Gateways and Corridors
Canada's Gateways and Trade Corridors comprise the transportation infrastructure, systems, operations, technology, regulatory and policies related to the marine, road, rail, and air modes supporting freight and passenger flows of national significance for international commerce. As a trading nation, Canada aims to improve the country's competitiveness in the world market leveraging the Strategic Gateways and Trade Corridors approach.
11.1 The Emergence of Strategic Gateways and Trade Corridors
With global supply chains evolving, trade movement on the rise and new markets emerging, the Government of Canada is working to ensure Canada's ongoing trade competitiveness through the implementation of long-term policies, strategic planning, and focused investment in the transportation system.
Since 1995, world container trade has more than tripled, exceeding 500 million twenty-foot equivalent units (TEUs) in 2009. In the same period, Canada's trade with the rest of the world grew by 65%. Canada's major ports now handle almost 33% more international trade volumes and 65% more containers than a decade ago. This trade increase has also affected Canada's airports, railways, roadways and internal waterways.
The growth of containerization has had a significant impact on world trade and created the opportunity for Canada to become a key gateway for Asia–North America trade. In the decade leading up to 2005, Canada's trade with China alone grew by almost 500%. All levels of government, along with private stakeholders, responded to improve both the capacity and efficiency of the transportation infrastructure on Canada's west coast. In 2006, these efforts culminated with the launch of the Asia–Pacific Gateway and Corridor Initiative (APGCI). The systems-based, multi-modal APGCI strategy extends beyond infrastructure to include policy, regulatory and operational measures to improve the efficiency and reliability of the supply chain.
Canada's connectivity with the U.S.—the country's largest trading partner—is also crucial. Central Canada's transportation infrastructure handles approximately 70% of trade (by value) with the U.S.
On the east coast, while European trade dominates, imports from South America and South Asia have grown significantly since 2000, providing new trade opportunities for Canada.
In response to the increase in trade and the resulting impact on the transportation system, the Government of Canada released the National Policy Framework for Strategic Gateways and Trade Corridors in July 2007. This Framework was developed to improve the capacity and efficiency of the country's transportation system to support international trade, thereby advancing the competitiveness of the Canadian economy. The Framework provides focus and direction through a government-wide approach that fosters further development and optimization of the transportation system that is fundamental to Canada's success in international trade.
The National Policy Framework emphasizes Canada's geographic advantages, includes long-term planning and public-private collaboration, and applies an integrated approach to assessing and implementing infrastructure, policy and operational measures.
Under the National Policy Framework, Canada's Gateways are divided into three strategic regions: the Asia–Pacific Gateway and Corridor, the Ontario–Quebec Continental Gateway, and the Atlantic Gateway and Trade Corridor. As each gateway is unique, specific strategies aim to reflect each region's local realities, opportunities and challenges, while recognizing that these gateways are complementary to one another.
Current gateways and trade corridors
The objective of the Asia–Pacific Gateway and Corridor (APGCI) Initiative is to strengthen Canada's competitive position by establishing the best transportation network between Asia and North America. To date, 47 strategic transportation infrastructure projects valued at more than $3.5 billion have been announced by the federal government in partnership with all four western provinces and other public and private sector partners. This gateway links the ports of Vancouver and Prince Rupert with the inland supply chain and the rest of the continent.
The Ontario–Quebec Continental Gateway is a vital component of Canada's multimodal transportation system and provides a critical link between all key gateway facilities and also to Canada–U.S. border crossings. The Ontario–Quebec Continental Gateway is focused on developing a sustainable, secure and efficient multimodal transportation system that supports business opportunities.
Canada's Atlantic Gateway and Trade Corridor is a transportation network that connects North America to markets in Europe, the Caribbean, Latin America, and Asia via the Suez Canal. With its deep-water ports, specialized niche and customized services, modern intermodal transportation network, and partnership between government and the private sector, the Atlantic Gateway and Trade Corridor reaches into the economic heartland of North America. The Atlantic Gateway and Trade Corridor Strategy was released in March 2011. It was developed through the collaboration of the Governments of Canada, Nova Scotia, New Brunswick, Prince Edward Island, and Newfoundland and Labrador, as well as the private sector.
Since 2007, Transport Canada, in collaboration with provinces and other public and private stakeholders, has developed and implemented an analytical framework to support the various gateways. Substantial analysis has been conducted to identify capacity and demand of the multimodal transportation system, and considerable knowledge has been gained. This analytical framework has led to the identification of issues and bottlenecks affecting the efficient flow of international freight, as well as the competitiveness of the transportation system—both now and in the future.
A key factor in gaining knowledge and gathering relevant information is consultation and collaboration with the private sector—owners, operators and users of the transportation system in Canada. Stakeholder roundtables, workshops and direct consultations create a strong base for collaboration to identify the real issues that impact the efficient movement of freight and Canada's trade competitiveness.
