U.S.-Mexico freight dynamics in times of contracting capacity

The bankruptcy of several trucking firms during 2019 put a spotlight on the presence of excess capacity in the market. This “excess” occurred because of a surge in freight in the last couple of years, particularly in 2018. In turn, some trucking fleets bought more equipment in the hopes of cashing in on the robust market. As the market plateaued and trends began to reverse, the fortunes of these trucking companies sank along with it. 

The collapse of Celadon in December 2019 was a huge blow. It is the largest U.S. truckload carrier company to declare bankruptcy to date, putting 3,500 employees out of work and dramatically impacting the capacity available in the market. This was especially true in the Interstate 35 corridor that connects Laredo, Texas, to the Midwest, where Celadon was a dominant player in hauling automotive freight. 

Aside from Celadon’s departure, several major trucking firms pulled out or limited their trailers moving into Mexico, exacerbating the shortfall in capacity across the border. This decline in the number of U.S. equipment circulating in Mexico boils down to simple economics – trucking firms find better return on investment on their trailers when they are moved around in the U.S., rather than in Mexico. 

With Laredo being the largest freight corridor in and out of Mexico to the U.S., the potential impact on the corridor during the peak season of May through July may be sizable. FreightWaves spoke with Troy Ryley, president of Redwood Mexico at Redwood Logistics, to understand the dynamics of cross-border trade in times of contracting capacity. 

“For trailers that were northbound (from Mexico to the U.S.), the objective was to not violate any seals or do transloading at the border. They would move straight through to somebody’s facility in say, Chicago or Detroit,” said Ryley. “For trailers that were southbound (from the U.S. to Mexico), it has usually been transloaded. This is because Mexico has a lot of stringent regulations to match paperwork with the actual freight. So the millions of square feet of facilities in Laredo are Mexican brokers’ facilities.”

Nearly every southbound freight load is physically offloaded and checked, before it is loaded on either a U.S. or a Mexican trailer to its final destination in Mexico. This is critical for Mexican customs brokers, as the country’s regulations dictate that they are liable for the freight’s classification. This means they could be penalized and even have their licenses revoked if there is a serious irregularity in the freight being moved. 

This explains the density of these facilities in Laredo, which exist to take the freight out of the trailers and inspect them to ensure proper classification before they move into Mexico. Unlike their Mexican counterparts, the U.S. customs brokers do not hold liability on the goods entering U.S. borders from Mexico, with regulations clearly stating that the liability resides with the importer of record. 

Ryley explained that this is especially hard on companies that transport fragile and bulk merchandise like plastic pellets or glass artifacts from Mexico into the U.S., as they seek to transport their freight without transloading it at the border. Because fewer U.S. trailers are in Mexico, the exporters are forced to pay premiums to secure such trailers for northbound freight. 

“The lack of equipment or the pull-out of carriers has put pressure on clients to consider other ways of moving their freight. The ones that need to have U.S. equipment are paying a premium, while the ones that don’t need to have it are looking at other options to continue keeping their freight rates low,” said Ryley. 

Ryley contended that to beat the adverse conditions, it is essential for shippers to not tie  themselves to just one particular carrier, but to build flexibility into their supply chains by having alternatives and a contingency plan in place. Mexico is currently teetering on the edge of a recession; therefore it is critical to scramble quickly and work with multiple carriers to have an uninhibited freight flow. 

The new USMCA trade deal will also shake up existing situations, as it warrants an increased content requirement for parts in the automotive industry – a mainstay of the Mexican economy. This is expected to drive more production in all three countries, increasing trade between them and also ensuring more availability and flow of both northbound and southbound freight.

“At Redwood Mexico, we are lucky to have our own assets through our carrier Freight Exchange F/X. In addition to that, we are also one of the larger truck brokers in the U.S., and we’ve already built in plenty of alternatives for our clients to move freight – either via our existing assets or via our brokerage group – even when several trucking companies exit the market,” said Ryley. 

In addition, Redwood also has a comprehensive transloading alternative at the Laredo border. During the upcoming peak season, the company will use best-in-class carriers at the Mexican border to carry freight to its Laredo transloading facility, which will then be loaded into carriers’ trailers north from Laredo to the destination chosen by the client.