Summary Report (Page 1 of 4)

"Without transport, it (the Single Market of the Union) would exist only in name. Without efficient, compatible, sustainable transport systems and operation, it obviously will not flourish."—European Commission, 1999

Introduction

One of the important trends in international commerce over the past decades has been the creation of common economic markets through the relaxation and elimination of cross border barriers to passenger and freight movements. The North American Free Trade Agreement (NAFTA) is an example of how several nations are developing such a market. The European Union (EU), another such example, has more years of experience in developing governmental and private sector strategies as part of a transition to an open borders policy. The purpose of this international scan was to investigate the issues, constraints, opportunities, and challenges faced by the European Union in developing an open borders policy, and the strategies used in implementing this policy. In addition, the scan was interested in identifying how the transport industry is responding to this changing market.

Freight logistics and governmental strategies to foster international commerce involve very complex and specialized processes. Understanding the motivation for logistics decisions and their response to different economic influences is an important point of departure for investigating how multi-national freight flows will reflect the characteristics of economic markets. This scan thus purposely focused not only on governmental policies and the steps in their development, but also on how freight terminal operators and users of the transportation system have responded to economic incentives/ disincentives.

The scan panel reflected a wide range of interests and concerns for both national and international freight movement. The Federal Highway Administration (FHWA) and the American Association of State Highway and Transportation Officials (AASHTO) jointly sponsored this scan. In addition to FHWA and AASHTO officials, the panel included representatives from the national ministries of transportation for Canada and Mexico, the departments of transportation for the states of Florida, Minnesota, and Ohio; the metropolitan planning organization for the Chicago metropolitan area, the Foundation for Intermodal Research, and a university professor in transportation planning and policy. These panel members represented a diverse set of interests and expertise in the areas of policy, planning, regulatory enforcement, freight logistics and economic development.

The panel targeted selected government agencies, terminal operators, logistics providers and shippers to gain a broad understanding of how the EU has been attempting to develop a common market, and how the private sector has been responding. Over a period of May 28-June 10, 2001, the panel met with representatives from the national ministry of transportation for the Netherlands and from the European Commission in Brussels; intermodal rail terminal operators and service operators in the Netherlands, Italy, and Switzerland; port officials in the Netherlands and Italy; managers of the Frankfurt, Germany airport; freight logistics companies in the Netherlands and Germany; and the president of an Austrian trucking company. The questions that served as the basis for each visit are presented in Appendix A.

Given limited time, the panel did not meet with other governmental agencies and private companies that could have provided a broader perspective on the issues facing the development of a common European market, groups such as national railways, inland water or coastal shipping firms, and the ministries of transportation for other countries. In addition, the panel did not meet with non-government organizations representing environmental protection/sustainability issues.

Lessons from this experience are very relevant to the U.S., Canada and Mexico in developing a common North American market. In addition, these lessons are important for national and sub-national investment decisions as they relate to enhanced freight movement within individual countries, serving primarily the domestic market. For example, case studies of public/private sector freight investment initiatives as found in Europe can provide useful lessons on how such initiatives could be undertaken in North America.

The Context

Before presenting the results of the scan tour, it is important to first illustrate the important differences between the EU and North America. As shown in Tables 1 and 2, there are some important distinctions between the two. It is not surprising that the extent of road and rail track is much greater in North America than it is in the EU given its much larger land mass. The larger expanse of the U.S., for example, results in the significantly greater average rail and truck trip distance and greater rail mode split (measured in tonne-kilometers) shown in Table 2. This table, however, indicates a substantial carriage of freight by truck and short sea transport in the EU. This is especially striking for truck movements given the short average trip distances.

Table 1—Comparison of EU-15 and North America

	EU-15	U.S.	CAN	MEX
Population (millions)	375	270	31
Urban population (millions)	78	77	24
Area (million km2)	3.24	9.6	10.0
GDP (EUR billion)	7,586	7,760	771
Transport infrastructure investment as % of GDP	1.1
Percent of household spending on transport/communications	15.2	14.0	17.2
Ave. transport costs as % of value of products transported	5-6	3-4	4-6
Motorization (cars/1,000 people)	451	488	454
Exports (EUR billion; not including intra-EU)	936	1,019	350
Imports (EUR billion; not including intra-EU)	1,023	1,301	311
Road network (million kms)	3,500	6,460	1,427
Rail network (million kms)	156	240	.05

Source: EU Statistical Pocketbook, 2000

Table 2—Freight Transport, EU-15 vs U.S. 1998

	Billion tonne-kms		Mode split by tonne-kms		Ave distance (kms)
	EU-15	U.S.	EU-15	U.S.	EU-15*	U.S.
Road	1,254	1,499	44%	28%	110	685
Rail	240	2,010	8%	37%	245	1,355
Inland water	121	521	4%	10%	280	767
Pipeline	88	905	3%	17%	170	1,224
Short sea	1,167	460	41%	8%	1,430	na

