NAFTA Revisited

April 23, 2007
Stephen Russell of Celadon Trucking Services. Gary Clyde Hufbauer of the Peterson Institute for International Economics. Chris J.F. Gutierrez of Kansas

Stephen Russell of Celadon Trucking Services.

Gary Clyde Hufbauer of the Peterson Institute for International Economics.

Chris J.F. Gutierrez of Kansas City SmartPort.

With the controversy about permitting Mexican trucks and drivers to bring freight into the United States beyond the present 20- to 25-mile zone at the border, focus again turns to the trade agreement that defined the terms for such activity. The North American Free Trade Agreement (NAFTA) has been in effect for some 13 years. From the moment it became a reality, on January 1, 1994, it was a controversial pact that prompted strong emotions on all sides regarding its enforcement.

In looking at the agreement's progress, Gary Clyde Hufbauer, a fellow with the Peter G. Peterson Institute for International Economics (, says that economic integration of the three NAFTA signatories was well underway before the signing of the pact and probably would have continued without it, but progress would have been slower. Washington, D.C.based Peterson Institute is a nonprofit research group devoted to the study of economic policy. When NAFTA began, it represented a $6 trillion economy with a population of 360 million. Within a decade the area grew to a $12.5 trillion economy with a population of 430 million.

"I think everyone who has looked at it concludes that trade with Mexico, in particular, has had a big boost in two-way traffic due to NAFTA," he says. "We had the Canada-U.S. Free Trade Agreement of January 1989. By the time NAFTA came into force, Canada and U.S. free trade had been underway for some five years. Before the agreement, trade barriers between Canada and the United States were much lower than they were with Mexico prior to NAFTA."

The biggest boost from NAFTA for Canada came in the first half of the 1990s when trade grew, but not by much more than what might have been expected on the basis of world economic growth.

For Mexico the second half of the 1990s and early 2000s saw growth that exceeded normal expectations. The maquiladora movement helped spur that growth, pushed by the Mexicans and abetted by the United States. Mexico had previously given tax relief with low or no taxes for firms that set up factories in Mexico. NAFTA eliminated those tarriffs.

"The way the U.S. helped the growth," Hufbauer says, "is through sections 906.3 and 807 of Customs regulations that allow firms to ship components to Mexico and then bring them back with duty only imposed on the value added."

Mexico really took a hit from the shift to sourcing from China and the U.S. recession of late 2002 to 2003, Hufbauer notes. "They have recovered lately and are back to where they were although some products have changed," he says.

While automotive parts and vehicles have been the largest product sector crossing the border, Hufbauer thinks future automotive trade increasingly will be in the hands of Toyota and Honda and some other foreign companies, in addition to the traditional Big Three. As foreign companies increase sales in the United States, they will follow the pattern set by the Big Three, which is to locate parts of the production process in Mexico. "I think the economics were very strong for that kind of integrated production," he says. "The same economics will hold in the future."

Textiles and apparel are another story. After a long life, the quota system for textiles and apparel expired in 2005, which helps liberalize shipments from the rest of the world. With the passing of the Dominican RepublicCentral America Free Trade Agreement (CAFTA), Central American countries now have the same no-tariff benefits as Mexico.

"In my view," says Hufbauer, "with textiles and apparel Mexico is not taking advantage of its close proximity to the United States because of shipping issues. China, for example, is super-efficient in terms of shipping and can really fill replenishment orders—jeans and the like—very quickly. It's been surprising that Mexico, that should be able to do it, has not been as efficient."

He continues, "NAFTA has been largely successful. The biggest disappointment is that Mexico has failed to grasp all the opportunities that NAFTA has put on the table."

Taking Advantage of an Opportunity
Although the company was founded before NAFTA came into existence, Celadon Trucking Services (Indianapolis, has benefited from the treaty. It provides time-sensitive cargo shipments door-to-door within and between any of the NAFTA countries.