The private sector offers insight into the daily challenges of moving goods through and along Canada's transportation system. Formal partnerships have been established for all three gateways and corridors. Coupled with the national perspective of Canada's Gateways, these partnerships assists the Government of Canada to address transportation system needs that are critical to the efficiency of international trade flows and trade competitiveness.
The APGCI Gateway Performance Table was established in 2008. Its participants represent a cross-section of major transportation, shipping and labour interests operating in the Lower Mainland of British Columbia and across the Prairies. The Performance Table was set up in response to ongoing stakeholder feedback regarding the overall performance of this supply chain, and to assess whether APGCI infrastructure investments were resulting in performance improvements over time.
Both a private sector and a public sector advisory committee were established for the Ontario–Quebec Continental Gateway, to provide advice on public policy issues and governmental measures, to collaborate on the development of the gateway and trade corridor, and to offer a forum for participants to share their expertise, information and insights.
In the east, the Atlantic Gateway Advisory Council provides regional perspectives to support the ongoing development of Atlantic Gateway initiatives. The Council consists of 13 private sector representatives from a broad range of industries in Atlantic Canada. The Council works with governments to identify and address the issues affecting Atlantic Canada's international trade competitiveness, and to ensure the greatest possible long-term benefits to the entire Atlantic Region.
In addition to its efforts in stakeholder collaboration, the Government of Canada has been engaged in extensive marketing initiatives to promote the advantages of the Canadian transportation system—particularly the country's first-class gateways and corridors that enable access to and from the North American market.
Trade missions have been led by various federal ministers, in partnership with provincial governments and the private sector, to Asia, South America, the United States and Europe. Emphasis is placed not only on Canada's transportation system, but also on the country's significant business opportunities.
More specifically, under the APGCI, the Department of Foreign Affairs and International Trade was allocated dedicated funding to develop and implement an international marketing strategy for the Asia–Pacific Gateway and Corridor. The strategy included business-to- business engagement, a strong presence at international transportation and logistics events, targeted media outreach, and an advertising campaign. When appropriate, Canada's other gateways were also represented.
Marketing is also a major component of the Atlantic Gateway Strategy and is supported by a dedicated fund. Atlantic Gateway marketing focuses on building national and international awareness of the gateway's assets and includes key sectors such as bulk/break-bulk, containers and air cargo. Ongoing collaboration with ports and airports in the region has led to the development and implementation of strategic international marketing initiatives in key international markets including the United States, Europe, Asia and South America. Participation at key industry events provided Atlantic Gateway ports and airports with venues to identify and develop global business opportunities.
Coinciding with the National Policy Framework for Stra-tegic Gateways and Trade Corridors, the $2.1 billion Gateways and Border Crossings Fund and the $1.0 billion Asia–Pacific Gateway and Corridor Initiative form a special element within Building Canada, the federal government's overall plan for infrastructure.
Almost $6 billion has been committed to Canada's gateways and trade corridors from a variety of sources, leveraging significant public and private investments. These commitments support the objectives of improving both the capacity and efficiency of the country's transportation system, and advancing the competitiveness of the Canadian economy. Investments support key projects underway or recently completed, such as the South Fraser Perimeter Road and the Roberts Bank Rail Corridor in British Columbia, a new access road linking the planned new Windsor–Detroit crossing to Highway 401 in Ontario, modernization of Port of Sept-Îles in Quebec, terminal expansions at the Port of Halifax in Nova Scotia and the Port of Belledune in New Brunswick.
Throughout the development and implementation of the various gateway and trade corridor initiatives, transportation system improvements have not been limited to infrastructure investments. In many cases, improvements have been identified and implemented to reduce policy, regulatory and financial barriers, to improve the business environment for trade growth, and to enhance freight operations at key facilities by way of company-level agreements, application of new technology and establishment of innovative operational practices.
These significant non-infrastructure improvements to date include modified customs tariff rules allowing greater domestic use of imported cargo containers, the elimination of the 25% duty on certain foreign-built vessels, amendments to the Canada Marine Act, the elimination of many manufacturing tariffs (Tariff-free Zones for manufacturers), free trade agreements under development (e.g. with the European Union and with India), and the amalgamation of ports in the Lower Mainland of British Columbia to form Port Metro Vancouver.
Inland ports and logistics hubs
Inland ports and multimodal hubs offer opportunities to attract investment and the concentration of value-added manufacturing, logistics and other services.
Successful inland ports and other multimodal hubs exist near strategic transportation infrastructure that is well integrated into global value chains, that has space for development, that offers proximity to suppliers and markets, and that resides in a regional economy with a skilled labour force and concentrations of services that support trade and transportation.
One prime example of such an inland port is Winnipeg's CentrePort Canada, a provincial and locally initiated project to develop a 20,000-acre zone for an inland port and trade area around J.A. Richardson International Airport. The project seeks to leverage Winnipeg's geographic location on north–south and east–west trade routes, and build a multimodal hub for international transportation, manufacturing, distribution and warehousing activities.
