The US Federal Maritime Commission’s (FMC) decision on October 5 to launch an inquiry into the movement of US-bound container cargo through Canadian and Mexican ports represents a new form of US trade protectionism.

On October 18, US ambassador David Jacobson gave a remarkable speech to the Canadian Club of Ottawa, principally on trade and transportation issues. Ambassador Jacobson tried to moderate and de-couple several unanticipated economic disputes that threaten to overshadow the high level Canada-US effort underway with the Beyond the Border initiative to improve regulatory and border cooperation.

He deserves full marks for sincerity and frankness, and for his effort to frame issues in the wider context of our uniquely successful bilateral economic relationship.

Jacobson delivered unwelcome news on behalf of the Obama administration regarding Canadian attempts to seek exemption from the “Buy America” clause in the US President’s Jobs Bill. He said that the President had to introduce a bill that had a chance of enactment, that possible government investments in projects not covered by NAFTA were minuscule in relation to our huge economic partnership, and that Canada would benefit from a recovery of the US economy.

He noted that President Obama’s Jobs Bill had already been rejected by the Senate because of Republican procedural tactics and that Obama would try to get some parts of it through the Congress individually. Canadian International Trade Minister Ed Fast and others forcefully rejected his argument on “Buy America.”

The ambassador had better news on another front, however.

In Montreal this past September, the chairman of the Federal Maritime Commission (FMC), a small independent regulatory body, announced at the Journal of Commerce’s Canada Maritime Conference that the FMC would announce an inquiry into the issue of US-bound containerized goods moving to their destination via Canadian West Coast ports. This study would be carried out at the request of a bipartisan group of eight US representatives from Washington State and California, as well as two senators from Washington State. This was in fact announced by the FMC on October 5.

Ambassador Jacobson said he had called FMC chairman Richard Lidinsky, who said the FMC is not contemplating any levies, sanctions or tariffs on Canada and that Canadians could participate in the study.

I debated Chairman Lidinsky at the Montreal conference, and Canadian stakeholders should welcome Jacobson’s reassurances and positive contacts with the FMC with respect to the potential imposition of tariffs. But Chairman Lidinsky’s allegations of unfair competitive practices by Canadian seaports and their supply chain partners as a potential cause of the difficulties experienced by US West Coast ports is extremely troubling.

Concerns remain regarding other protectionist issues Lidinsky has repeatedly raised. In Montreal, he spoke of the Harbor Maintenance Tax (HMT) as well as legal questions, security standards at Canadian seaports, rail cost disparities, and port and intermodal infrastructure.

Last year, in testimony before the House Subcommittee on Coast Guard and Maritime Transportation, he spoke less guardedly: “The Commission is also carefully monitoring the diversion of US-bound container cargo to Canadian ports and away from US ports, an issue that has had a growing impact on our West Coast ports. Two years ago, Canada opened a new container port in Prince Rupert, British Columbia. The Port of Prince Rupert, its vessel-operator customers, and the Canadian government have begun an advertising campaign promoting that Canadian port as the most efficient and cost-effective gateway for cargo destined to the US Midwest and beyond.”

He continued: “West Coast ports in the United States are already feeling the impact of this diversion. Yet Canada has said they expect to multiply capacity at Prince Rupert from the roughly 265,000 TEUs [twenty-foot equivalent units] they received in 2009 to between 1.5 and 2 million TEUs by the end of 2010, and perhaps to 4 million TEUs by 2015.”

Lidinsky then sounded a more ominous note: “United States-destined cargo moving through Canadian ports avoids both the US harbor maintenance tax and parts of the US container security regime. We are consulting regularly with US ports and examining the issue of potential unfair practices that would shift US cargo from US ports to Canada. We also have reached out to US Customs and Border Protection (CBP) to discuss and address any potential security impacts.”

While it is true that the FMC cannot itself impose taxes, it will report to Congress, which has great and unpredictable powers.

Senators Patty Murray and Maria Cantwell from Washington State, in asking the FMC for a study, said that non-US container ports are able to claim a substantial per-container cost advantage over US seaports based on the HMT alone: “The results of this unfair disparity are increased cargo diversion and lost US jobs. In addition the HMT is not collected at the land border, resulting in decreased revenue for the Harbor Maintenance Trust Fund…It is imperative that we level the playing field…We respectfully request the Commission to conduct an analysis of the impacts and the extent to which the HMT and other factors impact container cargo diversion…as well as offer legislative and regulatory recommendations to address this concern.”

