Cross-border trade using surface transportation (e.g. truck, rail, pipeline) between the United States, Canada and Mexico dropped 35.4 percent in May as compared to 2008 levels, the largest year-over-year decline on record for the North American Free Trade Agreement partners, according to the Bureau of Transportation Statistics of the U.S. Department of Transportation. Trade volumes declined for the eighth consecutive month. Imports from Canada and Mexico to the United States were down 38.1 percent in May 2009 from May 2008 while exports from the United States declined 32 percent. The value of North American surface trade dropped to $47.9 billion in the fifth consecutive month with a year-to-year decline of greater than 27 per cent.

Trucks carried 72.4 percent of the total. The value of imports carried by truck was 35.7 percent lower, while the value of exports carried by truck was 33.4 percent lower during this period.

U.S. – Mexico surface transportation trade totaled $18.6 billion in May, down 26 percent compared to May 2008. The value of imports carried by truck was 23.4 percent lower, while the value of exports carried by truck was 21.1 percent lower than in May a year ago.

Freight volumes in 2008 were down from the previous year as well. Traffic across the Ambassador Bridge, that links Detroit and Windsor, Ontario, the busiest border crossing, declined 15% in 2008 from the 2007 levels.

Although the July 2009 Ontario - U.S. truck traffic numbers remain lower than last year, the good news is that the month-to-month downward spiral throughout 2009 seems to have stopped. Recent numbers released by the Public Border Operators Association show that there 482,520 commercial truck crossings between Ontario and U.S. border states in July -- down nearly 25% from the same period in 2008, but relatively flat from June 2008 (483,450).

This blog will examine some of the forces at play with respect to NAFTA traffic to see if there is any reason for optimism.

Large Drops in Key Trade Sectors

There are two key business sectors that have been very hard hit. They are housing and automobile purchases. The severe downturn in new home purchases was compounded by the imposition by the U.S. of a 10 percent tariff on imports of softwood lumber products from Ontario, Quebec, Saskatchewan and Manitoba as a result of Canada’s alleged failure to comply with the Softwood Lumber Agreement. Softwood lumber is one of Canada’s largest exports to the U.S. representing $8.5 billion in 2005.

U.S. - Canada trade since 1965 has been dominated by auto parts and whole autos of US domestic brands and the recession combined with the massive disruption by the bankruptcies of GM Corp. and Chrysler Corp. has had a major impact on trade and sales. For many consumers, the purchase of an automobile can be deferred and has been deferred. The U.S. border states and Ontario, with their large auto and auto parts manufacturing industry layoffs, have been hardest hit.

There is some good news on both fronts. The release of the surprisingly strong Case-Shiller Price Index, compiled by Standard & Poor’s, followed earlier reports that sales of existing homes in the United States rose in June for the third consecutive time, while sales of new homes rose in June by the largest percentage in eight years. After a plunge lasting three years, houses have finally become cheap enough to lure buyers. That, in turn, is stabilizing prices, generating hope that the real estate market is beginning to recover.

While retail sales in July were disappointing, auto sales grew by 2.4%. August sales are expected to be even better. The “Cash for Clunkers” car trade-in scheme which gives Americans up to $4500 (U.S.) to replace their old car with a new one appears to be gaining traction. Pressure is now building on Canada’s federal government to initiate a similar program.

The U.S. “Buy America” Policy

The US$787 billion stimulus package, signed into law by President Obama, includes the proviso that all iron, steel and manufactured goods for the “construction, alteration, maintenance or repair” of public infrastructure projects must be U.S. produced. There is evidence that some U.S. distributors are refusing to stock construction products due to a concern that they won’t get government contracts. While the NAFTA agreement is supposed to prevent this from happening, these obligations do not seem to have the same impact at the state and municipal levels. As a result, some Canadian companies are being blocked from gaining access to these Recovery Act funded projects. More “Buy America” provisions are expected to be inserted in future U.S. appropriation and authorization legislation in the months to come.

Meanwhile, at this week’s NAFTA Summit, President Obama seemed less enthusiastic about quelling Canadian anxiety over U.S. protectionist policies. The President downplayed the impact of “Buy America” and said it is an isolated issue that does not affect the majority of trade between Canada and the U.S. Prime Minister Harper will likely continue to press President Obama on this issue.

Surge in Canadian Dollar

The Canadian dollar drifted down below $.80 U.S. in March of 2009 and has rebounded to $0.91 - $0.93 range in recent days. This is hindering Canada’s export traffic to the U.S.

The Mexico Issues

Meanwhile, U.S. - Mexico trade has benefited from Mexico requiring imports from the U.S. for materials and mid-level components to complete major exports. Mexico has benefited from Texas' economy. The second-largest state economy in the U.S., the Texas economy was the strongest in the U.S. for the last six months, and among the latest to reflect the impact of the U.S. economic slowdown and national unemployment trends. Texas is Mexico's largest and strongest U.S. state trading partner.

However, under the North American Free Trade Agreement passed in 1993, the U.S. is required to open its border to Mexican and Canadian carriers who meet U.S. trucking standards. The Canadian border is open; the Mexican border is not. Yielding to pressure from the Teamsters union (who fear loss of jobs) and safety advocates (who fear unsafe Mexican trucks), the pilot program allowing Mexican-domiciled trucks to deliver freight in the United States was stopped last year in an overwhelming vote by the House that gave a resounding “no” to Mexican trucks. Soon after the program was eliminated, the Mexican government said it would place tariffs on roughly 90 American agricultural and manufactured exports as payback for the U.S. decision to shutter the program. These tariffs amount to $2.4 billion of American goods, ranging from fruit juices to pet food to deodorant, among others, ranging from 10 percent to 45 percent, with affected products coming from 40 states, according to a Los Angeles Times report from earlier this year.

A published Bloomberg report said that President Obama told President Calderon at this week’s NAFTA Summit that he is determined to resolve this ongoing dispute. Bloomberg said that Obama will also address safety concerns that have been raised by the U.S. Congress. Mexican President Felipe Calderon told Obama that this dispute has hurt trade, raised consumer costs, and reduced job creation, according to the Bloomberg report. He also added that removing restrictions preventing Mexican trucks from delivering goods across the border is a top concern.

Is a Turnaround in Sight?

There are some encouraging signs. As stated above, Ontario-U.S. cross-border volumes have stabilized over the past 2 months. There are positive signs on the housing, auto sales and unemployment fronts in the U.S. President Obama backed off campaign pledges to "amend" NAFTA and promised he would do what he could to re-launch the Mexican cross-border truck project. There were reports last month that a new trucking proposal has gone through the interagency channels and will be passed along to Capitol Hill for a vote.

The question is whether Canada’s high dollar and the U.S. “Buy America” program will offset some of the positive developments that appear to be under way. The three NAFTA countries will be studying the trade indices carefully over the coming months to see if a turnaround is taking shape or if we will continue to see a downward trend in NAFTA freight volumes.