* Reported in EU Statistical Pocketbook as number of kms per tonne
Source: www.europa.eu.int
(Note: 1 ton-mile = 1.46 tonne-kms)

The respective role of governments and of the private sector is an important institutional difference between the two markets. In the U.S., for example, freight rail services have traditionally been owned and operated by private firms (Conrail notwithstanding). In Europe, national railways, in various ways connected to national governments, have been the norm. European governments tend to be much more active in central planning than the U.S. national government likely not only because of the historical development of governance in both, but also because of the relative size of the countries. And in Europe, although France and Germany tend to have a large influence on the economic market and on what happens in the EU, many other countries can play pivotal roles in defining overall directions. In North America, the U.S., because of its size and economic position, has the greatest level of influence.

Other differences between the EU and North America identified by those interviewed include a more fragmented customer base in Europe, language/cultural differences, different transport and labor regulations, the use of value added tax (VAT) and customs revenues for the EU budget, and historically different payment methods and financing schemes.

Perhaps the largest difference between the two economic markets is the large number of countries involved and the history that has defined their relationship. With the North American market consisting of only three countries, the level of complexity and institutional organization that might be needed for coordinated action is much less than what one would expect for a 15-nation economic and political union. In addition, a long history of European conflict and competition has resulted in a centuries-held perspective of national borders as protection against incursions from neighboring countries. The removal of customs at the national boundaries, the move toward a common currency and the many other initiatives that have changed centuries of national prerogatives in Europe represent a truly remarkable development in European, if not world, history.

Europe in a Changing Global Market: The Challenges

The past 50 years have seen dramatic change in Europe; how the Europeans see themselves and their role in the world. Starting with the Treaty of Paris in 1951 that established the European Coal and Steel Community to the latest Treaty of Nice, Europe has evolved institutional relationships and frameworks that have created an economic powerhouse. Important throughout these past 50 years was the creation of an internal economic market that provided barrier free access to all member states. Those interviewed during this scan used terms such as "harmonization" and "liberalization" to describe the evolution of the domestic market. In essence what they meant was the removal of barriers and constraints to market access and movement within the European Union, resulting in an integrated and commercially viable economic market second to none in the world.

The 15 nations that currently make up the EU truly represent an impressive economic market. With over 370 million people (6 percent of the world population), the EU is the largest trading group in the world, accounting for one fifth of global trade when counting movement of goods within the EU. The value of trade in the EU is equivalent to 18 percent of the 15 member state's gross domestic product. In the service sector, the EU leads the U.S. in share of world trade, 24.9 percent to 20.1 percent (1998 dollars). The EU recognized early the opportunities presented by a global market and the ingredients needed for competitive success at the global level.

Figure 1 is perhaps the most telling testament to the success of the EU in creating a vibrant economic market and the seeming impact of removing intra-EU transport barriers. As shown in this figure, the rate of growth in both goods and people movement has exceeded the growth rate in GDP; this is especially the case for goods movement. The growth rate in goods movement has averaged approximately 3 percent per year over the decade of the 1990's. Although the positive correlation between GDP growth and transport system usage has been known for many years, the marked increase in goods movement as shown in Figure 1 is remarkable.

Figure 1: Transport and GDP Growth in EU, 1985-1999

Notes:
(1): passenger cars, buses & coaches, tram+metro, railways, air
(2): road, rail, inland waterways, pipelines, sea (intra-EU)
Source: EU Statistical Pocketbook, 2000

Although this scan was not intended to examine the overall causal linkage between economic activity and the creation of an open market, the economic success of the EU over the past several decades can certainly be attributed in part to opening or liberalizing the market. Making the internal European market more transparent has lead to more transport demand, thus leading to significant transportation challenges facing the EU and member nations. The following challenges were identified by those interviewed:

