In May, executives from 32 large U.S. corporations, including some of the nation’s largest intermodal companies, sent a letter to President Trump urging him to build on a trading relationship that is “already working well.” But the President seems to be leaning in another direction and it has intermodal executives eyeing the negotiations like hawks.
It’s well known that President Donald Trump campaigned against NAFTA in the lead-up to last November’s election, calling it “the worst trade deal ever.” After he took office in January, Trump warned the United States would leave the North American Free Trade Agreement if the deal wasn’t renegotiated favorably to the US.
That made a lot of US business leaders nervous, not only importers and exporters, but also companies that provide crossborder transportation and logistics services, including the North American Class I railways. Higher tariffs and less-favorable trade conditions, whether through a renegotiated NAFTA or a scrapping of the treaty, would be bad for their businesses.
In May, 32 CEOs of large US corporations—including Lance Fritz, CEO of Union Pacific Corporation, and Patrick Ottensmeyer, CEO of Kansas City Southern—sent a letter to Trump asking him to be sensible about the changes he would negotiate in NAFTA. “We should build on the elements of our trading relationship that are already working well,” was the gist of their message.
A few weeks later, US Trade Representative Robert Lighthizer unveiled the Trump administration’s NAFTA priorities, and the CEOs surely breathed a sigh of relief. Deficit reduction (with Mexico) was included as a major objective as was market access issues with Canada with respect to dairy, wine, and grain. The negotiating objectives also included adding a digital economy chapter and incorporating and strengthening labor and environment obligations that are currently in NAFTA side agreements. Negotiations among the three countries began in mid-August; a second round convened in Mexico after Labor Day.
But, as is his wont, Trump threw a monkey wrench into what seemed to be a reasonable NAFTA renegotiation process. In a campaign-style rally in Phoenix on August 22, Trump said that “we’ll end up probably terminating NAFTA at some point.” “Probably,” the president added, for emphasis.
All of this raises the questions, where does this leave NAFTA and where does it leave crossborder intermodal? The rail chiefs, along with their fellow CEOs, can’t rest quietly just yet.
NAFTA the Intermodal Generator
The CEOs, in their letter to Trump, emphasized the benefits of crossborder NAFTA investments. The railroads, for their part, have made billions in investments, encouraged by NAFTA, in an effort to make crossborder intermodal work. (See sidebar on page 14)
And work it has. The Association of American Railroads came out with a study recently showing that 42% of carloads and intermodal units, and more than 35% of annual rail revenue, are directly associated with international trade.
Since NAFTA was implemented in 1994, trade between the United States and Mexico has nearly quadrupled and agricultural trade has increased five-fold. That’s been good news for the Class I railroads that carry a lot of traffic into and out of Mexico and Canada: UP, BNSF, and KCS. KCS, through its subsidiary Kansas City Southern de Mexico, generates 40% of its annual traffic from crossborder business, in addition to movements within Mexico. BNSF’s total rail volume more than doubled with NAFTA.
NAFTA also helped fuel Canadian National and Canadian Pacific Railways’ expansion into the U.S. and BNSF into Canada. NAFTA enabled KCS to extend into Mexico by acquiring Transportacion Ferroviaria Mexicana. UP generates 40% of its annual volume from international trade— including 12% from crossborder trade with Mexico—and owns a 26-percent stake in Ferrocarril Mexicano (Ferromex).
Crossborder trade between the United States and its closest neighbors and largest trading partners has grown prodigiously since NAFTA came on the books, and so have the crossborder intermodal services that offer shippers more options in getting their products to and from the NAFTA countries. The economics of crossborder transportation increasingly has justified the use of intermodal rail as an alternative to crossborder truck moves. As with domestic hauls, longer moves make intermodal more attractive when compared to trucks.
“The railroads seamlessly move containerized equipment between borders,” said Bryan Foe, vice president of intermodal at C.H. Robinson. “Freight moving more than 1,000 miles from many U.S. points to major Canadian or Mexican metropolitan areas can be serviced via rail.”
Two-way, U.S.-Canada intermodal traffic has increased by 38.5% since 2003. The southbound leg, where there is more capacity, increased by 353% during that same period. Crossborder rail trade with Mexico reached one-million rail carloads in 2014. Typical southbound trade includes grains, plastics, chemicals, and auto parts. Northbound trains transport autos, home appliances, beer, and floor tiles.
All Rail Transborder Service
Rail carriers are increasingly offering all-rail transborder service in the three NAFTA countries. KCS launched the first such service between the U.S. and Mexico service in May 2014, partnering with Ferromex. The five-day per week service runs from Chicago to El Paso, then via a steel-wheel interchange onto Ferromex’s line to Guanajuato.
CSXT Intermodal service between the eastern United States and Mexico is available via a service called Streamline Passport, a door-to-door solution for shippers to more than 100 Mexican locations. Passport rates include all border fees, fuel surcharge, and container per diem charges in Mexico. CSXT Intermodal ensures that all customs requirements are met when shipping crossborder freight.
Last year, BNSF and the Mexican rail carrier Ferrocarril Mexicano (Ferromex) launched a joint intermodal service for freight moving between Chicago and Silao. Also in 2016, KCS and BNSF jointly launched a new five-day-per-week intermodal service connecting Chicago, Dallas, and other markets on BNSF’s lines with several points on KCSM’s network.
Ferromex started a service with UP between Chicago and Monterrey about three years ago. In the first half of 2017, Ferromex’s intermodal traffic grew by six percent. Ferromex, together with its sister company Ferrosur—both owned by Grupo Mexico—expect similar results for the whole of 2017.
U.S. and Mexican customs agencies are working jointly to expedite the movement of crossborder freight by implementing a paperless rail e-manifest process so that shipments clear customs in the interior of the destination country. “That is likely to be finished on both sides of the Mexico-U.S. border by the end of this year,” said Iker de Luisa, director general of the Asociación Mexicana de Ferrocarriles (AMF).
As the CEOs wrote to Trump in May, “Uncertainty about the future of America’s terms of trade with Canada and Mexico would suppress economic growth and may cause political reactions that undermine U.S. exporters and their significant growth opportunities in these markets.”
Railroads, to include their intermodal components, exemplify the progress that has been made in three-way NAFTA trade. “Railroads in Canada, the U.S., and Mexico have the same standards for infrastructure and other operational specifications such as mechanical standards and the use of radio spectrum,” said de Luisa. “It is an integrated network.”
It’s no wonder the North American railroad executives are watching the NAFTA negotiations like hawks. They have a lot riding on the results.