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What’s Next For NAFTA?

On January 1, 1994, the landmark, sometimes controversial North American Free Trade Agreement between Canada, Mexico, and the United States came into effect.

Over 20 years later, NAFTA is the largest free trade area in the world, which, according to the Office of the U.S. International Trade Administration, "links 450 million people producing $17 trillion worth of goods and services."

In 2011, trilateral trade among the NAFTA partners had reached $1 trillion, as U.S. trade with Mexico increased by over 500 percent, and by 200 percent with Canada between 1993 and 2013, according to the U.S. International Trade Commission. Canada and Mexico accounted for 33 percent of total U.S. exports in 2013, ranking them first and second, respectively. Canada and Mexico added up to 27 percent of total U.S. imports in 2013 – the second- and third-largest exporters to their big North American neighbor.

Integrated automotive, rail
One of the biggest NAFTA growth areas has been Mexico’s vehicle exports to the U.S. and Canada, which was at over 70 percent export share in 2012, compared to a steep drop to Mexico’s next-largest light vehicle export destination ─ Latin America, according to statistics shared by Thomas Klier, senior economist and research advisor for the Federal Bank of Chicago at the NAFTANEXT Summit held in Chicago, April 22-25.

"Vehicles are being produced where they’re being sold. When we talk about near-shoring, or resourcing…it’s pulling up," said Klier.

"Subsequent to the passage of NAFTA, from a motor vehicle producers’ point of view, North America is one integrated production region. So if you’re headquartered in Detroit and you’re running plants in Michigan, in Ontario, in Mexico, you’re treating them all the same in terms of the state-of-the-art production technology that’s there," he said.

The Ford Fusion, when it was launched in 2005, was exclusively produced in Hermosillo, Mexico for the entire North American market, Klier said.

North America’s light vehicle production is forecast to climb to over 17 million units in 2015, according to IHS Automotive.

Automobiles and components are part of a larger mix of freight types moving by rail between the NAFTA countries, and Kansas City Southern is an example of a transportation company that has integrated itself between the U.S. and Mexico, according to the railroad’s CEO, David Starling, who gave an impromptu presentation at NAFTANEXT.

"We have 3,000 employees in Mexico, we’ve got 3,000 in the U.S. Three thousand miles [of rail] in Mexico, 3,000 miles in the U.S.," said David Starling, CEO of Kansas City Southern, who rose to speak during a question-and-answer session.

"We run it as one network. Mexico is 46 percent of our revenue," he said.

Another U.S. Class One Railroad, BNSF, is also realizing more inter-North America trade business.

"Our highwater mark in Mexico was in 2012 with 200,000 units, and we moved about 350,000 units in Canada in 2013 – an all-time record," said BNSF Chairman Matt Rose in his keynote address.

Road to rail and streamlining the border
Trucks, however, are still the biggest carriers of freight over the NAFTA borders, with close to 11 million of them crossing both the Northern and Southern borders of the U.S. in 2013, according to the Bureau of Transportation Statistics.

"As a collective group of industry providers and observers, cross-border activities take up the most time when we’re talking to our clients," said Gene Seroka, who was, at the time of the NAFTANEXT event, still president of the Americas unit of container-shipping line APL before he moved on to the top job at the Port of Los Angeles.

Seroka was responding to a question by CBN regarding the trend of road-to-rail conversion for intermodal containers and how this might impact border capacity and relieve bulging truck traffic, especially at the U.S.-Mexico border. A forecast by the Economist Group has Mexico positioning itself as the number-one trading partner of the U.S. by 2018.

Referring to the border crossing at Nogales, Arizona, Seroka said "the amount of time it takes to manage those 30 million crossings is quite challenging, to say the least."

"Realistically speaking, we’re seeing more and more of our customers and potential clients asking about the rail-type service to begin with and trying to deviate away from trucking," he said.

KC Southern’s Starling said "we still have a lot of

capacity on our double-stack trains that operate out of Mexico that cross the border at Laredo."

Laredo handles about 70 percent of all surface trade between the U.S. and Mexico.

On the U.S.-Canadian side, a series of Beyond the Border initiatives aimed at streamlining the flow of freight have progressed and in some cases may end up being models for the U.S.-Mexico border, including the Trusted Trader pilot program, Authorized Economic Operator programs, and the pre-inspection pilot programs in Blaine, Wash., Vancouver, BC, and Buffalo, New York.

The pre-inspection pilot’s aim is to inspect cargo in Canada in order to expedite on the U.S. side, with the mantra of "inspect once, clear twice," such as containerized cargo arriving at the Western Canadian port of Prince Rupert that is loaded onto Canadian National intermodal trains destined for the U.S.

After a recent tour of the U.S.-Canadian border, Customs and Border Protection Commissioner Gil Kerlikowske said "a lot of good things have come out of the pre-inspection pilots already…but we don't want to take a victory lap right now. We want to proceed carefully and make sure we are getting this right."

Another U.S. project called the International Trade Data System (ITDS) ─ planned for the end of 2016 ─ promises a paperless "single window" access point, per an executive order that President Obama signed earlier this year.

The ITDS would connect international traders with U.S. Customs and 47 different U.S. government agencies, greatly speeding up processing and regulatory approval. Currently, to clear imported or exported goods, users must submit a variety of mostly paper documents to a number of federal agencies, often taking days as opposed to what could, ostensibly, become minutes with the new system.

"This change will be particularly meaningful to our small- and medium-sized customers that depend on global trade to grow their businesses and reach the 95 percent of consumers that live outside U.S. borders," said Scott Davis, chairman and CEO of UPS.


A host of other recommended next-steps were discussed at NAFTANEXT, several of which were outlined in the "NAFTA 20 Years After" study that was officially released at the summit by the Texas A&A Transportation Institute, including:
      • Harmonizing truck size and weight
        regulations for cross-border trade.
      • Tackling security, and related costs so cross-
        border supply chain costs are not adversely
      • Modernizing land border-crossing practices         using technology and adding key infrastructure
      • Establishing a fund to invest in North American         infrastructure "to stimulate trade and reduce
        illegal migration."
      • A more "holistic solution" to implementing
        NAFTA trucking provisions, such as reducing
        "unnecessary drayage operations at land ports
        of entry that generate additional empty trips,
        and using limited physical infrastructure
        and human resources for inspection."
      • Harmonizing climate change and emissions         policies via "a coherent combination of policies
        consisting of subsidies, regulation and
        emissions pricing."
      • Reducing, and harmonizing transaction costs
        not directly associated with transportation
        costs, (such as the widely different de minimis
        values between the NAFTA partner countries)
        because, otherwise they "can reduce and
        sometimes eliminate the benefits gained from
        the removal of tariffs and trade liberalization
        caused by NAFTA."

Canada’s ambassador to the U.S., Gary Doer, told the NAFTANEXT audience that various inter-NAFTA issues create impediments to what could be the bigger picture for NAFTA’s future as a more significant global trading bloc.

"We have the strongest trading relationship of any trading bloc in the world…that’s why we’ve got to solve these small problems…and other small issues…we’ve got to have a can-do attitude."