trade and transportation integration: lessons from
TRANSCRIPT
1
TRADE AND TRANSPORTATION INTEGRATION: LESSONS FROMNORTH AMERICAN EXPERIENCE
T.R. Lakshmanan and William P. Anderson
Center for Transportation Studies
Boston University, Boston, MA. O2215
Paper Prepared for Presentation atWORLD BANK/ UNESCAP Technical Workshop on
Transport and Transit FacilitationBangkok, Thailand.
April 19-21, 1999
2
Introduction
The North American Free Trade Agreement (NAFTA) went into effect on January 1,
1994. This sweeping agreement is designed to open the borders separating Canada, Mexico, and
the United States to the free exchange of goods and services. In addition to abolishing all tariffs
over a ten-year period, provisions of NAFTA call for the elimination of certain administrative
non-tariff barriers such as import licenses and local content rules.
NAFTA represents the culmination of a long process of trade liberalization. Pre-NAFTA
arrangements allowed for the tariff free movement of goods within a specific sector between
Canada and the U.S., and within designated zones between Mexico and the U.S. Consonant and
complementary policies in transportation deregulation and privatization also helped to lower
trade barriers. The result was development of border-spanning industrial complexes producing
large volumes of trade in high value-added manufactured goods. By removing as many as
possible of the remaining barriers to cross-border goods movement, NAFTA provides
opportunities to expand and extend trade relationships that were already well established at the
time of its implementation.
Despite the comprehensive nature of NAFTA, and the favorable history that led up to it,
it is not yet accurate to say that trade within the NAFTA area is completely “free.” We can
define free trade as a situation where the movement of goods across a national frontier is no
more costly than the movement of the same goods over the same distance within a single
country. If this is not the case, then internationally traded goods will be at some competitive
disadvantage to domestically traded goods. Despite NAFTA, there are still a number of factors
that may hinder the free movement of goods across borders and therefore the full potential of
free trade may not be realized.
3
All such factors can be embraced under a broad definition of non-tariff barriers. They
include:
• product regulations that prevent goods produced in one country from being sold in another
country;
• the threat of illegal movements of undocumented people, drugs, and materials that may
transport pests or disease, resulting in the need for time consuming inspections at borders;
• inconsistency in technical and safety related transportation regulations such as vehicle size
and weight restrictions; and
• residual economic regulations as related to cabotage and restrictions on certain product
movements.
The focus of this report is on aspects of the North American transportation system that have
acted as effective barriers to trade in the NAFTA area. Thus our concern is with the third and
fourth categories, which prevent the seamless integration of national transportation systems, and
to a limited extent the second category, which can result in impediments to goods movement.
Our objective is to identify transportation factors that act as barriers to trade, explain and assess
their current situation, and describe measures that are being taken to mitigate their impacts.
While the report addresses issues involving the broader freight transportation sector, its
places particular emphasis on trucking. Trucking is emerging as the dominant mode of freight
transportation in North America. The recent Commodity Flow Survey conducted in the United
States showed that trucking accounts for over 70% of the goods moved in the United States by
value, and over 50% by weight.1 As the next section of the report will show, trade across the
U.S. – Canada and U.S. – Mexico borders is mostly in relatively high value manufactured goods
1 U.S. Department of Transportation, Bureau of Transportation Statistics, Transportation Statistics Annual Report,1997, Table 9-5.
4
and components, a market segment in which trucking is even more dominant. Furthermore,
some of the most important problems involved in cross-border transportation integration arise in
the trucking mode.
The report is organized as follows. The next two sections provide an economic overview
of the NAFTA partners and existing trade relationships and a review of some of the main
provisions of NAFTA. This is followed by sections on three major issues related to
transportation and trade: economic regulation, technical regulation, and border crossings. The
report concludes with a set of lessons learned from the NAFTA experience that can be applied to
other free trade areas.
The report also includes a set of annexes that contain more detailed information about
specific topics that are relevant to the main theme. These are:
• Annex A: The Evolution of Transport Deregulation in North America
• Annex B: Truck Size and Weight Regulation
• Annex C: Border Crossings
• Annex D: The Evolution of Canada – U.S. Trade
The NAFTA Partners
The three NAFTA partners are a diverse group in terms of size, level of development,
and the role of trade in their economies. While Canada and the U.S. both rank among the highest
income countries in the world, Canada is dwarfed by the U.S. in terms of population and GNP.
(See Table 1.) International trade is more critical to the Canadian economy, as indicated by the
ratio of total trade to GDP. Thus the U.S. and Canada roughly fit the classic “large country /
small country” case of international trade theory.
5
Mexico is a relatively low-income country that has been experiencing rapid economic
growth in recent years. Given its large population, rapid economic growth, and opportunities for
economic integration with its richer neighbors, Mexico could potentially be one of the most
important international markets in the twenty-first century.
Table 1: Statistical Comparison of the NAFTA PartnersCanada Mexico U.S.A.
GNP 1997 (billions U.S. dollars) 583.9 348.6 7690.1Avg. GNP Growth Rate 96-97 3.6 8.0 3.8GNP Per Capita (U.S. dollars)* 21,860 8,120 28,740Total Trade as % of GDP, 1996 73 42 24Population, 1997 (millions) 30 95 268Avg. % Population Growth 90-96 1.1 1.7 1.1* adjusted for purchasing power paritySource: World Bank, World Development Report 1998/1999
Canada and the U.S. now have the largest bilateral trade relationship in the world, but this was
not always the case. Between the time US became an independent country in 1776 and mid-19th
century, the US-Canadian Colony commercial relations were strained. After a short thaw
between 1846 (when Britain adopted a policy of free trade) and the American Civil War (when
Britain was suspected of helping the Southern states) US-Canadian trade was open and
unrestrained. After the Civil War, the US abrogated this free trade regime unilaterally. Later in
1879, the then autonomous Canadian Government instituted a policy of tariff barriers --partly to
protect its nascent manufacturing industries (against a more robust US production sector) and
partly to unify a geographically vast country by diverting north-south international trade flows to
east-west domestic trade. Over time this policy led to an expansion of interprovincial trade,
large and efficient industries (steel, agricultural machinery, and other key sectors), and a ‘branch
plant’ economy with US interests owning half or more of Canadian manufacturing capacity.
6
Tariff barriers have declined through time, due partly to the GATT, but more
significantly to the U.S.- Canada Auto Pact of 1965. This was an agreement to eliminate all
tariffs on automotive products and components, thus allowing Ford, Chrysler, and General
Motors to rationalize their North American production system. The agreement included
provisions to ensure an equitable market share for Canadian production plants. The importance
of Auto Pact in shaping U.S. Canada trade relations is evident in the fact that automotive
products now dominate U.S – Canada trade. More generally, a trade regime in which intra-
industry trade and trade in intermediate goods play prominent roles emerged as a result of that
agreement. (See Annex D.)
More comprehensive trade liberalization was achieved under the Canada - U.S. Free
Trade Agreement (CUSFTA), which went into effect in 1988. CUSFTA was a precursor to
NAFTA and served as a model, especially with regard to the removal of barriers to trade in
services. Transportation services, however, were not covered under CUSFTA because the U.S.
was still implementing a broad program of transportation deregulation and Canada was just
beginning a similar program at the time. (See Annex A). Under CUSFTA, all Canada – U.S.
tariffs were phased out by 1998.
Even before CUSFTA, Canada’s international trade had come to be dominated by its
relationship with the United States. By 1998, the United States was the destination of 84% of
Canada’s exports (by value) and the origin of 77% of Canada’s imports. This fact, coupled with
Canada’s high ratio of trade to GDP, indicates the extraordinary degree to which the Canadian
economy is dependent upon the U.S. economy. (A more detailed discussion of U.S. – Canada
trade relations is found in Annex D.)
7
Table 2, which breaks out Canada – U.S. trade by broad commodity groups, would come
as a surprise to many people in both countries. There is a lingering impression that the greater
part of Canadian exports to the U.S. is in primary commodities. This is based on historical
patterns of the late 19th and early 20th century, when the Canadian industrial sector was poorly
developed. At present over 70% of Canada’s exports to the U.S. are manufactured goods, of
which most are machinery and transportation equipment coming largely from the industrial
provinces of Ontario and Quebec.
U.S. – Mexican relations are based on shaky historical foundations. Mexico lost roughly
half of its territories (including California) to the U.S. as the outcome of a war fought between
the two countries in the 1840’s. Subsequent U.S. intervention (sometimes of a military nature) in
Mexican affairs led a successions of Mexican governments to be highly suspicious of their
northern neighbor.
8
Table 2: U.S. Trade with Canada 1993 and 1997 (millions of dollars)U.S. Exports 1993 % 1997 %0. Food and Live Animals 5,573 5.5 6,879 4.5
1. Beverages and Tobacco 148 0.1 320 0.22. Crude materials, inedible, except fuels 3,144 3.1 4,453 3.0
3. Mineral, fuels, Lubricants, and Related Materials 1,257 1.2 2,420 1.64. Animal and Vegetable Oils, Fats, Waxes 89 0.1 229 0.1
5. Chemical and Related Products N.E.S. 8,419 8.4 13,093 8.7
6. Manufactured goods Classified chiefly by Material 12,431 12.4 19,652 13.17. Machinery and Transport Equipment 54,273 54.2 82,961 55.3
8. Miscellaneous Manufactured Articles 10,458 10.4 14,773 9.89. Other 4,397 4.4 5,344 3.6
Total 100,190 100 150,124 100
U.S. Imports0. Food and Live Animals 4,899 4.4 7,434 4.41. Beverages and Tobacco 1,138 1.0 823 0.5
2. Crude materials, inedible, except fuels 8,417 7.6 11,983 7.13. Mineral, fuels, Lubricants, and Related Materials 11,772 10.6 17,908 10.7
4. Animal and Vegetable Oils, Fats, Waxes 219 0.2 379 0.2
5. Chemical and Related Products N.E.S. 5,499 5.0 9,514 5.76. Manufactured goods Classified chiefly by Material 17,765 16.0 27,336 16.3
7. Machinery and Transport Equipment 48,999 44.1 72,101 42.98. Miscellaneous Manufactured Articles 5,255 4.7 10,306 6.1
9. Other 6,958 6.3 10,266 6.1Total 110,921 100 168,051 100
source: U.S. Department of Commerce, U.S. Foreign Trade Highlights
Nevertheless, the Mexican economy is highly dependent on the U.S., not only because of
the size of the American market, but also because the American earnings of Mexican emigrants –
both permanent and temporary – contribute significantly to Mexico’s aggregate income.
The most important pre-NAFTA development in Mexico – U.S. trade relations has been
the creation of “Maquiladora” assembly plants. These plants are located in Mexico but they use
mostly U.S. components and produce almost exclusively for the U.S. market. They essentially
9
make it possible for American manufacturers to use low-wage Mexican labor in the assembly
phases of production that require relatively low skill levels.
The growth of the Maquiladora system has only been possible because of customs
provisions enacted by the U.S. and Mexican governments. Mexico allows U.S. components to
enter duty-free and be held in-bond at the Maquiladora site, so long as the finished products are
re-exported. Upon shipment from the Maquiladora, U.S. customs charge duty only on the
Mexican value-added content of the assembled product.
From the Mexican perspective, this system generates employment and income. From the
U.S. perspective, it makes U.S. producers more competitive while preserving jobs in component
manufacturing. Thus, despite the absence of any formal treaty, complementary U.S. and
Mexican policy measures have created a mutually beneficial trade relationship.
Due in large part to this system of production, exports from Mexico are largely in the
manufacturing categories (See table 3). Thus, despite the extreme economic differences between
Canada and Mexico, the U.S. – Canada and U.S. – Mexico trade profiles are relatively similar.
Both are dominated by intra-industry trade of manufactured goods arising from a high degree of
integration with U.S. production systems. There is a fundamental difference, however, between
these two bilateral trade relationships. U.S. - Canada trade is between two highly developed
countries, and is therefore comparable to the intra-industry trade between members of the EC.
By contrast, economic integration between the U.S. and Mexico is of a specific form dictated by
the large differences in wage and skills levels between the two countries.
10
Table 3: U.S. Trade with Mexico 1993 and 1997 (millions of dollars)U.S. Exports 1993 % 1997 %0. Food and Live Animals 2,460 5.9 3,074 4.31. Beverages and Tobacco 150 0.4 82 0.12. Crude materials, inedible, except fuels 1,808 4.3 2,956 4.13. Mineral, fuels, Lubricants, and Related Materials 1,044 2.5 2,006 2.84. Animal and Vegetable Oils, Fats, Waxes 212 0.5 375 0.55. Chemical and Related Products N.E.S. 3,470 8.3 6,343 8.96. Manufactured goods Classified chiefly by Material 5,529 13.3 9,319 13.17. Machinery and Transport Equipment 19,760 47.5 35,810 50.28. Miscellaneous Manufactured Articles 5,361 12.9 8,394 11.89. Other 1,843 4.4 3,019 4.2Total 41,635 100 71,378 100
U.S. Imports0. Food and Live Animals 2,680 6.7 3,917 4.61. Beverages and Tobacco 320 0.8 704 0.82. Crude materials, inedible, except fuels 652 1.6 978 1.13. Mineral, fuels, Lubricants, and Related Materials 4,869 12.2 8,449 9.84. Animal and Vegetable Oils, Fats, Waxes 27 0.0 29 0.05. Chemical and Related Products N.E.S. 772 1.9 1,551 1.86. Manufactured goods Classified chiefly by Material 2,903 7.3 6,642 7.77. Machinery and Transport Equipment 20,732 51.9 47,312 55.18. Miscellaneous Manufactured Articles 5,245 13.1 12,953 15.19. Other 1,730 4.3 3,337 3.9Total 39,930 100 85,872 100source: U.S. Department of Commerce, U.S. Foreign Trade Highlights
In assessing the potential and progress of NAFTA, it is important to keep in mind that it
was introduced at a time when a particular form of trade involving industrial complexes which
span the borders between the United States and its two neighbors had already evolved over a
period of decades. (Trade between Canada and Mexico is still very small.) Thus NAFTA
creates an opportunity to expand and extend trade relationships that are already well established.
11
Overview of NAFTA
NAFTA is a highly comprehensive trade area agreement, covering not only tariff
elimination, but a number of highly contentious issues including non-tariff barriers, direct
foreign investment, trade and services, government procurement, and intellectual property rights.
Despite the broad scope of the agreement, it contains a variety of exceptions and safeguard
measures. One of the most important aspects of NAFTA is its provisions for dispute resolution.
Tariff elimination. NAFTA requires all tariffs on industrial goods to be eliminated within
ten years of its implementation date (i.e. by 2004). A few Mexican tariffs on agricultural goods
will be eliminated over a fifteen-year period. Under the provisions of CUSFTA, all tariffs on
goods traded between the U.S. and Canada were eliminated in 1998.
Since tariff reduction only applies to the three partners, and NAFTA does not impose
common external tariffs, transparent rules of origin prevent any fourth country from reducing
tariff burdens by exporting to one NAFTA partner and then re-exporting to another partner with
a higher external tariff. NAFTA content rules prevent transshipment of goods after only minor
processing.
