However, challenges exist from border crossing issues to cargo theft.
Four years ago, the U.S. – Mexico - Canada Agreement (USMCA) trade agreement became effective, replacing and updating the much-debated North American Freight Trade Agreement (NAFTA.) The Agreement was signed on November 30, 2018, following much debate from varied shareholders. When USMCA became effective in July 2020, The American Trucking Associations (ATA) and the American Association of Railroads (AAR) applauded the new agreement, which was viewed as beneficial to all three countries, leading to freer markets and trade and stimulating economic growth.
Cross-Border Business is Booming
Fast forward to July 2024, and Mexico has become the number-one trading partner with the US, replacing China. According to some reports, in February 2024 alone, two-way trade between the US and Mexico reached $67 billion, an increase of 11% year-over-year.
According to Ed Habe, vice president of Mexico sales for Averett, a less-than-truckload (LTL) provider, some of the most severe challenges posed during the pandemic directly resulted from China’s Zero-COVID policy. This one policy locked down manufacturing and transportation hubs for months.
“To underscore the impacts of nearshoring, more than 450 new companies have relocated to Mexico since 2022, which some observers have said could increase imports to the U.S. by 30 or 40%,” said Kaitlyn Holmecki, ATA senior manager of international trade and security policy. “The value of truck transport trade to and from Mexico and Canada has increased more than 43%.”
Another challenge, unrelated to COVID, led more companies to consider nearshoring. Congestion at all US ports became severe, partly due to labor issues. At that time, it was common for 100 container ships to wait in the Pacific for weeks or months to be allowed to enter the port and have cargo processed.
Today, there are virtually no containers offsite waiting to enter ports. It does take an average of one to three days for a container to be unloaded. However, many companies have already made the transition to nearshoring after careful consideration of market dynamics.
“The goal is to reduce costs, increase speed to market, and improve efficiency by taking advantage of lower labor costs in Mexico, shorter transit times, and closer proximity to the end customer,” said Frank Bateman, vice president of supply chain operations for Ryder, “The savings from manufacturing overseas can be offset by inventory sitting on ships or in seaports incurring storage fees and, of course, by the product being unavailable to meet demand. With Mexico, you put what you need on a truck, and it can be in a final-mile distribution center within days, not months.”
The automotive and computer industries are the markets most active in cross-border trucking. A recent report shows that top imports from Mexico to the US include passenger and commercial vehicles, auto parts, and computers. The top commodities exported from the US to Mexico are computer parts, computer chips, auto parts, and gasoline. Exports from the U.S. like computer chips are said to support Mexico’s growth as an automotive manufacturing and assembly hub.
One of the most significant portions of the USMCA stipulates new trade regulations for automobiles and automotive parts. Under NAFTA, cars and trucks with at least 62.5% of their components manufactured in one of the three participating countries could be sold free of tariffs. The USMCA increases that minimum requirement to 75%.
At the same time, the USMCA stipulates minimum wages for workers in the automotive manufacturing process: 40-45% of the work done on eligible vehicles must be accomplished by workers earning at least $16 (USD) per hour. These changes became required in July 2020.
“Ryder has served the automotive industry for nearly 50 years,” said Bateman. “As a result of the pandemic, when the industry experienced strong demand and constrained production, many of our traditional Just-In-Time (JIT) customers in the automotive and other industries pivoted from JIT to Just-In-Case (JIC) supply delivery. Many customers invested in buffer warehouses in the U.S. and Mexico and shifted production from Asia to Mexico. The trend continues today.”
Significance of USMCA
For some, the fact that an agreement, the USMCA, was ratified by all three countries is a victory in itself. Dave Akers, President of C.R. England Mexico said, “The passage of USMCA ensured the continuity and growth of trade between the U.S. and Mexico. The negotiations were protracted and there was concern at the time for continued delays or even potential distancing by member companies from the treaty.”
C. R. England is the largest provider of refrigerated, cross-border trucking into and out of Mexico. Since 2020, year-over-year growth in the company’s Mexico-cross-border business has been close to 10%. In its over-the-road (OTR) division, cross-border Mexico activity accounts for roughly half of total network revenue.
The company expressed concern about the political risk to USMCA as presidential elections occur in both the U.S. and Mexico this year. Aker said, “We will be watching the US elections in November with interest and hope that the newly elected officials support North American trade.”
From Principle To Practice
While all parties agree that increased trade between the three countries is positive, the realities associated with implementation include some challenges. Delays at border crossings are one factor.
Holmecki noted, “The ATA spends a great deal of time working with the governments of the United States, Canada, and Mexico to ensure smooth and efficient inspections and customs clearance for trucks crossing through land ports of entry. To that end, the ATA continues to support the adoption and implementation of new technologies that will enhance security, without compromising the economic benefits of a more expeditious flow of goods and people.”
Capacity is another concern for some routes. Habe said, “There is a greater need for drivers and equipment to move a large number of northbound shipments into the U.S. and Canada. This imbalance causes delays in the U.S. as shippers vie for limited space.”
Security is another concern. Akers said, “As is the case for C. R. England, all premier members in the Mexico cross-border supply chain place cargo security at top priority.”
Reliance Partners, a cross-border insurance and consulting company, reported that cargo theft and high jackings in Mexico increased close to 3% from 2022 to 2023 with a total of 8,000 events occurring. Prevention of contraband being mixed with cargo is also a concern.
“From a national security perspective as well as a concern for our customers’ supply chains, and our people and operational assets in Mexico, this is the most important challenge,” said Akers.
