No major impact on rail traffic seen from potential tweaks to NAFTA

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Union Pacific crews swap at a yard in Santa Teresa, N.M., just a few miles north of the U.S.-Mexico border.
William P. Diven
OTTAWA, Ont. — As North American Free Trade Agreement negotiations resume in Canada this week, there’s a consensus among transportation experts and executives that the trade pact will be tweaked instead of scrapped.

“There’s just too much at stake” to rip up the agreement that covers trade between the U.S., Canada, and Mexico, Kansas City Southern CEO Patrick J. Ottensmeyer said while participating in a Sept. 14 trade panel discussion at the FTR Transportation Intelligence conference in Indianapolis.

About 40 percent of North American railroad traffic is related to trade. KCS, however, is far more reliant on NAFTA, as half its traffic and revenue comes from its Mexican operations. KCS has a trade surplus with Mexico: 60 percent of its cross-border traffic is southbound, dominated by shipments of U.S. grain.

The Mexican government is not opposed to reducing the U.S. trade deficit, Ottensmeyer says. Mexico would like to do so by increasing trade between the countries, he says.

Two up-and-coming cross-border commodities shipped by rail — refined petroleum products and plastics produced along the Gulf Coast — can help make a significant dent in the deficit, Ottensmeyer says.

Railroads haul more cross-border tonnage into the U.S. than trucks, and railroads have grown their share of cross-border traffic faster than trucking, says Larry Gross, an FTR analyst.

On Tuesday and Wednesday, the negotiators in Ottawa are scheduled to discuss one of the more contentious issues: Rules covering country of origin content for automobiles. Cars must have 62.5 percent of their content manufactured in the U.S., Canada, or Mexico to qualify for duty free transport across the border under current rules. The U.S. would like to see the standard raised.

Significant changes to the content rules could disrupt automakers’ long-established supply chains and have a ripple effect on cross-border rail traffic, an important traffic segment for the Class I railroads.

Auto parts flow freely across the U.S., Canadian, and Mexican borders to assembly plants in each country. The finished vehicles then are hauled across the borders, as well, although the vast size of the American market means more vehicles are imported to the U.S.

President Donald Trump has criticized NAFTA as a bad trade deal. As a candidate, he vowed to scrap the treaty. But the stated U.S. goals entering the negotiations were more about modernizing NAFTA and making minor modifications.

As president, Trump can withdraw from NAFTA after giving six months’ notice. None of the experts on two trade-related panels at the FTR conference believed that would happen, and none of the transportation officials attending one of the sessions thought NAFTA would be scrapped.

“Trade is good for transportation,” says independent analyst Anthony B. Hatch of ABH Consulting. It would be a jolt to the system if the U.S. pulled out of NAFTA, he says.

Ottensmeyer has spent time over the past year meeting with lawmakers and government officials on both sides of the border regarding trade issues. The most surprising thing about those meetings, he says, was the amount of misunderstanding there was about U.S.-Mexico trade, particularly how interconnected the economies have become and what the affect on U.S. farmers would be if free trade were curtailed.

NAFTA negotiations are expected to wrap up by the end of the year, with a final deal anticipated early in 2018.

NEWSWIRETrains News Wire

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