Foreign Trade Zones
Canada offers a unique package of tax programs and policies that allow any business to operate as if it has its own foreign trade zone (FTZ), anywhere in Canada. Developed by the Department of Finance, these include duty deferral and remission policies, the customs bonded warehouse program, and programs for exporters. The programs combine with the fully refundable GST/HST system to allow unrestricted access to FTZ-like benefits without the requirement of operating within the limited zone of a traditional FTZ.
Budget 2009 identified CentrePort Canada as a key priority for federal infrastructure funding, with contributions to six projects and operational funding for CentrePort Canada's start-up. A single-window task force and outreach program were also launched in Winnipeg to raise awareness of Canada's tax and duty deferral advantages, including enhanced promotion of Canada's foreign trade zone-type programs.
Ensuring continued success
Throughout the development and implementation of various tasks associated with Canada's gateways, collaboration among public and private stakeholders has been the key to success. While strong partnerships may take considerable time to develop, the ability to identify issues and implement solutions is a demonstration of what can be accomplished when stakeholders collaborate effectively.
Developing, maintaining, sharing and applying an extensive knowledge base of Canada's multimodal transportation system as well as the current and future trade flows it must support amount to a sizeable task. The economic environment is constantly changing, with decisions made daily that impact trade and the transportation system. Staying abreast of these issues and responding accordingly have been key to the gateways' success.
While the National Policy Framework for Strategic Gateways and Trade Corridors represents a national perspective, individual gateway initiatives have addressed needs at both regional and local levels. One essential—but often overlooked—benefit of the gateway approach is that gateways share global supply chains. As such, improvements to a specific supply chain in one gateway can benefit another gateway where the supply chain also exists.
The APGCI has had many successes in the last five years. With federal funding fully committed, significant progress has been made on infrastructure projects. Moving beyond traditional bricks and mortar toward competitiveness measures, the APGCI has also helped ensure a thriving business environment. Moving forward, to derive the greatest benefits from its investments APGCI will focus on deepening relationships domestically and internationally and seizing opportunities to expand trade with international partners.
As for the Ontario–Quebec Continental Gateway, analysis of the multimodal transportation system within Ontario and Quebec continues in order to identify impediments and opportunities for more efficient trade. The Government of Canada is working with the private sector and other key public sector stakeholders to address current and future transportation needs.
The Atlantic Gateway and Trade Corridor Strategy includes a balance of immediate measures and longer-term directions to position the region's transportation system to take advantage of global trade opportunities. Core elements of the Strategy guide implementation activities, which are well underway. Beyond advancing the infrastructure projects, other activities include further supply chain analysis, focused analytical work, regional workshops on various issues, international trade missions and marketing efforts. Moving forward, the Atlantic Gateway Federal-Provincial Officials Committee will also continue to collaborate with the private sector to identify and address policy and regulatory issues that affect the competitiveness of the Gateway.
More information on Canada's Gateways is available at canadasgateways.gc.ca.
11.2 Supply Chain Performance Monitoring
At the core of Canada's Gateways and Corridors Policy lies a crucial question: are Canadian gateways and supply chains reliable? Global competitive forces are imposing new standards in transparency and performance accountability in the international transport and logistics arena. Public and government agencies worldwide have somewhat lagged behind the private sector in adopting systematic and transparent key performance indicators (KPI), but KPIs are now rapidly emerging across government agencies in the transport sector as essential tools that support a variety of meaningful and legitimate goals, such as setting performance targets, guiding national policy, monitoring continuous improvement, ensuring asset management accountability, measuring return on infrastructure investments, and marketing.
Meanwhile, the emergence of global supply chains has brought new challenges to transportation and logistics—notably the need for a systems-wide approach to performance evaluation. Transport Canada is developing new tools for transportation system performance measurement that better reflect the efficiency and reliability imperatives that Canadian and other companies face in today's era of global supply chains.
Transport Canada has also devised an integrated approach that seeks to monitor performance and utilization of critical gateway assets at both gateway (port utilization indicators) and supply chain (fluidity) levels. These initiatives rest on sound partnerships between Transport Canada and participating supply chain partners and leverage an unprecedented level of world-class expertise.
Port utilization indicators
With approximately 90% of global trade by volume transported by sea and waterways, ports are critical links in global supply chains. Despite the importance of seaports to the global economy, little is known about what makes a port truly competitive and a best-in-class performer. While no single metric can truly capture the full complexity of port operations, gateway stakeholders recognize the need to build a factual, impartial case for ensuring the competitiveness of Canada's gateways. To do so, a project has been initiated to develop a set of port utilization indicators at a national level to assist ports in monitoring their operational performance over time.
Few studies exist that compare port performance internationally. The current state of practice and research in port performance indicators yields limited opportunities for port-to-port benchmarking and comparison. The primary challenge stems from the lack of standard definitions and calculations. Port utilization indicators were recently developed and implemented based on the principle of methodological transparency and under partnerships that leveraged operational and academic port expertise.
