It only takes a brief look at how quickly global economic dominoes fell in unison recently to understand that national economies are more inter-related than ever before. The trading bloc in our hemisphere—NAFTA—is as good an example as any, and one worth probing deeper.
It has been more than 15 years since the United States, Canada, and Mexico signed the North American Free Trade Agreement, dramatically changing the region’s trade prospects and economic reckoning. But is NAFTA leaving global trade dollars on the table by not being as competitive as it could be?
To answer that question, Inbound Logistics and sister publication Inbound Logistics México hosted a panel of North American trade and transportation experts. They recently met in Dallas to discuss the common trade interests among the three countries and to develop plans for fostering greater cooperation.
The group included the Canadian Consul General and representatives from the advocacy group North American SuperCorridor Coalition (NASCO), Mexico’s Urban Land Institute think tank, the Mexican state of Nuevo Leon, the Port of San Antonio, and other organizations leading the drive for development in the three countries. The participants discussed the NAFTA partners’ shared challenges, strategies for strengthening individual and collective economies, and the importance of logistics in the public and private sectors.
Listen in as these thought leaders come to grips with the challenges facing the NAFTA countries.
Transportation infrastructure is crucial to the success of North American trade. Each NAFTA country faces infrastructure challenges that degrade efficiency and impact the region’s collective ability to act as an effective international trading bloc.
In many areas of Mexico, roads are in very poor condition. This reality, combined with limited rail capacity and port and border congestion, forced government’s hand recently when it announced a transport infrastructure investment plan of historic proportions—$45 billion to be spent over the coming decades. Canada is challenged by a long and sparsely populated western border, the Great Lakes, and crowded cross-border chokepoints. And despite developed infrastructure, the United States faces huge expenditures to repair and maintain its broad transport network and expand capabilities to address new and ever-changing trade patterns.
Hugo Gonzalez, INVITE, State of Nuevo Leon: Mexico’s borders are a mess. In Tijuana, Laredo, and Nogales alone, the economy is losing $2 million daily to congestion, according to a Mexican research study. In Monterrey, 80 percent of traffic moves by road and it is very inefficient. The railroad is under-performing and air service is expensive. These conditions must be improved.
Todd Carter, Ryder: For Ryder, a lot is riding on Mexico’s proposed infrastructure improvements. Ryder does business with 1,700 carriers and makes four million moves a year, with as many as 4,000 Mexico and 3,000 Canada border crossings each month.
Norris Pettis, Canadian Consul General: Seventy percent of Canada’s trade travels over the road. That means a truck has to cross the U.S. northern border every two seconds, or else we will experience great difficulties.
The Great Lakes and the location of industry create natural chokepoints. There is a large geographical border west of the Lakes, but most trade takes place in the East.
Franco Eleuteri, Franco Eleuteri & Associates: Mexico’s inland port is one major project. Poor infrastructure costs an additional $2 billion annually for truck shipments moving from Monterrey to Dallas—so the need is desperate. This inefficiency handicaps us when Mexico’s goods compete with China-manufactured products.
Diego Semper, Intramerica: In the maquiladora area, the first industrial park was built only 20 years ago. Since then, the area has experienced growth, but it has been around the ports, not inland. The investment in these industrial parks is similar to the tourism industry:If you want global tourists to come, you must build good hotels.
In the industrial sector, we create warehouses and industrial parks to attract global trade. But these facilities can’t exist on their own. Even if the heart is healthy, nothing can happen without good arteries. This emphasizes the importance of connectivity between Mexico’s road, rail, and port facilities.
Jose Garza, Grupo Garza Ponce: The total cost of making a product in Mexico puts the country at a global disadvantage. For example, the logistics cost for producing a car in Mexico is 40 percent, as compared to 10 percent in the United States. How is this possible? For one, a single railroad bridge has not been built between the United States and Mexico in 100 years. Making things worse, Mexico only has two rail carriers. It’s hard to compete with that kind of monopoly.
Also, consider the Rio Grande river flowing from the United States to Mexico, and the corollary flow of goods across the border. Five dams contain the river’s flow; but there is only one dam—one entry point—for overland freight. No wonder there’s so much congestion.
We’re trying to build a dam to increase transportation flow in Monterrey, and we hope to build dams in San Antonio and Dallas, too. Having binational Customs on- site to allow U.S. consignees to pre-clear shipments also will help.
This is Mexico’s second chance to be successful as an economic power, and we cannot waste it. The country had its first chance when NAFTA was created, but we squandered that opportunity and China filled the void. Despite Mexico’s proximity to the world’s largest market, China became the United States’ large trade partner.
Ruben Navarro, NAI Mexico: In many manufacturing areas, we’ve managed to reduce the cost of making the product, but not transporting it. We need infrastructure improvements, and we need to rationalize the ratio of freight movements between rail and truck transportation.
