Obsolete Regulations Restrict Value-added Agricultural Exports

Commentary, Trade, Frontier Centre

New governments are more likely to take stock of existing policies and regulations than an entrenched regime. This is valuable because the economy is dynamic, while regulations, almost by definition, are static and exist to limit certain activities. As a result, economic regulations that may have been thoughtful and successful when introduced can become illogical and destructive over time. Instead of supporting the policy goals of the government, obsolete regulations can impede programs and efforts to adjust to new economic realities. A fresh administration provides an opportunity to overcome the inertia of regulatory systems and remove policy inconsistencies.

An important example exists in the regulatory impediments to the container shipment of value-added agricultural products. The increase of value-added agricultural exports is a longstanding policy objective of the Government of Canada.¹ Moving agriculture up the value chain is necessary to confront the surge of commodity-market competition from South America and the former USSR, and the export subsidies of the U.S. and Europe that have depressed commodity prices.

Value-added exports can help improve farm incomes, but they require better quality transportation and logistical services. With the exception of NAFTA trade, Canadian exports of value-added food products use intermodal containers. International container shipping is expanding rapidly and costs are falling. Annual growth rates for loaded containers through the west coast ports are forecast to grow at 10 percent annually over the next ten years.² This trend and rising incomes in Asia provide the opportunity to increase value-added food exports from Western Canada.

For perishable food products refrigerated containers are essential, but regular containers also offer advantages for grain and special crops. Containers can maintain identity preservation, offer complete traceability and deliver the efficiency of just-in-time supply chains. Identity preservation and traceability are rising in importance because of security issues and the greater differentiation of crops. Containers enable farmers to shift from commodity markets to segmented markets that pay more, with minimal differences in the cost of crop production.

The volume of grain shipped in containers is increasing, but federal regulations impede the growth and development of global supply chains. Customs rules on the use of foreign containers in domestic markets (cabotage) inflate costs, and the Canada Transportation Act (CTA) 2000 biases the railways against the shipment of grain in containers.

Canada Customs regulations on international containers are more restrictive than in the United States, where containers can circulate for 365 days and are treated like “re-useable packaging.” In Canada, international containers must exit after 30 days, and their use for moving goods point-to-point within Canada is very restricted.

Container cabotage restrictions make it more expensive to reposition empty containers in Western Canada for the shipment of grain. Erica Vido examined the impact on lentil exports of harmonizing Canadian container regulations with U.S. practices.³ She found that easing container cabotage restrictions would reduce costs and increase lentil exports by $10 million annually. Lentils represent about 20 percent of special crop exports, and 2.5 percent of all grain and oilseed exports. The impact of reforming Canada Customs regulations on container cabotage could increase value-added grain exports between $50 million to $400 million annually.

The railways’ bias against the containerization of grain is an unintended consequence of the Revenue Cap imposed on the railways under the CTA. The Act imposes a limit on the revenue the railways can earn from grain transportation, but has no reference to cost. Containerized grain costs the railways more to move than bulk shipments of grain in unit trains. Grain in containers also generate more revenue per tonne than bulk, but this a disincentive for the railways. Moving more grain in containers just reaches the Revenue Cap faster. Consequently, every container of grain carried imposes a financial penalty on the railways relative to the profit they could earn if the grain were shipped in bulk.

Regulations are blunt instruments. Container cabotage regulations and the CTA Revenue Cap are in conflict with the policy of encouraging value-added agriculture exports. The Revenue Cap should be revised to apply strictly to bulk movements and allow containerized grain to move freely. Farmers do not need any artificial protection for container movements. The large container shipping lines negotiate the rates paid to the railways for inland movement, and their market power ensures equitable treatment.

The Customs Rules that restrict the movement of international containers are anachronistic and protect no Canadian industry. The Canadian regulations should be harmonized with the U.S. regulations to create a single North American market. With the stroke of a pen, the costs of intermodal transport could be reduced throughout the economy and millions of dollars could begin flowing towards farmers’ pockets. Surely, the benefits of higher incomes for Western Canadian farmers should trump the questionable value of restricting the use of containers for value-added exports.

Dr. Barry E. Prentice is a Professor of Supply Chain Management at the I.H. Asper School of Business at the University of Manitoba.

¹ Putting Canada First. An Architecture for Agricultural Policy Framework (APF) for Canada.

² WESTAC Forecasting conference, December 7-8, 2005, Vancouver.

³ Erica Vido, “Container Cabotage Policy, and Its Impact on Western Canadian Pulse Exports,” M.Sc. Thesis, University of Manitoba, 2004.