Despite the basic principle that all tariffs should be eliminated, safeguard provisions
allow any NAFTA partner to reinstate its tariffs if imports cause serious injury to a domestic
industry. There are specific rules as to when safeguard actions may be taken, however, and the
country taking the action must pay compensation to the other countries. Also, NAFTA does not
eliminate all countervailing duty or anti-dumping procedures, but such actions are subject
NAFTA dispute resolution.
Non-tariff Barriers. Administrative non-tariff barriers, such as the issuing of import
licenses which can effectively act as quotas, are eliminated under NAFTA. Technical product
12
standards, such as safety standards for electrical equipment, constitute another important
category of non-tariff barriers. While accepting that standards may vary across countries,
NAFTA stipulates that they not be used as obstacles to trade. Specific provisions include the
licensing of laboratories in one country to conduct tests required under the standards of another,
the right of firms in one country to participate in the standard setting procedures of another, and
appointment of a committee to promote standards harmonization.
Trade in Services. One of the innovative aspects of CUSFTA was the promotion of free
trade in services. This theme was broadened in NAFTA, which covers trade in the majority of
service sectors. Major exclusions include marine and air transportation and basic
telecommunications. Specific exclusions to protect cultural industries, which were first won by
Canada under CUSFTA, were retained in NAFTA.
The fact that services are “covered” under NAFTA does not mean that all restrictions to
trade have been eliminated. For example, as we will explain in detail below, the definition of
land transportation as a tradable service under NAFTA does not mean that all restrictions to
cross-border truck and rail operation have been removed.
Intellectual property rights. Some of the most dynamic sectors in the U.S. and Canadian
economies – entertainment, software, pharmaceuticals, etc. – are highly concerned with the issue
of intellectual property protection in foreign countries. Provisions under NAFTA require each
country to prevent the illegal duplication or distribution of computer programs, recordings,
drugs, etc. Also, special provisions prevent foreign infringement of patent rights.
Investment. Under NAFTA, foreign and domestic investors have the same rights in most
cases. Foreign investors have the right to repatriate capital and profits and disputes between
governments and foreign investors are subject to NAFTA dispute resolution procedures. Certain
13
sectors are exempt, including maritime and telecommunications and each country may prohibit
foreign investment in specific activities based on national security. Also, due to provisions in the
Mexican constitution, the energy sector and railroads are exempt in that country.
Government Procurement. NAFTA significantly expands the opportunities for firms in
one country to bid on government contracts in another. Significantly, Mexico’s state controlled
industries (oil and gas, electricity) are opened up to foreign procurement. A variety of
restrictions, such as small and minority business set-asides in U.S. government contracts, remain.
Personnel. NAFTA does not provide for free movement of labor across borders. It does,
however, make it easier for business people to move between countries, so long as it is on a
temporary basis. This includes technical maintenance personnel who may be needed to work on
machinery that has been sold from one country to another. NAFTA also provides rules under
which personnel with licenses or certificates (engineers, architects, etc.) can work in another
country.
Dispute Resolution. One of the most important features of NAFTA is the establishment
of fair, transparent, and timely resolution of disputes. For example, NAFTA panels can be
convened to settle disagreements in the application of rules of origin, NAFTA content rules, or
the application of anti-dumping measures. NAFTA panels also have authority over disputes
related to environmental practices in border areas.
Transportation and non-tariff barriers
As trade barriers fall off with NAFTA, the production and transportation firms in all three
countries begin to rationalize their production and logistical systems as appropriate to a single
North American market. This drive for rationalization and increasing trade generate in turn the
14
demand for more economic harmonization and an interest in the removal of remaining obstacles
to free trade. Some aspects of transportation, however, appear to constitute part of these remnant
obstacles.
In transportation NAFTA sought to equalize the US-Mexico transborder operations to
those practiced between Canada and US. Reciprocal entry in the trucking industry was to be
permitted initially to zones in border states, later to border states, and in seven years to all states
and all over Mexico. Yet half a decade into NAFTA, in transborder traffic there remain many
subtle and not so subtle barriers which translate into higher costs. Why is this so given the
convergence over the last two decades in economic regulation and liberalized environment for
transport in the three countries--particularly between US and Canada where the business
practices are similar and the infrastructures are compatible?
It is worth noting that the three countries have come to NAFTA after a long divergent
history of public policy regimes as applied to domestic transportation systems, and to other non-
transportation matters that turn out to have subtle unintended consequences on transport
operations. Thus the variety of technical and safety-related regulations (e.g. vehicle size and
weight standards) that have developed in each country over the years to govern domestic
transportation are divergent enough to provide barriers to transborder traffic. Many of these
standards are complex and multidimensional so that considerable effort is involved in resolving
inconsistencies as in the work of the Land Transportation Standards Subcommittee (LTSS).
Further, after all the economic regulatory reform that has occurred there is still remnant
economic regulation in the form of cabotage rules that hinder efficient transborder operations.
Again, activities in non-transport matters such as interdiction of drugs pests and diseases, and
illegal immigration lead to time consuming border inspections.
15
The rest of the paper explores these non-tariff barriers – detailing their nature and
complexity, their current status and steps being taken to lower the barriers and mitigate their
effects.
Economic regulation of transportation and international trade
The public policy regimes in transport in North America have included a high level of
economic regulation for nearly a century. This derived from the fact that transportation carriers,
which are integrated with fixed facilities and vehicles and enjoy network economies, were able
to engage in monopoly pricing, market segmentation pricing and similar actions that seriously
disadvantaged shippers and communities.
Through various laws passed since 1887 the US instituted economic regulation of
railroads that allowed the Interstate Commerce Commission (ICC) to assure a normal rate of
return for railroads’ assets while balancing the advantages of shippers and equity of service to
communities. To this end ICC engaged in elaborate control of investment, pricing, and
operations in the railroad industry by specifying the conditions of entry, exit, the creation of
complex rate structure, and even rules of operations--without the ability to compute costs
effectively. During the 1930s similar economic regulation was extended to motor carriers and
airlines. Canadian carriers have also been subject to economic regulation, though more lightly
than in the US and predominantly at the provincial level. Mexico also regulated through the
award of transport concessions, the grant of route capacity and freight rate structures.
The adverse effects of such intrusive regulation became very evident by the 1970s in the
poor financial performance of US railroads and high truck rates in the LTL (less than truckload)
sector. Economic analyses have shown that the price and entry regulations introduce
16
inefficiency by creating a vicious cycle of artificially high prices, high service quality
competition and the resultant losses due to raised costs (Douglas and Miller, 1974). Three sets of
such regulatory distortions have proved costly. First, in both road and rail, rates were set above
marginal costs--costing the economy $1 billion annually (Winston, 1985). Second, the entry and
exit regulations cost the carriers dearly--the prohibition on railroads on exiting from poorly
performing lines leading to annual production cost inefficiencies of $2.5 billions (Winston,
1985). Third, restrictions such as disallowing backhauls, designation of routes, etc. led to X-
inefficiency costs of several billion dollars (Winston, et. al 1990)--besides hindering productivity
growth, technical change, and service quality.
The resulting drive for deregulation led in short order to regulatory reform of airlines
(1978), railroads (1980), and motor carriers (1980) first in the US. Entry conditions were eased;
freedom to price was promoted; reliance on the market and competition was encouraged.
Canada followed suit through the National Transportation Act (NTA, 1987), the Shipping
Conferences Exemption Act (SCEA), the Motor Vehicle Transport Act together with the
amendments to other legislation such as the Railway Act.
The US deregulation policies influenced the scope and direction of transport reform in
Canada for many reasons. The observed benefits--in terms of rate and service changes to
shippers and their customers and increased competitiveness--of US experience (detailed in
Annex A) provided a strong motivation for Canadian deregulation policies. Further, since
Canadian and US transport carriers compete directly in transborder markets the need for a level
playing field provided another incentive {In 1980, 25% of CN (Canadian National) and 22% of
CP(Canadian Pacific) Railroad revenue came from cross-border traffic} Again, the carriers in
both countries compete indirectly in global markets where domestic transportation costs are one
17
component. Transport deregulation came to Mexico as part of the late 1980s economic
restructuring intended to promote domestic investment-friendly policies. Liberalization of the
motor carrier industry occurred in 1989--permitting greater pricing freedom, opening the market
to private carriers, and allowing Maquiladora operators to use their own fleets to move goods in
both directions.
Major changes occurred in the US in the conduct, performance, and structure of airlines,
trucking and railroads after deregulation--more competition among all modal carriers, lower
prices, wider set of service offerings, and new entry into most geographic and product markets.
Carriers have been able to rationalize their networks, improve the efficiency of their operations,
and set rates in line with competitive market conditions.
Several studies have shown that average airfares (in constant dollars) have fallen since
1978 and competition stays rigorous on most city-pair routes, though concentration has gone up
in the industry (US GAO, 1990; NRC, 1991). There was a significant change in the cost
structure of the railroad industry following deregulation with productivity growing at well over
2% a year (Bereskin, 1996--for the benefits in trucking, see Annex A).
Shippers, confronting technological change and globalization, have begun to coordinate
their production activities more effectively with their transportation services--with consequent
productivity gains. The experience in Canada since 1987 has been broadly similar, with
competitive pressures lowering rates in international air traffic, railroads and trucking. Trucking
deregulation in Mexico in 1989 increased competition and lowered rates--29% lower a few years
later (Strah, 1995). It also promoted expansion of intercity routes and the vehicle fleet.
The advent of NAFTA in 1994 after considerable liberalization and deregulation in all
three countries has not, however, led to unhindered transborder flows of traffic.
18
Cabotage One class of these barriers pertains to the remaining economic regulation, in
particular, cabotage. Cabotage refers to the ability of foreign vehicles and labor to transport
goods within a country. The cabotage rules and regulations that limit the freedom of foreign
transportation carriers instituted by Customs and Immigration Departments are typically
symmetric. Such rules involve the use of labor and equipment of one country in the other--e.g.
foreign drivers cannot carry domestic freight and the use of foreign equipment is restricted to
domestic movements that are incidental to international movements. The existence of these
cabotage-rule barriers increases the cost of transborder transport. Railroads are less affected by
cabotage restrictions, though they too incur additional costs because of the need to change crews
at the border.
Another major remaining cabotage barrier is the existing US restrictions on trade in
domestic water transportation. In the large, multi-coastal US economy, foreign participation in
its intercoastal trade is restricted by the 1920 Jones Act. The Jones Act--justified by the need to
secure a sufficient merchant marine capacity for US defense needs-- reserves the shipping
cabotage traffic to US built and registered ships that are predominantly owned and crewed by US
nationals. The US maritime carriers and other stakeholders have excluded these provisions from
the GATT and NAFTA. The Jones Act permits domestic shippers to levy rates substantially
above comparable world prices, effecting thereby a massive transfer from US users of water
transport users to US maritime carriers-- a welfare cost around $3 billion in 1989 according to a
recent analysis of the Jones Act (Francois et.al.,1996).
Aviation is an important component of foreign trade, for example accounting for $355
billion or 27% of US trade in 1995--60% of which is hauled in US carriers (US GAO, 1996).
The rapid growth in international air freight services reflect the emergence of global systems of
19
producing and distributing goods and the associated ‘just-in-time’ inventory and supply chain
management systems. Such services are handicapped, however, by the bilateral international
aviation agreements that specify traffic rights – the routes, the number of flights on each route
and the number of airlines that can fly them. Such restrictions on transborder airline traffic have
been recently relaxed by the US negotiations on ‘open skies’ agreements with many European
countries such as Germany and Netherlands. In 1995 the U.S. and Canada signed the Open
Skies Agreement, under which carriers in each country were given full access to destinations in
the other, procedures for international fare approval were streamlined, and gates at some of the
busiest U.S. airports were dedicated to Canadian flights. The agreement extended both to
passenger and all-cargo air services. The agreement with Mexico (1991) is not ‘open’ but
liberalized to include open routes, no capacity restrictions, freedom to transfer cargo for ‘onward
flights’, and operational flexibility but restricted in the number of airlines allowed to operate
(one on any city pair segment), and double approval pricing.
As economic regulatory barriers fall, cabotage and other barriers in the form of safety
and technical regulations in such areas as vehicle size and weights, driver certification and hours
of service, and safety remain. As the rules governing these matters diverge in the different
countries, because of past national decisions on bridges, infrastructure, or social and political
issues governing transport, the resulting inefficiencies in transborder areas will spur the demand
for uniformity and harmonization.
The overall message is that inconsistencies in transport regulations between countries that
are part of a Free Trade Area will generate economic inefficiencies and disparate opportunities,
thereby generating demand for harmonization. As both production and transportation firms in all
three countries rationalize their operations across the NAFTA region, the transport non-tariff
20
barriers noted in this section as well as in the rest of the paper cause inefficiencies and generate
the political demand for their relaxation. The direct effect of these barriers--as the transportation
carriers are required to operate around these restrictions--would be higher costs; the longer term
indirect effect would be less competitive and efficient activities in the logistics industry and the
consequent loss of productivity in the NAFTA region.
“Rules of the road” – the complex problem of technical regulation
In addition to economic regulation, transportation is subject to a host of technical
regulations and standards. These include:
• size and weight regulations for trucks
• size, weight and other technical standards for locomotives and other railroad stock
• age, language, licensing and health regulations for vehicle operators
• conventions for road signs and traffic signals
• procedures for ensuring vehicle safety
• procedures of transportation of hazardous goods
In all of these cases, somewhat different regulations, standards, and procedures have evolved
over many years in the three NAFTA partners. To the extent that such inconsistencies increase
the cost of moving goods across borders, as compared with moving the some goods the same
distance domestically, they constitute a form of non-tariff barrier.
Inconsistencies in truck size and weight regulations are a good example. (A more detailed
discussion of this issue can be found in Annex B.) These regulations are imposed for two
reasons. The first is that excessively large vehicles will not operate effectively in mixed traffic
streams, resulting in congestion, delays, and accidents. The second is that oversized vehicles
21
result in accelerated wear and damage to road infrastructure, and may result in the failure of
bridges.
Truck size and weight regulations can be complex. For example, not only the gross weight
of the truck, but also the weight per axle, the way the weight is distributed to the front and back
axles, and the distance between the axles, may be included in the regulations. Truck length
regulations may be defined on overall length, on the length of tractor and trailer independently or
even on the length of the trailer beyond the back-most axle.
Unfortunately, there are some significant inconsistencies between these regulations in the
three NAFTA partners. Even on the most basic dimension – gross truck weight – there is no
consistency. As Table 4 indicates, the United States limits all trucks to a gross weight of 36,288
kg (80,000 lbs.). Both Mexico and Canada allow higher weights for all categories of trucks and
increases the weight limit for trucks with more than the standard 5 axles. This inconsistency is
due mainly to conservative assumptions by U.S. officials about the maximum weight that can be
supported by bridges.