The project began in the fall of 2008 and involved the largest Canada Port Authorities (CPAs). The first phase of the project sought to implement metrics at container facilities, while bulk facilities were addressed in a subsequent phase due to methodological complexities related to bulk operations. Bulk indicators are aggregated by commodity and cover iron ore, coal, minerals (potash and sulphur), grain, general cargo, forest products and liquid bulks. All metrics focus on operational aspects of port facilities (see Table M30A).
To evaluate how gateways and strategic trade corridors interact together operationally a fluidity indicator was developed. This indicator examines end-to-end supply chain performance by focusing on the time component. The fluidity indicator measures the total transit time of inbound containers from overseas markets to strategic North American inland destinations via various Canadian gateways. Initial phases of this indicator project targeted inbound container movements for Pacific Gateway markets (British Columbia ports). However, future phases will cover inbound movements at other gateways, but also international outbound container and bulk movements across all major gateways.
The fluidity indicator project is multi-phased. Phase 1 monitors transit times of containers departing Shanghai and Hong Kong via Prince Rupert and Port Metro Vancouver destined for Calgary, Toronto, Montreal or Chicago. Total transit times are calculated by summing all modal segments of end-to-end movement. No single data source (or provider) can capture transit time data for the entire container trip; hence, a variety of data exchange partnerships are in place with several stakeholders. For the most part, the method relies on genuine primary data from private sector carriers supplied on a voluntary basis.
In terms of shipment delivery time and costs, world-class gateways can offer shippers numerous options, ranging from expedited and premium services to lower-value propositions. For the fluidity indicators project, Transport Canada identified eight different supply chain models (see Table M30B). These represent various combinations of modes and logistical arrangements, including transloading of containers.1 The ‘direct rail' model is predominant at the two British Columbia gateways, accounting for just over half of all inbound container movements. Direct rail occurs when intermodal trains are built on-dock at marine terminals and leave the port directly for their final inland destinations. Besides a pure truck transit, direct rail is generally a faster landward option since containers bypass having to stop at origin rail yards. In the context of that project, Transport Canada estimates that during the year 2011, containers averaged 22.5 days of transit between Shanghai and Toronto via British Columbia ports using direct rail, compared to 25.6 days for the transload model.
Analysis of transit times by logistical segment reveals the essential role the marine component plays in overall trans-Pacific movement of containers. Indeed, ocean transit makes up 65% of the total journey, while port dwell and rail transit accounts for the remaining 35% of the journey. In other models, drayage—the transport of goods by truck on a short distance—generally constitutes a marginal share of total transit time, despite its critical role in the overall movement of goods.
Table M30C presents a sample of the fluidity results using the direct-rail model for Shanghai to Toronto via British Columbia ports over 2010 and 2011. Western Canadian gateways have achieved a consistent level of transit time performance from Asia to Central Canadian markets from 2010 to 2011, due to significant gains on the landside—notably at the port interface (dwell). Indeed, the two B.C. ports registered a combined 23% year-over-year decrease in port dwell times and achieved a remarkable average performance of slightly less than 2.5 days. The performance of Canadian supply chain partners has helped offset the significant deterioration of ocean transit times in 2011, thereby allowing for overall consistency of total transit times over the past 24 months.
Overall, Transport Canada's supply chain performance monitoring initiatives support the establishment of KPIs to assist government agencies in enhancing visibility and accountability in oversight of key assets. Transportation and logistics facilitate global trade, and their efficient performance is essential to trade-reliant countries such as Canada. Moreover, the nodal role of seaports in global supply chains and international gateways warrants special attention. Transportation decisions are increasingly made within a broader scheme of supply chain management; it is through this lens that performance should be approached. Improved supply chain performance can impact the daily lives of nearly all Canadian consumers. Insightful performance measurement can lead to more precise identification of logistics elements needing adjustment, which can then improve supply chain performance and Canada's trade competitiveness.
This benefits all gateway users and, ultimately, end consumers. This type of detailed information is highly valuable and can be leveraged for several purposes, including overseas promotion of Canada's gateways, stakeholder facilitation, policy support, and measuring return on infrastructure investment, among others. In gathering performance measurement details— and to maintain integrity of the data collected—Transport Canada continues to expand the scope of trade lanes and corridors while supporting effective data exchange partnerships.
11.3 Transportation, Logistics and Global Value Chains: a Canadian Perspective
This section aims to describe the symbiotic relationship between global value chains and transportation, with a special focus on the Canadian context. It is not the objective of this section to discuss the drivers and the raison d'être of global value chains (GVCs)2, but simply to highlight how the geographical extent of global production hinges on efficient transportation and logistics. GVCs impact the daily lives of every Canadian; given the central role transportation plays in GVCs, the vitality of this industry is a matter of high stakes to Canada's ability to prosper as a trading nation.
