1. Case Western University, Ohio April 17-19, 2008 The Tipping Point – Effects of Post 9/11 Border Security on Canada / US Competitiveness Gary Hufbauer Peterson Institute for International Economics Canada-United States Law Institute 2008 Annual Conference

2. Introduction By the end of 2007, Canada and the United States had: –a total population of 335 million –a combined GDP of US$15.3 trillion –a bilateral two-way merchandise trade of US$574 billion (up from $163 billion in 1989) –bilateral two-way FDI stocks (end 2006) of US$405 billion (up from US$99 billion in 1990). But trade densities are relatively low and large price divergences persist between US and Canadian cities. Three key factors account for these limits on economic integration: –different currencies, –a rising security tax, –regulatory barriers.

3. The Problem: Rising Security Tax Since 9/11, a heavy emphasis on security has “thickened” the border. Controls at the northern US border, rather than at the North American perimeter, hamper flows of goods and people. Travel woes: the Western Hemisphere Travel Initiative requires citizens of the United States, Canada, and others who are traveling through the region (whether by air, land or sea) to hold a passport. This rule hampers cross-border traffic because many citizens lack passports, the cost of getting one is high and the processing backlog is long. Alternatives to a passport are stop-gap measures. The PASS card, SENTRI, NEXUS and FAST, are designed to move the security process away from the border, but they have worked better on paper than in practice.

4. Cargo troubles: The 100 percent scanning legislation requires that all containers bound for North America be scanned at their ports of origin. Freight will have to be consolidated in a handful of large, well-equipped ports. The outcome will be higher costs of moving cargo, longer crossing times, and missed business opportunities. Port operators predict that the waiting time will increase from 5 to 7 days. The Problem: Rising Security Tax

5. Owing to the Container Security Initiative Partnership Agreement between the United States and Canada, sealed cargo entering the North American perimeter through Canada and continuing to the United States will not need to be scanned again at the Canada-US border. But cargo originating in Canada and shipped to the United States will have to be scanned.  With more efficient technology, and with inspections calibrated to risk, the security tax on Canadian merchandise can be reduced. The Problem: Rising Security Tax

6. Recommendations Security for flows of merchandise originating in the United States and Canada, and citizens of the two countries. To reduce border restrictions, the United States needs to accept the proposition that goods made in Canada pose no greater threat to the United States than US goods and vice- versa. For travelers: Canada and the United States should agree that citizens with high-tech passports can enter through rapid travel lanes.  However, only 25 percent of US citizens and 40 percent of Canadians have passports, so as an interim step, both countries should waive the passport fees until 2010.

7. For flows of merchandise: goods made in Canada, whether from Canadian or foreign components, should be examined and certified at the originating factory according to rules agreed by both countries.  If the merchandise is then sealed and tracked all the way to the border using high-tech equipment, it should travel through to the United States with no further inspection (apart from random audits). Recommendations

8. Security for goods coming from outside the North American perimeter. The 100 percent scanning requirement, combined with the CSI process, should be tailored to relocate security checks to ports and factories outside the North American perimeter. The best approach for relocating security checks to the North American perimeter is to create a joint inspection force for all merchandise imports arriving at the Canadian border from third countries.  Once certified, and put in sealed and tracked containers, the cargo should not have to go through additional security checks when reaching the US border.

9. A joint approach in the sensitive security arena will require a strong push from the president and prime minister. To get things moving, Prime Minister Harper and President Bush should take the initiative by creating a bilateral commission to examine the perimeter question and report back with options by the end of 2009. Recommendations