Table 4: Maximum Gross Vehicle Weights in the NAFTA Countries (in kg)Truck Type U.S. Canada* MexicoTractor – Semitrailer (5 axles) 36,288 39,500 – 41,500 44,000Tractor – Semitrailer (6 axles) 36,288 46,500 – 53,000 48,500Double Trailer (6 axles) 36,288 47,600 – 43,500 47,500* range of provincial regulationsSource: North American Free Trade Agreement Land Transportation StandardsSubcommittee, October 1997.
To make matters worse, different regulations may apply in different places. For example,
Canadian regulations are set at the provincial level, and despite recent efforts at standardization
some variation remains across provinces. There are also some state level variations in the United
22
States and different regulations apply on different parts of the highway network. (This is
especially true for regulations applying to trucks hauling more than one trailer.)
These inconsistencies have the potential to add significantly to the cost of cross-border
transportation. For example, it is already the case that some Canadian trucking firms must
maintain separate fleets of trucks for shipments into the U.S. and for domestic shipments
(Prentice and Wilson, 1998). Also, given these inconsistencies, each country must take measures
that trucks entering their territory are not in violation of its rules. This implies border
inspections, which add to the cost of border operations and may contribute to costly border
delays (see below.)
Recognizing the potential problems arising from inconsistencies in technical regulation of
transportation, a provision of NAFTA established the Land Transportation Standards
Subcommittee with responsibility for harmonization in all of the categories of technical
regulation listed above. To date, significant progress has been made in the regulation of vehicle
operators and in harmonization of road signs and signals. The issue of safety compliance,
especially with reference to Mexican trucks coming into the U.S., still presents problems. (See
below.)
Truck size and weight regulation is perhaps the most complex task that LTSS has to
address. A special working group has been set up to address this issue. This group has
concluded that complete harmonization is probably an unrealistic goal, but that it may be
possible to eliminate some of the most onerous inconsistencies. The first task of this group was
to exchange and publish information which could be used to make sure that drivers don’t
unexpectedly find themselves in violation of the regulation.
23
Complete harmonization will be difficult for a number of reasons. For one thing, carriers
in all three countries have considerable investments in fleets designed for compliance with
national regulations. Also, in each country infrastructure design and construction has been done
based on assumptions that embody the national regulations. Finally, as with any question of
harmonization, there is an important political dimension. Since international freight accounts for
a relatively small percentage of trucking activity in the U.S., it is unlikely it to change its
regulations substantially. The other two partners, however, may see the adoption of U.S. rules as
tantamount to sacrificing their political autonomy.
Borders as barriers
Border crossing areas may be subject to long delays. This is partly because most national
frontiers are crossed by a relatively small number of road and rail links, resulting in traffic
bottlenecks. Furthermore inspection and documentation activities that must occur as vehicles
cross the border are time consuming. If delays at borders are long enough they can to add
significantly to transport costs. Labor must be paid and valuable vehicle capital must sit idle
while waiting at border crossing. To the extent that this increases the cost of internationally
traded goods relative to domestically traded goods long border delays constitute a category of
non-tariff barrier.
Canada and the U.S. have traded large volumes of goods for a number of decades, and in
the process both governments have worked cooperatively to develop relatively efficient border
crossing routines. The situation along the U.S.- Mexican frontier is quite different. These border
crossings are plagued by long delays and many Mexican trucks must be sent back due to
violations of various U.S. regulations.
24
There are several reasons why efficient movement across the U.S.- Mexican border poses
such a great challenge. For one thing, large volumes of freight movement at this border are a
more recent development, so there has been less time to work out the kinks. Also, the issues of
illegal immigration and transport of drugs in commercial vehicles is a major concern. Finally,
the Mexican truck fleet is in a relatively poor state and Mexican carriers and drivers are not well
informed on U.S regulation, so many trucks fail inspection.
The situation along the Mexican border has presented a major impediment to full
implementation of NAFTA provisions. NAFTA specifies a timetable for providing full freedom
of truck movement across the U.S. – Mexico border. Initially, Mexican trucks were only
allowed to operate in a relatively small commercial zone extending only a few miles into the
territory of the four states that border Mexico. (Mexican goods bound for destinations outside
this zone must be transferred to American trucks.) By December 1995, Mexican trucks were to
be allowed to make deliveries throughout the territories of the border states and U.S. trucks were
to have similar access to Mexican border states. By 2000, Mexican trucks should be able to
travel throughout the U.S. and American trucks should be able to travel throughout Mexico.
Thus, cabotage restrictions notwithstanding, Mexico and the U.S were to have a similar
arrangement to the one that now exists between Canada and the U.S.
At the time of this writing, the access for Mexican trucks that was planned for 1995 has
not yet been granted and the full access will almost certainly not come about by 2000. The main
reason for this delay is that the U.S. government and especially the governments of the bordering
states fear that Mexican trucks will not meet U.S. regulations and may therefore cause accidents
and damage infrastructure.
25
This would not be a problem if effective surveillance could be applied to prevent non-
compliant trucks from entering the U.S. The inspection process, however, must necessarily be
highly complex because various federal agencies (Customs, Immigration and Naturalization,
Department of Agriculture, Food and Drug Administration) all have concerns about what may
cross the border in trucks. Inspection of the trucks themselves (as opposed to their contents of
personnel) comes under the jurisdiction of state Departments of Transportation, who receive
some limited assistance from the U.S Department of Transportation.
State officials check trucks for size and weight violations and for safety violations such as
worn tires, improperly secured loads, inadequate brakes etc. Since a relatively small number of
inspectors have been assigned, and because facilities are limited, it is only possible to conduct
spot inspections. In these spot checks, roughly 50% of the trucks inspected have been put out of
service due to some violation. It is not surprising therefore that state officials are reluctant to
allow Mexican trucks to travel further into their territories until either a more stringent inspection
process can be put in place or a much lower rate of violation can be observed in spot checks.
There is considerable potential for new information and communication technologies that
come under the general heading of Intelligent Transportation Systems (ITS) to speed border
crossings by eliminating much of the need for paper handling, remotely reading truck
identification and cargo information, and conducting certain basic checks on weight, length,
height, and width while the truck is in motion. Also, electronic databases can be used to identify
trucks and drivers with previous violation histories so that inspection efforts can be concentrated
on them.
In the long run, probably the most important measure to deal with the current problems
will be cooperative efforts that are now under way to encourage the Mexican government to
26
follow domestic inspection procedures that are more consistent with U.S. procedures. The
objectives of these efforts is to bring the general condition of the Mexican fleet up to a level
where U.S. officials will permit them to have broader access to U.S. highways. (A more detailed
discussion of border crossing problems is provided in Annex C.)
Conclusion and lessons learned
There are two main categories of lessons to be learned from the NAFTA experience. The
first is that the high volumes of trade in North America are not simply the outcome of a single
free trade agreement. Rather, they have evolved over a period of three decades due in large part
to policies that have promoted the development of border-spanning industrial complexes,
resulting in intra-industry trade of high value added goods. In the case of Canada and the U.S.
this is the outcome of a sectoral trade agreement, the Auto Pact of 1965, while in the case of
Mexico and the U.S. it is the outcome of policies by both governments facilitating the
development of the Maquiladora systems. Agricultural and resource commodities, which often
figure prominently in public discussions of North American trade, make up relatively small
proportions of the overall trade picture in the NAFTA area.
In light of this, it would be a mistake to imagine that the level of economic integration
observed in North America will arise swiftly when tariff barriers are eliminated in some other
part of the world. NAFTA is essentially a means of eliminating remaining trade barriers to
create opportunities to expand and extend already well established trade relations.
The second category of lessons relate to the fact that despite the favorable history leading
up to NAFTA, the elimination of tariffs has yet to create an environment for truly free movement
of goods across international frontiers. Even if administrative non-tariff barriers such as import
licenses are removed and product standards are harmonized, a number of factors that are not
27
normally associated with trade policy can create non-tariff barriers that retard the cross-border
flow of goods and prevent the full benefits of trade liberalization from being realized. In
particular, factors that retard the integration of freight transportation systems within the free trade
area and cause major delays in cross-border freight movements can serve as significant barriers
to trade. In North America processes of transport deregulation and privatization have played
complementary roles with trade liberalization to promote transport integration, but significant
impediments to cross border movement still remain. Also, many areas of public policy that
relate to border security (such as drugs and illegal immigration) may pose major impediment to
free movement across borders.
Among specific lessons are the following:
• Some of the greatest potential for trade within a free trade area lies in intra-industry trade in
high value added goods arising from cross-border integration of manufacturing industries.
This type of integration may take decades to be achieved, and may involve more than just the
elimination of tariffs.
• Inconsistencies in the economic regulation of transportation can impede the free movement
of goods across borders. While in North America deregulation and privatization occurred in
the years leading up to NAFTA, some forms of residual regulation – especially in the form of
cabotage rules or restrictions on the movement of certain goods – still increase the costs of
cross-border shipment.
• Harmonization of technical standards such as truck size and weight regulation is a mundane
issue that may not command much attention while the free trade treaty is being negotiated.
The complexity of such issues, however, means that they may take a long time to sort out
28
once the agreement has been made. This should at least be recognized when implementation
timetables are drawn up.
• Agreement of such standards is not enough. Methods of inspection and enforcement must
ensure that each partner in the agreement adheres to the standards. This implies that
sufficient resources must be devoted to inspection activities at the border and elsewhere.
• The need to prevent undesired movements across borders – as in the case of drugs or illegal
immigrants – can result in long delays that add significantly to the costs of international
shipments, and therefore constitute one of the most important barriers to trade. Coordination
between different government agencies to speed up border movements is therefore critical.
• Factors that that lead to delays at borders not only increase transportation costs, they also
make it impossible to reap the productivity benefits associated with timely delivery services,
as in the case of just-in-time inventories.
29
Annex A. The Evolution of Transport Deregulation in North America
Efficient transport networks are necessary in U.S., Canada, and Mexico to facilitate the
unhindered flow of goods and the development of rationalized logistics and production systems
across entire North America, made possible by the lowering of trade barriers in the North
American Free Trade Act of 1994. The ability of the transport sector to serve the broader
economy in this emerging environment of free trade is strongly influenced by public policy
regimes in the three countries. The transport sector, for reasons noted below, has been subject in
all three countries for a long time to economic regulation, from which in the last two decades or
less they are breaking away to varying degrees. This uneven evolution of deregulation of
intracountry movements in the three countries has led to their post-1994 cooperative efforts at
harmonization of transborder transport in order to avoid or reduce non-tariff barriers in NAFTA.
This Annex provides a survey of a) the recent transport deregulation initiated in the US
after nine decades of regulation, b) the effects of such deregulation on the transport markets in
the U.S., c) the subsequent regulatory reforms in the linked market economies of Canada and
Mexico and d) the interplay between domestic and transborder traffic regulations and free trade
policy which evolved initially from the US-Canada Auto Pact (1965), through the Canadian US
Free Trade Area (1988), to NAFTA (1994).
30
Transport Regulation and the Drive for Reform in North America
Government regulation of transport arrived in late 19th century in order to curb the
market power of US railroads that engaged in monopoly pricing, in market segmentation pricing,
in manipulating demand, and other practices, that seriously disadvantaged many shippers and
communities. The authority granted to the Interstate Commerce Commission (ICC) through
various US laws passed between 1887 and 1920 led to extensive regulation of railroads in terms
of entry, exit, and rate structures. Under lobbying pressure from the railroads worried about
emerging motor carrier competition, the US Congress provided the ICC authority through the
1935 Motor Carrier Act (MCA) over truck rates and market entry. Regulation was extended to
the airline industry in 1938. Subsequently in 1940, ICC was granted the power to control
domestic water transportation. This process reversed beginning in the late 1970s, so that in
contemporary United States regulation as practiced for most of the 20th century has virtually
disappeared.
It is worth noting here that the ability of railroads to engage in market segmentation
pricing and similar actions derives from the fact that the railroad is the only fully integrated
mode, owning its vehicles, fixed facilities, and providing service. Fixed facilities provide a
geographic base of operations-- tying the area’s customers to the railroad and allowing the latter
to capture most of the customer’s consumer surplus. This allows the railroad the power to
capture for itself the advantages of different locations--at the expense of shippers and
communities. At the other extreme from the railroads are the commercial operators who are
unintegrated with fixed facilities and not bound in their geographic operations. These transport
providers can be viewed as operating in contestable markets (with competitive conditions and
the threat of entry from unregulated competition) with little or no market power. e.g. charter
31
airlines, charter barge operators, tramp tankers, truckload motor carriers (Boyer,1997). In
between these two extremes of fully integrated railroads and unintegrated truckload operators
are partially integrated carriers, owning some of their fixed facilities with the government
providing most of their fixed facilities as exemplified by Less than Truck Load (LTL) motor
carriers2 and Commercial Airlines. Because of the effects of lumpy facilities and vehicle sizes
and network economies these markets handicap free entry and are not contestable--allowing
some market power to these carriers.
The ICC regulation of railroads for nine decades aimed at assuring a normal rate of return
for their assets while specifying a price structure that balanced the advantages of shippers and an
equity of service to communities. Consequently, ICC engaged in elaborate control of
investment, pricing, and operations in the railroad industry by specifying the conditions of entry
and exit, the creation of a complex rate structure, and even rules of operations3.
The adverse effects of such intrusive regulation became evident in the deteriorating
economic performance of the railroads. Further, other developments such as technological
change in production systems, the large public investments in new highway and water
infrastructures, and changing shippers’ needs since the end of World War II have strengthened
other modes of transport 4. Unable to adjust their rates to changing market situations, incurring
2 This part of the trucking sector ships loads of 10,000 pounds utilizing break-bulk terminals and a hub and spokesystem3 Railroad companies had to apply for a ‘certificate of convenience and necessity’ (with a burden of proof ofinadequate service) before new lines can be built.Railroads had also to get permission to abandon rail lines or to merge with other carriers The regulated rate structure comprised of a set of high list prices, under which no traffic moved combined with aregulatory approved set of rate reductions for each commodity and locality--rate reductions negotiated betweenshipper and carrier and passed on to the rate bureau.ICC set rules of operations such as those governing interchange of freight, baggage, and equipment, as well as theprices to be charged between originating, terminating and bridge carriers.4 From the late 1940s (when the railroads had a 70% share of intercity freight), there has been great growth ofintercity truck traffic and specialized water and pipelines so that freight is now more evenly distributed among themodes.
32
high capital and maintenance costs because of their inability to shed poorly performing parts of
their track, and unable to rationalize their networks to offer better service, the railroads’ financial
problems increased. They continued despite shedding the unprofitable intercity rail passenger
service to Amtrak (1970), reorganization after bankruptcies such as Penn Central (1973),and
reorganization of Conrail (1976), so that ‘regulatory reform’ was born as a solution to railroads’
financial conditions and poor service characteristics .