In addition to transport infrastructure, facility investment needs consideration. We need industrial parks and locations for manufacturing and value-added distribution and logistics activities.
Within and around these facilities, necessary improvements to information technology architectures can similarly drive business excellence. For example, a project underway at the Port of Manzanillo aggregates and digitizes Customs information, and posts it on the Internet so everyone can access and assess this data. Unfortunately, we don’t promote the importance of IT infrastructure aggressively enough.
Carter: Technology is definitely an advantage to North America, given the length of its supply chain. Information will continue to flow faster and faster, and if it doesn’t, barriers to trade will only grow. In some countries you can’t receive goods unless that technology is in place.
Although we’re not promoting regionalism, the economic conditions are ripe for North America to become a competitive force in international trade. Not long ago, for example, the price of shipping containers from Shanghai to Oakland tripled. Costs have since come down, but they may go back up again. These shifts create more opportunities in the region, and a tremendous advantage to foster tighter trade if we endeavor to use NAFTA’s benefits to compete globally.
Macroeconomic conditions are prime right now to achieve this goal, but it will take leaders who understand the importance of transportation, logistics, technology, and infrastructure, and act on improving them, to seize this opportunity.
It also will take people like us to move things along. The green initiative is an ideal starting point because efforts are already underway to reduce transportation costs and emissions and they span the region.
I wonder if our respective governments realize that conditions are ripe for change. Some have said these new infrastructure programs may take 20 years to achieve. I don’t think we can wait 20 years. Other regions aren’t waiting, they’re moving now. We have to follow their lead.
NATIONAL SECURITY AND CUSTOMS
One of the most prominent issues in North American trade is border-crossing security regulations in a post- 9-11 era. Discussion panel participants agreed that Customs clearance and security go hand-in-hand. There was near unanimity in a call for harmonizing security requirements across the NAFTA bloc.
Semper: We need Customs pre-clearance throughout all the NAFTA countries because there is no way you can have just one secure entry/exit point and expect to succeed as a competitive global trade bloc.
Pettis: A few years ago, Canada and the United States issued a Smart Border report that established areas beyond the border where shippers could pre-clear cargo. In the post-9/11 world, however, several different security regimes are in effect. These processes were well-intentioned from a security perspective, but they were established without considering the unintended collateral effect they might have. For instance, we have situations where a cargo shipment is cleared, but the truck driver isn’t, creating another chokepoint.
Bureaucratic application of new rules and procedures can cause significant slowdowns. I’ve heard of some Canadian suppliers sending two trucks with the same critical cargo across the border to make sure that at least one gets through in the requisite time period.
Border slowdowns cost North America billions of dollars. In Canada, we are engaged with the U.S. government on regulatory issues. But it’s a tough sell because of the Department of Homeland Security’s (DHS) superseding mandate to secure the nation. The DHS operates with a law enforcement mentality; trade considerations are secondary.
Eleuteri: In the past, we were only concerned about Customs pre-clearance, but in this post-9/11 era, we have to consider both Customs and security clearance. If you don’t clear both, you have the same problem when you cross the border.
The current sophistication required for Customs pre-clearance is not sufficient to get the job done. Unfortunately, it is very difficult to reliably secure truck cargo. Even if the freight is secured at the point of origin, how do you ensure no contamination occurs in transit? You have to validate that the move has not been interfered with, and we have yet to reach that level of surveillance in North America. I’ve seen it done elsewhere, between China and Hong Kong, for example. We may consider applying lessons from other parts of the world.
Establishing regulations intended to create more secure cargo and border crossings comes with a cost. It becomes necessary to tolerate a degree of risk in order to keep cargo traffic moving. Inbound Logistics’ research shows upwards of 100 million inbound events to the United States each year. It is clear that there is no way to secure every one of those shipments. That begs the question: aren’t we already tolerating a certain amount of risk?
Carter: Yes, we are. In security and risk discussions, emotions tend to run high and exercise a disproportionate influence on balancing some degree of risk with the gain of economic growth. This emotional approach sometimes results in poor legislation being enacted in the United States, hurting the economy and costing jobs. People’s lives are certainly important, but legislation impacts these other areas. That means tolerating risk to stimulate trade for our economies.
Garza: U.S. security is not a reality; it is theoretical. From my perspective, the United States may be paying too high a price for security. But the political price of not appearing to support an assumption of security may be too much for some political and corporate entities to bear.
The infrastructure and security challenges facing NAFTA are complicated, but there are solutions: public-private partnerships, small successes leveraged to create others, and constant lobbying to educate public leaders—from grassroots to national levels—on the importance of transportation and trade policies and their role in creating jobs and stimulating economic growth. Making a case for securing NAFTA trade is one way to bring greater efficiency to the bloc while drawing greater interest from the public sector.
