Rail leaders speak out: Don’t pull the plug on NAFTA

By Julie Sneider, Senior Associate Editor

Class I and freight-rail industry executives are continuing to raise concerns about the economic turmoil that would occur if renegotiations over the North American Free Trade Agreement (NAFTA) break down and President Trump follows through on his threat to pull the U.S. out of the trade deal if he doesn’t like the final results.

In Class I fourth-quarter remarks, op-ed columns and letters to the administration, rail-industry leaders are highlighting NAFTA 's impact on the North American economy — and more specifically — the business of railroading.

Chief executives of CN, Kansas City Southern and Union Pacific Corp. told analysts during fourth-quarter 2017 earnings conference calls last month that they're paying close attention to the status of the current renegotiations. While they agree that the 24-year-old trade deal needs to be updated, they’ve said scrapping it would cause great economic harm to their industry, as well as to the overall economy.

According to the Association of American Railroads (AAR), 42 percent of rail carloads and intermodal units and 35 percent of annual rail revenue are directly associated with international trade. Moreover, 50,000 rail jobs worth more than $5.5 billion in annual wages and benefits depend on international trade.

In a January letter to policymakers, AAR and freight-rail trade associations in Canada and Mexico called for "constructive negotiations" on a new version of NAFTA and stressed the importance of trade and the need for a continental railroad network to provide businesses with access to economic markets.

"Economic growth tied to NAFTA has allowed railways to invest tens of billions of dollars into their infrastructure while improving productivity and customer service, and fostering innovation," the groups' letter stated. "Collectively, these improvements have enabled railways to maintain the low rates that are required to provide shippers with access to global supply chains and support their success."

NAFTA talks: Slow progress on core issues

The latest NAFTA talks — round six — were held late last month in Montreal. After the meetings wrapped up, trade ministers from Canada, Mexico and the United States said progress was made on the agreement's chapter related to corruption. However, negotiations on the core issues are moving slowly, according to a statement issued by U.S. Trade Representative Robert Lighthizer after sixth round of talks ended on Jan. 29.

Rail industry leaders have pleaded with the Trump administration not to scrap NAFTA, which is used heavily by freight railroads hauling commodities such as automobiles, auto parts, beer, plastic and grain between the three countries.

"[Negotiators] are down to the really difficult parts of the deal that need to be negotiated, and while I still believe there is a good opportunity for the NAFTA agreement to be solidified, all three parties continue in it going forward," UP Chairman, President and Chief Executive Officer Lance Fritz said during UP's Jan. 25 earnings conference call.

In an editorial published Dec. 3, 2017, in the San Antonio Express-News, BNSF Railway Co. Executive Chairman Matt Rose explained that NAFTA has powered Texas economic growth over the past two decades, and exiting it would "trigger disastrous consequences for the state."

BNSF is based in Fort Worth, Texas.

"To ensure NAFTA continues to serve U.S. interests, the country should look to include provisions that promote e-commerce and digital trade, strengthen intellectual property and help businesses of all sizes gain access to Mexican and Canadian markets," Rose recommended. "Updating NAFTA to eliminate these and other barriers to trade will promote more rapid growth in Texas and throughout the United States."

In an interview with Reuters at the Midwest Association of Rail Shippers winter meeting in Chicago last month, KCS President and CEO Patrick Ottensmeyer said ending NAFTA would put supply chains, jobs and consumers at risk — which could harm Trump politically. Many farmers who supported Trump in the 2016 presidential election also support NAFTA, he said.

And in a Feb. 6 op-ed column in The Washington Post, Fritz said that the United States' potential exit from NAFTA threatens to undo recent economic progress.

"Exiting NAFTA would mean increasing tariffs, which would increase costs for consumers and businesses," Fritz wrote. "About 60 percent of U.S. imports are intermediate goods for U.S. production, so raising costs through what will be functionally higher taxes on production would make U.S. businesses less competitive — thwarting tax reform's goal of allowing people and businesses to invest their money as they see fit."

Fritz: Back away from 'poison pills'

Increasingly, the growing middle classes of emerging markets are becoming important consumers of U.S. exports. Nearly 40 percent of UP's shipments now come from or are headed to Canada, Mexico, Asia, Europe and beyond, Fritz added.

"In this increasingly competitive environment, it will be critical for the United States to strengthen its most important trade partnerships, not abandon them," Fritz's column stated.

Although NAFTA requires modernization, the United States should back away from pushing  "poison pills" that would end it, Fritz added, noting that the United States is seeking a sunset clause that would automatically terminate NAFTA after five years unless all three countries agreed to continue.

"This would cause significant uncertainty for long-term business planning and investment," Fritz wrote.

Freight-rail leaders say they expect to present a united front on NAFTA when they meet with lawmakers, congressional aides and U.S. Department of Transportation officials during Railroad Day on Capitol Hill on March 7.

"What we are emphasizing is that NAFTA is over 20 years old, so it's natural to take a look at it and make improvements," says Railway Supply Institute President Mike O'Malley. "But what we're [also] emphasizing is that it's important [for NAFTA negotiators] not to put impediments in the supply chain that would add costs not only for our members, but for the people who are buying the goods."

To find out more about political issues that rail industry execs will talk about on Capitol Hill next month, read the cover story in the February issue of Progressive Railroading.