It’s time for cross-border recalibration

| October 26, 2011 | 0 Comments
Long line-ups and cumbersome reporting requirements, all in the name of enhanced security, have undermined the quality and quantity of Canada and U.S. trade, writes Derek Burney.

Long line-ups and cumbersome reporting requirements, all in the name of enhanced security, have undermined the quality and quantity of Canada and U.S. trade, writes Derek Burney.

The joint action plan on perimeter security and economic competitiveness announced with much fanfare by Prime Minister Stephen Harper and President Barack Obama in February was a refreshing step in the right direction. The concept is compelling in principle. The question is: Will it produce yet another spasm of communiqué massage offering the promise of relief but with little lasting effect? Or will it deliver actual benefits in terms of enhanced security and improved border access? There is some merit to the effort itself because, for Canada, constructive engagement with the U.S. can be more rewarding than neglect. While it is more than timely to reconsider and recalibrate North America’s mutually dependent economic and security environment, the proof, as the saying goes, will be in the pudding.
For the better part of the decade since 9/11, the bilateral relationship between Canada and the U.S. languished more or less on idle, reflecting a lack of common resolve, a dearth of ideas and a diminution of mutual respect. Meanwhile, U.S. security concerns introduced a plethora of new inspection and monitoring procedures and fees at our shared border which violated the spirit of NAFTA undertakings and hobbled the efficiency of cross-border trade in goods and services.
The Canadian Chamber of Commerce estimated that these new provisions added an average of $800 in cost to autos produced in North America, parts and sub-assemblies of which cross the border several times.
Long line-ups and cumbersome reporting requirements — all in the name of enhanced security — undermined the quality and the quantity of trade, as well as the competitive positions of North American companies facing rising pressures from rapidly growing Asian economies. Negatively affected as well was the 40 percent of bilateral trade that is based on intra-firm value chains where products are assembled from components from various North American suppliers. Efficient trade flows were hampered further by duplicative but separate regulatory regimes, divergent standards and inspection routines that often defied rational explanation. All served to compound border administration.
As a recent study by the Canadian Federation of Independent Business (CFIB) confirmed, the cost of understanding and coping with thousands of regulations and paperwork requirements prevented many small and medium-sized Canadian firms from attempting to serve other markets, notably the one on our southern border.
John Noble, president of the Ottawa-based Canadian International Council, and Michael Hart, Simon Reisman Professor of Trade Policy at Carleton University’s Norman Paterson School of International Affairs, estimated that in 2003, Canadian border officials were charged with ensuring compliance with almost 100 statutory instruments on behalf of dozens of federal departments and agencies. Their U.S. counterparts administered roughly 400.
Patrick Grady1 has observed that the number of U.S. agents at the border increased six-fold from 340 in 2001 to 1,845 in October 2009. (The food industry is rife with incompatible grading, inspection and packaging requirements that hobble trade. Some, on beef for example, are blatantly protectionist and have nothing to do with food safety.)
The Beyond the Border Working Group (BBWG), led by senior officials, is expected to report annually to the leaders on the implementation of its work plan and the mandate is to be reviewed after three years.
[It] is joined at the hip by the creation of a regulatory cooperation council (RCC) with a two-year mandate to improve regulatory cooperation and adopt more compatible approaches that, in turn, are meant to drive greater efficiency and fuel prosperity for both countries. This is a tall hill to climb and one that has frustrated many initiatives in the past.
Much [bilateral trade] is based on “value chains.” This is especially true of the automobile, telecommunications and aerospace industries. Yet integrative trade is hampered by needlessly divergent standards and inspection procedures from different jurisdictions compounded by burdensome border administration. It is at the border that compliance is monitored most meticulously, adding to time and cost.
As Kathleen MacMillan2 has written, “regulatory incompatibility means reduced trade, higher compliance costs for business, extra expenses for consumers and less than optimal outcomes… that damage our competitiveness unnecessarily.” She added, more pointedly, that Canadians are simply “shooting themselves in the foot” by maintaining and even expanding minor but wasteful regulatory differences.
The differences are particularly damaging for smaller companies, and because Canadian companies tend to be smaller, the burden on Canada is lopsided. The examples of inconsistency are legion, reflecting what Prof. Hart3 has characterized as the “tyranny” or the “narcissism of small differences” — the obsession for maintaining difference to sustain distinction:
• In Canada, anti-theft immobilizers are required on all vehicles; in the U.S., lower-cost entry-level vehicles are exempt. This is just one of more than two dozen different standards undermining efficient production by North American auto companies;
• In Canada, cheese-flavoured popcorn, which is imported, must contain no more than 49 percent real cheese — perhaps with a nod to Canadian dairy farmers — whereas, in the U.S., no less than 53 percent;
• In Canada, fortified orange juice is classified as a “drug.” In the U.S. it is classified as “food;”
• Because of different labeling requirements and despite our colder weather, Canadians pay more for body deodorants than Americans;
• There are differences over the colouring and nutritional content of jellybeans, a distinction that David Ganong once highlighted at the top level of the two governments, to no avail.
That is why a more balanced approach to trade and security makes sense. On security, the objective fundamentally is to enable both countries to cooperate better using 21st-Century technologies, measures and techniques to identify and monitor more closely those posing a real risk to the security of the U.S. and Canada (as opposed to those who pose no risk whatsoever). New challenges from cyberspace are best countered, as well, by joint surveillance mechanisms.
