By Theo van de Kletersteeg

The Federal Maritime Commission (FMC) recently released the “Study of U.S. inland containerized cargo moving through Canadian and Mexican seaports”. The report examined three questions, namely:

1. Are there any legal or regulatory bars to the carriage by sea and movement of U.S. inland containerized cargo entering via the Canadian or Mexican border?

2. What are the competitive factors that would cause a U.S. importer or exporter to route cargo through ports in these adjacent nations?

3. To further enhance the ability of U.S. ports to compete against these cross-border ports, what can Congress do to help create a “level playing field?”

With regard to the first point, the Commission states categorically that “Our findings conclude that carriers shipping cargo through Canadian and Mexican ports violate no U.S. law, treaty, agreement, or FMC regulation.”

As for competition between ports, the Commission makes its position reasonably clear when it says that “ … the fact that each container requires, on average, a $109/FEU fee to use a U.S. port places those ports at a competitive disadvantage before the container has even been off-loaded.” (US$109/FEU is the ascribed average cost to an importer of importing a container into the U.S. through a U.S. seaport, by virtue of payment of the required Harbor Maintenance Tax (HMT).)

The Commission observed that (as far as containerized cargo is concerned) unlike seaports in the U.S., Prince Rupert was developed to focus exclusively on intermodal cargo, “thereby achieving natural efficiencies of cost, time, and space that benefit the port users.” The Commission credits Canada’s Asia-Pacific Gateway Corridor initiative, and the Corridor’s enabling rail connectivity. Prince Rupert’s on-dock rail facility “allows containers to be loaded directly to the ship to double-stack railcars, permitting intermodal trains to leave the terminal within hours (rather than days) of a ship’s arrival. In short, at its present scale of operation, the Fairview Container Terminal in Prince Rupert is viewed by its supporters as a simpler, cheaper, more efficient “mouse trap”.”

As to the volume of U.S. containers that is diverted to Prince Rupert, the number has declined steadily from 3.2 per cent of containers bound for the U.S. in 2000 to 1.7 per cent of containers in the year 2007, which was the year that the Fairview Terminal opened for business. Thereafter, the numbers increased again, and stood at 2.5 per cent in 2010, the latest year for which numbers were available. U.S. export containers being shipped through Canada have declined slowly but steadily from 3.4 per cent in the year 2000 to 2.7 per cent in 2010.

Interestingly, on a percentage basis, a lot more Canada-bound and originated-from-Canada containers entered the U.S. or were shipped from U.S. ports. In the year 2000, 10.8 per cent of Canada-bound containers were imported through U.S. seaports. This number gradually declined to 6.1 per cent in 2010. On the export side, 10.7 per cent of Canadian export containers were shipped from U.S. seaports in 2000. This percentage varied little over the years, and stood at 10.8 per cent in the year 2010.

On a net basis, in 2010 Canada received 287,892 containers that were destined for U.S. recipients, and Canada exported 107,135 U.S. containers through Canadian seaports.

The word “diversion” has a specific meaning and is rooted in the history of American regulation of common carriage. However, the notion of domestic diversion was made moot by the deregulation of domestic rates with the passage of the Shipping Act of 1984, and the Interstate Commerce Commission Termination Act of 1995. With respect to foreign diversion, this was a subject of much discussion and litigation in the late seventies until the D.C. Circuit held in Austasia Container Express v. FMC in 1978 that FMC’s jurisdictional authority did not include cargo originating from, or ultimately bound for U.S. inland destinations that was exported or imported through a foreign port. After the Austasia cases made clear that the FMC lacked jurisdiction, the issue was put to rest until the current competitive controversy arose in 2011.

The Commission examined freight rates from Shanghai to either Chicago or Memphis via Los Angeles/Long Beach, Seattle/Tacoma, Vancouver, and Prince Rupert, and found that Prince Rupert was always the least costly option to get to Chicago. However, to get to Memphis, Los Angeles/Long Beach was the least costly routing, while routing via Prince Rupert was the most expensive. When factoring in the cost of the HMT at an assumed average cost of US$109 per container, Prince Rupert was the least costly option in all cases.

The Commission recognized that price of transportation is only one factor to consider among a wide array of factors which include the nature of the importer’s supply chain components, such as location and capacities of warehouses, transloading facilities, distribution centres and retail stores. In some cases, importers reported that their logistics facility investments afforded them no option to change to a different seaport of entry due to a reliance on CN or one of the U.S. railroads. Other considerations include the sailing frequencies and sailing times of carriers calling on different ports, and port diversification to mitigate risk associated with weather, accidents or industrial strife.

The Commission stated that about two million containers annually arrive at Los Angeles/Long Beach, Oakland, Seattle, Tacoma and Portland with Midwestern destinations. It considered all of these containers at potential risk of being diverted through Canadian ports. Other than to note that, at present, about 12.5 per cent of containers bound for the Midwest are diverted through Canada, the Commission offered no estimates of how much traffic could realistically be diverted.

The report concluded by stating that HMT is “one of many factors affecting the increased use of foreign ports for cargo bound for U.S. inland destinations. While a user fee is necessary for U.S. ports to grow, the number of proposals in both the House and Senate as well as from other sources, suggest that amendment of the current HMT structure should be given consideration.”

Following the enumeration of a number of Congressional initiatives, the report’s final statement reads as follows: “Currently, many U.S. ports, highways, and bridges are slowly decaying due to lack of investment and strategic long-term planning. Our closest competitors, Mexico and Canada, have national transportation policies that ensure that their ports, highways, and bridges, all of which play important roles in the intermodal transportation of commerce, are sustained. Our country’s decisions regarding infrastructure investments today will directly impact our ability to compete in a global economy for years to come.”

At Canadian Sailings, our interpretation of the expressions contained in the report is that the Commission believes that Ports and legislators have better things to do with their time than bemoan the fact that the imposition of HMT has driven some U.S.-bound traffic to Prince Rupert. The Commission appears to congratulate Canada for having had the foresight to invest in upgraded import/export infrastructure, which has helped put it in a more competitive position vis-à-vis some American ports for a number of selected inland destinations, and encourages the U.S. to respond by building “third-generation mouse traps” to best Canada at its game.