In my last blog, I provided an overview of Canada’s economy and demographics. In this blog, I will outline the importance of trade to Canada, and the United States, and then touch on some of the key variables that facilitate the trading process.

Canada has been a major trading nation for many years. Well before NAFTA was signed in 1994, Canada and the United States were major trading partners. As pointed out in the last blog, Canada possesses many raw materials that are in high demand throughout the world. With such a small population, Canada is not able to consume many of the raw materials that it produces. As a result, 58% of Canada’s exports consist of pulp and paper products, energy supplies (i.e. oil, coal and gas), minerals, food products, fish, seafood and fertilizers. By contrast, 38% of Canada’s exports are manufactured goods, primarily machinery, automotive parts, aerospace and aviation products, equipment, chemicals, plastics and information technology. Ontario and Quebec contain the largest centers for manufactured goods. Western Canada is a key producer of coal, grain, oil, natural gas and potash.

Canada – U.S. Trade

NAFTA has just entered its 23rd year. It was designed to expedite the trading process between Canada, the United States and Mexico. There are $750 billion in goods and services traded annually between Canada and the U.S. Exports represent 30% of Canada’s GDP. The United States is Canada’s largest trading partner; it receives 73% of Canada’s exports and 63% of its imports. Canada receives 23% of U.S. exports and 17% of its imports. Canada is largest export market for 35 of the 50 US states.

The North American Free Trade Agreement (NAFTA) is celebrating its 20th anniversary in 2014. Since the enactment of NAFTA in 1994, trade between the United States, Canada and Mexico has increased almost 200 percent to an estimated $930 billion. The cross-border flow of goods between the U.S. and Canada has grown to $400 billion.

A new U.S. Transportation Department report shows three of the five surface transportation modes, truck, rail and pipeline, carried more U.S. trade with North American Free Trade Agreement partners Canada and Mexico by value in 2013 than compared to the year before. Most U.S.- Canada trade in 2013, 83.6%, was carried on the surface modes of truck, rail and pipeline. Trucks carried 54.4%, followed by rail at 16.7%, pipeline at 12.6%, vessel at 5.7% and air at 4.5%.

Michigan led all states in trade with Canada in 2013 with $74.6 billion. Of the top 10 states for U.S.-Canada trade in 2013, Washington had the highest percent change over 2012, a 6.4% increase. The top commodity category transported between the U.S. and Canada in 2013 was mineral fuels, valued at $134.1 billion, with $79.2 billion or 59.1% moved by pipelines. The next highest commodity category transported by a single mode in U.S.- Canada trade was vehicles and vehicle parts (other than railway vehicles and parts) with $66.1 billion in trade moved by trucks. Cross-border trade via truck and rail continues to show positive trade growth for Canada and the United States. The growth continues as freight transportation providers on both sides of the border strengthen their relationships with cross-border shippers.

Transforming words and good intentions into more concrete and long-term action, both the United States and Canada are promoting greater economic growth and jobs through a stronger, more visible commitment to regulatory cooperation. With greater opportunities for growth on the horizon, trucking companies on both sides of the border have bolstered their cross-border service offerings to accommodate trade. While Canada and the United States have been good friends for many years and have the longest unpatrolled border in the world, they are distinctly different countries. The two countries have different geographies, climates, cultures, currencies, populations, laws and transportation systems. A failure to understand the unique features of each country can lead to fines, service problems and unhappy customers.

As an example, Canadian e-Commerce is expected to grow at a double-digit pace over the next few years, and U.S. businesses are increasingly tapping in to that $32 billion annual market. But the not-so-good news is that businesses are bumping into unexpected challenges in transporting those goods from the U.S. to their Canadian consumers. A new research brief, “Canadian e-Commerce Presents New Opportunities for U.S. Businesses,” details those challenges, and also highlights ways in which U.S. businesses are overcoming those obstacles. The research brief details findings of a study conducted by Peerless Research Group in which supply chain managers were queried about issues with U.S./Canada e-Commerce shipping.

In my last bog I looked at how the near-shoring movement and a host of other factors are contributing to an economic boom in Mexico.  I also discussed how the privatization of the Mexican rail industry has led to the improvement in Mexico’s rail network.  These enhancements combined with lower costs and faster customs clearance processes (as compared to truck) are expected to positively impact on cross-border intermodal growth.  In this blog, I will examine some specific activities that are under way that could propel significant growth in cross-border (e.g. Mexico – U.S.) rail traffic.

