security and those businesses will find it increasingly difficulty to exploit the benefits of NAFTA. (15) While the bigger players will have a reasonable chance to foot the bill for increased security, the smaller ones, for whom we were hoping to democratize free trade to a greater extent, may be shut out of trading due to rising security costs.

I would now like to summarize some of the sources of evidence that increased border security has affected Canada-U.S. trade. While I will mainly focus on econometric studies. I will also talk about what is happening to the waiting times, estimates of cost and profitability. I will also discuss findings from surveys done by various authors, and then turn to the econometric studies, both the one that Steve and I did and then one from the Conference Board of Canada by Michael Burt.

The evidence related to border security and waiting times shows up in two effects, both of which can have significant consequences. One effect is an increase in average waiting times as measured by mean or median crossing times. The other effect is an increase in variability of waiting times as measured by standard deviations or variances.

We need to be concerned about the impact of security on both the average length and variability of border delays. If you are waiting for a longer time at the border, you are going to be burning more fuel, you will be later making delivery, and it will cost more money for labor. (16) The increase in variability is also an issue because predicable arrival times are needed to get the benefits of "just-in-time" inventory management systems. (17)

A study conducted by Danielle Goldfarb for the Conference Board of Canada has expressed the concern that efficient just-in-time procedures might be replaced by potential wasteful duplication of facilities that are needed as a form of insurance "just-in-case" there is a border disruption. (18) In an earlier session at this conference we heard Garland Chow describe the interesting case of such a "just-in-case" facility in Kent, Washington which may well have been set up in order to have inventories on both sides of the border. You only need the insurance policy created by this redundancy if you are worried about the possibility of significant variability in waiting times at the...