To ease border congestion, bi-national port of entry committees will be established to coordinate planning and funding for building and updating shared border facilities. (Most of the current infrastructure was established in the first half of the last century.) The two leaders also pledged to focus investments in modern infrastructure and technology at our busiest ports of entry. Should the new Windsor-Detroit bridge ever become a reality, it could serve as a pilot project to move this cooperation one step further, establishing a single, bi-national facility for customs and immigration inspection and epitomizing a bold new standard of trust and efficiency.
The forces of globalization oblige countries like Canada and the U.S. to examine all possible ways to bolster the competitiveness of our firms, to streamline regulatory barriers and to expedite trade flows. It is relevant to note that what we decide to do better together can also enhance our ability to take advantage of growth opportunities elsewhere.
On regulatory reform, the fundamental objective will be to achieve greater compatibility and complementarity of regulatory standards, not harmonization. The essential ingredient for success will be an enlightened approach to mutual recognition. Differences should be confined to those that serve distinct, identifiable and transparent public policy purposes and not the “iron rice bowl” mindsets of bureaucrats. Either country can pick and choose where it makes sense to align or refine common standards. Similarly, each can choose to leave some topics off the table. That is the nature of any negotiation. But the current system would benefit from a firm shake up and a heavy dose of common sense.
Because many of the regulations and standards involved are provincial in nature, it will be imperative to include the provinces in negotiations, directly and substantively. It would be prudent for the negotiators to be guided by a formal consultative network of those with a direct stake in the outcome, including public interest advocates and experts in regulatory matters. Privacy concerns about sharing personal information will also have to be addressed in a manner consistent with existing laws and regulations in both countries.
For too long, the U.S. has seemed to prefer to deal with Canada primarily through trilateral summits despite the fact that this approach generated a meagre track record in terms of achievement. Besides, Mexico is not a party to NORAD, nor to NATO. Nor is it a shared partner in the Arctic. Especially on matters of security, these distinctions are acute. Nonetheless, giving greater attention to bilateral border and regulatory issues does not preclude the prospect of doing something trilateral if and when it makes sense. After  all, NAFTA began as a bilateral agreement between Canada and the U.S.
The potential benefits to both countries from the perimeter security and regulatory reform initiatives are obvious but may not be sufficient to drive success. Deeply-held attitudes on security will not be easy to change. Even more troubling is the fact that the U.S. is beset by seemingly intractable challenges at home and abroad — an unsustainable fiscal problem, a sputtering economy and the wear and tear of three protracted and frustrating wars. A bilateral initiative with Canada, no matter how promising, will have difficulty capturing the necessary political support.
For Canada, there is always concern about a perceived loss of sovereignty in any bilateral negotiation with the U.S. That sentiment will never fade away even though history has demonstrated that bilateral accords with the U.S. on trade, defence and the environment have, in fact, been assertions of sovereignty serving to strengthen our prosperity, our security and our well-being as a society.
In the negotiations, the Americans will attach top priority to enhanced security arrangements whereas, for Canada, the major objective will be smoother access at the border to reinforce the benefits of free trade. Arriving at a healthy balance will pose the most daunting challenge of all for the negotiators.
Support for the initiative from the private sector has been cautious to date, no doubt tempered by the fact that previous efforts to facilitate border access and rationalize regulatory differences have died without much in the way of result. Officials will need to focus their initial negotiating efforts on solutions to what can be readily identified as key obstacles, thus generating tangible results and needed credibility for the whole exercise.
Some early achievements would also help spur momentum and may help galvanize broader support, especially from those who have the most to gain. Tangible examples of why changes make sense will be needed to counter both the inevitable attitudinal concerns in Canada and the chronic apathy or indifference of Americans to all things Canadian.
The essential tonic for progress, however, will be firm and persistent prodding from the two leaders. Backed now by a solid, majority government, Mr. Harper is in a good position to lead and drive the twin initiative forward. He will need to, especially as Mr. Obama will be otherwise pre-occupied in the run-up to the 2012 election campaign.
The goal of the perimeter security and regulatory initiative is pragmatic. It may not be as dramatic in impact as the free-trade negotiations which dismantled tariffs across the board and provided a better basis for dispute settlement. But it is an exercise whose purpose is to remove many of the barnacles that have since stifled that agreement’s original intent. As well, it can reduce longstanding, outdated regulatory impediments to more efficient, more competitive operations in North America.
The political environment has also changed dramatically since the 1990s and success is not pre-ordained. The obstacles, both overt and benign, are formidable. But the prescriptions established by the two leaders provide the opportunity for constructive engagement. The focus for negotiations should be on delivering concrete results. If the priority is sustained from the top, if key stakeholders become committed and a significant degree of trust is established between the negotiating teams, there is reason to believe that innovative solutions can be implemented that will advance the interests of both countries.

1 Patrick Grady, “A More Open and Secure Border for Trade, Investment and People,” Carleton University, Canada-U.S. Project: From Correct to Inspired: A Blueprint for Canada-U.S. Engagement, January 2009.

2 Kathleen MacMillan, “A Canada-U.S. Regulatory Accord,” Carleton University, Canada-U.S. Project: From Correct to Inspired: A Blueprint for Canada-U.S. Engagement, January 2009.

3 Michael Hart, “Steer or Drift: Taking Charge of Canada-U.S. Regulatory Convergence,” C.D. Howe Institute Border Papers, March 2006.

Derek H. Burney is senior strategic adviser for Norton Rose OR LLP, an international commercial law firm, and a senior research fellow at the Canadian Defence and Foreign Affairs Institute (CDFAI.) Mr. Burney was Canadian ambassador to the United States from 1989–1993. This column has been adapted from a research paper presented to the University of Calgary’s School of Public Policy.

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