Transportation is integral to international trade. GVCs—also called global commodity chains, global production networks, or global supply chains—depend on efficient, affordable transportation, logistics and information and communications technologies (ICT). Today's global production activities are transport-intensive and rely heavily on responsive transportation and logistics capabilities. There is simply no value-added without the physical movement of resources, people, intermediate and finished goods—or transportation.
Many have argued that the “container revolution” of the 1950s underpins globalization as we now know it.3 Today, 90% of global trade, by volume, still transits the oceans.4 Since its inception, the container has weathered global economic structural changes and proven to be an adaptive and resilient facilitator of merchandise trade. As containerization celebrated 50 years of service in 2007, the transportation industry strove to adapt to the new trade reality of GVCs. Indeed, 50 years after Sealand5 launched the world's first container service, Maersk echoed that innovative spirit by introducing in September 2011 the concept of ‘absolute reliability' through its Daily Maersk6 service. Maersk's move recognized the need to adapt to the ever-increasing velocity of GVCs and the complete reliability demanded by shippers. In the rail sector, the concept of ‘precision railroading' introduced in the past decade illustrates similar—and necessary—adaptation. Other transportation sectors have also made adjustments to this new global trade arena. Firms have been expanding from domestic to international, crafting new supply chain partnerships, and investing in logistics facilities and technologies. These transformations represent profound changes in the global economy and are reshaping the transport and logistics landscape, both in Canada and throughout the world.
Like many countries, Canada is seizing opportunities in trading with emerging economies showing strong growth, such as Brazil, Russia, India and China, commonly known as BRIC economies. Figure EC16A illustrates Canada's total merchandise trade with the four BRIC economies over the past decade. Both the pace and magnitude of bilateral trade with China stand out and have even dwarfed trade with other BRIC countries. As terms of trade under the GVC paradigm are changing and new opportunities emerge, the appropriate conditions must be in place for Canada to reach its full GVC integration potential.
Global value chains and transportation have a mutually beneficial relationship. The geographical extent of global production hinges on efficient transportation and logistics. Canada's ability to prosper as a trading nation in the international marketplace is directly linked to the capacity of the transportation sector to support global value chains.
Transportation in global value chains
Global value chains can be defined as “the full range of activities undertaken to bring a product or service from its conception to its end use and how these activities are distributed over geographic space and across international borders.”7 But what role does transportation and logistics play in GVCs? In the minds of many, production is often synonymous with assembly, but in a global trade reality this cannot be farther from the truth. Global value chains span functions well beyond assembly.
For a typical manufactured item, value-adding activities take place from design and conception through to post-consumption (see Figure 11.1). Transportation and distribution figure prominently at both pre- and post-assembly stages—namely procurement and distribution to consumer markets. For example, in the post-production distribution of goods to market for a flat-screen TV, ocean transportation costs from Asia to North America are estimated at 2% of retail value; for a shirt, 0.85% of its retail value; while for a tonne of grain these costs climb to 40% of the purchase price.8 Another example is fresh lobster, where air transportation from Halifax to Shanghai accounts for only 2% of its retail price.9 These transport costs are often supplemented by additional logistics costs such as storage or transloading.
While useful, Figure 11.1 focuses on finished goods and thereby does not accurately depict the magnitude of transportation activity in global value chains. Further transportation and logistics activities take place within each of the value-adding stages—particularly in and around the assembly (manufacturing) stage. These embedded transportation costs can be further explored through an example of automobile manufacturing. A typical automobile is made up of approximately 30,000 different parts10 that are sourced, manufactured and sub-assembled at various locations around the globe. It is not a simple task to measure the number of truck trips, rail movements, air cargo shipments, or ocean container movements involved in the assembly of a single automobile, as thousands of individual parts make their way from several countries to a final assembly point. Each of these intermediate parts has further embedded transportation costs in its own manufacturing. Figure 11.2 attempts to illustrate this using tires as one of many intermediate components contributing to the assembly of a finished vehicle. As each successive stage of production is linked by the physical movement of semi-finished goods, a transportation cost is added cumulatively. Using the tire example, the embedded transport cost of producing rubber is 2.3% (as share of producer price). Then, the rubber must be transported to the tire production plant, a cost that represents 2.1% on top of producer price. The same cycle occurs for the manufacturing of the tire, adding another 0.9% to transport the tire from the factory to the car assembly plant. This cycle continues for the thousands of parts involved. Superimposed onto this process are border crossings—which can be several, even for a single part. It quickly becomes clear that transportation activities are vital linkages in GVCs.
Figure 11.1: Value Creation Along the Value Chain
[Detailed description of this image]
This is a graph that shows different added-value activities, such as R&D, design and assembly and how these activities are categorized as pre-production, production or post-production. The chart shows that added-value services take mostly place in the pre and post-production stages.
Source: adapted from G. Gereffi, presentation at joint OECD-World Bank workshop on GVCs and Emerging Countries, Paris, September 2010.
