A Border Tax Would Take Its Toll

Could a proposed new border fee lead to a tipping point?

Under intense budgetary pressures, Washington is looking for easy ways to make money.  Border watchers were therefore not surprised to hear that the U.S. Department of Homeland Security is considering slapping a new tax on pedestrians and passenger vehicles at border crossings.

The just announced budget proposal is drawing ire from both sides of the border. Politicians and business leaders are arguing that it is not in anyone’s long-term interest. Most research on the border supports this position. Anything that impedes legitimate cross-border interaction is likely to have negative consequences for our tightly-integrated economies and societies. And it is not clear that it will have an improved security impact – which is again top of mind after the Boston marathon attacks.

Here’s why such a proposal – if it comes to fruition – matters.

The U.S. will continue to be Canada’s largest trade partner for the foreseeable future. Our study What Might Canada’s Future Exports Look Like? shows that the emergence of fast-growth markets is reducing our share of trade with the U.S. market, but it will still be our most important trading partner by 2025.  

Low-cost access to the U.S. matters a lot for Canada and Canadians. For one, relatively free access to the U.S. provides Canada with far greater growth prospects than if the country were confined to selling to its relatively small domestic market. The evidence shows that relatively open access to the U.S. has substantially improved Canadian living standards beyond what they would otherwise have been.

We need to be able to move people and sell expertise. The proposal would certainly hurt cross-border shoppers and the U.S. states that rely on their purchases. But it extends far beyond this. Canada’s fastest-growing exports are not goods, but services and expertise, as our recent report Walking the Silk Road: Understanding Canada’s Changing Trade Patterns shows. Examples include financial services, and engineering and architectural services, not to mention expertise that is part and parcel of buying goods or resources. Selling this expertise requires moving people across the border – sometimes by plane and sometimes by car.

Small border cost increases can have large effects. Small increases in cross-border trading costs may sound relatively minor. But they matter – and more so for Canada. Goods and people often cross the border repeatedly, magnifying any cost increases.

Over time, we may reach a tipping point. One border fee may not affect a decision to travel to the U.S., but when one is added to the others, this may tip the balance in favour of not going. This could negatively impact the U.S. economy, and impede Canadian companies’ ability to sell both our goods and expertise in the U.S.

Moreover, Canadian companies face competitive pressures beyond North America. The rise of large developing countries such as China has led to intense global competition. Added to this are pressures from the rapid appreciation of the Canadian dollar over the last few years. In such a highly competitive environment, even small costs can tip the balance away from companies investing in Canada to serve the North American market.

If Washington wants to boosts government revenue and drive U.S. economic growth, instead of studying a new border fee, it might want to look at the impact of going in the opposite policy direction. A more forward-looking avenue might examine the impact of opening up the Canada-U.S. border to greater mobility of low-risk people. This could possibly help to alleviate unemployment, plug skill shortages, focus security attention on higher-risk individuals, and boost cross-border trade – especially of services.