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How ‘Cabotage’ Laws Erode Transportation Supply Chain Efficiencies

March 4, 2022

The past two years have brought significant public interest in the importance of the supply chain in the efficient delivery of commerce. For those operating within the transportation sector, none of the articles and anecdotes highlighting the current pinch points are surprising. We can now empirically state that North Americans do not like delayed gratification.

As always, in free markets when demand goes up, so do prices. The average dry van rate per mile has increased 26.6% in the last 24 months, according to the Stephens TL Rate Index. This is due to two key factors: a lack of available capacity caused by both equipment and driver shortages; and price competition for those goods that people desire most combined with access to larger supply of free (or low interest) cashflow.

Since KSMTA’s specialty is in freight network engineering – which helps carriers build the most efficient and profitable freight networks possible – we thought it would be useful to highlight some areas of focus and best practices to establish efficient networks. Some of these areas are in a carrier’s full control while others are forces that are counterproductive in free-market economies.

What Is Cabotage?

One counterproductive force that has eroded the efficiency of freight movements for close to a century has an unusually foreboding name: cabotage. Typically, anything with a ‘tage’ suffix brings dark imagery such as sabotage, hostage, and disadvantage.

Let’s explain cabotage from the perspective of a Canadian for-hire carrier, and then the slight differences for U.S. for-hire carriers.

The act of cabotage refers to “forbidden freight movements by foreign carriers from two domestic points.” Cabotage is outlawed not only for road transport, but also for aviation and marine vessels. In fact, the Jones Act, which received public attention during the 2018 hurricane in Puerto Rico, was enacted to prevent marine cabotage.

When a carrier/driver hauls freight from Canada across the border into the U.S., they can only deliver those goods to one or more U.S. destination points. They cannot pick up domestic freight and continue on their route to deliver to additional destinations in the U.S. They must return to Canada on their next loaded/paid move.

Anyone with a cursory knowledge of freight patterns knows that manufacturers and food producers on either side of the border do not construct their facilities and distribution centers with a primary goal of reducing the empty (deadhead) miles for Canadian or U.S. carriers. Further, the type of freight destined for Canada can change dramatically from season to season. As a result, Canadian cross-border carriers need to be more nimble than many of their U.S. counterparts to adjust for these inefficiencies and patterns.

The same rules apply for empty trailer repositioning unless the driver entered and subsequently departed the U.S. with that same trailer. In other words, Canadian carriers maintaining efficient trailer pools for U.S.-domiciled customers is similar in complexity to building a nuclear fusion reactor with a couple of AA batteries.

Flipping the script, for U.S. carriers/drivers entering Canada the rules are similar but different. On both sides of the border, the applicable government agencies are attempting to prevent the movement of domestic goods within their respective borders by foreign carriers/drivers. However, for U.S. carriers, there is one distinct advantage in that repositioning (paid) movement can occur within the borders of Canada.

For example, a U.S. carrier/driver can deliver goods to a customer in Toronto, then pick up a prescheduled domestic load bound for Montreal if that carrier/driver has a subsequent pickup scheduled in Montreal for an export load bound for the U.S. Based on our research, this exception was made to enhance the efficient movement of freight within the large geographic expanse of Canada. However, it underscores a glaring lack of quid pro quo for a continent built using free-market economics.

What Needs To Change?

What exactly should change? The global supply chain is built on an endless series of minor and major variables and potential pinch points. When one of those variables is modified, it can have disastrous effects for the industry and ultimately for the public.

Future-proofing the supply chain should be more about eliminating as many easy-to-change nontechnical barriers as possible, rather than focusing on moonshots (i.e., autonomous trucks and drones). One recommendation is to allow Canadian carriers to build more efficient networks (equating to less empty miles) by allowing for the one U.S. repositioning move.

Updating counterproductive barriers like cabotage will end up protecting the very carriers that these laws sought to protect when they were originally proposed and implemented more than 100 years ago. Further, taking a hard look at global supply chain inefficiencies could highlight other similar barriers to efficient freight movements throughout the North American supply chain.

To discuss your freight network engineering options, please contact a KSMTA advisor or complete this form.

Chris Henry Chief Operating Officer, KSM Transport Advisors & KSMTA Canada

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