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New Study Examines Border Compliance Costs in the Pre- and Post 9/11 Eras

Posted July 30, 2015

In the aftermath of the terror attacks on September 11, 2001, a new security regime was implemented to regulate the movements of goods across the Canada-U.S. border, raising concerns about the degree and extent to which the so-called “thickening” of the border has affected the cost of moving goods across the border by truck.

A new study by McGill professor Dr. W. Mark Brown with the Microeconomics Studies Division of Statistics Canada, How Much Thicker Is the Canada–U.S. Border?, building on previous research and extending the period of analysis back to 1994, found that increased delays at the border and additional border regulations may have increased the costs incurred 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.

At the micro level, the study noted evidence that border compliance costs are reflected in prices, finding that 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 U.S. But the research indicated 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 cross-border 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 study notes that the costs examined in the report 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. Furthermore, increased variability in border-crossing times may cause shippers to maintain buffer inventories on the other side of the border, which would not be reflected in carrier revenues.