Chairman Lidinsky said in Montreal that if the FMC found something problematic with regard to the HMT, the FMC would advise Congress; if regarding container security, they would advise Customs and Border Protection; and if with regard to subsidies, they would inform the US trade representative.

In announcing the FMC inquiry, Lidinsky made further inflammatory statements about the overall examination of “diversion” of cargo, including Canadian government plans to increase the capacity of Prince Rupert to 5 million container equivalents by 2020, and the FMC’s intention to study “government-created disparities,” including artificial differences in container inspection practices and costs, rail costs and infrastructure cost investments.

It should be noted that the throughput goals quoted for Prince Rupert by the FMC are unrealistic and have never been endorsed by the Canadian government. Rupert has been open several years, but its capacity is still less than half a million container units. It is tiny in comparison to Vancouver and US West Coast ports.

The FMC’s chairman added at the end of his remarks that his “little study has raised an eyebrow or two recently,” and that he rejected “overheated claims” by “a certain lobby” that anyone had raised the prospect of levies, sanctions or tariffs.

Taking the chairman’s various good cop / bad cop statements and the congressional request for legislative recommendations together, it is hard to see how the Canadian stakeholder and official reaction was “overheated,” given Canada’s history of dealing with imaginative protectionist arguments from south of the border.

Fortunately, and to the extent it matters, all the free track facts are on Canada’s side

It is disappointing that the loaded of trade diversion, which implies a natural or historic right to certain trades, has been deployed, given the joint efforts of Canadians and Americans over centuries to build an integrated market-driven North American economic and transportation system. This has been shaped via numerous bilateral economic treaties — GATT, FTA, NAFTA, WTO — and driven by massive private sector initiative and cross-border interaction, national treatment of almost all of each other’s corporations and enormous investment flows.

Canada has been particularly fortunate that Canadian railways have succeeded in becoming truly competitive North American railways with significant operations in the US. We have also benefited from Canada excellent port management model in competition with American ports.

The success of Canada’s Asia Pacific Gateway and Corridor Initiative (APGCI) has provoked emulation and some envy south of the border, as it has brought significant rewards in trade with Asia. It combined Canada’s geographic advantage, multi-partisan support, smart strategic infrastructure investments linked to international trade, unprecedented federal-provincial-stakeholder partnerships, vigorous marketing in the United States and East Asia and a vision of Canada’s West Coast as the gateway of choice for Asia-North American trade. The US West Coast Collaboration (USWCC), comprising ports and railroads, is based upon the APGCI, but lacks coherent US federal or multi-state leadership because of the complications of the American political system.

Free choice by North American consumers, producers and shippers is the engine driving container transshipment from Asia through Canada to and from the United States. Choice has also brought Canada-bound container cargoes profitably to Eastern markets through US East Coast ports. The chairman of the FMC has said no shipper has ever complained about the US-Canada-Asia supply chain.

There is no closer friend and ally of the United States than Canada in handling international marine container security. We have been full partners in the US Container Security Initiative for years, and the relationship and cooperation between US and Canadian customs agencies is strong. This is not surprising given our history of uniquely close Canada-United States political, security and people-to-people relations through two World Wars, Korea, NATO, continental defence through NORAD, comprehensive domestic security and intelligence cooperation since 9/11, fighting the war in Afghanistan together, and huge investments of people and treasure in the domestic struggle against terrorism. Container security is steadily improving in North America.

Subsidy is a specific term in international trade law that applies to goods and not to services. It is not applicable to generally available national economic services like road, rail and port transportation; educational facilities; tax regimes; or resource, labour and capital endowments, etc. If these fundamentals were considered subsidies, then the playing field would be so level international trade would not exist.

Services are not subject to trade remedy measures. Neither NAFTA nor the WTO provides for countervail or dispute resolution in the circumstances under discussion, other than exhorting freer trade in services. Canada and the United States have pledged repeatedly in G8 and G20 summits to resist protectionist tendencies, a message that has apparently not reached the FMC.