These embedded transportation costs, however important, generally remain a small share of the final retail price of finished consumer goods, due to efficient and affordable transportation and logistics services. In the case of finished automobiles, it stands at an estimated 1.4%.
Transport as a share of producer price naturally varies, depending on the commodity, the geographical location of both inputs and the market and mode(s) of transport used. For example, for forest products, transportation as a share of final producer price stands at approximately 3.9%, while that share for coal stands at 1.1%. Generally speaking, bulk commodity supply chains tend to be more vertically integrated and transport costs more internalized. In addition, in Canada, an increasing share of traditional bulks are now being containerized for export (e.g. forest products, pulse), and logistics will vary whether commodities are loaded into containers at their source or at port prior to being shipped overseas.
Figure 11.2. Embedded Transportation Costs of Finished and Semi-finished Manufactured Goods
[Detailed description of this image]
This figure shows at a very high level the transportation costs ties to transforming rubber into a tire and assembling car with that tire. These transportation costs include an embedded cost tied to the manufacturing component itself as well as a transportation cost to move the component along the supply chain. So for example producing rubber has an embedded transportation cost of 2.3% but there is also a 2.1% cost in transporting rubber to the tire plant.
Source: Transport Canada from Statistics Canada (input-output) data
Every value-adding process bears an embedded transportation cost. But despite the geographical lengthening of value chains, the proportion of transportation as a share of total production inputs into manufactured goods remains marginal. In fact, the criticality of transportation and logistics within GVCs against its small share in total production costs creates an interesting paradox.
The transportation paradox
The marginal share of transportation costs as a proportion of the value of goods can be attributed to advances in global logistics, especially since the advent of containerization. However, to a large extent, this belies the necessity of reliable transportation and logistics services. This forms the transportation paradox: although transport costs may be small in the overall production process, the penalties of poorly performing transport/logistics systems can be severe—particularly for producers and consumers. Since transportation costs are compounded as value is added to goods, each time an intermediate good is physically transported at any stage of production it risks delays, which can result in cost penalties at the receiving end. Therefore, while transportation as a share of total input into manufactured goods can be relatively marginal, the share of total logistics costs can be high—and is strongly dependent on logistics competence. The inability to deliver on-time due to a transportation disruption can stop production, and the costs behind such a stoppage are significant.
To better capture this paradox, total logistics costs should be examined—a comprehensive set of costs to shippers that include transport costs, among others.11 Taking the total logistics costs view, a shipper's penalty for providing underperforming and unreliable transportation services does not necessarily translate into higher transportation costs but into other induced costs: additional lead times, stock-out costs, additional safety stocks and inventory costs, opportunity costs of in-transit inventory, etc. A truck, ultimately, is inventory on wheels, and managing and maintaining inventory bears a cost. But these buffer costs are difficult to quantify and add uncertainty in the management of supply chains that costs billions of dollars each year to North American shippers. Based on preliminary research conducted by Transport Canada and Industry Canada, total logistics costs represent a significantly higher proportion than transportation costs alone to importers and exporters.
In a recent survey, Industry Canada found that “the top 20% performers in total landed cost12 and on-time shipment are more likely to invest in logistics network strategies—such as capability to electronically collaborate with networks of key suppliers and customers—and supply chain modeling applications”.13 The same study reports that investments in distribution centres in Canada increased by 106% from 2005 to 2010.
On a macro-economic scale, these logistics costs can become a tremendous liability to a nation's trade competitiveness. By facilitating global trade, logistics capabilities are at the core of a nation's global competitiveness.14 This concept applies to an even greater extent to developing countries, where logistical capabilities can often fall behind export production capacity and become a hindrance to trade.
The case of China is particularly interesting. Logistics costs as a share of gross domestic product (GDP) stood at 18% in 2008.15 This was high compared to developed economies, where typical logistics costs were less than 10% of GDP. Moreover, a decade ago, inland transport costs accounted for approximately 60% of the total transport costs from Chinese producers to overseas markets, compared to averages of 15% for Europe and 11% for the United States.16 China's Central Government recognized this shortcoming and made a policy objective to decrease this share in its last two consecutive five-year plans. China's government also introduced an initiative called the Rejuvenating Program for the Logistics Industry in February 2009. The same year, China announced transportation infrastructure investments of no less than $290 billion U.S. (or 6% of its GDP). China's logistics industry has come a long way to support its booming export trade and, despite these shortcomings, no other country in history has ever handled the cargo volumes that China handles today.
