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Security vs. Commerce in U.S.-Canada Trade

By Tim Triplett, Editor-in-Chief

Do current regulations strike the right balance between border security and the free flow of trade between Canada and the United States? No, asserted panelists at the Metals Service Center Institute’s Forecast 2012 conference Sept. 13 in Chicago.

Sidebars:

Economy to Gain Strength in 2012, But Pace of Recovery ‘Disappointing’

Appliance Sector Suffers Along with Housing

Long-Term Prospects Good for Auto Industry

Companies that move goods across the border between the United States and Canada have paid a sort of “terrorism tax” ever since 9/11, a toll that is becoming increasingly irksome. The cost of security and its numerous regulations has added billions to the cost of trade over the past decade, raising the question: What is the proper balance between safety and commerce?

An estimated $520 billion in goods passes over the border each year, and $75 billion is wasted due to delays resulting from security measures, said Wayne Bassett, president and CEO of Samuel, Son & Co., Ltd., Mississauga, Ontario, one of four executives on MSCI’s panel on U.S.-Canadian trade. More than one-third of the material that crosses the border is moving from one company’s branch to another, yet the same standards are applied to all of it for security purposes. “Security comes before trade, which is an issue,” Bassett said.

“Yes, we do need a secure border, but we should also be able to allow for the free flow of trade,” said Satinder Chera, vice president, Ontario, of the Canadian Federation of Independent Business, noting that about 200,000 people and $1.6 billion in goods pass through the border every day.

Marmon/Keystone, a leading pipe and tube distributor, has facilities in both countries. Moving materials across the border is a huge problem for commerce, said Norm Gottschalk, president of Butler, Pa.-based Marmon. “The paperwork is cumbersome and if there is a mistake it takes forever to correct it.”

After 9/11, the American government determined that security must trump trade, said Brian Herman, consul and head of political, economic and public affairs for the Consulate General of Canada. “Somehow we have to find a way to make sure the lifeline of goods and services that crosses the border is not interrupted while security is maintained.
We must link the security of the border with economic
competitiveness.”

The bureaucracy and red tape are particularly troublesome for the many small businesses involved in cross-border transactions. “It is important for both countries to have a trade policy that is closely aligned with the needs of small and mid-sized businesses,” Chera said.

Pro-manufacturing groups in both countries should join forces to apply political pressure for rules changes that make more common sense. Regulations can be better coordinated and streamlined without sacrificing security, the panelists agreed. Indeed, as of press time, U.S. and Canadian officials reportedly were near a new trade pact designed to rework security procedures and ease some of the bottlenecks at the border.

It is important to understand the integrated nature of the U.S. and Canadian economies, explained Herman. For example, Canadians “feel sideswiped” by American appeals for less dependence on foreign oil. Canada does not consider its energy resources as “foreign.” Canada supplies 22 percent of the oil and gas consumed in the United States, and 90 cents of every dollar America spends on Canadian oil ends up back in the U.S. in some form. “We see this as a North American reserve that will benefit both of our countries,” Herman said.

Canada may be on stronger fiscal ground than the United States, but the performance of its manufacturing sector has lagged that of the U.S., Bassett noted. The Canadian government has taken steps to support manufacturing, such as a two-year write-off on capital expenditures, reduced business taxes and more support for R&D. “They have now made manufacturing a priority,” he said, which stands to benefit both countries.

Just like in the United States, Canadian officials are debating where to cut spending and how to fund stimulus programs, Chera said. Long-term, the Canadian government views diversification as important to the country’s future, to encourage trade with other countries and reduce Canada’s reliance on the American market. “We can’t count on the U.S. to pull us out if it this time,” he added.

Herman pointed to infrastructure issues that need to
be addressed cooperatively, such as upgrading the bridge that crosses the border at Detroit/Windsor. “Our governments need to do what they can to make the border more
efficient.”

With the weak U.S. dollar and the trend toward reshoring, North America can be very prosperous in competition with other parts of the world, he added. “We need to get away from the idea that Canada and the United States compete with each other. We need to work together to better compete with emerging markets like China.”

“North America is a trading bloc. We are all in this together. If one of us is successful, the others will be as well,” Bassett agreed.


Economy to Gain Strength in 2012, But Pace of Recovery ‘Disappointing’

Even though the Great Recession technically ended in June 2009, the economy has grown at a “very disappointing” 1.5 percent pace since then. “The normal bounce back from recession is just not happening,” said William Strauss, senior economist and economic advisor for the Federal Reserve Bank of Chicago, who addressed a large gathering of service center and mill executives at MSCI’s Forecast 2012 conference Sept. 14.

The U.S. economy will see GDP growth around 2.5 percent in 2012, he predicted, up from 1.3 percent in 2011. “That’s decent, but we should be looking at more impressive growth coming out of a recession.” Recoveries from past recessions have seen the economy surge by 6 percent or more, he noted.

Weighing on the economy are sluggish consumer demand, a persistent lack of job growth and a stagnant housing market. Existing home prices are down over 25 percent and the stock market continues to trade below previous levels, “so people don’t feel as wealthy,” Strauss said, which restrains consumer spending.