While the regulation of railroads financially disadvantaged them, the (MCA) interstate
truck regulation--route certification and rate regulation--protected that industry from serious
competition--the MCA specifically excluded any regulation of intrastate trucking. (As in the
railroads, an applicant for new route authority had to prove that the proposed service will be
required by future ‘public convenience and authority’). Where they had service advantages,
trucks could even divert traffic from rail--this diversion became important a) only after the
Interstate Highway System started(1956) and improved roads and further when larger and more
efficient trucks arrived, and b) and with the emergence of unregulated and highly competitive
owner-operator trucking sector carrying exempted commodities, and private trucking (in-house
freight haulage by non-transport firms). The drive to deregulation of the trucking industry in the
1970s in the US Congress came from the objective of lowering trucking rates, particularly in the
LTL (less-than-truckload--partially integrated and thereby endowed with some market power)
33
sector (Winston et.al.1990)5 The airline industry was regulated by the Civil Aeronautics
Board(CAB), which like the ICC viewed its mission as assuring equity and stability rather than
efficiency--engaging in new route allocation, rate setting and even specifying levels of flight
service.
In Canada, where transportation has been historically viewed as a tool both to unify a vast
fragmented nation and to promote international economic competitiveness, the carriers have also
been regulated though more lightly than in the U.S, and predominantly from a provincial
perspective. The National Transportation Act (NTA) of 1967 permitted some competition
between transport modes but limited competition within each mode. In general, the regulation of
entry into interprovincal trucking in Canada was similar to that of interstate trucking rules in
US.--the grant of new route authority by provincial boards needed tests like the showing of
future ‘public convenience and necessity’ required by ICC in US. However, in contrast to the
rigid ICC ratemaking process, the decentralized and diverse pattern of interprovincial rate
regulation in Canada ranged from no regulation to rate filing and approval (Chow, 1997). Rail
regulation in Canada had similarities to the US experience--freight rate setting in the public
domain, collective ratemaking, etc. Airline regulation in the form of restrictions on entry, exit,
and rate setting prevailed in Canada till recently.
In Mexico, transportation was viewed as a public service that was permitted through
concessions granted by state government. In trucking state regulations governed the award of
concessions, the growth of route capacity, and freight rate structures. The concessions, available
only to nationals, specified the maximum tons per kilometer that can be transported on any route;
5 The ratemaking system under regulation led to rates in the LTL sector far higher than they would be undercompetition. See John W. Snow 1977 “the problem of Motor Carrirr Regulation and the Ford Administration’sproposal for Reform” in Paul W. MacAvoy and john W. Snow eds. Regulation of Entry and Pricing in TruckTransportation American Enterprise Institute. pp.3-46
34
entry into new routes was difficult since existing operators were both consulted and preferred;
private trucking was prohibited. The Secretariat of Communications and Transport set tariffs
and the lack of contact between carriers and shippers precluded any discounts (Chow,1997).
Economic analyses have shown that such price and entry regulation introduce
inefficiency by creating a vicious cycle of artificially high prices, high service quality
competition and the resultant losses due to raised costs (Douglas and Miller, 1974). Three sets of
such regulatory distortions have proved costly. First, in both road and rail, rates were set above
marginal costs--costing the economy $1 billion annually (Winston, 1985).
Second, the entry and exit regulations cost the carriers dearly--the exit prohibition on
railroads leading to annual production cost inefficiencies of $2.5 billions (Winston, 1985).
Third, restrictions such as disallowing backhauls, designation of routes, etc. led to X-inefficiency
costs of several billion dollars (Winston,et.al 1990)--besides hindering productivity growth,
technical change, and service quality.
As a consequence, the drive for deregulation which has been gathering steam in the
1970s led to the Airline Deregulation Act (ADA) of 1978. This Act laid out a time schedule for
the relaxation and eventual elimination of airline entry, pricing, route and other restrictions on
passenger and freight regulation, thereby transforming the industry in short order. The Staggers
Rail Act (SRA) of 1980 finally directed the railroads to rely on the market. The Motor Carrier
Act (MCA) of 1980 largely deregulated the trucking sector--easing entry controls, limiting
collective rate making, and promoting freedom to price-- and increased competition in the
industry by removing restrictions on the unregulated private trucking sector.
Canada followed suit realizing that the costs of transport regulation far outweighed its
benefits. The US deregulation policies influenced the scope and direction of transport reform in
35
Canada for many reasons. The observed benefits--in terms of rate and service changes to
shippers and their customers and increased competitiveness-- of US experience (noted in detail
below) provided a strong motivation for Canadian deregulation policies. Further, since Canadian
and US transport carriers compete directly in transborder markets the need for a level playing
field provided another incentive {In 1980, 25% of CN(Canadian National) and 22% of CP
(Canadian Pacific) Railroad revenue came from crossborder traffic} Again, the carriers in both
countries compete indirectly in global markets where domestic transportation costs are one
component. The regulatory reforms came in the National Transportation Act (NTA, 1987), the
Shipping Conferences Exemption Act (SCEA), the Motor Vehicle Transport Act together with the
amendments to other legislation such as the Railway Act.
Transport deregulation came to Mexico as part of the late 1980s economic restructuring
intended to promote domestic investment-friendly policies. The restrictions in the domestic
motor carrier industry were relaxed in 1989--permitting negotiated prices below maximum rate,
allowing private carriers to function as for-hire carriers and allowing Maquiladora operators to
use their own fleets to move goods in both directions (Chow,1997)6
Consequences of Transport Deregulation
Important changes in the conduct, performance, and structure of the airlines, railroads,
and trucking industries took place in the period following regulatory reform in the US. The
changes from deregulation anticipated by policymakers appear to be largely realized.
Specifically:
6 Plants located in Mexico to process and assemble products imported free of duties from US andto export the finished goods back to the US with US import duties charged on only the ‘valueadded’ in Mexico are called Maquiladora plants.
36
*Competitive conduct among transport carriers increased considerably in all modes, with
a wider set of service offerings in the context of lower prices.
*There was significant new entry into most geographic and product markets both in the
form of new firms and expansion of existing firms-- in truckload and intermodal
segments, etc. However,concentration increased through consolidation in LTL sector and
the
airlines. In the latter case, after a few years the new entrants and the smaller carriers
merged or disappeared. As Table A1 indicates, the degree of concentration has increased
(by both measures)in domestic airline industry since deregulation.
37
Table A1. Post-Deregulation Domestic Airline Industry Concentration
1977 1990 8-firm Concentration Ratio 81.1% 90.5% Herfindahl Index 0.106 0.121_____________________________________________________Source: Borenstein. 1992.
*Carriers have been able to rationalize their networks, improve the efficiency of their
operations, and set rates in line with competitive market conditions; Shippers,
confronting technological change and globalization, have begun to coordinate their
production activities more effectively with their transportation services--with consequent
productivity gains.
*There was a considerable decline in prices in the different modes of transport. Trucking
costs, according to Standard and Poor’s began to decline in 1980 in the truckload market
and followed in the LTL sector in 1984 (Fig. 1). The truckload sector, which has had to
compete against a very competitive unregulated sector, realized cost savings through the
development of highly efficient advanced truckload firms. LTL also became more
competitive, partly by reducing labor costs.
*The railroads, which shed considerable trackage, equipment, and labor improved their
financial performance, and reduced their costs sharply. Figure 2 shows the progress of
railroad costs after deregulation.
*Winston (1991) suggests that airline deregulation has lowered fares and provided
travelers and carriers with $ 14.9 billion of annual benefits (1988 dollars)--though the hub
and spoke system and the increased travel and delay lower these benefits by $2 billion.
*Motor carrier service to small communities have improved or
38
stayed constant since deregulation (Winston, et.al 1990)--since growth in competition
has made small communities attractive markets for
small carriers. Similarly, the rise of small railroads has been salutary.
Overall, there have been substantial benefits of deregulation. Shippers’ and final consumers’
benefits amount (in 1988 dollars) to $20 billion annually.
As these benefits became clear, the drive to remove the state level economic regulation of
trucking--50 states with different trucking regulations, economic environments, and social and
political structures do not provide a level playing field for all actors--led in 1995 to remove all
state economic control, leaving to states only safety and insurance issues. ICC was abolished
with remaining functions given to US Department of Transportation.
Figure 1: US Trucking Costs Index, 1973-88(source: Standard and Poors's)
80
85
90
95
100
105
110
115
120
125
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
Less Than Truckload
Truckload
Figure 2: US Railroad Costs, 1967-88 in DollarsPer Revenue-Mile
(Source: Arthur D. Little)
0.024
0.026
0.028
0.03
0.032
0.034
0.036
0.038
0.04
0.042
0.044
1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
39
Since interprovincial regulation in Canada was not as stringent as in US, the benefits
from deregulation were not as dramatic. New competition arrived in the trucking industry when
existing carriers entered new geographic and product markets. The LTL sector has consolidated;
the large owner-operator segment is experiencing serious rate competition and may be bearing
the burden of deregulation (Chow, 1997); US truckers freely entered the Canadian market just as
Canadian truckers had come into the US market after the 1980 MCA deregulation.
Rates declined in Canadian trucking since deregulation. Competitive pressures have
lowered the rates the Canadian railroads have been to get from shippers (Figure 3). The rise in
the proportion of airline discount fares since deregulation in Canada is a measure of the benefits
accruing to passengers. (Figure 4).
Figure 3: Railroad Costs 1980-1991 in 1986 Cents Per Reveue Ton-mile
(source: IBI)
0
1
2
3
4
5
6
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
CN Rail
CP Rail
40
Trucking deregulation in Mexico in 1989 increased competition and lowered rates--29%
lower a few years later (Strah,1995). It also promoted expansion of intercity routes and the
vehicle fleet.
Deregulation and Transborder Flows
As US led the deregulation efforts, periodically before NAFTA was completed, there was
asymmetric treatment of potential transport competitors on different sides of the border. Thus
after the US MCA of 1980 reformed trucking regulations, both Canadian and Mexican trucks
could enter freely in US, while US trucks suffered the old restrictions in Canadian and Mexican
markets--till the 1994 US ban (on truck movement from both countries), which in turn was lifted
for Canada after reciprocal transborder trucking arrangemens were agreed upon. As Canada and
Mexico deregulated in late 1980s, transportation remained a contentious issue--The Free Trade
Act CUSFTA) of 1988 between Canada and US specifically excluded transportation issues.
Figure 4: Discount Fare Tickets as % of Total Tickets(source: National Transportation Agency, Canada)
0
10
20
30
40
50
60
70
1987 1988 1989 1990 1991
41
However, the importance of transportation reliability, effectiveness and choice in truly
integrating an CUSFTA, brought these issues back when NAFTA was debated and approved.
Mexican carriers, prior to and after NAFTA, are allowed to operate on the US portion of
the commercial zones of the Mexican-US border, while Canadian and US carriers have a
temporary ban to transport into Mexican space. This causes inefficiencies through equipment
interchange, staging areas, need for coordination among carriers, and locating interchange at
locations not ideal for logistical purposes. Applications by Canada and US for access to
Mexican border states have not been acted upon (Chow, 1997).
There have been also a number of initiatives by both the public sector in Canada and
Mexico and by the transportation companies in all three countries to expand the north-south
NAFTA networks (Prentice and Wilson,1998). Since 1995, the Canadian government privatized
the Canadian National Railway (CN), cut off ($600 million annual) subsidies; The Ferrocarriles
Nacionales de Mexico (FNM) was broken up after seven decades of government ownership and
privatized into several concessions. In 1997, TMM (the largest marine transportation company
in Mexico) and The Kansas City Southern Railroad (KCSR) purchased the Laredo-Mexico City
line. Meanwhile, CN plans to merge with Illinois Central (IC); Jointly with the Canadian
Pacific-Soo line and the KCSR--TMM, the CN-IC can provide single line service avoiding
switching costs and delays from Canada to Mexico (Prentice and Wilson,1998). In the US, the
Union Pacific (UP)-Southern Pacific (SP) merger and the Burlington Northern-Santa Fe mergers
reflect the drive to realize network economies.
42
Cabotage
Cabotage refers to the ability of foreign vehicles and labor to transport goods within a
country. Traditionally the carrier after dropping off a load was allowed to pick up and drop off
domestic loads if such haulage was incidental to the international return route--provided certain
rules on the use of labor and equipment were followed. The cabotage rules and regulations that
limit the freedom of foreign transportation carriers instituted by Customs and Immigration
Departments are typically symmetric. Such rules involve the use of labor and equipment of one
country in the other--e.g. foreign drivers cannot carry domestic freight and the use of foreign
equipment is restricted to domestic movements that are incidental to international movements.
Such rules raise costs and penalties for failure to observe these rules (often poorly understood)
can be significant.
Immigration rules on the nationality of labor used in repositioning trucks (in the other
country after unloading an international shipment) are essentially similar, except that Canada
permits more flexibility. The Customs rules on the use of equipment to move goods in the other
country are being more harmonized and recent efforts at similar enforcement of rules are
improving in the US- Canada case.
As noted above the existence of these cabotage-rule barriers increases the cost of
transborder transport. Railroads are less affected by cabotage restrictions, though they too incur
additional costs because of the need to change crews at the border. Canadian truckers claim a
disadvantage because of comparative size and spatial dispersion of the US cities and markets
relative to Canada--the latter factor making full and efficient use of Canadian drivers who cannot
use empty space during backhauls for moving US domestic freight, particularly in the TL sector.
43
There has been fear that entry by large, well-financed US-based truckers into Canada and
Mexico posed serious threat to domestic trucking industries. Chow and McRae (1989) found
that government policy in the form of nine non-tariff barriers minimally affected the competitive
advantage in the US-Canadian case. Only the long haul TL Canadian carriers had disadvantages,
because of driver and equipment restrictions (cabotage) on domestic movements and an
unfavorable spatial distribution of industry in the two countries. Chow and McRae also noted
that ‘the level playing field’ problem was exaggerated by Canadian trucking industry--since the
disadvantages of operating as a Canadian domiciled carrier were more than compensated by
lower (10-14%) input costs than US-domiciled carriers, and even after accounting marginal tax
differences an 8% cost advantage for Canadian operators--which still received concessions from
a one time fuel tax rebate, accelerated depreciation, and assistance to owner operators. Since
Mexican industry also fears “unequal competition’ from the US carriers, there has been delays to
NAFTA agreed upon changes in Mexican regulations to improve transborder flows.
Another major remaining transportation (cabotage) barrier is the existing US restrictions
on trade in domestic water transportation. In the large, multi-coastal US economy, foreign
participation in its intercoastal trade is restricted by the 1920 Jones Act. The Jones Act--justified
by the need to secure a sufficient merchant marine capacity for US defense needs-- reserves the
shipping cabotage traffic to US built and registered ships that are predominantly owned and
crewed by US nationals. The US maritime carriers and other stakeholders have excluded these
provisions from the GATT and NAFTA negotiations so that this represents a major barrier to
unhindered transportation in NAFTA.
The Jones Act permits domestic shippers to levy rates substantially above comparable
world prices, effecting thereby a massive transfer from US users of water transport users to US
44
maritime carriers. A recent analysis of the Jones Act restrictions using an applied general
equilibrium (AGE) of the US economy estimates a welfare cost around $3 billion in 1989
(Francois et. al. 1996), while other estimates place the costs at $5.8 billion--suggesting an annual
cost of $200,000 to $387, 000 for protecting each of 15,000 jobs in the Jones fleet.