In terms of costs, Canada's logistical performance offers both challenges and opportunities. The higher logistics cost associated with doing business in Canada compared to the United States was confirmed by a joint report by Industry Canada and the Supply Chain and Logistics Association of Canada.17 The survey-based study revealed that total logistics and supply chain management costs for the Canadian economy increased by 3% from 2005 to 2007. Compared to the U.S., total logistics costs were slightly higher for Canadian manufacturers and wholesalers but somewhat more significantly so for Canadian retailers in 2007. In other words, all else being equal, running a firm's global operations out of Canada costs more in logistics than out of the U.S. This finding supports the need to target measures to enhance Canada's competitiveness, whether from a trade, logistical, or information and communications technology capability viewpoint. The study also demonstrates how Canadian firms continue to outsource more of their activities in low-cost countries—notably in China—making them more sensitive to changes in international transportation costs and energy prices, although acknowledging that locational dynamics of offshoring may have changed since then.
Supply chain collaboration
How are GVCs reshaping the Canadian transportation and logistics sector? In the global marketplace, supply chain management becomes a key differentiator for trade-reliant economies like Canada. Global value chains are forcing us to rethink conventional ways we look at competition. Two competing value chains may, for example, use the same airport but different airlines and ground transportation providers to bring goods to market. At the core of GVC competitiveness is governance—under what arrangements the various supply chain partners come together to differentiate their offerings and provide a competitive value proposition to the market. Although Canadian transportation and logistics firms are adapting to the realities of GVCs in numerous ways, collaborative partnerships are a strength that differentiates Canada on an international scale.
Supply chain collaboration and partnership is being driven by both private and public sector initiatives. At the public sector level, the National Gateways and Trade Corridors Strategy has proven a powerful metaphor to incite and foster greater levels of collaboration across the entire supply chain. The most advanced of the gateways, the Asia–Pacific Gateway and Corridor Initiative, captures the spirit of collaboration between all levels of government and private sector stakeholders. Ongoing collaborative platforms that have yielded real operational benefits include the Gateway Performance Table (performance measurement), the Winter Contingency Planning Table (resilience) and the Asia Pacific Skills Table (skills and knowledge base).
In the private sector, 2010 and 2011 were marked by an unprecedented number of service level agreements between marine terminal operators, Class I railways and port authorities in a consolidated bid to enhance the operational performance and competitiveness of national gateways and corridors. Such agreements were put in place at all four major container ports starting in April 2010, and provide service level guarantees to supply chain partners, backed by key performance indicators. These agreements have led to concrete results on both coasts: a reduction in the range of 20 to 25% in port dwell times at west coast ports18 during 2010 and similar reductions at the Port of Halifax from January 2010 to November 2011.19 A general trend among Canadian transportation service providers is to become more transparent and accountable for their performance, which speaks to improved collaborative relationships and better overall governance of supply chains. In fact, the Canadian gateway model is increasingly recognized internationally as a best practice.20
Transportation and logistics are at the very core of global value chains, which aim for the seamless flow of commodities, people, knowledge, information, capital and goods. An embedded transportation cost lies in all finished and semi-finished goods. Transportation becomes value-adding when it is reliable and in sync with all stages of production, but can become value-subtracting when it is underperforming and unreliable.
GVCs are reshaping the transportation landscape in Canada and worldwide by heightening the time-sensitivity of shipments that must meet leaner manufacturing requirements. A horizontal end-to-end integrated approach to transportation services and infrastructure becomes a more appropriate framework to examine domestic transportation systems. In such a context, consistency, reliability and visibility of transport and logistics services become premiums for shippers. Improvements in supply chain performance can often be traced to the supply chain's governance, where stakeholder collaboration can have a significant effect. Indeed, research shows that GVCs with sound collaborative frameworks are likely to perform best21 in the global marketplace. GVC governance—how various stakeholders come together to create the best value proposition in the marketplace—is critical in defining the long-term competitiveness of GVCs in Canada. Lastly, the international nature of GVCs has also placed an emphasis on the importance of trade facilitation processes. Such things as customs and border processes play critical roles in Canada, given its geography and the weight of U.S.–Canada trade.
Today's transportation decisions are increasingly being made within a broader context of seamless value-adding activities. Many of these new imperatives are being addressed under Canada's National Gateways and Trade Corridors Strategy. The Government of Canada has a role to play in fostering and facilitating quality dialogue with the private sector to define optimal conditions for the efficient, safe, secure and sustainable movement of goods. In 2009, Transport Canada introduced the concept of the value-added gateway as a “strategy that focuses on helping Canadian companies to further exploit opportunities such as intermodal transportation, transshipping, warehousing, logistics, information and communications technologies, finance, and skills development”.22 Among other things, the federal government's support for the value-added approach was reflected in changes to the tariff and treatment of international marine containers, the elimination of duties on foreign-built vessels to help modernize the country's domestic fleet, an international re-branding of Canada's foreign trade zone-like programs, as well as the implementation of a supply chain performance monitoring initiative.
This section has addressed transportation's role within GVCs, but public policy challenges relating to GVCs reach far beyond transport and logistics.23 Other challenges facing developed economies include attracting and retaining talent, consequences of deindustrialization on labour, fostering innovation and partnerships, investing in smart infrastructure, streamlining international business practices, and reexamining fiscal policies—all areas that will determine Canada's role in tomorrow's global economy. Beyond Transport Canada, other federal departments such as Foreign Affairs and International Trade, Export Development Canada, Industry Canada, Agriculture and Agri-Food Canada, Human Resources and Skills Development Canada, and Canada Border Services Agency are also actively examining Canada's role in GVCs.
