A host of challenges faces Canadian exporters to the U.S. market – an 80-cent Canadian dollar, border infrastructure bottlenecks, shrinking truck capacity, rising freight costs… But as U.S. legislators continue to fortify the backbone of their border security programs, the Customs-Trade Partnership against Terrorism (C-TPAT) still heads the list of shipper concerns.
Ask Patrick Jones, spokesperson, U.S. Customs and Border Protection (CBP) what Canadian exporters should expect from C-TPAT as it evolves over the coming months. His response: “I don’t think that Canada really has to worry.”
Easy enough to say, but even with CBP’s intention to keep C-TPAT voluntary, Canadian exporters who are serious about maintaining efficient movement of goods between the countries have to consider whether they can afford not to be C-TPAT approved. As George Kuhn, executive director of the Canadian Freight Forwarders Association, puts it, “It’s not mandatory, and may not be in the future, but anybody in his right mind will want to participate if they want to conduct normal cross-border business.”
What Kuhn has to say about C-TPAT, he frames in the context of America’s current mindset: “We have to of course remember that the American government is paranoid. So if we accept that premise per se, this translates into the U.S. wanting as much border control as possible. At the same time, U.S. Customs recognizes that they cannot stifle trade because that is, after all, an economic lifeline.”
In his opinion, C-TPAT is charting that line between competing interests relatively well. If the importer is known, if the carrier is known, if the commodity is known, if all this information about U.S. bound shipments is verified, then, in theory, the goal of reduced inspections and wait times for products crossing the border should be the reward. It is preemptive work done at the front-end replacing inspection work at the border. “The U.S. is now working on a gold C-TPAT membership level with even tighter requirements, which if met will allow even faster processing. So you really have three levels – the gold level, the standard C-TPAT level and the non-members, who will have to succumb to a lot of inspections and additional scrutiny and will have to reckon with delays,” Kuhn says.
According to Jones, over the course of C-TPAT’s three-year history, CBP has identified some best practices from a variety of industries engaged in global commerce, which it is now using as a baseline. “You could also say that the program is becoming a little more transparent in terms of what is expected of business.”
Currently, C-TPAT applicants can expect a four-part process: signing a memorandum of understanding; submitting a document detailing the security practices of their trading partners and summarizing the security practices of their service providers and overseas suppliers; a CBP review; and either provisional acceptance or a request to improve the security plan. At some point after the final step, a site inspection verifies the company’s claims. But since C-TPAT membership has expanded to include ocean carriers, freight forwarders, customs brokers, port authorities, and, most recently, foreign manufacturers, U.S. Customs resources are being stretched thin. Manufacturers report wait times of three or more months before CBP acknowledges receipt of their memorandums of understanding. The entire application process can take well over a year.
The Price of Secure Trade
Trade experts agree that Canadian/U.S. cross-border trade today is more difficult and more costly than it used to be. Canadian shippers have little choice but to work with U.S. initiatives to improve their supply chain security in order to reduce the risk of terrorist attack. But are C-TPAT approved shippers actually getting value from their hard-earned status?
Bob Ballantyne, president of the Canadian Industrial Transportation Association, says that anecdotally – judging from what he has heard amongst his 100 member companies that buy freight transportation – “Most of them are not getting much out of C-TPAT. There are a few that are. They’re the early ones to register and are now starting to reap the benefits. But there are a lot of links in the chain. Even if a shipper is registered with the C-TPAT and FAST (Free and Secure Trade) programs, there’s still the suppliers, the trucking company and the truck driver that also need to be registered.”
A weak link in the chain of C-TPAT approvals is turning out to be individual drivers, according to Dan Carruthers of Wheels International Freight Systems. The general manager of this Canadian third-party logistics provider (3PL) suggests that as the truck driver demographic changes, C-TPAT approval can become a roadblock for many new drivers. “As North American drivers get older, they’re not necessarily being replaced by people born in Canada or the U.S. The people who have stepped into that role – particularly in Canada – are immigrants. So you’ve got Europeans, Middle Easterners, Pakistanis, people from India and Asia becoming drivers and this demographic, in the context of the C-TPAT process, is not an easy one,” he says. “Because of this paranoia about terrorism and all the information about peoples’ origins being required, many of these drivers are worried. There is no Court of Appeal. If you lose your right to enter the U.S. as a truck driver, you cannot go into the States period.” The result is fewer drivers for cross-border lanes, further exasperating the current trucking industry driver shortage.
Despite the rising Canadian dollar versus the U.S. dollar, despite the delays at the borders and the higher cost of crossing borders, Carruthers echoes economic and industry experts when he says cross-border trade is up and capacity is tight. “Typically, shippers try to deal directly with carriers, thinking they would have more control. They would use third parties like us only to fill in the gaps. But all of a sudden through the summer of 2004, we’re getting a lot more calls from shippers who now have run out of carrier direct sources. They just can’t phone enough companies and entice them to do the loads for them. So rates are also going up,” Carruthers says.
