APPENDIX D
ECONOMIC BENEFITS OF TRANSOCEANIC SHIPPING THROUGH THE ST. LAWRENCE SEAWAY

Estimating the economic benefits of transoceanic shipping through the St. Lawrence Seaway is a challenging task. On the assumption that closing the seaway to transoceanic vessels would change the costs of shipping goods from points outside the seaway into the Great Lakes and vice versa, the challenge is to quantify the changes in these costs. One would need to determine, for example, whether break-bulk import cargoes arriving on transoceanic vessels could be transshipped from Quebec City or Montreal to interior destinations in Canada and the United States via road or rail without a significant increase in delivered cost and without straining the capacities of the alternative modes. A conclusive assessment would require access to a computable general equilibrium (CGE) model1 linked to the transportation network in such a way that all flows between origins and destinations would be mapped onto this network.2 In addition, one would need assessments of the capacity

1

A CGE model essentially captures the circular flow of demand–production (supply)–income in an economy. On the basis of typical assumptions about the behavior of producers, consumers, and government, the impacts of changes in demand or supply and the effects of government policy (tariff reduction, new taxes, or deregulation) on the economy can be traced.

2

Most CGEs assume that the transportation cost is determined by the shipper (someone interested in moving a commodity from a to b or purchasing a commodity from b to be moved to a). In only a few models have there been attempts to “map” the transportation flows onto multimodal networks, and even in those few cases attention is usually only on road and rail. Thus, CGE models in their present form, while more flexible than other models, fail to capture the peculiarities of the transportation network.



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APPENDIX D ECONOMIC BENEFITS OF TRANSOCEANIC SHIPPING THROUGH THE ST. LAWRENCE SEAWAY Estimating the economic benefits of transoceanic shipping through the St. Lawrence Seaway is a challenging task. On the assumption that closing the seaway to transoceanic vessels would change the costs of shipping goods from points outside the seaway into the Great Lakes and vice versa, the challenge is to quantify the changes in these costs. One would need to determine, for example, whether break-bulk import cargoes arriving on transoceanic vessels could be transshipped from Quebec City or Montreal to interior desti- nations in Canada and the United States via road or rail without a significant increase in delivered cost and without straining the ca- pacities of the alternative modes. A conclusive assessment would require access to a computable general equilibrium (CGE) model1 linked to the transportation network in such a way that all flows between origins and destinations would be mapped onto this network.2 In addition, one would need assessments of the capacity 1 A CGE model essentially captures the circular flow of demand–production (supply)–income in an economy. On the basis of typical assumptions about the behavior of producers, consumers, and government, the impacts of changes in demand or supply and the effects of government pol- icy (tariff reduction, new taxes, or deregulation) on the economy can be traced. 2 Most CGEs assume that the transportation cost is determined by the shipper (someone interested in moving a commodity from a to b or purchasing a commodity from b to be moved to a). In only a few models have there been attempts to “map” the transportation flows onto multimodal net- works, and even in those few cases attention is usually only on road and rail. Thus, CGE models in their present form, while more flexible than other models, fail to capture the peculiarities of the transportation network. 1 86

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Economic Benefits of Transoceanic Shipping Through the St. Lawrence Seaway 187 limitations of all links (i.e., their ability to absorb additional demands without straining capacities) and a further assessment of the diversion possibilities. For the latter, one would need to know whether, absent an ability to use the seaway, an exporter (importer) has an alternative market (source) in the event that the alternative transportation mode proved too expensive. As discussed in the fol- lowing paragraphs, a review of the literature suggests that partial answers are available to some of the relevant questions, but the comprehensive analysis needed to quantify with confidence the economic impacts of closing the seaway to transoceanic vessels is lacking. The study by Taylor and Roach (2005) probably comes closest to an overall assessment (see Box D-1). To the committee’s knowl- edge, it is the only study to date that offers an estimate of handling and transportation cost savings attributed to transoceanic vessels transporting cargoes via the seaway. The study’s principal conclu- sion is that a cessation of transoceanic shipping on the Great Lakes would result in a transportation cost penalty of approximately US$55 million annually. The committee notes that the Taylor and Roach estimate does not include the transportation cost savings associated with coastal vessels that move goods between Great Lakes ports and coastal ports within the Canadian and U.S. exclusive economic zones (EEZs). These vessels are also a possible source of aquatic invasive species (AIS), as discussed in Chapter 4.3 The vessel traffic data from the seaway corporations include coastal vessels within the “laker” category, but the coastal component of the laker traffic cannot be readily extracted. Thus, assessing the transportation cost savings for coastal vessels using the seaway is problematic. The methodology of Taylor and Roach is analogous to that of earlier researchers who have faced similar questions, and conse- quently the study has shortcomings often attributed to these types of efforts. In particular, these analyses fail to consider a spatial 3 Contrary to recent evidence, Taylor and Roach state that “aquatic invasives are introduced by oceangoing vessels, and not by lakers that remain within the North American EEZ” (2005, p. 6).

