A major theme of President Trump's 2016 election campaign was the argument that the U.S. had been bested in trade negotiations, and that there was a pressing need to renegotiate many of those international agreements. True to his word, promptly after the inauguration in January, the administration advised signatories to the Trans-Pacific Partnership (TPP) agreement that the U.S. was withdrawing from that arrangement. That was followed in May 2017 by an announcement that the U.S. intended to initiate negotiations with Canada and Mexico over modernization of the North American Free Trade Agreement (NAFTA).
The prospect of major changes in trade terms among the three North American nations was met with trepidation by a large number of companies with operations in those countries. Foremost among them were auto companies and their suppliers, given the high degree of integration across borders. But many other industries voiced concerns, from U.S. corn growers who have enjoyed huge increases in exports to Mexico to medical device manufacturers who rely heavily on Mexico to source components. The freight railroads of all three countries were deeply concerned.
From the freight railroads' perspective, international trade makes up a very sizeable portion of their business base. The Association of American Railroads (AAR) estimates that over 42 percent of all shipments by rail are associated with export or import business. While the larger portion of that traffic is trade with Asia and Europe, the volume of traffic with Canada and Mexico is still quite substantial. Rail revenue of U.S. railroads for traffic that originates in Canada or Mexico and merely passes through the U.S. exceeds $700 million every year.
The most at-risk of the freights are Kansas City-based, Kansas City Southern (KCS) through its subsidiary KCS de Mexico; and Mexico City-based Ferromex, which is controlled by Grupo Mexico. Together, they operate concessions from the Mexican Government that account for 72 percent of the route miles in Mexico.
Forty percent of KCS's total traffic each year is from its cross-border business. KCS has invested heavily in its KCS de Mexico subsidiary by improving track, yards and bridges. It has added freight cars, locomotives and built a new office building. For the company, any threat to reduce trade between the U.S. and Mexico is a serious matter.
Grupo Mexico is similarly committed to its international trade. It credits a 23 percent increase in intermodal to its import/export business, and attributes much of its volume increases in automotive, steel and agricultural products to traffic interchanged with U.S. railroads.
So far, developments in this space have been progressing promisingly for the rails. The highly controversial "border adjustment tax," which would have had much the same economic effect as a traditional tariff, appears to be dead. Republican leaders in Congress and the administration have all but abandoned it as an element of the overall tax reform proposal. And, in July 2017, the Office of the U.S. Trade Representative released its summary of objectives in the NAFTA renegotiation. Notably, the goals included, "maintain existing reciprocal duty-free market access" for industrial and agricultural goods. Rather than targeting increased protectionism for U.S. goods, the objectives call for reducing obstacles to U.S. exports.
Some of the objectives promise to improve the flow of goods across the borders. Just a few include: automating import/export processes, reducing import/export forms, and further harmonizing customs data requirements.
All that being said, a theme that runs throughout the objectives is that trade deficits have hurt U.S. workers. While one side of that coin is breaking down existing impediments to U.S. exports, trade protectionism is an ever-present possibility that could always raise its head as negotiations proceed. As a cautiously optimistic Patrick Ottensmeyer, CEO of KCS said on the company's second quarter conference call, "it's just too hard to know exactly where some of these things are going to land."