Conclusions
After nine decades of economic regulation, US initiated a regulatory reform process, that
has conferred significant economic benefits to carriers, shippers and to consumers. This has
promoted regulatory changes in the economically related Canadian and Mexican transport
markets as well as in US-intrastate and Canadian Intraprovincial markets. The trucking industry
in Canada and US is for most practical purposes completely deregulated.
While state economic regulation in US is preempted, states are still responsible for safety
and fitness regulation. The lack of uniformity in the way these regulations are implemented
raises the fear that they may pose different degrees of inefficiencies for transborder carriers (see
Annex B). Chow (1997) points out that some Canadian provinces maintain substantial barriers
to entry. In Mexico, domestic trucking is open but only to nationals because of national political
sensitivities--this ban on foreign investment has penalties in terms of slow replacement of new
capital and efficient operations in Mexico.
Given the convergence in economic regulation of transport in the three countries and the
liberalized environment for transport, it turns out that there exist even between US and Canada
(where the business practices are similar and the infrastructure are compatible) transport
barriers, which in turn translate into higher costs. Such barriers are often subtle in nature and are
unintended consequences of domestic policy considerations in matters as varied as personal and
45
environmental safety and technical inconsistencies in transport operations, cabotage issues, and
non-transport matters as drug interdiction and immigration.
NAFTA provides a definite but slow path for deregulation of transborder trucking. The
trend is towards more uniform and less regulation. There is more work to be done on the
Mexican side where the pace of removal of economic restrictions is a function of how economic
benefits are balanced by political and social considerations. As economic regulatory barriers
fall, barriers remain in the form of safety and technical regulations in such areas as vehicle size
and weights, driver certification and hours of service, and safety. (See Annex B.) As the rules
governing these matters diverge in the different countries, because of past national decisions on
bridges, infrastructure, or social and political issues governing transport, the resulting
inefficiencies in transborder areas will spur the demand for uniformity and harmonization.
Cabotage issues provide one more barrier.
The overall message is that inconsistencies in transport regulations between countries that
are part of a Free Trade Area will generate economic inefficiencies and disparate opportunities,
thereby generating demand for harmonization. As both production and transportation firms in all
three countries rationalize their operations across the NAFTA region, the transport non-tariff
barriers noted in this Annex as well as in the rest of the paper cause inefficiencies and generate
the political demand for their relaxation. The direct effect of these barriers--as the transportation
carriers are required to operate around these restrictions--would be higher costs; the longer term
indirect effect would be less competitive and efficient activities in the logistics industry and the
consequent loss of productivity in the NAFTA region.
46
Annex B: Truck Size and Weight Regulations
It is likely that there is no other field of public policy which is more complex than truck size andweight limits, and in this context harmonization of vehicle weights and dimension regulationwithin the three countries which are partners in the North American Free Trade Agreementpresents a major challenge.
NAFTA Land Transportation Standards Subcommittee, 1997
One of the most important barriers to trade in the NAFTA partnership is inconsistency in
truck size and weight regulation across national borders. Size regulation refers to limits on the
width of the truck and to its overall length and the lengths of it component parts (tractors,
semitrailers, and trailers). Weight regulation refers to both the gross vehicle weight (GVW) and
to the distribution of weight across axles. Truck size and weight regulations are imposed to
avoid excessive wear and damage to road and bridge infrastructure; to ensure consistency with
the geometric design standards of roads; and to promote safety, especially in relationship to the
interaction of trucks and automobiles in the traffic stream.
Inconsistencies in these regulations can add significantly to the cost of trans-border
transportation. For example, suppose that the truck configuration typically used to ship lumber
within Canada is not legal on U.S. roads. Shipments going from Canada to the US must then
either be transferred from one truck to another at the border, or be shipped via some “lowest
common denominator” truck configuration that is legal in both countries. In the first case,
considerable extra costs in terms of labor and delay are incurred. In the second, it may be
necessary to use a truck configuration that is less efficient than the best option for shipping
lumber in either country. Either way the outcome is the same – transport costs are higher than
the costs of shipping the same load a similar distance within a single country.
Harmonization of truck size and weight regulation is necessary in order to achieve the
full trade creation potential of the elimination of tariffs under NAFTA. This effort is retarded by
two factors. The first is the complexity of truck size and weight regulation, requiring agreement
47
on a wide range of engineering and safety issues. The second is the problem of jurisdictional
fragmentation. In each of the three NAFTA partners, state or provincial governments have some
latitude in setting their own regulations. This means that there are, in principle, a total of 64
jurisdictions must ultimately be involved in the harmonization process. Given these problems, a
complete consensus on regulations is not seen as a realistic goal.7 Instead, a set of agreements
and procedures that will minimize the impact of regulatory inconsistencies on cross border traffic
is sought.
The remainder of this appendix is organized as follows. Section two defines the basic
dimensions of size and weight regulation. Section three explains the rationale for truck size and
weight regulation. Section four discusses the economic costs of imposing truck size and weight
restrictions. Section five briefly reviews the history and structure of regulation in each of the
three countries. Section six identifies the main inconsistencies, and section seven describes the
institutional mechanism that has been created under NAFTA to move toward harmonization.
2. Dimensions of Size and Weight Regulation
Trucks used for conventional freight applications (as opposed to special use trucks such
as waste disposal, tow, and dump trucks) fall into the following types:
• Single unit trucks (sometimes called straight trucks): The engine, cab, and freight container
are mounted onto a common chassis, generally with one front axle and either two or three
rear axles.
• Tractor semitrailers: The tractor (engine and cab) and the freight container are two separate
units. In this configuration the tractor has either two or three axles – a front steering axle plus
7 Working Group 2, Land Transportation Standards Subcommittee, 1977.
48
one or two tractor axle(s)—while the freight container, called the semitrailer, has one two or
three axles in the rear only. The tractor axles support the front of the semitrailer.
• Multiple trailer combinations: These are similar to tractor semitrailers except that either one
or two additional trailers (with front and rear axles) are connected to the semitrailer. (For
obvious reasons these trailers or often called “trains.”) A variation on this theme is the truck-
trailer combination where a trailer is added to a single unit truck.
Multiple trailer combinations are a relatively new idea. They are highly cost efficient, but
controversial due to safety concerns. At present they play a much larger role in Canada than in
the U.S. or Mexico. Tractor semitrailers dominate long and medium distance trucking, and
account for more than 50% of the truck shipments in all three NAFTA countries. Single unit
trucks are more commonly used for shorter distances, and make up a much larger proportion of
the truck fleet in the US than in either Canada or Mexico. (See Table B1)
Table B1. Percentage of Total Ton-Miles Carried by Truck TypeTruck Type Canada United States MexicoStraight Truck 12.0 40.4 23.6Tractor Semitrailer 69.5 52.3 72.5Multiple TrailerCombinations
18.4 3.4 2.5
Others 0.1 3.9 1.4Source: North American Free Trade Agreement Land Transportation StandardsSubcommittee, Working Group 2 – Vehicle Weights and Dimensions,Harmonization of Vehicle Weight and Dimensions Regulations Within the NAFTAPartnership, October 1997.
Size regulation may relate to width, overall length, or length of component parts. The
maximum allowable vehicle width is primarily dependent upon the width of highway lanes, and
the maximum length is depended on geometric design and safety issues. Given the increased
49
maneuverability of an articulated vehicle, longer lengths are generally permitted for
combinations than for single unit trucks. Restrictions may be placed on component lengths
rather than overall length to prevent manufacturers from shortening the tractor or cab section in
order to increase maximum freight capacity – a strategy that may impair safety.
Weight regulation are generally defined both overall and on a per axle basis. The goal is
to minimize the stress placed on the pavement by the weight of the truck. A critical element in
weight regulation is the need to ensure that trucks are not heavy enough to cause bridge failure.
Thus the maximum allowable weight may be determined by a bridge formula that takes into
account not only the total weight but also the number of axles and the spacing between them (see
below).
Truck height is also regulated primarily to prevent collisions with overpasses and
overhead signs.
3. Rationale for Size and Weight Regulation
Infrastructure wear and damage. Truck weight affects wear and damage to both
pavement and bridges. In the case of pavements and short span bridges (shorter than the typical
truck length) it is the axle weight which is of greatest concern, while for gross vehicle weight
(GVW) is of primary concern for bridges.
An engineering unit called an equivalent single axle load (ESAL) measures the affect of a
single axle in terms of pavement damage. (It is defined such that the wear and damage
associated with two ESALs is twice as great as the wear and damage associated with one ESAL.)
The nature of pavement wear is that the ESAL measure increases at a greater-than-linear rate
with axle weight. In other words, doubling the axle weight more than doubles the pavement
50
damage and wear inflicted by that axle.8 Thus limiting axle weights is critical to controlling the
cost of pavement construction and maintenance. Axles clustered in pairs (tandem) and threes
(tridem) dampen the relationship between weight and ESAL. Thus, increasing the number of
axles significantly reduces the pavement impact of a truck with a given GVW. Axle spacing is
also important, however. When two pavement stresses occur in rapid succession, their affects
overlap. As a result, the presence of a rear tandem axle does not have the equivalent effect on
ESALs of cutting the rear axle weight in half.
Bridges are designed based on assumptions about the maximum loadings that it they
likely to receive during their service lives. Loadings include dead load (the weight of the bridge
itself), live load (the weight of vehicles), and the affects of wind, earthquakes, and temperature
variations. Live load estimates are based on assumptions about the weights of vehicles passing
over the bridge. Since trucks are the heaviest vehicles using bridges, the weight of trucks is a
critical factor in bridge design, and from both maintenance and safety standpoints it is critical to
ensure that actual weights of trucks are consistent with the weight assumed in the design process.
In calculating bridge stress, the overall weight, rather than just the axle weight is
important. However, the stress associated with a particular GVW is mitigated somewhat by the
number of axles and by the total length across which the weight is carried (the distance between
the front-most and rear-most axles.) In order to adjust for these factors, somewhat complicated
bridge formulas are used to define weight/length/axle combinations that are consistent with
bridge design standards.
8 According to AASHTO, the EASL measure is proportional to the axle weight taken to the power of 4. So, forexample, an axle carrying 30,000 pounds does not cause twice as much wear and damage as an axle carrying 15,000pounds, but rather 16 times as much.
51
Given the combination of factors affecting potential wear and damage to both pavements
and bridges, regulations designed to protect infrastructure must incorporate limits on total
weight, axle weight, and vehicle length.
Geometric standards and truck size and weight regulations. Geometric design refers to
characteristics of road layout such as the width of lanes, the length of on ramps and climbing
ramps, roadway grade etc. Standards are defined so as to ensure safety and limit congestion.
Standards that are too conservative, however, can significantly increase road construction costs.
An important objective of truck size and weight regulations is therefore to ensure that all trucks
can function properly under a reasonable set of geometric design standards.
Compared with automobiles, trucks have large turning radii. This means that
intersections must be larger if trucks are to be accommodated. Also, as a truck turns some part
of its cargo container may encroach on vehicles in other lanes if the lanes are not wide enough.
This problem is exacerbated by the phenomenon of offtracking, whereby the rear wheels follow
a line that is outside the line of the steering axle wheels as the vehicle turns. Offtracking occurs
in cars, but is much more pronounced in trucks. Furthermore, all these problems are more
significant in longer trucks.9 Thus, geometric standards are one of the main drivers behind truck
length restrictions.
Truck weight is also relevant to geometric design in that heavier trucks are more severely
impacted by steep grades. If a highway is to accommodate heavy trucks without significant
traffic disruption it may require addition of climbing lanes, or in the extreme case may need to be
built along a less direct alignment in order to avoid steep grades.
9 The magnitude of these problems depends not only on truck size but also on truck type. For example an articulatedvehicle such as a tractor semitrailer will offtrack less than a single unit truck of the same length.
52
The interaction between geometric standards and truck size and weight has an important
implication. If large trucks are to be accommodated, either all standards must be adjusted at
significant costs or large trucks must be limited to certain roadways on which the more
conservative standards are applied. (Different construction standards for pavement and bridges
may also apply to those roads.) It is therefore generally the case that the largest vehicles allowed
under truck size and weight restrictions are only permitted to operate on a subset of the road
network. In fact a hierarchy of road categories with different standards and size and weight
limits is generally defined. This leads to a larger and more complex set of regulations.
Safety. Safety is the rationale for truck size and weight regulation that is most prominent
in the public eye. There is a general perception that larger trucks pose a greater safety hazard
because they are more prone to rollover and breaking failure (points which are hotly contested by
the trucking industry.) Also, motorists find large trucks difficult to maneuver around and feel
threatened by the potential damage from collision with such large vehicles.
Not all safety concerns about large trucks are warranted. For example large trucks do not
necessarily have poorer breaking performance because they generally have more axles and are
therefore equipped with more breaks. Also, large trucks are not necessarily more prone to roll
over, although this tendency increases with the size of the payload. (USDOT, 1997.)
There is an especially high level of controversy over the stability of multiple trailer
combinations. A phenomenon called rearward amplification occurs when the lateral
acceleration of a tractor changing lanes or entering and off ramp is amplified in the trailer or
trailers, potentially causing the back of the truck to swing out if its lane or even roll over. Recent
research indicates that this problem can be alleviated considerably by using a type of converter
dolly that creates a more rigid connection between the trailers. (USDOT, 1997.)
53
5. Costs of Truck Size and Weight Regulation
While truck size and weight regulations yield benefits in terms of reduced infrastructure
costs and fewer accidents, they impose considerable costs in terms of shipping time and expense.
As in most industries, the cost of labor has increased for trucking relative to the cost of capital.
Thus technological options that increase the amounts of goods that can be shipped per driver
hour, such the use of multiple trailers, has been increasingly attractive.
Until fairly recently, weight regulations have constituted the most binding constraints,
with operators preferring to move more weight per truck. More recently, the importance of
goods with relatively high ratios of value to weight in the overall trucking picture has increased.
For high value goods, it is often the case that shipments “box out” (meaning they fill up the
cargo container) before they reach the maximum allowable weight. In this case it is the truck
size regulations that are binding. Thus it is the LTL (less than truckload) sector of the industry
that is most concerned with size limitations and most anxious to expand the use of multiple
trailer combinations.
54
4. Size and Weight Regulation in the NAFTA countries
United States: The history of truck size and weight regulations in the US reflects the
historically expanding role of the US federal government in highway transportation. Size and
weight regulations were first imposed in the 1913 by the state of Maine when it became obvious
that heavy trucking would lead to rapid destruction of roads. Since the federal government did
not at that time have jurisdiction over roads, regulations were imposed by the states without
much coordination. By 1929, most states had enacted regulations.
Inconsistencies in these regulations constituted significant impediments to interstate
commerce. The American Association of State Highway Officials (AASHO10) published a
common set of standards in 1932, which all states were encouraged to adopt. This helped
overcome inconsistencies but did not eliminate them.