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1 88 Great Lakes Shipping, Trade, and Aquatic Invasive Species BOX D-1 Analysis of Transportation Cost Increases That Would Result from a Cessation of Transoceanic Shipping in the Great Lakes A 2005 study sponsored by the Chicago-based Joyce Foundation, which supports efforts to protect the natural environment of the Great Lakes, analyzed the transportation cost benefits to Canada and the United States resulting from the movement of freight car- goes into and out of the Great Lakes via the St. Lawrence Seaway on transoceanic vessels (Taylor and Roach 2005). The methodology used, a comparative shipper cost approach, involved (a) identifying the current level and type of transoceanic vessel traffic on the GLSLS system and estimating its “door-to-door” transportation and handling costs, (b) identifying alternative modes and routings for commerce identified in (a) and estimating associated door-to-door transportation and handling costs, and (c) estimating quantities moving by alter- native modes and routings and calculating the cost for the most likely alternative mode and routing. The analysis centered on an estimated 12.3 million tonnes (Mt) of transoceanic vessel cargo that transited the Montreal–Lake Ontario (MLO) section of the seaway in 2002. During the same year an estimated 17.7 Mt of laker cargo also moved through the MLO section. The transoceanic vessel cargo in- cluded 4.1 Mt of grain exports, 4.6 Mt of imported steel, and 3.6 Mt of other commodities. On the basis of the outlined methodology and commodity handling cost and transportation rate data collected from various sources, the annual cost savings associated with use of transoceanic vessels entering the Great Lakes was estimated at US$54.9 million. Closure of the seaway to transoceanic vessels was estimated to divert 2.97 Mt to lakers, 5.98 Mt to railroads, 1.18 Mt to barge, and 2.16 Mt to truck. It was assumed that the diverted traffic would not increase the transportation rates of the involved modes.

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Economic Benefits of Transoceanic Shipping Through the St. Lawrence Seaway 189 equilibrium framework and require the researcher to select alter- native routes and modes arbitrarily, without consideration of related trade flow patterns and associated costs. Criticism also often centers on various assumptions made by researchers with re- gard to the effect of diverted traffic on transportation rates and the routings of other modes.4, 5 A more recent study estimated the transportation cost savings for all Great Lakes St. Lawrence Seaway (GLSLS) shipping, rather than merely the transoceanic shipping through the seaway consid- ered by Taylor and Roach (Transport Canada et al. 2007). The estimated savings of $2.7 billion per year were calculated in terms of the transportation and handling costs that GLSLS shippers would have incurred had they used other modes of transportation. The methodology was based on a rate analysis and shipper survey, but no further details are provided in the report. No attempt was made to explore the impact on cost savings of alleviating possible congestion on other modes through use of the GLSLS. The com- mittee notes that a more detailed evaluation would need to explore the costs of maintaining the GLSLS system to realize the estimated savings and then to evaluate the benefits and costs of this choice vis-à-vis other transportation investments. In contrast to the Taylor and Roach study, Martin Associates (2001a) provided a more traditional assessment of the economic impact of the GLSLS system. That analysis was based on assess- ment of public data supplemented by interviews with approxi- mately 400 firms at the U.S. Great Lakes ports. (No Canadian data or ports were surveyed.) The analysis identified (a) the direct impact from the employment, income, and revenue of firms 4 Comparing transportation rates does not take into account the costs associated with changes in transportation and logistics systems. These changes can be significant for the people and firms affected and for the economy. 5 The Taylor and Roach study estimates alternative costs of transporting goods by modes and routes other than transoceanic vessels through the seaway. While the transportation rates and associated service levels are the characteristics on which shippers base their traffic allocation decisions, these rates are not the same as the economic costs to society. Such economic costs would measure (and compare) the future value of resources consumed under the alternative transportation scenarios.

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1 90 Great Lakes Shipping, Trade, and Aquatic Invasive Species associated with the maritime community at each port and (b) in- duced impacts resulting from these direct impacts including sup- plier chain linkages and the expenditures from wages and salaries. The employment estimate for 2000 was that “152,508 jobs are in some way related to the 192 million tons of cargo moving on the Great Lakes St. Lawrence Seaway system in 2000” (p. E-2). About 44,000 are the direct jobs, which implies a crude multiplier or rip- ple effect of 3.4: for every direct job, there are 2.4 additional jobs. There is concern whether the number of jobs entirely centered on shipping activities on the Great Lakes is an overestimate. Further- more, the analysis estimates that the direct job increases were larger (by 50 percent) than the national increase in employment over the period 1991–2000. A companion study (Martin Associ- ates 2001b) assessed the cost savings associated with the GLSLS system at $1.2 billion for 2000. However, the methodology was not detailed, so what alternatives were explored is not clear. The report also claims that 37,000 jobs might not have located in the region without the Great Lakes as a navigable system—an asser- tion that does not appear to be based on any formal economic assessments. A report from the Midwest Regional University Transporta- tion Center (2006) provides a more detailed assessment of the transportation system for the region comprising the states of Minnesota, Iowa, Wisconsin, Illinois, Indiana, Michigan, and Ohio. Valuable data and perspectives are provided, but the focus is on the anticipated effects of increasingly congested road and rail networks. The authors put forward ideas about coordination among networks and the notion that water-based transportation systems could play an increasing role in meeting the future needs of the region. The analysis does not, however, provide the type of integration with a CGE model that would be necessary to evaluate fully the impacts and savings associated with seaway closure. Cangelosi and Mays (2006) have provided a scoping report for the analysis of the potential impacts of commercial vessels on the GLSLS that would be free of invasive species. As befits a scoping study, the economic analysis in this report relies on other documents,