Carter: If the North American nations don’t all treat security the same, then we face continuing disruption in the flow of trade. Security policy must be harmonized.
Pettis: In April 2008, I spoke at the North American Leaders’ Summit in New Orleans. I asked the audience of more than 100 people if they had heard of the Security and Prosperity Partnership of North America (SPP), a trilateral effort to increase security and enhance prosperity among the three NAFTA countries through greater cooperation. Not one person raised a hand. It brings to bear the lack of public-private trust and the inability to put cooperative initiatives together.
Is it a systemic problem and an inherent distrust of processes among our governments? We need to show people that reducing obstacles to trade will not harm their sovereignty. Certainly, we have a track record with NAFTA.
It’s also a compelling part of our job to talk to the general populace and let them know that fostering trade is in their best interest. It’s extremely important because until you do that, how can you get the political support necessary to marshal commitment and make these transportation and logistics infrastructure investments?
There is a distinction between the northern and southern border of the United States. There is tighter integration on security issues between the United States and Canada than between the United States and Mexico. Canadian and U.S. law enforcement work together on security issues. More remains to be done, but we have a good start and a working relationship.
Francisco Conde, NASCO: NASCO is taking the initiative to use its technology and contacts to create a standard for cross-border security practices and compliance. The U.S. government looked at what NASCO was doing and adopted those practices on a federal level.
Tiffany Melvin, NASCO: Efforts to harmonize Customs and security requirements are critical, and no other initiative is underway in the three countries to achieve that. If NASCO’s security efforts are successful, not only will it directly benefit those along the NASCO corridor, it will serve as an example to others on how to move forward.
Government leaders can help boost trade. But in many instances they act to prevent NAFTA’s ability to compete with other areas of the world, such as the European Union and China.
North American countries are more alike than they are different. We should recognize this and work collaboratively to communicate better, integrate culture and education, and place pressure on our respective governments to make a concerted commitment and allow our economies to grow. Politicians lead to get votes, and don’t necessarily act in the best interests of the people. Why do policymakers act this way? What can be done about it? How can public and private sectors work together to drive economic development and security initiatives?
Mariana Perrilliat, Industrial Global Solutions: One challenge is getting government officials to see the larger picture. They often don’t understand the full import of how their actions impact trade with Canada, the United States, Mexico, and our neighbors. Mexico’s global competitiveness is at stake. If government officials don’t recognize these political realities, Mexico will not grow. The business community is perceived as the end consumer or beneficiary of economic development projects, but that’s not true. It’s the country’s workforce and population who stand to gain.
Eleuteri: Government wants to promote shared economic goals; the private sector wants to make money. Leaders have to create—and promote—a mutual benefit. We’re all entangled in our own interests—the private sector in earning money, the public sector in getting votes.
When I was consulting in China, I was told: ‘If you’re coming here to give us the same caliber of infrastructure the United States and Europe have, we don’t want it. We want to leapfrog them so we can become economic leaders.’
While we’re frittering away resources, China is using its transportation and logistics superiority to drive continued economic domination. It speaks to motivation. Global competitors are motivated to use transportation and logistics infrastructure to achieve economic dominance. We’ve been talking about it for 20 years, but haven’t grasped that shared goal or practiced it yet. The Chinese and others are acting in their self-interest; they are motivated to get things done.
Pettis: It is in Canada’s interest to see these infrastructure improvements come to fruition—not only in Canada and the United States, but also in Mexico, because together we’re a North American economic base. It benefits us to see the smooth flow of North American trade; we need that synergy to combine the strengths and offset the weaknesses so we can become global trade competitors.
Navarro: There are benefits to working in North America, but in the past Mexico has missed the opportunity. In China, the regime is autocratic, has control, and is market-driven.
Mexico President Felipe Calderon is more democratic, but not as market-driven as leaders in Asia. Mexico is struggling with corruption and taxation issues, but we are addressing these concerns, which increases opportunity. The United States, Canada, and Mexico must act together.
Three years ago, South Korea had half the per capita GDP of Mexico. Today it has more than two-and-a-half times the GDP of Mexico. That’s a lesson for us. How can we compete if we don’t work together?
Eleuteri: It comes down to the shared interest of our governments and it is usually built around a deal—how many jobs will be created, what volume of tax revenue and profits will be generated?
Melvin: The goal of harmonizing security may be too big to tackle all at once, so perhaps affected groups can cooperate to address the challenge one step at a time. Business leaders in the NAFTA countries should coalesce around NASCO to move these security initiatives forward. They’ve taken some preliminary steps and are working with the government agencies that are already involved.
