Alan Fox, Joe Francois, and Pilar Londoño-Kent Measuring Border Costs and their Impact on Trade Flows: The United States-Mexican Trucking Case

Presentation Outline The Problem Objectives –Inefficiencies in the Border-Crossing Processes –Presentation of their Implication on the Trade Flows and the Economic Welfare of the countries Conclusion

The Problem Border crossing: theoretical efficiency vs. institutional barriers The context: –World’s longest border between highly industrialized/developing economies –Language, culture, and history NAFTA: –Expands trade –Eliminates tariff barriers, and minimizes non-tariff barriers –Rules guaranteeing the permanent access of domestic products –Recognizes and encourages the large and growing trade

Mexico-U.S. Trade (billions of U.S. dollars) Year of NAFTA Agreement

NAFTA Scenario: Crossing the Border South-Bound Trucking the main mode of transportation between U.S. and Mexico

Current Situation Scenario: Crossing the Border South-Bound

Objectives Identify inefficiencies in the border- crossing process Quantify inefficiencies in terms of time and cost Present their implication on the trade flows and the economic welfare of the countries

Impediments to Free Trade Agreements: The United States-Mexican Trucking Case Significant time and cost inefficiencies in border crossing processes at Laredo, the main border crossing Generates costs in the form of congestion, pollution and lengthy delays Favors specific economic interests by the revenue it generates Creates local employment and economic activity The sources: legal and institutional barriers that impede NAFTA’s assumed seamless border

Border Crossing Logistics, Cost and Time Methodology: interview shippers, truckers, ITDS members, transport consultants; verify by examining invoices, observing times and movements, and calculating data from maps, traffic engineering, etc. The next figure shows times and variable transportation cost for the Laredo crossing southbound by truck; excludes costs such as pedimento, duties, taxes and broker’s commissions, costs regardless the mode of transportation

Crossing the Border South-Bound Southbound costs total between $287 - $636 per truckload It typically takes from 2-5 days to cross the border

Crossing the Border North-Bound Northbound costs total between $150 - $300 per truckload It typically takes only a few hours to cross the border

Macroeconomic Effect of Border Crossing Inefficiencies Review of literature on border effects GTAP model appropriate framework for analysis Micro effect of Laredo border inefficiencies apparently minimal: 1-2 percent money to brokers Time is a more important variable: Hummels estimates that each day saved in shipping is worth 0.8% ad valorem for manufactured goods. 2-5 days are equivalent to 1.6% - 4%

Simulating Removal of Trade Frictions Use GTAP version 6 to measure welfare and trade impacts Two types of shock –Tariff reduction (- Δ tms, - Δtxs) Southbound brokerage cost treated as import tariff Northbound brokerage cost treated as export tariff –Productivity increase (+ Δ ams) Proxies for removal of iceberg tariff

Model Aggregation Table 1: Model Regions and Sectors RegionsSectors MexicoFood and Agriculture* United StatesCoal, Oil and Gas CanadaOther Primary Production* European UnionMotor Vehicles and Parts* Rest of WorldPetroleum, Coal Products Minerals and Metals Electronic Equipment* Other Manufacturing* Transport, NEC Sea and Air Transport Services and Activities, NES *Sectors included in set T, commodities predominantly shipped by truck.

Experiment Structure Table 2: Experiment Structure Variable shocked* BarrierSouthboundNorthbound Lost time∆ ams(T, US, Mex) = +3%∆ ams(T, Mex, US) = +0.25% Brokerage frictions∆ tms(T, US, Mex) = -2%∆ txs(T, Mex, US) = -0.75% *T is the set of commodities shipped predominantly by truck. See Table 1.

Welfare Impact Table 3: Welfare Impact of Friction Removal (millions of 1997 dollars) RegionAllocative Technical ChangeTerms of Trade Investment and SavingsTotal Mexico USA Canada EU Rest of World Total

Impact on Trade Flows Sector Mexican imports from U.S.U.S. imports from Mexico Chg. (mill.)PercentChg. (mill.)Percent Food and Agriculture* Coal, Oil and Gas Other Primary Production* Motor Vehicles and Parts* Petroleum, Coal Products Minerals and Metals Electronic Equipment* Other Manufacturing* Transport, NEC Sea and Air Transport Services and Activities, NES Total (∆ viws) *Commodities predominantly shipped by truck and subject to liberalization.

Conclusions Reform could increase welfare: –For Mexico, $1.8 billion/year –For the United States, $1.4 billion/year Other benefits not quantified: –Reduction in pollution, congestion, and demand for new infrastructure at the border –Improved efficiency of capital equipment use –Improved integration of the two economies –Increase in security