Why is the government choosing Team USA on interswitching?

  • National Newswatch

If interswitching were a hockey championship, the Canadian government these days would be cheering for Team USA.

This is, unfortunately, what the federal government’s proposal in Bill C-47 to extend the regulated interswitching distance to 160km in the Prairie provinces amounts to.

Cheering for the other team and changing the rules to benefit the ‘away’ side.

At that 160km, U.S. railways can siphon Canadian traffic onto American routes without any corresponding ability for Canadian Class 1 railways to do the same. Regulated interswitching does not exist in American law.

This punishes our ‘home team’ players, CN and CPKC, along with their 27,000 Canadian employees in two important ways.

First, they will be forced to move traffic for movements up to 160km at a cost-based rate. In other words, they don’t make any money for this work. Second, they will lose the business by moving traffic at cost to their direct competitors in the U.S. for the long-haul portion of the trip and with the U.S. railways charging market rates.

Under the government’s proposal, Canadian rail shippers – in this case mostly global grain companies – will be financially incentivized to contract with an American railway instead of CPKC or CN. This is because those shippers, if they use extended interswitching, will get a below market rate for the first 160km.

All a U.S. railway would need to do is get close to matching the Canadian market rate and they get the business – a job made considerably easier by not having to carry the first 160km haul at regulated rates like Canadian railways will.

The effect of this proposed Canadian law is to subsidize U.S. railways at the expense of Canadian ones fully aware of that outcome. As Daniel Dufort of the Montreal Economic Institute wrote in the Financial Post on May 31, “American railway transport companies must be rubbing their hands with glee before this sad spectacle of self-sabotage.”

Given the Canadian government’s focus on Canada-U.S. competitiveness in the wake of the American Inflation Reduction Act, it is baffling to see such a decision included in the “Made-in-Canada” federal budget – especially in an environment where we must ensure Canada stays competitive.

The impacts of commercial distortions caused by extended interswitching are not imaginary. Perhaps this is what makes the whole thing so puzzling. The regulated interswitching distance was extended to 160km from 30km back in 2014 following a much larger than anticipated harvest and a harsh winter which challenged transportation. It was then removed by the current government in 2017 due to, in part, the fact that thousands of carloads were moving from Canadian supply chains to American ones.

A Canada Transportation Act review panel, led by the Hon. David Emerson, concluded in 2016 that extended interswitching raised competitive concerns vis-à-vis U.S. railways – a conclusion echoed by Transport Canada in 2017 after analyzing significant data provided by Canadian Class 1 railways.

The review panel also found that Canadian railways were receiving rates, set by the Canadian Transportation Agency, that were non-compensatory. This situation is (and was) untenable because railways are market participants. They pay their suppliers and employees at market rates and likewise should be entitled to collect market rates for their service. Railways cannot invest in their infrastructure if the law prevents them from generating revenues.

Each carload lost to an American carrier means less revenue to invest in capacity-expanding infrastructure in Canada. That hurts every Canadian. It also means less work for Canadian rail workers. That is why unions like the Teamsters are rightly concerned by this pro-Team USA policy.

Canada’s ports must also be concerned, because more Canadian traffic moving south under extended interswitching means more goods in Portland or Seattle and less in Vancouver or Prince Rupert.

It is disappointing to see certain groups frame this debate around “integrating” the North American market. Canadian railways welcome intense competition, but on a level playing field. This policy is not “integration.” The lack of reciprocity creates an uneven playing field between carriers whereby U.S. railways are the clear winners and Canadian railways (and supply chains) are the clear losers.

In addition to limiting work available to Canadian union workers, this could decrease fuel revenues earned by provinces and lead to other deleterious consequences in the form of chokepoints at interchanges and added greenhouse gas emissions.

The shipper groups asking for this policy need to consider whether this is something they really want. Is the cheaper-than-globally-low Canadian average rate for 160km worth hindering Canada’s supply chains by adding transit time, losing unionized Canadian jobs, reducing Canadian investment, and raising costs for all shippers?

Extended interswitching is not a competitive tool. It is a blunt regulatory instrument that distorts the market for the benefit of a few shippers and an American rail giant. The government must heed the calls of railways, unions, transportation experts, industry leaders, and others to protect Canadian economic interests.

In a highly competitive global marketplace, we should be skating to where the puck is going, not scoring on ‘own goals.’ We need our political leaders to be cheering for Team Canada, not Team USA.

Marc Brazeau is president of the Railway Association of Canada.