Gonzalez: Mexico’s leaders are starting to take steps. At a recent Borders Governors Conference, a meeting of governors from the United States’ and Mexico’s border states, one transportation roundtable made recommendations on how both countries can work together to reduce traffic congestion. Ten governors on both sides of the border are considering the plan, which is a good start.
Garza: Progress requires small steps and short-term goals. For example, our Monterrey project comprises three components: First, building a dedicated and secure highway; second, completing two inbound rail carrier terminals; and third, rolling out Mexican and U.S. Customs pre-clearance. These small steps incrementally move us forward in accomplishing our larger mission.
Sometimes the public sector is criticized by business and labor interests for being too focused on its own goals, not taking the long-term view, and failing to push improvements for the greater good. The private sector is often criticized for ignoring shared public interests and focusing only on profits. What can be done to mediate these exclusive objectives?
Gonzalez: Often, the public sector doesn’t understand the importance of transportation and logistics. It’s tough for them to understand the value of logistics because, in the past, transportation was considered a cost of doing business. Today, it’s considered a value-add, a competitive advantage. And value-adds can drive competitiveness not only for a company, but also for a region.
The combination of public will and private resources can move infrastructure projects forward. Even though the Mexican government has a greater understanding of infrastructure’s importance, the individual states still need to work together. They’re still focused on whether an initiative is good for the state rather than beneficial to Mexico as a whole.
Pettis: Canada needs additional rail and truck crossings. Those could fall under both public and private authorities. We have the privately-owned Ambassador Bridge, and there’s talk of building another. Understandably, discussions revolve around who’s going to pay for it: The public sector? Private sector? Both?
Melvin: NASCO is designing a project that will provide complete supply chain visibility for responsibly handling and moving shipments through the corridor. This program would allow us to not only know where products are in real time, but also what happens to them within the containers—events such as temperature changes and security breaches. This monitoring is electronically connected with a Web site that can send delivery time information to the shipper’s Blackberry or personal computer.
Conde: Here’s an additional benefit to public/private partnerships moving forward with security initiatives: they can provide real-time information to every state and federal law enforcement entity in the event of a natural disaster such as a hurricane or any other supply chain disruption.
For example, when I-35 traffic was disrupted in May 2008, NASCO talked to seven district Department of Transportation departments in Texas, and we learned they had never talked to one another before. One department would shut the roadway for maintenance without talking to the other districts, and not realize its impact on trading relationships at the district office level.
That kind of thinking still exists. The only way to counteract this siloed communication is to raise the collective consciousness of everyone in the shipping community, from local levels on up to the top. We strongly urge shippers to vigorously support integrated public/private partnerships such as NASCO and others that are seeking to change this insular thinking, which is disruptive to the economies of the three NAFTA countries.
Eleuteri: Although each operates in its own interest, when the private and public sectors work together, progress really happens.
I was recently involved in a public-private partnership to build an industrial city in North Korea. The most-closeted communist government in the world worked together with my client, a leading multinational manufacturer. If that can happen in North Korea, the public and private sectors in North America can work in partnership, too. If you can create special economic zones in China, with its corruption, culture and language differences—the same things we face in this hemisphere but larger by a factor of 10—then why can’t we do it here?
Navarro: Our three countries must understand that there are different levels of development, and because of that, Mexico is a land of opportunity. Mexico offers building and manufacturing growth; metals, electronics, retail growth—even aerospace production—with very low barriers to entry.
Mexico has proven that it has capacity, but does it have the attitude to continue to change? I think so. It will take time, but our three economies will grow together.
Perrilliat: We should try to push initiatives to make change real, then truly act as a trading bloc. If we consider these broad-based efforts as small, incremental changes, it will be more doable.
Past inaction has been blamed on cultural differences among the three NAFTA countries. There are differences among us in this hemisphere, that is true, but that is no excuse. Look at Europe’s example. Many individual countries set aside their cultural differences to work toward a common goal and act as a trading bloc. They say, ‘We are not going to speak the same language or be one country,’ and yet they act closely and with a shared interest. If it is possible there, it is possible here with Canada, the United States, and Mexico.
Canada, Mexico, and the United States need to get together and carefully address how cementing the collective whole—in terms of infrastructure, security, trade policy, technology, and public-private collaboration—can benefit each country by expanding their respective trade interests. If the NAFTA region is to compete as a global trading bloc, its advantages need to be shared and leveraged, and its challenges and risks must be met en force, rather than apart. NASCO’s example offers a path to follow. But as a global trading power, NAFTA will not be able to compete with China, the European Union, and other emerging markets if it remains mired in parochial interests that diminish shared efficiency.
Talking the talk is a small step toward walking the walk. How can industry and the public sector take these talking points and make them actionable? What effort is your company making to enlighten government of the inherent challenges and opportunities that await North American trade? We’d like to know. Email: [email protected]