Mexico’s Rail History

Mexico's current rail system started to take shape in 1995, when the Mexican government announced its privatization plans. U.S. railroad Kansas City Southern (KCS) and Mexican company Transportación Marítima Mexicana (TMM) formed a joint venture to buy the Northeast Railroad concession. KCS bought out TMM's share in 2005 and changed the railroad's name from Transportación Ferrovaria Mexicana to Kansas City Southern de México (KCSM).

In 1998, mining corporation Grupo Mexico and U.S. railroad Union Pacific (UP) joined forces to buy the Northwest Concession, creating Ferromex.  In 2005, Grupo Mexico bought a third Mexican railroad, Ferrosur, which operated in southeastern Mexico. Grupo Mexico is currently merging Ferrosur with Ferromex.

Ferromex and KCSM offer cross-border service in partnership with KCS, UP, and BNSF Railway. The U.S. and Mexican railroads pass freight from one jurisdiction to the other at six major border crossings. The U.S. sides of these crossings are in San Ysidro and Calexico, Calif.; Nogales, Ariz.; and El Paso, Eagle Pass, and Laredo, Texas. 

It is hard to believe that the North American Free Trade Agreement (NAFTA) came into effect on January 1, 1994, almost twenty years ago.  Like so many of us in the industry at the time, my colleagues and I rushed down to Laredo/Nuevo Laredo and other key Mexican points to learn the intricacies of the Mexican market and border clearance processes.  But a “calamitous” peso crash, the rise of Asia and its huge, cheap labour force, the prevalence of ocean shipping, low energy costs and a host of other events conspired to delay the anticipated growth in the Mexican freight market.

Ten years ago, wages in Mexico were six times higher than those paid in China.  A gallon of gasoline in America was $1.11 in 1994.  By March 2003, it hit a record $1.79 a gallon. 

Flash forward to 2013 and the picture is very different. The wage gap between Mexico and China had shrunk to 40 percent by 2011, according to the International Monetary Fund. Gasoline prices are averaging $3.63 a gallon for regular fuel, double the figure in 2003 and almost four times the cost in 1994. 

Of course, geography is a key factor.  Mexico not only sits across the U.S. border but it is a gateway to the Latin American markets that are buying Mexico’s autos, appliances and advanced electronics.  The shorter transit times on shipping between Mexico and the United States and Canada are a big advantage over ocean shipping from Asia.

Manufacturing activity in Mexico is booming.  While much of the world experienced slow growth or recession in 2012, Mexico had 6% GDP growth.  Manufacturers in Mexico have well established supply chains that ship finished product north to U.S. markets, while raw materials move south to service their production lines.

Trade using surface transportation between the United States and its North American Free Trade Agreement (NAFTA) partners, Canada and Mexico, was 6.6 percent higher in June 2012 than in June 2011, totaling $82.6 billion, unadjusted for inflation according to the Bureau of Transportation Statistics (BTS) of the U.S. Department of Transportation. Adjusted for inflation and exchange rates, the June 2012 total was $61.0 billion in 2004 dollars, up 11.0 percent from June 2011.

BTS, a part of the Research and Innovative Technology Administration, reported that the June 2012 value of U.S. surface transportation trade with Canada and Mexico rose 11.4 percent from June 2008, seven months into the recession, and 62.8 percent from June 2009, at the end of the recession. 

The value of U.S. surface transportation trade with Canada and Mexico in June increased by 79.0 percent compared to June 2002, a period of 10 years. Imports in June were up 69.7 percent since June 2002, while exports were up 90.8 percent.  Surface transportation includes freight movements by truck, rail, pipeline, mail, Foreign Trade Zones, and vessel. In June, 87.7 percent of U.S. trade by value with Canada and Mexico moved via land, 8.3 percent moved by vessel, and 4.0 percent moved by air.

In June, the value of railed imports between the United States and Canada rose 16.6 percent to $6 billion and value of railed exports soared 25.5 percent to $3 billion. The value of railed imports between the United States and Mexico climbed 16.1 percent to $3.3 billion and value of railed exports increased 7.7 percent to $2.3 billion.  For the same month, the value of trucked imports between the United States and Canada rose 2 percent to $12 billion and value of trucked exports jumped 6.4 percent to $18 billion. The value of trucked imports between the United States and Mexico climbed 8.7 percent to 15.6 billion and value of trucked exports increased 9.6 percent to $11.8 billion.

The value of U.S. surface transportation trade with Canada and Mexico decreased 1.4 percent in June 2012 from May 2012.  It should be noted that truck imports and exports between the United States, Canada and Mexico declined between May and June 2012, while rail imports and exports continue to be strong.  Month-to-month changes can be affected by seasonal variations and other factors.