Global value chains offer both challenges and opportunities for Canada, which is well positioned to respond. The Government of Canada is committed to providing competitive, reliable and secure gateways in support of its international trade goals. It is Transport Canada's mandate to ensure that Canada's transportation system is efficient, safe, secure and environmentally sustainable to ensure Canada's integration into GVCs as well as the country's long-term trade economic prosperity.
- Transloading generally refers to the transfer of shipments from international marine containers (20', 40', 45'+) to domestic containers (53').
- For a Canadian perspective, see Sydor, A. (ed.) 2011. Global Value Chains: Impacts and Implications. Foreign Affairs and International Trade. Ottawa.
- See, for instance, Levinson, M. (2006). The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. Princeton University Press, as well as Donovan, A. & Bonney, J. (2007). The Box that Changed the World: Fifty Years of Container Shipping. The Journal of Commerce.
- World Shipping Council (2011). http://www.worldshipping.org.
- Now owned by Maersk Line (since 1999).
- See http://www.dailymaersk.com/
- Sydor, A. (2011). The Evolution of Global Value Chains. Canada's State of Trade 2011, Government of Canada, Department of Foreign Affairs and International Trade, Ottawa. pp. 85-101 (Special Feature).
- Kolding, E.D. (2010). Beyond the Storm: the Industry our Customers Should Ask For. Maersk Line. Presentation made at Transpacific Maritime Conference 2010, Long Beach, March 1, 2010.
- Price on a per-pound basis. G.E. Simpson & Associates (2012). Air Cargo and the Fish and Seafood Study. Prepared for Transport Canada, January 2012.
- From Toyota official website at www.toyota-global.com.
- These costs are generally made up of: (1) transportation costs, and (2) inventory costs, including (but not limited to): direct transport costs, in-transit inventory carrying costs, ordering costs, cycle stock carrying costs, safety stock carrying costs and stockout costs. From Chow, G. (2008). Total Logistics Cost Model: Conceptual Framework. University of British Columbia Sauder School of Business.
- A concept similar to (yet narrower than) total logistics costs.
- Industry Canada (2011). Global Business Strategy and Innovation: A Canadian Logistics Perspective. In partnership with Canadian Manufacturers and Exporters and Supply Chain and Logistics Association of Canada. http://www.ic.gc.ca/eic/site/dsib-logi.nsf/eng/h_pj00528.html.
- The World Bank (2010). Connecting to Compete: Trade Logistics in the Global Economy. Washington.
- KPMG (2008). Logistics in China. http://www.kpmg.com.cn/en/virtual_library/Property_Infrastructure/LogisticsChina.pdf [PDF Version, 240kb]
- Carruthers, R., Bajpai, J.N. & Hummels, D. (2003). Trade and logistics: an East Asian perspective, in K. Krumm & H. Kharas (eds) East Asia Integrates: a Trade Policy Agenda for Shared Growth, Washington: the World Bank, pp.117-137. This supports the so-called ‘first mile-last mile' argument, namely that the first and last ground transportation steps are critical to end-to-end performance.
- Industry Canada and The Supply Chain & Logistics Association of Canada (2008). State of Logistics: the Canadian Report 2008. http://www.sclcanada.org/
- Based on data from Transport Canada collected under Port Utilization Indicators project.
- Port Authorities of Vancouver Fraser, Prince Rupert, Montreal, and Halifax (2011). Vancouver Fraser Port Authority, Prince Rupert Port Authority, Montreal Port Authority, and Halifax Port Authority Submission to the U.S. Federal Maritime Commission. December 2011. http://www.portmetrovancouver.com/Libraries/ABOUT_News_Press_Releases/FMC_Submission_-_Dec_21_2011.sflb.ashx [PDF Version, 94kb]
- See, for example, Kulisch, E. (2011). Knatz: U.S. at Fault for Canada Diversion. American Shipper, October 26, 2011. See also a number of U.S. submissions to the Federal Maritime Commission Notice of Inquiry Docket No. 11-19: U.S. Inland Containerized Cargo Moving Through Canadian and Mexican Seaports, www.fmc.gov.
- Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The Governance of Global Value Chains. Review of International Political Economy, 12(1): 78-104.
- Transport Canada (2009). Gateway Corridor News. 2009 Edition, Ottawa. http://www.pacificgateway.gc.ca/gateway-news-2009.html
- For a full discussion on this topic, see: Organization for Economic Co-operation and Development (2008). Staying Competitive in the Global Economy: compendium of studies on global value chains. http://www.oecd.org/document/62/0,3746,en_2649_34173_40815102_1_1_1_1,00.html
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