The economy has added only 1.3 million jobs in the past year, barely enough to keep pace with the rising population and new entries into the workforce, let alone put a dent in the high unemployment rate. So far the jobs recovery has been the slowest since the 1930s, Strauss said, forecasting unemployment of 8.7 percent next year, just a slight improvement from the current 9.1 percent.

The issue of jobs creation will be central to the political debate in the upcoming presidential election, he predicted, noting that FDR was the only president ever re-elected while the country was facing an unemployment level over 7 percent.

Contributing to the disastrous labor situation is a housing market where new-home construction continues to suffer from the glut of properties built in the pre-recession boom. Strauss forecasts housing starts will grow from around 593,000 in 2011 to 714,000 in 2012, “well less than half of what trend should be.” The housing recovery and the jobs that come with it could take years to materialize, he said.

On the positive side, despite what appear to be high energy costs, oil prices are actually below levels of 30 years ago when adjusted for inflation. “People can deal with $4 a gallon gasoline better today than people could deal with $1.35 a gallon in the early ’80s,” he noted.

Manufacturing has led the economic recovery, averaging 6.5 percent growth each month for the past 25 months. The automotive and primary metals sectors were two of the hardest hit during the recession and today are two of the fastest to rebound, he said. The auto industry is expected to produce 12.7 million vehicles this year and 13.4 million in 2012, a relatively healthy growth rate.

Core inflation (the rate minus volatile food and energy prices) remains low, which means the government can continue its stimulative fiscal policies. The Fed is likely to keep interest rates near zero through 2013, Strauss said. “It is our view that the sluggish outlook will keep low interest rates justifiable.”


Appliance Sector Suffers Along with Housing

The beleaguered U.S. housing market is taking the appliance sector along for the ride—and it’s no joy ride. “The economy in general is probably not in a double-dip recession—but we are,” said Neil Cline, economist with Whirl-pool Corp., describing current appliance demand for attendees at MSCI’s Forecast conference.

Sales of home appliances, such as refrigerators, freezers, ranges and laundry machines, are highly dependent on new-home construction, as well as sales and remodels of existing homes. In 2005, there were 2.1 million housing starts in the United States; in 2009, just 554,000—a 73 percent decline. Existing home sales declined by 30 percent in a comparison of the same two years. So far in 2011, appliance shipments are down 5.7 percent. Current shipping levels are even below those of 2009, Cline said.

Most economists forecast some improvement in the economy in 2012, but that won’t necessarily translate into new residential construction. “We have talked to builders and they are not enthused about 2012. If you listen to builders and you listen to economists, you get different stories,” Cline noted.

Indeed, the country’s unemployment situation may even be worsening. “One of the factors that worry me a lot is that we are not creating jobs. Forty thousand jobs a month is nothing. The U.S. economy is truly sputtering right now,” Cline said. Likewise, consumer confidence has plunged in recent months. “It is just as bad as it was during the teeth of the recession.”

The federal government injected $300 million into the market in 2010 through its Energy Star program, which gave consumers an incentive to replace older, less-energy-efficient appliances. It worked, boosting demand by 2.5 percent. But that was last year, Cline said. “In 2011, it is contributing to the negative growth. It was an unfortunately temporary government stimulus.”

If conditions remain the same, the appliance industry could see 3 percent growth in 2012. If the housing market improves, perhaps 4 to 5 percent. “2012 will be the first of a few years of moderate growth, but it will take many years for the industry to get back to the 47 million unit level of its peak in 2005-06,” he said.


Long-Term Prospects Good for Auto Industry

The U.S. auto industry is faring better than the economy in general today and long-term prospects for carmakers and their suppliers are very positive, said Jim Gillette, director in the IHS Financial Services Group, who spoke at MSCI Forecast Sept. 14. “The shakeout [from the recession] was far less draconian than I and others imagined.”

Only 8.6 million vehicles were produced in 2009, “an absolute disaster for the industry,” Gillette said, down from over 15 million in 2007. IHS projects industry production will get back up to 12.9 million vehicles this year, including some replenishment of lean inventories. U.S. exports of cars and light trucks will top a million units, due in part to the favorable trade effect of the weak U.S. dollar. “But to see booming sales, we are going to have to wait a few years yet,” he added.

Globally, light vehicle production is expected to hit 76 million units this year and exceed 100 million by 2017. “That’s a lot of metal and plastics,” Gillette noted.

To capture new production efficiencies, automakers are designing more vehicles that will use a common global platform. Combined with mandates for greater fuel economy, this will accelerate the trend toward smaller vehicles in the United States. The current U.S. target of about 36 miles per gallon for the average vehicle is readily achievable, Gillette said. “Almost every manufacturer has the technology to meet that goal.”

And it is not all about electric cars. “Rumors of the demise of the internal combustion engine are greatly exaggerated,” he said. “You see a lot of technologies extending the life of the gasoline engine,” such as gas direct injected systems and turbochargers. By 2017, almost 30 percent of U.S. vehicles will have smaller turbocharged engines, IHS predicts.

Lightening of vehicle designs will continue with greater use of aluminum and high-strength steels. Weight reduction and new power train technologies will be the keys to regulatory compliance. “In the future, you won’t sell as much steel per vehicle, but you will sell a higher-value-added alloy on which you can make a good profit,” Gillette said.

  
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