With the Federal-Aid Highway Act of 1956, the US federal government began to take a
major role in highway transportation through the establishment of a federally funded Interstate
and Defense Highway System. While still recognizing size and weight regulations as a state
prerogative, the federal government used its dominant funding position (90% of interstate
construction cost) to justify imposition of a common set of regulations for these highways based
on AASHO guidelines. The main features of these regulations were maximum single and double
axle weights of 18,000 and 32,000 pounds respectively and a GVW limit of 73,280 pounds. The
same act established a program for federal funding state highways up to 80%, in which federal
size and weight regulations would also apply. In states that had already legislated higher limits,
however, heavier trucks were allowed to use the roads under a grandfather clause.
Ambiguities concerning the roles of the federal government and the states in truck size
and weight regulation were to cause significant problems. The 1974 Federal-Aid Highway Act
55
Amendments increased the federal weight limits to 20,000 and 34,000 pounds for single and
tandem axles respectively and to 80,000 GVW. The legislation did not, however, mandate that
states adopt these limits. A group of states in the Mississippi valley refused to adopt the new
higher weights. These states came to be known as the “barrier states” because they constituted a
barrier to the movement of new, heavier trucks on major east-west routes, even on the Interstate
system.
The federal government imposed its will on the states under the 1982 Surface
Transportation Assistance Act. Under this act, states were required to adopt weight limits on the
Interstate network only that were no lower than the federal limits. Federal jurisdiction of size
(width and trailer length) rules was imposed not only on the Interstate but on a subset of
federally financed state highways. Again, this encroachment by the federal government into an
area of traditional state authority was justified on the basis of the high federal share in the cost of
these roads.
Grandfather clauses that are still in effect allow individual states to permit higher weight
limits, even on the interstate. For example, GVW limits in Wyoming and Montana are about 9%
above the federal limit. Also, states have authority to issue special permits for the movement of
oversized loads.
One area where there is still little consistency across states is in the use of multiple trailer
combinations. These trucks have been used for some time in the Great Plains, Rocky Mountain,
and Pacific Northwest states, but there is considerable resistance to their use in the East. Some
states, such as Massachusetts and New York allow their use only on a few major roads. Triple
trailer combinations are allowed on a relatively sparse network in just a few states. East of the
Mississippi, triples are only permitted on a single span of east-west highway spanning Illinois
10 Later renamed The American Association of State Highway and Transportation Officials (AASHTO).
56
and Indiana. Due in part to the limited network of roads they can use, multiple trailer
combinations account for less than 4% of the US truck shipments (see Table B1). In 1991,
responding to safety concerns, the Intermodal Surface Transportation Efficiency Act (ISTEA)
placed a freeze on the use of these trucks, so that no expansion of their network was possible in
the 1990s.
Canada. In contrast to the United States, the federal government of Canada has played a
relatively minor role in road transportation. With the exception of a single Trans-Canada
Highway, all roads are the jurisdiction of provincial governments. While the federal government
has a mandate for vehicle safety and environmental standards, it has no direct jurisdiction over
truck size and weight regulation. (Similarly, economic regulation of trucking has also been a
provincial function in Canada.)
Given the barriers to trade that could arise out of significant inconsistencies in truck size
and weight, the federal government has encouraged the provincial ministers of transportation to
agree to common standards under a series of memoranda of understanding (MOU) (Transport
Canada, 1998). Surprisingly, this approach has resulted in a high degree of uniformity across
provincial size and weight regulations, with variations no greater than those observed across US
states. A significant difference, however, is that the maximum GVW varies across categories of
trucks. For example, most provinces impose a maximum weight of 39,500 kilograms (87,081
pounds) for five axle tractor semitrailers, as opposed to 46,500 (102,514) for six axle tractor
semitrailers.
Mexico. Truck size and weight regulation in Mexico lies at the other end of the political
spectrum, with the federal government in complete control. Technically, each of the state
governments can set regulations on those roads not included in the extensive federal highway
57
network, but no state has exercised this prerogative to date. Like Canada, but unlike the US,
Mexico defines different GVW limits for different categories of trucks.
5. Major InconsistenciesIt is generally true that truck size and weight regulations are more conservative in the
United States than they are in either Mexico or Canada. Table B2 shows prevailing weight
restrictions for popular truck configurations on the major national highway networks of the three
NAFTA partners. Since some states allow higher weights than the national limit under
grandfather clauses, both the federal and maximum state limits are shown for the US. The
federal maximum, however, is the most relevant comparison for international shipments since
the state maxima would only apply to trucks that operate exlusively within a single state.
Provincial minima and maxima are shown for Canada, where in Mexico a single national
standard prevails. In general, acceptable weights are higher in the Canada and Mexico than they
are in the United States. Also, while the United States defines a single maximum that applies to
all trucks, Canada and Mexico define different limits for different configuration and numbers of
axles. Thus, as Table B2 shows, the disparities are greater for six axle trucks than for five axle
trucks.
58
Table B2. Maximum Gross Vehicle Weights (kilograms) in the NAFTA CountriesTruck Type U.S.
FederalU.S. StateMaximum
CanadaProvincialMinimum
CanadaProvincialMaximum
Mexico
Tractor Semitrailer(5 axles)
36,288 39,917 39,500 41,500 44,000
Tractor Semitrailer(6 axles)
36,288 45,360 46,500 53,000 48,500
A Train Double (5axles)
36,288 43,092 38,000 43,500 47,500
A Train Double (6axles)
36,288 48,082 47,600 48,000 56,000
Source: North American Free Trade Agreement Land Transportation StandardsSubcommittee, Working Group 2 – Vehicle Weights and Dimensions, Harmonization ofVehicle Weight and Dimensions Regulations Within the NAFTA Partnership, October1997.
Why are there such large differences? Partly this is the outcome of the separate evolution
of policies through very different political processes. Much of the differences, however, can be
attributed to inconsistencies in bridge formulas. The United States, adopting methods developed
by AASHTO, is much more conservative in its assessment of potential damage or bridge failure
due to over-weighted trucks. This difference of views probably constitutes the greatest
impediment to harmonization of truck weight regulations in the NAFTA partnership.11
Inconsistency in size regulation is an even more complex issue not only because of
jurisdictional variations within the countries, but also because they are defined along different
dimensions in the three countries. For example, the U.S. federal government prohibits states
from imposing overall length restrictions (this is to prevent shortening the tractor to allow greater
payload capacity.) Instead, restrictions are placed on trailer length, wheelbase, rear overhang,
etc. By contrast, the only length restriction in Mexico is the overall length restriction.
Table B3 shows the length, width and height restrictions for the most common truck for
cross-border shipments, the five-axle tractor-semitrailer. (In the U.S. these regulations are
59
defined at the state level, with most states following an AASHTO standard. The table therefore
displays the maximum and minimum state values.)
Table B3. Size regulations (in meters) for 5 Axle Tractor-Semitrailer Trucks in theNAFTA CountriesTruck Type U.S. State
MinimumU.S. StateMaximum
CanadaProvincialMinimum
CanadaProvincialMaximum
Mexico
Overall Length none none 23.0 25.0 20.8Overall Width 2.6 2.6 2.6 2.6 2.6Overall Height 4.11 4.27 4.15 4.20 4.25Tractor Wheelbase none none 6.2 6.2 noneTrailer Length 14.6 18.3 16.2 16.2 noneTrailer Wheelbase 11.28* 13.11* 12.5 12.5 noneRear Overhang 1.22* 1.83* 35% 35% noneTandem Spread Min. .91 1.22 1.20 1.20 noneTandem Spread Max. 2.44 3.05 1.85 1.85 none* many states define no regulation on this dimension.Source: North American Free Trade Agreement Land Transportation StandardsSubcommittee, Working Group 2 – Vehicle Weights and Dimensions, Harmonization ofVehicle Weight and Dimensions Regulations Within the NAFTA Partnership, October1997.
Clearly the inconsistencies are of a more complex nature here than in the case of weight.
For example, the spacing of wheels used to define a tandem axle is different in the U.S. and
Canada, and there is no specific definition in Mexico. This is important because weight
regulations are sometimes specific to tandem versus single axles. Rear overhang is defined as a
percentage of trailer length in Canada, but as a fixed value in the U.S. In some cases, however,
the problem is not as great as it appears. For example, the great majority of states have adopted a
common trailer length limit that is roughly consistent with the Canadian limit. Also, many of the
state and provincial variations are exceptions to a standard rule necessary to allow specialized
11 NAFTA, 1997, page 23.
60
trucks that are usually associated with a specific industry to operate within jurisdictional
boundaries, and are not really at issue with regard to international shipments.
How much of an impediment to the free flow of goods do these regulatory
inconsistencies pose? On the one hand, the great majority of cross-border shipments, especially
between the U.S. and Canada, use a standard five-axle tractor-semitrailer configuration. Higher
weights for these trucks are permitted in Canada and Mexico than in the United States, but this
only means that Canadian and Mexican trucks must limit their payload when crossing the U.S.
border. Size regulations are sufficiently similar to allow definition of a NAFTA-wide
configuration that is already being broadly adopted.
On the other hand, current inconsistencies limit the scope of cross-border transportation
options. For example, six-axle trailer-semitrailers at weights well above the U.S. limit are
commonly used in Ontario and Quebec. (The fact that six-axle trucks carry 18.5% of the tonne-
km in Canada, versus only 3% in the U.S., is probably due to the fact that they are allowed to
carry heavier weights in Canada.) Since these trucks can only enter the U.S. at much lower
weights, they do not play a major role in shipments from Central Canada to the Great Lakes
states.12 Thus, the two road transportation systems are not fully integrated. Inconsistencies in
the regulation of multiple trailer combinations both between and within Canada and the United
States pose a further impediment to full integration.
6. Mechanisms for Harmonization Under NAFTA
Harmonization of truck size and weight regulation within the NAFTA partnership
presents a major challenge for three reasons. The first is the complexity of the regulations
12 In some cases, Canadian carriers must maintain separate fleets of trucks for cross-border and domestic business(Prentice and Wilson, 1998).
61
themselves, the second is the participation of a large number of sub-federal jurisdictions in the
regulatory process, and the third is the political dimension of the problem. As to the political
dimension, there is strong resistance in all three countries to changing policy to please other
countries. In the United States there is a deeply ingrained antipathy to adopting conventions
proposed by international bodies. (Witness, for example, the international convention on land
mines and the reluctant participation in greenhouse gas conventions.) In both Canada and
Mexico, no political criticism is more potent than that of “caving in” to the wishes of the more
powerful Americans neighbors.
In recognition of the importance of harmonization in all policy related to road and rail
transportation, and of the difficulty of achieving it, NAFTA (Article 913(5)(a)(i)) established the
Land Transportation Standards Subcommittee (LTSS). Comprising representatives of all three
nations, the mandate of LTSS was to produce agreements on standards harmonization in the
follow areas:
Bus and truck operations
• non-medical standards for drivers (age, language. liscencing)
• medical standards for drivers
• vehicle weight and dimensions
• supervision of safety compliance
• road signs
• transportation hazardous goods
Rail Operations
• standards for operating personnel on cross-border routes
62
• locomotive and other rail equipment
• transportation of hazardous goods
Each of these sub categories was given a time limit ranging from one and one half to six years.
Vehicle weight and dimensions agreements, which were to have been finalized within three years
of the signing of NAFTA, have not yet been completed.
This is not to say, however, that little has been accomplished. A working group on
vehicle weights and dimensions was established with representatives of national and sub-national
governments. A thorough comparison of all standards that was conducted by this working group
was in itself a major task. Now that this comparison is complete, the working group is able to
identify major areas of inconsistency and propose possible solutions (NAFTA, 1997).
The general strategy of this group so far has not been to establish a common set of
standards – a task that they see as unrealistic given the persistence of state and provincial
inconsistencies in the U.S. and Canada. Rather they will work toward elimination of the most
problematic inconsistencies and the identification of truck configurations that can serve as
general-purpose NAFTA-wide standards. They have also called for separate regional
agreements on standards on inconsistencies that relate to only one border. For example, an
agreement on single unit trucks between Mexico and southern border states would help
overcome problems at the U.S – Mexico border.
63
Annex C: Border Crossing
Harmonization of regulations regarding truck size and weight, driver licensing, road
signs, etc is not sufficient in itself to guarantee smooth movement of goods across international
frontiers. Rapid but thorough inspection procedures are needed to ensure that that trucks adhere
to harmonized regulations and also to make sure that they are not transporting contraband goods
or illegal undocumented people. The necessary inspection may be complex and may involve
officials from different government agencies and different levels of government. If such
inspections lead to long delays at border crossing, they will substantially increase the cost of
international, as compared with domestic, transportation. Thus, delays at border crossings may
constitute substantial non-tariff barriers to trade.
Canada and the U.S. have the largest bilateral trade relationship in the world. Most of the
goods move between these two countries by land – predominantly by truck – with the bulk of the
freight passing through a relatively small number of major crossings. Over a period of many
years, efficient procedures have been developed at these crossings, and more recently new
technology has been implemented to speed up the process. While moving trucks and trains
across international borders will always entail some delay, Canada and the U.S. can boast of
some of the most efficient crossings in the world.
The crossings along the U.S. – Mexico border are a different story. Under NAFTA, truck
traffic has increased rapidly without a corresponding expansion in the ability to inspect trucks
passing in either direction, but in particular trucks passing from Mexico into the United States.
Problems with border crossing are already primarily responsible with a failure to meet deadlines
for providing Mexican trucks with access U.S. Border States. These problems are partly due to
64
the poor state of much of the Mexican truck fleet, but also due to the inability of government
agencies to gear up to the required inspection effort at a number of critical border crossings.
Background
Four U.S. states border Mexico: California, Arizona, New Mexico, and Texas. Because
of the spatial distribution of economic activities on both sides of the border and the position of
major highways, the states of California and Texas account for roughly 85% of the total truck
crossings, with Texas alone accounting for more than 60%. While there are 28 crossing points in
total, the largest seven (two in California, four in Texas, and one in Arizona) account for 90% of
the crossings (see table C1). Thus, despite the great length of the U.S. - Mexico border, trade
flows are funneled through a relatively small number of crossings.
Table C1: Trucks from Mexico to U.S. and Inspection Personnel at Seven BusiestCrossings (1996)Crossing Trucks
1996% oftotal
StateInspectors
FederalInspectors
TotalInspectors
Trucks /Inspector
Ota y Mesa CA 520,908 17 28 1 29 17,962Calexico CA 169,403 5 19 1 20 8,470Nogales AZ 225,274 7 7 2 9 25,030El Paso TX 577,152 19 9 2 11 52,468Laredo TX 899,754 29 8 2 10 89,975McAllen TX 198,260 6 5 0 5 39,652Brownsville TX 224,537 7 7 2 9 24,948Subtotal 2,815,288 90 83 10 93 30,272Others 297,803 10 10 1 11 27,073Total 3,113,091 100 93 11 104 29,934Source: U.S. General Accounting Office, Commercial Trucking: Safety Concerns AboutMexican Trucks Remain Even as Inspection Activity Increases, April 1997.
