BUSINESS
10/05/2011 05:10 EDT | Updated 12/05/2011 05:12 EST

New Canada-U.S. trade tensions loom over West Coast ports as inquiry launched

WASHINGTON - A U.S. federal agency is launching an inquiry into whether Canadian ports on the West Coast are luring lucractive cargo business away from their American counterparts in yet another growing Canada-U.S. trade dispute.

The five-member Federal Maritime Commission entered the fray on Wednesday, voting unanimously to hold the inquiry following complaints from American ports that Canada is unfairly subsidizing the diversion of cargo ships away from its U.S. competitors, particularly in Prince Rupert, B.C.

The agency will deliver its findings to U.S. Congress after it completes the inquiry amid concerns that American lawmakers are mulling over a US$143-per-container levy on cargo entering the United States from B.C. ports.

"Canadian and Mexican ports are free to compete with U.S. ports for U.S. cargo, but they should do so on a playing field that is not artificially tilted by governments' policies," Richard Lidinsky, chairman of the commission, told the hearing on Wednesday.

It's another bit of alarming news on the Canada-U.S. trade front.

Protectionist Buy American provisions have been resurrected in U.S. President Barack Obama's job legislation even as Canada and the U.S. prepare to officially announce a sweeping agreement on border co-operation that will see Canada spend $1 billion for new border facilities and programs.

At issue is the growing popularity of Prince Rupert, a $170 million port that opened four years ago with $60 million in subsidies from both the B.C. and federal governments.

Cargo ships travelling from China arrive several days earlier at Prince Rupert and Vancouver than they do to at U.S. ports on the West Coast. That's especially true of the port of Los Angeles after ships travel what's known as a circular route across the Pacific Ocean and end up far closer to the Canadian destinations.

American ports also charge companies the Harbor Maintenance Tax that covers the cost of dredging port channels. Canadian ports don't charge cargo ships a harbour tax.

"So let's say I'm Walmart _ my ship gets unloaded in Prince Rupert and my cargo immediately gets put onto a train to Chicago," says Peter Tirschwell of the Journal of Commerce, a trade publication that's been closely following the dispute.

"So the pitch from Prince Rupert is, 'Look, your cargo is going to get to Chicago faster than if it went to L.A., and you don't have to pay this tax.' For a big retailer, that's pretty attractive. But from the perspective of American ports, Prince Rupert is taking cargo away from them."

Two senators from Washington state, Patty Murray and Maria Cantwell, urged the Federal Maritime Commission to launch the inquiry.

Eight members of the House of Representatives made a similar plea last week, as did a Democratic lawmaker from California.

In their letter to the commission, Murray and Cantwell point out that the Harbor Maintenance Tax is not collected at border crossings when cargo enters the U.S. on trains from Canada, suggesting it should be.

"As a consequence, our country's capacity to handle international trade growth is adversely affected," the letter read.

"It is imperative that we level the playing field between international ports and domestic ports so that the U.S. can continue to compete for cargo."

Canadian opponents says that could amount to a punishing tariff on every container entering the U.S. from B.C. ports.

Ed Fast, International Trade Minister, told the House of Commons on Wednesday that Canada is pushing back and has informed both Lidinsky and Ron Kirk, the U.S. trade representative, of Canadian concerns.

"Any new tax is a bad idea as it raises costs on consumers," he said. "Canada's ports and railways are competing fairly ... we will defend Canada's competitive advantage wherever it is threatened."

The Canadian Chamber of Commerce is dismissing the U.S. complaints, calling them part of an American debate about taxation that has nothing do with Canada.

"This is a domestic U.S. issue, and should remain one," the chamber said in a statement Wednesday.

"Canadian ports and users are required to pay the full cost of the infrastructure they use. The Canadian chamber will oppose any protectionist measures that will penalize Canadian ports, railways and all cargo carriers and make North America's freight system more costly."

Some in the U.S. have indeed suggested scrapping the tax and letting local ports figure out how to keep their channels dredged. That wouldn't pose much of a problem for ports located in the Pacific Northwest, on the deep Puget Sound, but doesn't sit well with other port officials.

Ports like Houston, Savannah and New York have to be dredged, so they need levy to remain in place in order to afford the dredgings.

But Tirschwell questions the wisdom of levying a new tax at border crossings.

"The question is, whose interests should the government be protecting?" he asked.

"Let's say they impose a tax on containers coming in from Canada. Who pays that? The consumer does because now the retailer's costs are higher. So you've helped out some longshoremen on the West Coast at the expense of the American consumer, who doesn't have a lot of money to spend these days."

Nonetheless, Lidinsky has already raised concerns about the tactics of Canadian ports.

He griped to a House of Representatives committee in February about a Canadian government advertising campaign promoting Prince Rupert as the most cost-effective port for cargo headed to the U.S. Midwest.

Lidinsky told lawmakers that ports on the U.S. West Coast were "already feeling the impact of this diversion," and also raised security concerns about the safety of the cargo if it enters North America through Canada, not the United States.

He reiterated those concerns in a speech in Montreal last month, in which he also suggested Canadian railroads are on the receiving end of government subsidies.

But in his remarks on Wednesday, Lidinsky urged cooler heads to prevail as the commission launches its inquiry.

"Contrary to some overheated claims ... no one at the FMC or in the U.S. government has raised the prospect of levies, sanctions, or tariffs. I am simply talking about a study of the facts."