Mexican-American free trade deal seems favorable, Kansas City Southern says

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A basic map of Kansas City Southern dwell time issues on crossing the border between the U.S. and Mexico.
Kansas City Southern
BOSTON — The trade deal between the U.S. and Mexico appears to be largely favorable for Kansas City Southern, Chief Financial Officer Mike Upchurch told an investor conference this week.

KCS has yet to see the text of the actual preliminary trade agreement, which must be ratified in Washington and Mexico City. But based on media reports, KCS says that most of what’s in the “MAFTA” deal will not hurt the railroad’s rapidly growing cross-border traffic.

The agreement permits transportation companies to retain their ability to go to dispute settlement panels. The 16-year deal contains a provision for review after six years, and a 10-year exit if either country decides to withdraw. And the agreement does not impose tariffs on agricultural products.

New auto content rules, perhaps the thorniest issue to arise in the new trade pact, do not appear to be onerous.

Some 75 percent of the parts content in an automobile must be sourced from the U.S. or Mexico to qualify for tariff-free treatment, up from 62.5 percent under the current North American Free Trade Agreement.

“We don’t think that increase will have a big impact on auto production in Mexico,” Upchurch says.

In addition, between 40 and 45 percent of the content of autos must be produced by workers earning at least $16 an hour — a wage level that does not exist in Mexico. This clause of the preliminary agreement has an eight-year transition period, after which any vehicles that do not qualify would be hit with a 2.5-percent tariff.

“We don’t believe this will have a material impact on our auto business,” Upchurch says.

KCS’s cross-border traffic, which accounts for more than a quarter of the railroad’s overall volume and more than a third of its revenue, continues to charge ahead.

Volumes to and from Mexico are up 17 percent for the third quarter to date, propelling the railroad’s overall 5-percent gain in traffic since July 1.

Petroleum products shipments to Mexico are up 143 percent since July 1, while cross-border intermodal is up 25 percent, and automotive volume is up 7 percent.

But the growth, along with changes in operations at the Laredo, Texas, gateway, have created some operational headaches for KCS.

Terminal dwell is high at Monterrey, as well as the new Sanchez Yard in Nuevo Laredo, Mexico, which is now classifying most cross-border traffic. It’s a role that used to be handled by the cramped Nuevo Laredo Yard.

Upchurch attributes the operational challenges to “growing pains” and an imbalance of traffic crossing the border. Southbound crossings have been 11 percent higher than northbound volumes at the International Railway Bridge linking Laredo and Nuevo Laredo.

KCS this week announced that the Laredo gateway, including the 19 or so miles between Laredo Yard in Texas and Sanchez Yard in Mexico, is now under a unified transportation management structure designed to smooth operations.

The railroad expects cross-border service and operating metrics to return to normal by the end of September.

Upchurch spoke at the Cowen & Co. Global Transportation Conference on Sept. 5.

NEWSWIRETrains News Wire

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