The number of trucks crossing the border has been growing at annual rate of roughly
12% during the 1990s (GAO, 1996). Mexican trucks are for the most part restricted to a
commercial zone that extends only a few miles across the border. (Very few U.S. trucks are
65
permitted to operate anywhere in Mexico.) This means that most trailer loads coming from
Mexico are transferred to U.S. tractors shortly after crossing the border. Under NAFTA,
Mexican trucks were to be granted full access to border states (and U.S. truck were to be granted
full access to Mexican border states) by the end of 1995. This deadline has been missed. The
primary reason is the inability of officials at border crossings to ensure compliance with U.S.
truck regulation by Mexican trucks.
A number of federal and state agencies have an interest in inspecting trucks as they cross
the border. Issues of major concern include the possibility that trucks may contain illegal aliens,
drugs, agricultural commodities that are banned to avoid the migration of pests, improperly
handled food products that may pose a health threat, and other goods that cannot move freely
across the border under the terms of NAFTA. Thus the U.S. Customs Service, Immigration and
Naturalization Service, Department of Agriculture, Food and Drug Administration, and several
other federal agencies are concerned with the border inspection process. Violations of truck size,
weight, and safety regulations, however, are the purview of the State Departments of
Transportation.
Problems Arising
The normal procedure for trucks entering the U.S. from Mexico to pass first through
federal inspection centers operated by U.S. customs, where Customs and other federal officials
conduct inspections related not so much to the truck itself, but rather to its contents and
personnel. From there they pass into state operated truck inspection facilities (where such
facilities exist) to be inspected for size, weight, and safety violations. Where such facilities do
not exist, state inspectors may be permitted to operate within the federal facilities or temporary
66
inspection centers may be established at roadsides, in parking lots or in vacant lots. (Note that
Mexican tractors only travel a short distance into the United States, but oversized or unsafe loads
in trailers that are transferred to U.S. trucks are a major concern for state transportation officials.)
Border crossing delay has emerged as a major impediment to the free flow of goods
between the U.S. and Mexico. Delays of three to four hours are commonplace. Also, concerns
over the safety of Mexican trucks and the potential for trucks with oversized loads to damage
infrastructure has led to the failure to implement the NAFTA timetable as mentioned above.
Part of the problem is the failure of both state and federal governments to commit
adequate resources to border inspection. As table C1 indicates, the number of truck inspectors
(as distinct from customs or immigration inspectors) is very small relative to the number of truck
crossings. On average, each inspector is responsible for over 30 thousand trucks annually. This
level of effort varies across states, with California providing a better ratio of inspectors to trucks
than Texas. Clearly only a small proportion of trucks can be subjected to spot checks by such
small forces. To make matters worse, the federal inspectors also have responsibility for
commercial passenger vehicles such as buses and vans (GAO, August 1997).
Facilities for inspection are also very limited, especially in Texas, where there were no
permanent truck inspection facilities located at border crossings until 1997 – three years after
NAFTA became effective. California was more proactive, building two inspection facilities at
major crossings at a cost of $30 million.
This commitment of personnel and facilities seems small given the high value of cross
border trade and the high political profile of NAFTA. But these levels reflect significant
increases from pre-NAFTA levels. For example, the number of state inspectors in California,
Arizona and Texas combined more than doubled between December 1995 and January 1997
67
(GAO, April 1997). Furthermore, it is likely that state governments see NAFTA as a federal
initiative and border crossing as a traditional area of federal jurisdiction, and therefore have little
incentive or inclination to commit state resources. Also, the states (especially Texas) are
currently faced with very large incremental expenditures on highway repair and maintenance due
to increased truck volumes under NAFTA.
Failure to develop adequate facilities is in some cases due to the lack of space around
border crossings that were never designed for the current high volumes of traffic and that are in
some cases located in crowded urban areas with little space available. Also, the lack of state and
federal cooperation was a problem in the first years after NAFTA, when state truck inspectors
were not allowed to use federal facilities adjacent to the borders. (This was corrected under a
cooperative agreement between Texas and U.S. Customs commencing in November of 1995.)
Problems arising from the shortage of personnel and facilities have been exacerbated by
the poor condition of the Mexican truck fleet. For example, during a three-week period of
intensified inspection during late 1995 and early 1996, state and federal officials inspected a total
of 1,613 trucks. Of those, 56% were placed out of service due to violation of safety or size and
weight regulations, and 14% of drivers were placed out of service due to invalid licenses. (On
average, 28% of trucks and 8.5% of drivers are placed out of service after domestic inspection in
the U.S. GAO, April 1997.)
Initiatives
The large number of safety violations encountered in the limited inspection effort to date
is one of the main reasons for the failure of the U.S. government to go ahead with expanded
access to U.S. destinations for Mexican trucks. If this problem is not overcome, both the U.S.
68
and Mexican governments will be embarrassed by the failure to meet NAFTA milestones and,
more importantly, the economic benefits from trade liberalization envisioned for both countries
will never be realized. To overcome this impasse a number of initiatives have been undertaken,
some requiring enhanced state and federal cooperation in the U.S. and some involving
cooperation among the NAFTA partners.
As noted above, state officials are now allowed to use the border compounds operated by
U.S. Customs for safety inspections. This includes the use of federally owned equipment such as
weigh scales. (This is not necessary in California, which has already built inspection facilities at
its two major crossings.) In addition, the U.S. Department of Transportation has assigned a
limited number of federal employees as truck safety inspectors for a limited period. The federal
government has also provided incremental funds ($2.5 million in fiscal 1998) to the four border
states for enhanced enforcement activities.
Cooperative efforts by U.S. state and federal governments can only step up and expedite
inspection and enforcement. Attacking the problem at its root causes requires cooperative efforts
between the governments of the U.S. and Mexico. The Mexican government is in a better
position than the U.S. government to promote compliance with size, weight, and safety
regulation by Mexican carriers. To this end, the two governments have initiated a number of
information exchange agreements. Under one such agreement, the results of inspections by U.S.
and state officials are passed to Mexican officials so that they can identify those carriers who
have the greatest problems and take appropriate actions. Under another, officials at U.S. border
crossings are gaining access to a database of licensed Mexican commercial drivers (FHWA,
1998).
69
Mexican and U.S. officials have also worked together to harmonize inspection
procedures. The rationale is that if standards and procedures for trucks inspected within Mexico
are similar to those used in the United States, Mexican carriers will adopt better maintenance and
operational procedures and fewer trucks will be taken out of service as the result of border
inspections.
ITS
Intelligent Transportation Systems (ITS) refers to the application of information and
communications technology to the operation of transportation systems. There are many
opportunities for ITS to speed the movement of trucks through border crossings. These include
electronic payment of tolls and exchange of cargo and driver information via an Automatic
Vehicle Identification (AVI) device.
Certain types of truck inspection can also be automated. For example, Weight-in-Motion
(WIM) and Automated Vehicle Classification (AVC) devices can be used to tell whether trucks
violate certain weight and size regulations without requiring them to stop. More generally,
databases on truck and driver violations can be matched against information read from AVI
devices in order to identify trucks and drivers with histories of violations. In this way, the
inspection process can be made more productive by allowing inspectors to concentrate their
efforts on trucks with higher likelihood of violation.
Efforts to implement ITS at NAFTA borders are organized under International Border
Clearance Planning and Deployment Committee (IBPDC), which is made up of representatives
of transportation, customs, and immigration agencies from all three NAFTA nations. A
considerable amount of field testing of technologies has already been conducted. Furthermore,
70
some elements of automated toll collection and customs clearance have already been
implemented at U.S. / Canada border crossings. One possible impediment to extensive
deployment on the U.S. / Mexico border is the fact that carriers must make investments in on-
board AVI devices and the computer systems necessary to support automated clearance.
Conclusions
The early history of NAFTA provides two major lessons about the problems encountered
in opening up land borders to trade. First, because border inspection involves issues that come
under the purview of a variety of government agencies, inter-agency cooperation is critical to
smooth border operation. Second, harmonization of vehicle regulation must be followed up with
procedures for their enforcement at border crossings.
At the current moment, full implementation of NAFTA provisions is imperiled by the
fact that vehicles from one nation (Mexico) are failing to meet agreed upon size, weight, and
safety standards to the satisfaction of a second nation (the U.S.). Because of this, the free
movement of trucks within border states is almost four years behind schedule, and free
movement of trucks within both countries (comparable to the current U.S. / Canada arrangement)
is sure to be delayed beyond its scheduled implementation in 2000.
71
Annex D: The Evolution of Canada – U.S. Trade
Canada and the U.S. have the largest bilateral trade relationship in the world. This
relationship has evolved over a period of more than 150 years, and has seen periods of
protectionism and trade liberalization, culminating in comprehensive free trade agreements in the
1980s and 1990s.
The purpose of this section is to briefly review the history of Canada – U.S. trade
relations, to assess the level and character of trade between the two nations at the end of the
1990s, and to consider the role that transportation plays in the process of economic integration.
History
The U.S. and Canada are relative newcomers to the world scene, with the former
establishing its independence in 1976 and the latter being established as an independent
dominion of the British Empire on in 1867. Not surprisingly, relations between the U.S. and
what remained of Britain’s North American colonies were strained in the aftermath of the
American Revolution. In fact, the U.S. invaded what is now Canadian13 territory during the war
of 1812. This was the last military clash between the two neighbors.
With rapid economic growth during the 19th century, it became clear that some form of
trade relationship would be mutually beneficial. Furthermore, in 1846 Britain unilaterally
adopted a policy of free trade, ending the system of Imperial Preferences that had until then
governed Canada’s trade relations. This freed the North American colonies to negotiate a system
of relatively unrestricted trade with the U.S. under the Reciprocity Treaty of 1854. By this time
the United States was emerging as a producer of manufactured goods, and this treaty facilitated a
72
complementary trade regime under which U.S. manufactures were sold into Canada and
Canadian resource products (forest products etc.) were sold into the United States.
In 1866 the U.S. unilaterally abrogated the Reciprocity Treaty. Britain was thought by
Congress to have favored the Confederacy in the U.S. Civil War, and this abrogation was a
means of punishing Britain through its North American colonies. In the following year,
parliament granted autonomous dominion status to Canada under the British North America Act.
The newly created Canadian government made repeated and unsuccessful attempts to negotiate a
new trade arrangement, including a new Reciprocity Treaty negotiated between the two
governments in 1874, which the U.S. Senate failed to ratify.
Shortly thereafter, a new Conservative government under Prime Minister John A,
MacDonald reversed the course of Canada – U.S. trade relations by instituting the National
Policy of 1879. This was basically a protectionist policy imposing high tariffs on manufactured
good. More than just the outcome frustration with failed negotiations, the National Policy was
proposed as a means of promoting Canadian economic development and political unity. Three
intended outcomes of the national policy were:
• Promotion of domestic manufacturing industries. The U.S. had a considerable head start on
Canada in terms of industrialization. The Canadian government believed that tariff protection
would give nascent manufacturing industries time to develop technologically and achieve
efficient scale.
• Promotion of U.S. investment in Canada. While London was the traditional source of
Canadian capital, the tariff barriers would give U.S. industrialists the incentive to set up
operations on the Canadian side of the border.
13 Prior to 1867, “Canada” referred only to the provinces of Ontario and Quebec, which were called Upper Canadaand Lower Canada respectively.
73
• Promotion of trade between the Canadian provinces. Prior to the National Policy, major
flows of goods were of a North-South variety, between the various regions of Canada and
neighboring U.S. regions. The government hoped that the tariffs would divert some of this to
an East-West trade exploiting complementarity among the Canadian provinces. The benefits
would be not only in terms of economic integration, but also in terms of a sense of political
unity within the young and geographically dispersed nation.
For the most part these desired results were realized. Canada developed large and efficient
industries in steel, agricultural machinery, and other key sectors, and inter-provincial trade
expanded. The expected U.S. manufacturing investment also materialized. This led to the
development of the “branch plant” economy whereby U.S. interests owned half or more of the
manufacturing capital in Canada.14
The National Policy set the tone for U.S.-Canada trade relations for nearly a century.
Successive governments debated trade policy – with Conservatives primarily favoring
protectionism and Liberals favoring trade liberalization – but nothing on the scale of the ill-fated
Reciprocity Treaty of 1874 was ever proposed, let alone adopted. Despite this, the trade
relationship between the U.S and Canada continued to grow. Shortly after World War II, the
U.S. supplanted the U.K. as Canada’s principle trading partner, and even before the
implementation of CUSFTA or NAFTA, U.S. – Canada bilateral trade flows were the largest in
the world.
Policy refinements generally worked in the direction of liberalization. For example, the
Canadian government realized that charging tariffs of manufactured industrial inputs that could
14 This outcome was eventually to be viewed as a threat to Canadian sovereignty. In the 1970s the ForeignInvestment Review Agency was established to prevent U.S. investors from acquiring dominant positions inCanadian production sectors.
74
not be obtained in Canada would have a negative impact on Canadian firms, so tariffs on a
variety of goods were refunded. Also, many U.S. – Canada tariffs declined under the GATT.
It was not until 1965, however, that a major U.S. – Canadian agreement on the auto sector
led to trade liberalization on a massive scale. By the 1960’s, the automotive industry had
become a critical economic engine in both the United States and Canada. The same three
companies – General Motors, Ford, and Chrysler – dominated automobile production in both
countries. Scale economies that could be gained by allowing assembly plants in each country to
specialize in particular models, rather than producing all models on both sides of the border,
provided a compelling economic rationale for tariff-free movements of cars and components.
The Auto Pact of 1965 achieved this goal. While this is a “free” trade agreement in the sense
that all tariff barriers were removed, it is more precisely a “managed” trade agreement, since it
contains an explicit guarantee that Canada’s share in automotive production will remain
proportional to its share in aggregate automotive purchases. While labor interests initially
opposed the auto pact, the prosperity of the automotive sector in the years that followed made it
the mainstay of blue-collar employment, especially in Ontario.
Trends in the sectoral structure of trade demonstrate the impact of the Auto Pact. While the
trade had traditionally consisted of exports of primary commodities from Canada and exports of
manufactures from the United States, automotive products came to dominate exports in both
directions. Effectively, the international industrial arrangement that emerged from the Auto Pact
amounted to a cross-border industrial complex whereby cars and parts moved freely across the
frontier among plants located for the most part in the province of Ontario and a few Great Lakes
states, most notably Michigan.
75
With the Auto Pact, two now-persistent characteristics of Canada – U.S. trade were
established. The first is the presence of a large proportion of intermediate goods, as opposed to
final goods or raw material, in total trade. The second is an important role for intra-industry, as
opposed to inter-industry trade. To some extent the limitation of the Auto Pact to the automotive
preordained this, but even when the broad automotive sector is broken down into component
industries, a high level of intra-industry trade is observed.
In the early 1980s, Canadian politics changed course. After a long series in of Liberal
governments, a new Progressive Conservative government was elected under Prime Minister
Brian Mulroney. In contrast to the historical roles of the Liberal and Conservative parties, the
Mulroney government was more favorable to trade liberalization than its Liberal predecessor,
which was more concerned with U.S. economic dominance of Canada. Although free trade was
not a major issue in the first Conservative electoral victory, a number of factors coalesced to
create the right environment for a major breakthrough:
• Energy and other resource interests were anxious to secure access to the U.S. market. These
included oil and gas producers in Alberta, who had been constrained from exporting into the
U.S. under the Liberal government, the provincial government in Quebec, which had
ambitious plans to expand hydroelectric generation for the U.S. market. Lumber, fertilizer,
and mineral interests maintained their traditional support of free trade.
