Trade between the United States and Mexico has skyrocketed since the 1993 implementation of the North American Free Trade Agreement (NAFTA), but uncertainty surrounding the agreement’s renegotiation poses serious risks for future cross-border trade growth.
Trade between the United States and Mexico has been increasing over the last several years, but the market continues to face headwinds from ongoing cross-border transport challenges and uncertainty regarding the future of the North American Free Trade Agreement (NAFTA) between the U.S., Canada and Mexico.
According to the Office of the U.S. Trade Representative (USTR), in 2016, the U.S. imported $294.2 billion worth of goods from Mexico, a 48.4 percent increase compared with 2006 and a 637 percent jump from 1993, which was prior to NAFTA kicking into gear on Jan. 1, 1994. Meanwhile, U.S. goods exports to Mexico totaled $231billion in 2016, surging 72.7 percent from 2006 and 455 percent from 1993.
Overall, these figures made Mexico the United States’ second largest market for both goods imports and exports in 2016.
Goods in Mexico are made at a competitive price to China, and some of the most significant products on the market, such as cars, refrigerators, aerospace and technological goods, are now produced in Mexico, Jordan Dewart, president of Yusen Logistics Mexico, told American Shipper in a phone interview.
Yusen Logistics, the third-party logistics provider (3PL) subsidiary of Japan’s NYK Group, first set up shop in Mexico 20 years ago due to NAFTA, initially focusing on cross-border trade between the U.S. and Mexico. The company later expanded its Mexico operations to include ocean and air freight forwarding.
Persistent Challenges. Despite strong trade between the U.S. and Mexico, cross-border challenges remain, particularly when it comes to trucking.
It is economical to import and export freight from/to Mexico, but the transaction process is complex, Tom Sanderson, chief executive officer of transportation management services and logistics technology provider Transplace, said in a recent interview. When cargo moves between the two countries, the process typically involves three different trucks, and sometimes involves two separate trailers, Sanderson explained. Often, one truck will transport the freight up to the border, a second truck will haul it across the border, and then a third truck will take it the rest of the way after it crosses the border. It’s also not uncommon for the Mexican trucking company or U.S. trucking company to not want its trailer to move across the border, meaning that often times, freight will be transferred to a separate trailer before crossing the border. This complexity is good for companies like Transplace because it serves as a barrier to entry for competitors, since only a handful of service providers are equipped to handle both the customs clearance and freight transportation processes, Sanderson said.
And although the Customs-Trade Partnership Against Terrorism (C-TPAT), Nuevo Esquema de Empresas Certificadas (NEEC), and Free and Secure Trade (FAST) programs have provided a higher level of security on shipments crossing the border, there has not been a significant reduction in the crossing times, Jose Minarro, senior vice president of customs in Mexico for Transplace, told American Shipper.
In addition, Mexico is adding new requirements in 2018, which will mean less trucks will be able to use the FAST lane. Currently, only the shipper, Mexican carrier, cross-border drayman and U.S. broker need to be C-TPAT certified to utilize the FAST lane, but the new requirements mean that the Mexican carrier and Mexican broker will also have to be NEEC approved to use the FAST lane on top of the existing entities, Minarro explained.
Further complicating matters, because there are more goods moving from Mexico to the U.S. than the other way around, there are not enough southbound trailers to accommodate rising northbound demand.
To tackle this issue, Minarro said Transplace secures yearly contracts that guarantee capacity throughout the year; transloads from Mexican to U.S. equipment on the U.S. side of the border; and often co-loads freight from two shippers in the same trailer, intermodal container or railbox car, cutting down on the need for additional capacity. The company has also set up distribution centers in Laredo, Texas, to avoid the U.S. leg for destinations in the southern regions of the U.S.
Dewart explained that while Mexican factories used to source component parts and raw materials exclusively from the United States, many are now getting those same inputs from Asia via ocean transport, thus cutting down on trailers coming down from the U.S.
Another challenge with cross-border transport is that Mexican carriers are not expected to carry cargo insurance, Mike Burkhart, director of North America Surface Transportation, Mexico region at 3PL C.H. Robinson, said in an email.