The ATA takes a broader view of the impact of cargo threat, stating that it is not only a cross-border issue. Holmecki said, “We are seeing a surge in cargo thefts across all parts of the trucking industry, which is why fighting it is a priority for the ATA.”
Benefits to Businesses and People
Regardless of any challenges associated with cross-border trade, there are many benefits, including allowing companies to increase their footprints while diversifying their logistics strategies. And for Mexico, nearshoring has resulted in positive changes. According to recent research, in August 2023, construction in manufacturing factories in Mexico surged to over 47% compared to the prior year. Investments of billions of dollars are moving into Mexico as companies look to establish natural gas pipelines.
While the minimum wage in Mexico is still less than in the U.S., Canada, or China, the USMCA stipulated that a minimum of 40% of an automobile’s content must be produced by workers earning no less than $16 an hour. Mexico has seen double-digit annual increases in minimum wages since the implementation of the USMCA. There have also been improvements in benefits including pensions and paid holidays. An industry analyst notes that these changes are important and represent a deviation from the NAFTA era.
Best Practices in Cross-Border Shipping
Cross-border shipping requires a complete understanding of all international and government rules of transportation. Some companies, like Averitt, have cross-border logistics professionals to assist shippers. Averitt also has border service centers in Laredo, El Paso, Harlingen, and Del Rio with an in-house team of customs brokers.
“Our border service centers are state-of-the-art facilities with around-the-clock surveillance and security personnel,” said Habe. “In addition, we thoroughly vet our partners in Mexico.”
Regardless of where freight is being shipped, the most fundamental aspect of providing excellent service is understanding the shipper’s general needs, cost drivers, cash flow scenarios, and the type of commodity being transported.
Akers said, “At C. R. England we are problem solvers and always anxious to be a part of engineering viable solutions that ease supply chain challenges for our cross-border customers.”
Ryder’s Bateman has a similar view, stating, “Today, our customers are looking for strong business intelligence and analytics so they can see how they’re performing across the industry, and identify opportunities.”
He also noted that operational know-how, technology, and business analytics are the benefits that 3PLs provide to their customers, whether moving products across town or borders. “We help them make informed decisions on striking the right balance with their supply chain strategies,” said Bateman.
Rail Volumes Grow Between the U.S., Canada and Mexico
USMCA has also had a significant impact on rail transport between the U.S., Canada, and Mexico. As a representative of the American Association of Railroads (AAR) notes, rail has deep ties with international trade.
A hefty 42% of rail traffic and approximately 50,000 domestic rail jobs worth over $5.5 billion in annual wages and benefits depend on trade. Industry experts credit the USMCA predecessor, NAFTA, with opening new markets and driving economic growth by lowering trade barriers between the U.S., Canada, and Mexico.
The AAR has expressed support for the USMCA, saying that it builds on the strengths of the previous deal (NAFTA) but modernizes it for today’s commercial landscape. For example, it includes essential provisions related to e-commerce and digital trade, which were in their infancy when the original deal was struck but now help drive the economy and intermodal rail shipments — one of the most important parts of the rail business.
Economic Benefits of USMCA
This spring, policymakers received a long-awaited economic analysis of the impact of the agreement. The US International Trade Commission found that the new trade agreement would add 0.35% or $68 billion to the US GPD if implemented. It would also provide long-term policy certainty for US businesses, encouraging investment and growth.
However, one issue that could negatively impact rail and consumer benefits of the USMCA is uncertainty. A glaring real-world example was the disruption that occurred in December 2023. The Customs and Border Patrol shut two major train crossings at Eagle Pass and El Paso, Texas for three weeks. The reason for the shutdown, according to the CBP, was the need to devote personnel to the apprehension of migrants.
At the time, the AAR opposed the closing for many reasons, including relevance. Sources from the AAR stated that there was little evidence to suggest that migrants used rail crossings to enter the US. Specifically, according to the AAR president and CEO at the time, Ian Jeffries, “Widely circulated video from late 2023 is not from these direct crossings. The railroads have partnered with the CBP to ensure that 100% of trains are screened, and any unauthorized individuals are apprehended.”
Regardless of the reason for the shutdown, the negative impact on free trade was significant. There is only one interconnected North American rail network. It was reported by the AAR in December 2023 that roughly 450,000 rail shipments crossed the Eagle Pass and El Paso gateways annually. If the crossings were to close permanently, the AAR stated that more than $200 million in goods, wages, and transportation costs would be lost each day.
Disruptions Pose a Threat to Trade
While that chapter is in the past, industry experts are concerned about future, unplanned disruptions. The impacts of unplanned and uncharted disruptions like shutting down two critical rail arteries restrict trade and undermine confidence. Uncertainty is a reality that could impact North American trade at any time.
“When manufacturers aren’t sure about the future of their supply chains, it means they can’t forecast and plan, which ripples into adjacent industries. For railroads, uncertainty makes it increasingly difficult to properly plan future business decisions, such as the allocation of rail cars, personnel, and equipment,” stated a source for the AAR.
It is these types of concerns that Ryder’s Bateman states are the reasons many shippers turn to third-party logistics providers.
“Today, our customers are looking for strong business intelligence and analytics so they can see how they’re performing across the industry and identify opportunities. They’re looking for a smart procurement strategy to ensure they’re positioned when the market changes again,” noted Bateman.
Not only do shippers have the option of choosing third-party logistics providers with expertise in serving specific markets or commodities, but Bateman said, “It’s really about partnering with a 3PL that provides flexibility and resiliency, no matter the current challenge or opportunity.”