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Economic Benefits of Transoceanic Shipping Through the St. Lawrence Seaway 191 such as the Taylor and Roach study (2005) and Martin Associates reports (2001a; 2001b). Good examples of supply chains are pre- sented, thereby providing the basis for consideration of disruptions of reroutings. However, the report does not provide the formal analysis that would be required to assess the economic impacts of seaway closure to transoceanic vessels. Finally, an ongoing investigation of the Midwest is being con- ducted by the Brookings Institution (Austin and Affolter-Caine 2006); to date, the project is at the stage of reporting trends and the spatial distribution of economic activity and of positing some pol- icy initiatives. No formal economic model underlies the report. In assessing the results of its literature review, the committee observed that the Taylor and Roach estimate of the cost benefit of transoceanic shipping on the Great Lakes (US$55 million annu- ally) has been widely cited. Clearly, this initial estimate has con- tributed to the discussion of closure of the seaway to transoceanic vessels as a possible means of preventing further ship-vectored introductions of AIS into the Great Lakes. The committee notes, however, that a single estimate with recognized limitations and imperfections is not a robust basis for informing a major transporta- tion policy decision—whether to close the seaway to transoceanic vessels. In the case of deregulation of the U.S. airline industry, for example, numerous analyses by experts with varying perspectives and areas of specialization explored the likely implications of deregulation. The results of these analyses were available to inform the public policy decision to proceed with deregulation. As the committee’s literature review indicates, current analyses do not provide a comparable level of understanding about the likely eco- nomic impacts of any decision to close the seaway to transoceanic vessels. Analyses of the environmental and quality-of-life impacts would also be needed to inform any such decision.

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1 92 Great Lakes Shipping, Trade, and Aquatic Invasive Species REFERENCES Austin, J., and B. Affolter-Caine. 2006. The Vital Center: A Federal–State Compact to Renew the Great Lakes Region. Brookings Institution, Washington, D.C. www.brookings. edu/metro/pubs/20061020_renewgreatlakes.pdf. Cangelosi, A., and N. Mays. 2006. Great Ships for the Great Lakes? Waterborne Trade Free of Invasive Species in the Great Lakes–St. Lawrence Seaway System: A Scoping Report for the Great Ships Initiative. Northeast-Midwest Institute, Washington, D.C. www.nemw. org/scopingreport.pdf. Martin Associates. 2001a. Economic Impact Study of the Great Lakes St. Lawrence Seaway System. Prepared for the U.S. Saint Lawrence Seaway Development Corporation, Washington, D.C. www.greatlakes-seaway.com/en/pdf/impact_study_en.pdf. Martin Associates. 2001b. Economic Impact Study of the Great Lakes St. Lawrence Seaway System, Transportation Cost Savings. Prepared for the U.S. Saint Lawrence Seaway Development Corporation, Washington, D.C. www.greatlakes-seaway.com/en/pdf/ impact_costanalysis_en.pdf. Midwest Regional University Transportation Center. 2006. Upper Midwest Freight Corri- dor Study. University of Wisconsin, Madison, and Intermodal Transportation Insti- tute, University of Toledo, Ohio. Taylor, J. C., and J. L. Roach. 2005. Ocean Shipping in the Great Lakes: Transportation Cost Increases That Would Result from a Cessation of Ocean Vessel Shipping. Grand Valley State University, Grand Rapids, Mich., Aug. www.gvsu.edu/cms3/assets/C6D78A67- 0AEF-0264-A38619EC6FB0793A/OceanShippingReport091105.pdf. Transport Canada, U.S. Army Corps of Engineers, U.S. Department of Transportation, St. Lawrence Seaway Management Corporation, Saint Lawrence Seaway Development Corporation, Environment Canada, and U.S. Fish and Wildlife Service. 2007. Great Lakes St. Lawrence Seaway Study. Final Report. www.glsls-study.com/Supporting% 20documents/GLSLS%20finalreport%20Fall%202007.pdf.