• The new Conservative government coincided roughly with the election of President Ronald
Reagan and Republican majority in the U.S. Senate, both of whom were politically
predisposed in favor of free trade. (Reagan and Mulroney established a strong personal
relationship.)
76
• Experience under the Auto Pact indicated that free trade could be beneficial even to
manufacturing interests and blue-collar workers. (Still labor remained opposed.) This
helped to offset the argument that under free trade the Canadian economy would be pushed
to concentrate in resource industries.
After protracted negotiations the Canadian and U.S. governments produces the Free Trade
Agreement (CUSFTA). This was a broad trade liberalization plan that would phase out tariffs on
all but a few categories of goods over a ten-year period. It was innovative in the extent that it
addressed trade in services, although transport services were not covered. While ratification of
the CUSFTA was a relatively minor political issue in the United States, the free trade issue
dominated debate in a Canadian parliamentary election in which the Progressive Conservatives
won reelection because the Liberal and New Democrat15 parties split the anti-CUSFTA vote.
CUSFTA went into effect in 1988 and negotiations to extend the free trade area to
Mexico under NAFTA commenced almost immediately. Canada initially had little interest in
this extension, since its trade with Mexico was very small and the inclusion of a low-wage,
developing nation was sure to cause protests from labor and environmentalists. The government
believed that it was not in Canada’s interest, however, to exclude its voice from the negotiations,
and saw it as an opportunity to add some refinements to the CUSFTA language, especially in the
area of dispute resolution.
The Liberal Party, under the its new leader Jean Chretien, abandoned its anti-CUSFTA
position. Despite the fact that the Progressive Conservatives were swept from office in 1993, the
new Liberal majority government accepted NAFTA subject to only minor amendments.
15 The New Democratic Party is supported by labor and agricultural interests and by other traditional constituenciesof European socialist parties. It is a major political force in Canada, especially at the provincial level where it hasformed a number of majority governments. In the 1990’s two more parties successfully elected substantial numbers
77
Canada – U.S. Trade in the 1990s
The phase out of tariffs first mandated under CUSFTA was completed in 1998. It is still
difficult to make a “before and after” assessment of the effects of CUSFTA and NAFTA on
Canada – U.S. trade. For one thing, CUSFTA essentially represented an acceleration of on
ongoing decline in the average tariff under the GATT and the Auto Pact, so it is somewhat
misleading to portray a high tariff past and a no-tariff present. Also, as this report describes, a
number of non-tariff trade impediments still survive.
The general trend, as indicated in Table D1, is of increasing trade reliance by Canada
upon the United States. By 1998, the U.S. accounted for about 84% of Canadian exports and
77% of imports. It should be noted, however, that this is consistent with a long-term trend that
predates CUSFTA and NAFTA.
Table D1 Canadian Exports and Imports, 1993 and 1998 (millions of Canadiandollars)
1993 1998ExportsU.S. 149099.7 270560.5Total 190213.1 323400.3U.S. as % of Total 78.4 83.7ImportsU.S. 130244.3 303983.8Total 177123.2 234177.3U.S. as % of Total 73.5 77.0Balance 13089.9 19416.5as % of total trade 3.6 2.9Source: Statistics Canada, CANSIM Database Matrices 3651 and 3685
of members to the federal parliament: the Reform Party, which is positioned to the right of the Progressiveconservatives, and the Bloc Quebecois, which represents the interests of Quebec separatists.
78
Despite the high and increasing volume of trade between Canada and the United States,
recent research indicates that the Canada – U.S. border still represents a significant impediment
to goods movement. A number of recent studies based on spatial trade flows data ask the
question: What would the flow of goods between Michigan and Ontario (or any state/province
pair) be if they were not on opposite sides of the border? The results indicate that trade between
pairs of cross-border regions is much lower than that which would be expected between regions
of the same size and intervening distance within one country. Studies by McCallum (1995) and
Helliwell (1996) indicate that within-country trade is about 20 times higher than cross-border
trade between comparable regions. A more recent study (Brown and Anderson, 1999b), which
controls for regional differences in industrial structure, indicates much lower, but still very
significant, border effects for most categories of goods.16
Recently available trade data indicate that the common perception of Canada – U.S.
trade, whereby Canada trades mostly resource commodities and the U.S. trades manufactured
goods is not accurate. Manufactured goods dominate trade flows in both directions (See Table 2,
in main report). In fact intermediate goods – goods sold from one manufacturer to another –
account for 39% of Canadian exports and 48% of U.S. exports by value. The structure of trade
also has a geographic dimension, with a larger role of intermediate goods among industrial
regions that are contiguous across the border. For example, intermediate goods account for 55%
of Ontario’s exports destined for the Great Lakes States17 and 62% of the Great Lakes States’
exports to Ontario (Brown and Anderson, 1999a).
The traditional explanation of trade is based on the 19th century concept of comparative
advantage that was later formalized in the Hecksher – Ohlin theorem (Ohlin, 1933). Under this
16 While this study is based on more recent data than the other two, it also employs substantially different methods.It is not, therefore, possible to attribute the difference in results to the introduction of NAFTA.
79
explanation, trade occurs between countries or regions with different comparative advantages
based on unequal factor endowments. While much of the trade between pairs of U.S. and
Canadian regions fits into this model (for example, shipments of natural gas from Alberta to the
American Northeast) most of it does not. The lion’s share of the trade occurs between regional
pairs straddling the border with relatively similar factor endowments and industrial structures –
and a great deal of that trade is intra-industry trade, a result that is inconsistent with the notion of
comparative advantage.
The model of Krugman (1979), which was developed to explain trade between countries
with similar factor endowments, is more applicable here. By this model, trade may come about
simply to allow greater specialization in production by individual trading units, leading to scale
economies. So long as the gains from increasing returns are not exhausted by transportation
costs, units with identical factor endowments still have an incentive to trade. Furthermore,
specialization may consist of producing different varieties of the same category of goods, so a
substantial share of intra-industry trade may occur. This view of trade helps to explain the
economic gains arising from the Auto Pact and the general structure of trade between Canada’s
industrial heartland and adjoining U.S. regions.
The Role of Transportation
The explanation of Canada – U.S. trade described above places particular emphasis on
the need for efficient transportation. Cross border trade in the form of intermediate goods
suggests a trade regime whereby industrial plants on either side of the border exchange inputs on
an ongoing basis. This type of trade calls for a high degree of coordination between activities
that can only be achieved via fast, flexible, reliable and timely transportation. (The recent trend
17 Michigan, Wisconsin, Illinois, Indiana, and Ohio.
80
to just-in-time inventories in production systems implies even greater emphasis on timeliness.)
Furthermore, the goods being traded have relatively high ratios of value to weight when
compared with primary commodities. All of this points to a large and expanding role for truck
transportation.
The data in table D2 indicate rapid growth in international truck activity, nearly all of
which is related to exports to or imports from the U.S. International rail shipments also grew
during the same period, but at a much slower rate.
Table D2: Trends in Domestic and International Truck Activity(millions of tonne kilometers)
1990 1996Domestic volume 54,700 71,506Domestic share 70.3 59.0Domestic % growth 1990-96 31%International volume 23,070 49,627International share 29.7 41.0International % growth 1990-96 115%Total volume 77,770 121,133Source: Transport Canada, Transportation in Canada 1997, Annual Report
Tables D3 and D4 illustrate the dominance of manufactured goods in shipments by truck,
with the top three manufacturing categories accounting for about 70% of both imports and
exports. Furthermore, truck origins and destinations are highly concentrated in the industrial
provinces of Ontario and Quebec.
81
Table D4: Sectoral Breakdown of Canada’s Exports to US by Truck 1996Motor vehicles and parts 27%Fabricated materials 26%Equipment miscellaneous 18%Other 15%Food 7%Heavy equipment 7%Total 100%Source: Transport Canada, Transportation in Canada 1997, Annual Report
Table D5: Sectoral Breakdown of Canada’s Imports to US by Truck 1996Motor vehicles and parts 30%Fabricated materials 21%Electrical equipment 18%Other 15%Heavy equipment and machinery 10%Food and related 5%Total 100%Source: Transport Canada, Transportation in Canada 1997, Annual Report
By contrast Tables D6 and D7 show a much more diversified shipments profile for rail,
with a much larger role for primary products. Exports by rail are also more diversified in terms
of geographical origins, with large shares from the Eastern and Western provinces. Imports by
rail, however, are largely destined for Ontario and Quebec.
Table D6: Sectoral Breakdown of Canada’s Exports to US by Rail 1996Forest products 29.5%Fertilizer materials 13.4%Grains 5.8%Intermodal traffic 5.2%Transportation equipment 4.6%Refined petroleum products 3.6%Construction materials 3.8%all others 35.3%Source: Transport Canada, Transportation in Canada 1997, Annual Report
82
Table D7: Sectoral Breakdown of Canada’s Imports to US by Rail 1996Intermodal traffic 13.9%
Transportation equipment 7.8%Construction materials 5.3%Forest products 3.8%Non-ferrous metals 3.7%Refined petroleum products 3.3%Grains 2.8%All others 59.2%Source: Transport Canada, Transportation in Canada 1997, Annual Report
General trends in Canada – U.S. trade point to continued growth in the role of truck
transportation, despite the energy and environmental advantages of rail. This implies that
highway infrastructure and efficient border crossings will both play critical roles as trade
expands over the coming decades.
83
References
Bereskin, C. Gregory 1996. “Econometric estimation of the effects of deregulation on railwayproductivity growth” Transportation Journal, 35 (4).
Borenstein, Severin, 1992. “The Evolution of Airline Competition”, Journal of EconomicPerspectives. Vol. 6, No. 2, pp. 45-73.
Boyer, Kenneth D., 1997. Principles of Transportation Economics. New York, Addison-Wesley.
Brown, W. Mark and William P. Anderson, 1999a. “The Influence of Industrial and SpatialStructure on Canada - U.S. Regional Trade.” Growth and Change, 30(1): 23-47.
Brown, W. Mark and William P. Anderson, 1999b, “The Potential for Economic IntegrationAmong Canadian and American Regions, McMaster University, Department of Geography,Hamilton, Ontario, Canada.
Chow, Garland, 1997. “North American Trucking Policy” in Transport Economics, (eds.) T.H.Oum, et al. Amsterdam. Harwood Academic Publishers. pp. 591-624
Chow, G. and J.J. McRae, 1989. “Non Tariff Barriers & the Structure of US-Canadian(Transborder) Trucking Industry”, Transportation Journal. 30(2), pp. 4-21
Delaney, Robert V., 1993. “Transportation, Regulation & International Trade” in Free Tradewithin North America. (eds.) G. P. O’Driscoll Jr. Norwell, MA, Kluewer Publishing Co.,pp. 161.
Douglas, George W. and James C. Moller III., 1974. “Quality Competition, IndustryEquilibrium and Efficiency in the Price-Constrained Airline Market,” The AmericanEconomic Review. pp. 657-669.
Federal Highway Administration, North American Initiatives, U.S. Department ofTransportation, Spring 1998.
Francois, J.F., H. M. Arce, K. A. Reinert & J. E. Flynn. 1996. “Commercial Policy and theDomestic Carrying Trade”. Canadian Journal of Economics, 81, pp. 181-198
Helliwell, J. F., 1996. “Do National Borders Matter for Quebec Trade?” Canadian Journal ofEconomics, 24:507-522.
Krugman, Paul R., 1979. “Increasing Returns, Monopolistic Competition, and InternationalTrade”. American Economic Review, 70:950-959.
McCallum, J., 1995. “National Borders Matter: U.S. - Canada Regional Trade Patterns,”American Economic Review, 85: 615-623.
Meyer, John R., et al., 1959. The Economics of Competition in the Transportation Industries,Harvard University Press.
Montufar, Jeannette, 1996. Trucking and Size and Weight Regulations in the Mid-ContinentCorridor, Master of Science Thesis, Department of Civil and Geological Engineering,University of Manitoba, Winnipeg.
Motor Vehicle Projects Office, John A . Volpe National Transportation Systems Center,ITS/CVO Cross-Border Strategic Plan, prepared for Federal Highway Administration,U.S. Department of Transportation, July 1996.
NRC (National Research Council) Transportation Research Board 1991. Winds of Change:Domestic Air Transport Since Deregulation , Special Report 230. Washington. D. C.
84
National Transportation Act Review Commission (Canada). 1993. Competition inTransportation Policy Legislation in Review. Ottawa Minister of Supply in Services,Canada. Vol. I & II.
North American Free Trade Agreement Land Transportation Standards Subcommittee, WorkingGroup 2 - Vehicle Weights and Dimensions, Harmonization of Vehicle Weight andDimensions Regulations within the NAFTA Partnership, October 1997.
B. Ohlin, 1933. Interregional and International Trade, Cambridge, MA. Harvard UniversityPress.
Prentice, Barry E. and W.W. Wilson., 1998. “Future Transportation Developments in the US-Canada Grains/Livestock Subsector under NAFTA and WTO”. Manuscript.Snow, John W., 1977. “The Problem of Motor Carrier Regulation and the Ford
Administration’s Proposal for Reform,” in Paul W. MacAvoy and John W. Snow, eds.Regulation of Entry and Pricing in Truck Transportation. American Enterprise Institute.pp. 3-46.
Strah, T.M., 1995. “Mexican Truckers Set off Alarms”. Transport Topics. March 13, 7.Transport Canada, Transportation in Canada 1997: Annual Report, Minister of Public Works
and Government Services, Canada 1998.U.S. Department of Transportation, 1997, Comprehensive Truck Size and Weight Study, Vol. II,
Issues and Background.U.S. General Accounting Office, 1997, Commercial Trucking: Safety Concerns About Mexican
Trucks Remain Even as Inspection Activity Increases, April 1997. (GAO/RCED–97– 68)U.S. General Accounting Office, 1997,Commercial Passenger Vehicles: safety Inspection of
Commercial Buses and Vans Entering the United States from Mexico, August, 1997.(GAO/RCED–97–194)
U.S. General Accounting Office, 1996, Commercial Trucking: Safety and Infrastructure IssuesUnder the North American Free Trade Agreement, February 1996. (GAO/RCED-96-61)
U.S. General Accounting Office, 1990. Report on Fares and Reduced Competition atConcentrated Airports GAO/ RCED-90102. Washington. D.C. U.S. Government PrintingOffice.
Winston, Clifford, 1985. “Conceptual Developments in the Economics of Transportation: AnInterpretive Survey,” Journal of Economic Literature, vol. 23, p. 83
Winston, Clifford, Thomas Corsi, Curtis Grimm. 1990. The Economic Effects of SurfaceFreight Deregulation. The Brookings Institute. Washington, D.C.