Stephen Russell, chairman and CEO of the carrier says that when Celadon was formed in 1985 movement of freight to Mexico involved taking a trailer to the border, having the cargo unloaded and put into a warehouse. Then it would be loaded onto a Mexican trailer to move the rest of the way into the country. "It was a costly, inefficient, insecure kind of trade between the two countries," he says.

Russell claims that Celadon was the first carrier to allow its trailers to go across the border and be delivered by Mexican truckers. Pioneering hook and drop between the U.S. and Mexico, it cultivated relationships with a small number of Mexican trucking companies to make the final deliveries within the country.

"In 1995 we bought Transportacion de Jaguar, a Mexican trucking company," recalls Russell. "We still do business with more than 30 different Mexican carriers. We don't require a U.S. or Mexican shipper to use Jaguar on the other side." Helping to allay concerns about loads going missing, shippers are able to track loads electronically. They can know exactly where they are at any moment, whether they are in the United States, Mexico or Canada.

In 1998 Celadon bought Canadian carrier Gerth Transportation Ltd. "We now have about 350 trucks there," says Russell. "We use Canadian drivers and Canadian management. They come into the United States and go back. Since 1982, the Canadian border has been open, allowing Canadian trucks to come into the U.S. They can't take a load from one point in the U.S. to another. That's the same with American trucks going into Canada and that will be the case with Mexican trucks coming into the U.S." Once a majority, Celadon's automotive business has dropped dramatically.

"Our first customer was Chrysler," says Russell. "In 2001, probably 60% of our business was automotive. Today we don't do any business with the Big Three—Chrysler, Ford or GM—and our total automotive business is probably about 8%. We now have a diverse customer base with about 40% of our business crossing the border. The remaining 60% is domestic U.S. freight. Our average length of haul is in the 900 to 1,000 mile lane."

On the subject of the opening of the southern border to Mexican trucks, Russell doesn't think it will significantly change the truckload world in the United States. "There are roughly 3.3 million Class 8 operating tractors in America and roughly 10 million truckload moves a week, and about 115,000 crossings a week of the Southern border, both southbound and northbound. If some of those got moved by Mexican drivers, that just wouldn't be a lot," he says.

Port Positioning
Both Canada and Mexico are making moves to capture cargo moving to North America from Asia, transload it and bring it into the United States. Canada has a major rail line connecting the Port of Prince Rupert to the U.S. Offering the shortest sea route, the port is a viable alternative to crowded West Coast ports further to the south.

Having experienced a strong 2006 performance, the port is expected to continue its growth through 2007, particularly with the conversion of its Fairview Terminal to a 500,000 TEU (20-foot equivalent unit) container handling facility by October of this year. Despite the terminal closing, in 2006 the port handled 7.7 metric tonnes compared to 4.4 million metric tonnes in 2005. When the conversion is complete, the Fairview Terminal will reportedly be the first pure intermodal port in North American and the West Coast link in a new Asia-North American Midwest Express Gateway.

"2006 was a turning point for the Port of Prince Rupert in its aggressive transformation from a regional port to become a competitive participant in the global economy," says Port Authority board of directors chair, Dale MacLean.

Further south on the Mexican Pacific Coast, two major projects are underway to speed the movement of freight into the United States. Port Colonet is in its infancy, but promises, when completed, to ease traffic congestion at U.S. ports like Los Angeles-Long Beach. More developed is Mexico's Port of Lázaro Cárdenas.

As Chris J.F. Gutierrez, president of Kansas City SmartPort (Kansas City, Mo., notes, "You can come through L.A.-Long Beach and BNSF's intermodal will serve that route. But you can also come through the Port Lázaro Cárdenas. The Mexican government is only allowing Asian freight to move through the Mexican country into the U.S. on rail. Plus the only railroad that serves that port is KC Southern."

"The port's new container terminal has all of the earthwork completed and they are going to lay the pavement," he reported after a recent visit. "The new cranes arrive this month. Rail infrastructure is being put into place. There is a building to serve as a Customs cross-dock facility. They are projecting to have that open in the third quarter of this year. That will mean they will jump from a couple hundred thousand containers to a million."