“In fact, insurance as we understand it in the United States simply does not exist in Mexico,” he said. “Yes, you can find plenty of companies to offer insurance—and to collect your premium—but collecting on a claim can be difficult due to the many exclusions.
“The best practice is to add a separate endorsement to your global insurance policy for cargo insurance to cover the value of the freight while it’s in Mexico,” he added.
And on the U.S. side, the impending electronic logging device (ELD) mandate, which takes effect Dec. 18, is expected to cause an initial tightening of trucking capacity until the industry adapts, as ELDs will ensure carriers are following proper hours-of-service regulations. Prior to the mandate, drivers were already required to record their work hours and stay within the federal guidelines, but could much more easily falsify those records using the traditional paper logbooks.
While trucking companies are facing capacity constraints when it comes to trade between the U.S. and Mexico, it appears to be a different story for rail operators.
Trucking capacity has been tightening and rates increasing on the U.S. side of the border throughout 2017, but recently this has been seen on the Mexican side as well, according to C. Doniele Carlson, AVP of corporate communications and community affairs at Kansas City Southern (KCS) Railway Co.
“This has to do with a growing trade volume, increasing diesel prices and insurance premiums, as well as driver shortages,” she said in an email.
Carlson noted that railroads, while less geographically flexible than trucks, may be positioned to absorb some of the excess demand.
“Intermodal trains crossing the border every day, in most cases, do so with open capacity in terms of train length and cars, providing capacity on the line of road for growth,” she said. “This will, of course, require that containers are available in the market to move on rail, so that this capacity can be brought to bear. However, rail is not subject to the same capacity constraints as trucking.”
the border every day,
in most cases, do so with
open capacity in terms
of train length and cars,
providing capacity on the
line of road for growth.”
C. Doniele Carlson,
AVP of corporate communications
and community affairs,
Kansas City Southern Railway Co.
Political Unpredictability. Whether it’s trucking operators, railway companies, or 3PLs, the logistics industry as a whole remains hopeful that the current administration will not plug the plug on NAFTA. President Donald Trump has repeatedly floated withdrawal as an option, but it remains to be seen whether this is a genuine threat or simply a negotiating tactic.
Sanderson said withdrawing from NAFTA would be extremely harmful for the U.S. economy, specifically for rural farmers. Scrapping the trilateral trade deal would result in an increase in tariffs, and would hurt U.S. consumers because the prices of goods such as appliances and fresh produce would rise, he said.
Dewart said Yusen is “optimistic that NAFTA will remain intact. Regardless with what is done in the short term, the factories and supply chains are already well established; the flow of goods between the U.S. and Mexico is efficient and effective. Both countries have benefitted greatly from NAFTA.”
Meanwhile, Carlson said that KCS sees the importance of trade between the U.S. and Mexico firsthand, as export grain is the company’s largest southbound cross-border commodity.
“If the U.S. would like to make progress toward closing the $63 billion trade deficit with Mexico, look no further than the opportunity to export refined products, LPG’s and plastics into Mexico,” she added.
Bob Mihok, president and chief executive officer Kuehne + Nagel North America, said that because of NAFTA, “consumers have access to a wider choice of products at competitive prices and businesses gain by expanding their market share and achieving economies of scale,” something that could go away should the U.S., Mexico and Canada fail to reach an agreement on a renegotiated deal.
“NAFTA also affects the U.S. border communities, like our offices in Texas and California, which depend on cross-border trade for jobs in warehousing, transportation and other services, etc.,” he added.
Despite the logistics industry expressing strong support for a renegotiated NAFTA, U.S. Trade Representative Robert Lighthizer said after the latest round of formal discussions he remained concerned about the lack of headway made on key issues, namely the reversal of the United States’ bilateral trade deficits with both countries.
“Thus far, we have seen no evidence that Canada or Mexico are willing to seriously engage on provisions that will lead to a rebalanced agreement,” Lighthizer said. “Absent of rebalancing, we will not reach a satisfactory result.”