GLOBAL ECONOMICS COMMENTARIES

Patrick Grady
How Much Were Canadian Exports Curtailed by the Post-9/11 Thickening of the U.S. Border? An Executive Summary
May 10, 2008

The full paper is available in and revised in .

After the terrorist attack on New York and Washington on September 11, 2001, the United States Government introduced a series of measures designed to tighten security at the Canada-U.S. border. An unwelcome side effect was that these measures collectively have turned out to have had a very adverse effect on Canadian trade. Canadian Ambassador Michael Wilson said "We call it a thickening of the border". Most recently, Federal Industry Minister Jim Prentice complained about mounting border delays and warned about the "thickening of the border" resulting from enhanced security measures. Many observers have commented on this phenomenon.

In a joint report prepared earlier this year, the Canadian and U.S. Chambers of Commerce contended that based on the feedback that they had received from Canadian and U.S. businesses there was "an increase in border costs and a 'thickening' of the border because of increased wait times; direct fees for crossing the border; additional and duplicative border programs; additional costs for participating in trusted shipper and traveler programs; and increased inspection times." Because of their concern about the "increasing costs and delays associated with crossing the border," they made practical recommendations to reduce border costs without compromising security.

In its report to NAFTA Leaders, The North American Competitiveness Council lamented that "Businesses in Canada, Mexico, and the United States are bearing the burden of new measures to enhance security, as well as more rigorous enforcement of existing rules", and complained that "This means that businesses in all three countries are facing longer delays, higher inspection rates, additional fees, and more layers of security when they can afford it least". These articles and studies contribute to a growing literature documenting the various ways in which U.S. border controls have been tightened after 9/11, restricting trade between Canada and the United States.

A Fraser Institute study by Alexander Moens and Michael Cust summarized the studies attempting to measure increased border costs after 9/11 and estimated that the "waiting, processing and security measures costs at 2 to 3 per cent of total trade". The studies surveyed for the estimate were done by: KPMG; the Michigan Department of Transportation; Transport Canada; the Canada-U.S. Trade Center at the State University of New York at Buffalo; and the Conference Board. The important contribution of these studies is that they reveal the costs imposed on traders by the tightening of U.S. border controls.

In contrast, the working paper summarized here, examines the issue of the "thickening" of the border from a different perspective than these other studies. Rather than focusing on the specific measures contributing to the "thickening" of the border and the related policy issues and seeking to quantify their costs, its contribution is to present the statistical data on Canadian exports, and to analyze them using econometric tools to provide quantitative estimates of the impact of the post 9/11 tightening on Canadian exports.

The paper presents the data for exports of goods that have been cited as prima facie evidence of a "thickening of the border." After more than a decade of strong growth following the 1989 Canada-U.S. Free Trade Agreement, the growth of Canadian exports of goods to the United States in current dollars stalled after the year 2000, declining slightly from $334.1 billion in 2000 to $331.4 billion in 2007. The share of exports of goods going to the United States fell more significantly from 86.7 per cent in 2000 to 79.3 per cent in 2007. The decline in exports of goods to the United States as a share of GDP from 31 per cent in 2000 to 21.6 per cent in 2000 is even more striking as exports had grown more rapidly than GDP after the implementation of the FTA/NAFTA.

The source of the weakness in current dollar exports that is identified in the paper is non-energy exports. Energy exports were the only component of exports that continued to grow strongly after 9/11. Forestry Products exhibited a particular weakness after 2000, dropping by over a third from $32.4 billion in 2000 to $21.1 billion in 2007. This was the result of restrictive trade actions taken in the United States against softwood lumber exports. Hence, total exports to the United States excluding forestry products as well as energy, also declined more than total exports, but by less than total exports excluding energy.

In order to better understand the forces behind the trends in exports to the United States, the paper examines exports in constant chained 2002 dollars. This provides a more accurate depiction of the volume of exports as some export categories such as energy and other commodities experienced large price increases over the period. In constant dollars, the stagnation of exports after 9/11 is even more evident once the impact of price increases is removed.

The econometric analysis presented in this paper provides empirical support to back up the many complaints made that there has been a "thickening of the border" after 9/11. It estimates that Canadian exports of goods, excluding energy and forestry products, to the United States have been 12.5 per cent lower than would have been expected based on estimated relationships. This would amount to a reduction of $30.6 billion in the exports of goods excluding energy and forestry products in 2007 in current dollars. It should be noted that this is substantial negative impact on exports even in comparison with the likely positive impact of the FTA/NAFTA, which, even though it reduced non-tariff barriers, only eliminated tariffs averaging around one per cent. The analysis also confirmed that there was an 8-per-cent negative impact on the exports of services to the United States (or $3.1 billion in 2007 in current dollars) and an almost 13 per cent on the imports of travel services. It is ironic to consider such large estimates of the negative impact on Canadian exports of the post-9/11border tightening at the same time as the Democratic presidential candidates are both promising to renegotiate NAFTA to get a better deal for the United States. Indeed, it could be argued, based on the analysis presented in this paper, that the benefits Canada derived from the FTA/NAFTA have been substantially eroded. And unimpeded access to the U.S. market is much more important for Canada than greater access to any of the smaller markets that the Canadian government has been pursuing through recent bilateral free trade deals.

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