• The significant increase in passenger and freight movement over the past 20 years has led to high levels of congestion on line-haul facilities and at transshipment points. Many motorways experience large delays, especially within and near urban centers. Ports, airports, and rail terminals are especially prone to peak congestion periods. This congestion is likely to get worse. Under current policies, freight transport in the EU is expected to grow 40 percent by 2010, with the highest growth expected for the road sector (50 percent). In some countries, the increase will likely be even greater. In Germany, for example, the German Ministry of Transport forecasts a growth in freight transport between 1997 and 2015 of 64 percent to 600 billion tonne-kilometers.
• This congestion is most severe at strategic geographic barriers that hinder continental travel because of the "funneling" effect they have on traffic flow. For example, the Alps, Pyrenees, and English Channel were identified as critical links in the European transport network where significant congestion occurs (see Figure 2). Providing additional capacity at these locations to handle this congestion requires substantial investment.
• In many cases, freight transport movements must share facilities with passenger movements, often to the detriment of freight transport productivity. Passenger rail service, which provides frequent service between most European cities, receives priority treatment on many rail lines. Because of the need to coordinate train movements, freight trains are limited in length so that they do not infringe upon the movement of passenger trains. Similarly, truck transport shares the right-of-way with passenger vehicles. It is not uncommon to see long queues of trucks on major motorways intermixed with passenger vehicles, waiting for congestion to clear. One of the interesting questions raised, but not answered, during this scan was the likely impact of the high speed rail network being developed on its own right-of-way throughout Europe. Will this free additional capacity on the local rail network to provide for more productive freight rail service?
• Historically, national transport systems were designed in part for national defense purposes, thus the physical design (e.g., rail track gauge) and operations strategies (e.g., ability to use locomotives across national boundaries) have often been incompatible. There are 37 different combinations of rail gauge/tunnel clearance/power systems in Europe. This legacy has left a significant challenge to modern Europe of providing a compatible transport network that is interoperable.
• Similarly, the historical development of individual national transport systems has resulted in a level of transport infrastructure development that varies substantially across the EU. Some of the newest members of the EU, e.g., Spain, Portugal, Greece, and Ireland, have significant needs for upgraded transport systems. Even in some of the first member states, there are regions where adequate transport infrastructure is lacking (e.g., the southern part of Italy). The challenge of providing a minimum level of transport mobility across the EU is exacerbated when one considers the wide range of transport capability of the countries that are seeking membership in the EU, the so-called accession states.
• Transport policy is integrally linked to EU and national policies on environment/ sustainability/energy. This is not surprising given that Europe has recognized for some time the important role that transport has in achieving economic growth, environmental quality, and community health. However, this linkage necessarily leads to different interpretations of what role transport will have in achieving the many different goals established by the European Parliament and/or national governments. For example, during the scan visit, there was considerable debate in the media and among transport officials on what level of reduction in vehicle kilometers traveled was necessary to achieve sustainability goals. Transport officials, with a seeming closer connection to transport's role in economic development, were, in the minds of those more concerned about sustainability, not willing to target significant reductions. In many ways, this debate could provide the basis for Europe's ability to achieve what it has established as its desired sustainable future, while still remaining economically competitive.
• The changing global economy is also providing challenges to the EU. Globalization of production, procurement, and distribution; e-logistics and e-transport; and outsourcing of what traditionally had occurred internal to a company or country have caused many government and private sector officials to rethink what types of investment and at what levels are necessary to remain competitive. For example, the Netherlands is home to 57 percent of all European distribution centers for U.S. companies. Seven-five percent of these centers are out-sourced. This changing economy has especially affected logistics decisions, which has led to new organizations and strategies for reducing the logistics costs associated with freight movement within Europe and overseas (e.g., the German national railway bought the Dutch rail freight unit to achieve economies of operation). The changing economy has been a large challenge for European freight shippers and operators where different business customs and practices have been, and still are, common in different parts of the EU.
• The key challenge for EU transport policy is shown in Figure 3. Whereas the EU and national governments are putting greatest emphasis on shifting freight mode shares from road transport to rail and inland water, the historical patterns of usage have shown exactly the opposite trends. Freight rail mode share has declined significantly over the past 30 years; inland water mode share has declined as well, although not at the same rate. All of the government officials met during the scan discussed the importance of rail and inland water freight services, combined (i.e., intermodal) freight services, and the use of road pricing to encourage a shift toward these services. The emphasis on intermodal freight services is especially interesting given the low mode share for this type of service currently. Approximately one (1) percent of all domestic freight movement in the EU as measured in tonne-kilometers occurs by intermodal transport. Fourteen (14) percent of international goods transport occurs by intermodal. Several of those interviewed also expressed concern that the quality and price of rail service, the operational difficulties in providing cross border service, and the organizational culture of the rail companies themselves did not bode well for achieving this policy goal. In some sense, the "push" toward rail and inland water for freight movements is an "experiment" in the interaction of government policy, market response, and institutional capability. It will be worth watching to see what happens.

Figure 3: EU Transport System Freight Mode Split, 1970-1998

In summary, Europe faces many of the same transportation problems found in North America. Economic growth has resulted in significant increases in travel, both passenger and freight. In the transport sector, infrastructure development and operations have not kept pace with the tremendous increases in freight demand. The "common market" concept has certainly resulted in new challenges to the transport sector. The following sections describe how both the private sector and governments in Europe have responded to these challenges.

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