The impact of 9/11 on trade costs: a survey.

• Author: Tanguay, Georges

1. INTRODUCTION

   The trade partnership between Canada and the United States is known to be one of the strongest economic partnerships in the world. Its importance has been growing rapidly during the last decade due to the Canada-U.S. Free Trade Agreement (FTA) of 1989 and the North American Free Trade Agreement (NAFTA) of 1994. Since 1989, trade between Canada and the United States has more than tripled, from $192.4B to $680B in 2004. (1) Today this partnership yields close to $1.8B in trade turnover every day. (2) Therefore, many consider both economies as very much integrated and it is widely believed that ceteris paribus any inter-provincial trade is as provinces trading with states. However, this is not the reality: the Canada-U.S. border trade between both countries has never been frictionless.

   Numerous studies have shown that the border and border policies have caused important costs and negatively affected firms trading between both countries. For instance, McCallum (1995), Helliwell (1996,1998), Anderson et al. (1999) and Brown et al. (2002) show that the mere existence of the border causes important trade frictions between the U.S. and Canada. This is what has been called the border effect. Hence, trade between two regions (provinces or states) can be explained by factors such as distance, economic size (GDP) and the existence of trade barriers (e.g. tariffs) but also by the mere existence of the border itself. For instance McCallum (1995) showed that ceteris paribus trade between provinces was 20 times more likely than trade between a province and a state. The existence of the border effect has been explained by factors such as differences in national institutions and cultures.

   Also, Taylor et al. (2004) estimated that the border management system and trade policies cost the United States and Canadian economies $10.3B in 2002. Given these costs, it is not surprising that before September 11, 2001 there was a movement to make the Canadian-American border more open, facilitating travel for business and other parties. (3) The tragic events shifted the focus in both countries to border security and led to border policy changes. As a result, initiatives have been coordinated to combine increased security under new policy regulations with less restrictive border crossing procedures for pre-approved business partners. This is to mitigate the potential negative effects which increased security may have on trade. As illustrated in Golob (2002) "both sides have long recognized that it is in the interest of neighbors with highly interdependent economies to facilitate legal trade, but now there is an added reason to cooperate to keep out illegal cross-border flows."

   The emergence of new border policies has led some authors to evaluate the policies' effects. Like our study, those studies have indicated that tightened border security has had a negative influence on Canada-U.S. trade. As a matter of fact, to our knowledge no study based on hard data and statistics found that the border worked better and led to lower costs after 9/11. For instance, two reports prepared by the Ontario Chamber of Commerce (2004, 2005) show among others that: i) the United States absorbs 40% of the border delays totaling USD $4.13 billion per year; ii) if nothing changes concerning border issues, the US will lose 17,345 jobs by 2020; iii) border delays represent a cost of more than CDN $1,100 a year for each Ontario taxpayer; iv) delays at the border are costing the Canadian and US economies over CDN $13.6 billion per year. Hufbauer and Vega-Canovas (2003) wrote: "The long-term impact of new and permanently higher levels of border security would be much greater transaction costs, acting like an added tariff on North American trade, a new tax on direct investment, and an obstacle to business and pleasure travelers. Until NAFTA countries come to grips with this new reality, the progressive rise in economic integration achieved between 1989 and 2002 could simply grind to a halt." Dobson (2002) also argues that the potential long-term impact of a permanent increase in-border security would present an added tariff on two-way trade. In a recent study, Lee et al. (2005) support those views. They analyzed how costs and border wait time have varied due to security measures implemented after 9/11, for goods exported by truck from the province of Quebec to the United States. Their findings indicate an average increase in cost of $50 per border crossing per truck. These cost increases are often absorbed by firms to maintain their prices by reducing salaries and/or loss of jobs. This same study estimates the cost of adjustments of firms to the new security policy C-TPAT at 17% of the value of sales to low volume trading firms, at 0.79% of the value of sales to mid-volume trading firms and 0.10% to high volume.

   The current paper adds to the previous literature by looking at how firms have been affected by the new border policies in the North American North East. To do so, we conducted a survey in 2004 of 64 firms trading in the New England states and provinces of Atlantic Canada and Quebec. We present a general portrait of how surveyed firms' costs varied due to the implemented security measures. We then show how costs varied relative to the destination of shipments, the size of the firms and the firms' volumes of trade. A priori, we expect that 1) costs will be higher for firms shipping to the U.S. as border security policies seem stricter; 2) larger firms will more easily absorb adjustment costs to the new policies; 3) smaller firms will adapt more easily to changes but would incur higher costs; and finally, 4) firms with higher volumes of trade will more easily absorb higher costs due to changes in border policies.

   We obtain that close to half of all goods were traded at higher costs and the magnitude of the cost increases was quite important. Hence, we argue the implementation of various additional security regulations at the Canadian-American border has strongly impacted the routine activities of exporters and importers. It impacted their business activity on all levels: preparation of goods for shipment, staff training, obtaining additional security clearances, dealing with increased disturbances at the border (such as increased wait times), internal adjustments, new distribution tactics and delivery timing plans. Moreover, our data reveals that the new security measures at the Canadian-American border have strongly and quite equally impacted the activities of exporters and importers on both sides of the border. First, a significant number of firms on both sides of the border saw their different categories of costs (e.g. transportation, insurance etc.) increase due to new security measures. Second, very generally, our results reveal that small firms adjusted more easily than larger ones to the new security measures. Our data shows that larger firms were more likely to experience increased costs following 9/11 and that among firms that saw their costs increase, larger firms had greater cost variations than smaller ones. Third, our results show that for any given firm, the higher the volume of trade, the more likely costs were to increase after 9/11. Also, the higher the trade volume, the more important the cost increases.

   In the next section, we explain the methodology developed to conduct the survey. In section three, we show how trade costs varied relative to destination of shipments, size of the firms and firms' trade volumes. The conclusion follows.

2. METHODOLOGY AND SAMPLE INFORMATION

   1. Survey Development

   A "sweeping in" process was used. This methodology allowed us to start our research by first understanding what are the major issues which firms face with border policy changes. The next step was then to build a mail survey by questionnaire around those issues.

   Therefore, to better understand the issues related with the new border security regulations, we met in the spring of 2004 with four firms engaged in trading and one trade association. The collected information was analyzed to determine key questions to be included in the survey. Also, in this first step we conducted a general research of the Canadian-American trade partnership and border security policies. Data was collected on the history and current trends in the development of Canadian-American economic cooperation. In particular, we looked at border policies before and after 9/11. A questionnaire was developed based on the acquired information (see Appendix 1). Various issues were considered, such as costs variations, transportation, border wait times, internal firm strategies, firms' economic indicators before and after 9/11 and feedback from firms on new border policies.

   2.2 Data

   Our objective for this research was to obtain a non-probable purposive sample of 50 firms (25 in Canada and 25 in the U.S.). We therefore chose a sampling frame by random assignment of 300 firms (150 in Canada and 150 in the U.S.). For each state and province, approximately 30 questionnaires were sent in the summer of 2004. The questionnaire included questions on costs, volumes of trade, organizational structure and other issues. The firms included in the sampling frame were all private firms and were also all involved in trading according to information obtained from the web sites of International Trade Canada and the U.S. Department of Commerce. We also made sure that firms were chosen in different industry sectors as we eventually would need to organize our non-probable purposive sample for simple statistic calculations. The questionnaire was sent directly to the manager identified as being responsible for trade in their firm, based on information obtained from the previously mentioned websites. In order to increase the survey response rate, we sent out a postcard reminder to firms who had not returned the survey by August 31, 2004. The postcard indicated that firms could...