Essential transport infrastructure receives government investment and support in the United States and all other countries. There are myriad examples of US government support for transportation infrastructure, including ports.

The US Department of Transportation’s TIGER (Transportation Investment Generating Economic Recovery) grants closely resemble the APGCI, and US corporate and port officials have spoken highly of the effectiveness of Canada’s APGCI investments.

Last year, a senior Port of Seattle representative testified before the Senate Subcommittee on International Trade, Customs and Global Competitiveness: “If we were to emulate the Canadians and execute a national goods movement strategy, we could improve and make the most of our existing trade infrastructure, create jobs, save billions of taxpayer dollars by ensuring that investments are made in the right place at the right time, and we can do it in a way that minimizes global carbon emissions.”

The recent Obama American Recovery and Reinvestment Act and the new Jobs Bill will pump billions of dollars into transportation facilities. Department of Transportation Secretary Ray LaHood has underlined the need to invest in ports. New APGCI-like projects in the US will contribute in the same way as do Canadian federal and provincial government infrastructure investments in the overall competitiveness of the North American productivity platform. These new American gateways and corridors will pose useful competition to Canadian supply chains.

The HMT is an internal tax on the value of incoming containers. It is an entirely American matter and a divisive one internally. The tax feeds a fund that largely pays for dredging of East Coast ports and recreational facilities, and is anathema to the US West Coast ports on various grounds. Lidinsky has admitted that this is an American problem, that the tax needs reform and the US may have something to learn from Canadian port governance and financial management.

Canada simply has a different system of financial plumbing on our side of the border. Shippers, carriers and port operators pay market price for the use of our ports, including “harbour maintenance.” Obviously, maritime containers transiting Canada could not be subject to extra-territorial double taxation for US harbour maintenance.

Recently, the Journal of Commerce reported a new twist: “U.S. ports, railroads push for a new container tax to ”˜close the land border’ loophole’ …a coalition of six major US west coast ports and two major railroads argue that the US should collect a tax on US bound containerized cargo that lands at a foreign port to make up for losses of Harbor Maintenance Tax revenue.” Both measures would be starkly inconsistent with Canadian trade and tax treaties with the US.

What next?

Despite the advantage of rationality in Canada’s case, it would be unwise in the current context of US weak growth, election campaigns and toxic relations between the administration and Congress to dismiss the possibility of congressional action, an issue that the FMC has regrettably raised.

This is a core Canadian interest. Billions of dollars of trade pass weekly through these supply chains, and anything that would reverse the Canadian, and with it North American, success of recent years would be highly damaging to North American consumers, producers, exporters, importers and shippers. As this scuffle may affect partners’ confidence in Canada’s carriers and ports, it needs to be resolved quickly and in a civil way.

In the short run, Canadian private and public stakeholders will need to work together to present the facts to the FMC, particularly shared arguments and agreed data. More importantly, American consumers, importers, exporters and shippers, need to be mobilized to appear before the FMC in favour of market-driven North American transport networks and against local protectionism.

In the longer term, the current swirl of Canada-US economic issues should remind Canadians of some fundamental truths in the relationship: the fundamental asymmetries of size and political system; the frequent occurrence of unexpected, painful issues coming from south of the border; the futility of linking issues when dealing with a dis-jointed superpower; the importance of activating congenial US domestic constituencies; the constant attention required to regional factors; and the importance of utilizing trustful personal relationships at all levels.

There is nothing more important than strongly supporting the two governments’ shared bilateral vision for perimeter security and economic competitiveness, which is embodied in the Beyond the Border initiative announced earlier this year by Prime Minister Harper and President Obama.

Based on past experience, there will be difficulties in mobilizing American attention, political will and inter-agency cooperation. As it did in the Ridge-Manley 9/11 border process and the trilateral Security and Prosperity Partnership, Canada will have to do much of the heavy lifting and will pay the price if it does not do so. Ideally, better mechanisms will develop to channel and handle issues of stealth protectionism like the current maritime container dispute. Perfection will remain a goal, not a fact.

The United States is, and will always be, Canada’s most important trading and transportation partner. Our rail, port, highway, air, pipeline and electrical links with the United States are a bilateral treasure — the physical embodiment of our huge bilateral economic relationship. These links need coordinated high level government attention and support in all bilateral negotiations and discussions.

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