Apart from the direct costs of the C-TPAT participation, which has been estimated anywhere from thousands of dollars to hundreds of thousands of dollars depending on a company’s size and the complexity of its supply chain, there are indirect costs. Rising freight costs can be, in part, attributed to C-TPAT’s effect on supply and demand issues in trucking as smaller haulers pull out of U.S. lanes after weighing the importance of that component of their business against the investment they would require into C-TPAT to do it more efficiently.
John Ferguson, chief marketing officer for PBB Global Logistics Inc., which provides a full range of 3PL services, says, “It’s getting to a point now that you have to have that badge, that C-TPAT brand, associated with your company to deal with other businesses in cross-border trade. That is something that we’ve always maintained – that C-TPAT would become like an ISO banner. It’s another quality measure and there are a lot of intangible, unwritten benefits to it.”
A World Standard
Carol West, president of the Canadian Society of Customs Brokers, says that among her U.S. colleagues there runs a fear over what another terrorist event might do to even C-TPAT approved participants. The answer, she says, lays in expanding C-TPAT into a truly global standard.
“We’re not just talking about a number of shippers, manufactures and transporters being C-TPAT approved. We’re talking about the evolution of authorized supply chains,” West says. “That’s carriers being authorized, customs brokers being authorized, warehouse operators being authorized. That way, there is a greater level of assurance that goods will keep moving even under the most dire circumstances. If we have standards that are truly global and endorsed in consultation with busines
s, we would have the level of predictability that is important in doing international business.”
In fact, this appears to be the direction the CBP is headed. “The ultimate goal is to create a line of security from point of origin of the merchandise to the U.S. port,” Jones says. “For those companies that can demonstrate they have a completely secure line there will be no inspection. It’s going to take technology and, to some extent, agreements with foreign companies, governments, agreements with various labor groups and input from business. It’s a big undertaking. But we believe that the ultimate result will be both greatly improved security and a much more efficient flow of commerce.”
Strong Loonie is a challenge for exporters but also an opportunity
Currencies fluctuate. Trade experts may not endear themselves to Canadian exporters to the U.S. by advising them to improve their processes rather than depending on a favourable exchange rate to be competitive, but that is what they’re saying. And it seems Canadian companies are doing just that.
“When the dollar moved from 62 cents into the 70-cent range, everybody was screaming that exports were going to get killed,” says Jay Myers, chief economist with Canadian Manufacturers and Exporters. “But, in fact, Canadian exports had increased last year.” For Myers, a 70-cent Loonie represents a return to normal, but an 80-cent dollar is something else entirely and many Canadian business sectors are feeling the squeeze.
As for currency predictions, Myers expects the Canadian dollar to stay between 80 and 85 cents this year. He hinges the Loonie’s fortunes on the U.S. dollar’s weakness and Canadian interest rates not going up because of a general slowdown in Canadian economic growth this year.
Stephen Poloz, senior vice president and chief economist, Export Development Canada, on the other hand, says, “My prediction is that the Canadian dollar will average something like 77 or 78 cents on the U.S. dollar this year. That’ll come as a result of oil prices gradually returning to normal and rising interest rates in the U.S. while Canadian interest rates remain unchanged.” In his view, an 80-cent dollar is a temporary phenomenon partly fueled by the current obsession with the big U.S. current account deficit – which doesn’t particularly alarm Poloz.
He says the industries hardest hit by a strengthening Canadian dollar are the thin profit margin products easily made in other countries: apparel, leather goods, footwear, furniture and fabricated metals. He also points to companies whose supply chains are not globalized.
“The average Canadian manufactured item has over 40% imported content. The more foreign content you have the more insulated you are from the currency fluctuations. It is as though you’re naturally hedged because as the Canadian dollar goes up, you’ve got more buying power and your imported inputs cost you less. You are getting squeezed on your Canadian dollar revenues on U.S. dollar sales, that is true, but the other side of the page is this effect on the input costs,” Poloz says.
Most of the strategies for coping with the strong Canadian dollar start with examining company efficiencies. CIFFA’s George Kuhn says, “Many Canadian exporters are simply putting everything on a truck. They don’t think beyond that. But railroads have become very sophisticated in offering various plans and exporters should take more advantage of that, especially when shipping beyond 500 kilometers.”
Myers points to the fact that as the Canadian dollar strengthened so have other world currencies. So opportunities to export to other markets beyond the U.S. should not be overlooked.
Poloz suggests following an “integrative trade model,” where Canadian companies take advantage of the current strong Canadian currency position to invest into foreign manufacturing facilities, as did the U.S. when its dollar was strong. “The key to success is to get China working for you,” he says. “If you’re making chairs, you don’t make the screws to hold it together. You buy them from a supplier. So take that simple idea and extend it to all the other bits and pieces you’re making for that chair.”
Veteran writer Paul Stastny combines his transportation background with his education in political science and international trade to write about supply chain management and transportation issues. He has a deeply rooted understanding of the industry drawing on his past experience as a risk manager/marine underwriter of freight forwarders and motortruck carriers.