Making a Run for the Border
Although the future of NAFTA is uncertain, and trade challenges remain, Mexico continues to attract foreign companies looking for easier access to the huge U.S. consumer base.
The Mexican peso’s exchange rate fell 13 percent to a record low of 20 pesos to one U.S. dollar on Nov. 9, 2016, one day after Donald Trump was elected president. The drop came amid concerns about the impact of a Trump presidency on the North American Free Trade Agreement (NAFTA), which Trump described during his campaign as the "worst trade deal in history."
In addition to saying he wants to renegotiate trade terms, the president said before the election that he would consider a 35-percent tax on Mexican-made goods sold in the United States.
What actually happens with the new administration remains to be seen. And, while many involved in cross-border logistics say that the uncertainty has created problems, they believe NAFTA does need to be updated to reflect two decades of change.
"The rise of the Internet, environmental concerns, and dozens of other issues were not addressed when NAFTA was negotiated," says Jordan Dewart, president of third-party logistics provider Yusen Logistics Mexico. "We all need to agree to be pro-business. The factories are already in Mexico, and the supply chain has moved here, so where do we go now?"
The impact of any changes could be significant, considering Mexico is the United States’ third-largest trading partner. Canada, the other NAFTA country, is first; China is second. In 2015, $531 billion in goods moved both ways between the United States and Mexico.
"One thing I hope doesn’t get lost is how close our relationship is with Mexico," says Seth Stodder, assistant secretary for border, immigration, and trade policy in the U.S. Department of Homeland Security (DHS) during the Obama administration. He cites a Wilson Center study showing that nearly 5 million U.S. jobs depend on trade with Mexico.
Much of the U.S. trade and corresponding logistics are built around the vehicle, electrical machinery (including appliances), mineral fuels, and optical and medical instruments industries, according to the Office of the U.S. Trade Representative. Mexico is also the United States’ second-largest supplier of agricultural products that include fruits and vegetables, wine and beer, and snack foods. In fact, 80 percent of Mexican exports go to the United States.
"We see automotive, appliances, light goods, electronics, and agricultural goods coming out of Mexico," says Troy Ryley, senior vice president, TM Services, Mexico, for Transplace, a third-party logistics provider based in Texas.
Much of that trade comes courtesy of foreign direct investment from global corporations seeking proximity to the massive U.S. consumer base—Mexico is the world’s 10th-largest recipient, to the tune of $30-plus billion in 2015. The top three foreign investors in Mexico are the United States, Spain, and Canada. Mexican finance, automotive, electronics, and energy sectors are major recipients.
While the trading volume between the United States and Mexico is significant—and not surprising, considering proximity— logistical challenges remain, caused by a number of factors that include trade imbalance, regulations, customs issues, and crime.
Trade imbalances and regulations are linked when it comes to the flow of tractor trailers to and from the two countries. More goods flowing from Mexico to the United States than vice versa creates a transportation equipment imbalance—northbound trucks unloading at the border or their final U.S. destination sometimes return empty because fewer goods are heading south.
In addition, many U.S. carriers are reluctant to send their empty trailers into Mexico for several reasons, including regulations that prohibit them from being hauled by U.S. tractors. Tractors on Mexican highways need to be owned and driven by Mexicans. Because of that, companies often crossdock in a border-free zone, moving goods from a trailer coming from Mexico to another that takes it north to its U.S. destination. More often than not, this happens in Laredo, Texas, the busiest inland port between the two countries, with more than $183 billion in imports and exports moving across the border there.
Working the Rails
Some companies use rail to reposition empties in central Mexico. "Shippers typically get a better rate when transporting empty containers by rail because there’s less risk," says Mike Burkhart, director, Mexico region, at Minnesota-based 3PL C.H. Robinson. "Sometimes we can put together a package that works well for a shipper going north."
Transplace encourages companies to relieve some of the imbalance by using point-of-entry distribution programs instead.
"For example, one company we work with was moving freight from Mexico to Chicago, then sending it back down to Dallas. They should be distributing from Laredo, instead," says Ryley, who notes that Transplace has 600,000 square feet of warehouse space there. That space is at a premium because "Laredo is at 99 percent occupancy," he says.
It Takes Two
"The reality is that the majority of full truckload movements are actually two trailers doing the transportation," says Carlos Cubias, vice president of the UPS Center of Excellence. "The freight moves north to the U.S. border, where one trailer unloads onto another that takes it north into the United States. There are security issues, and goods can be damaged when they’re offloaded, but U.S. carriers don’t want their trailers going into Mexico."
The recent peso devaluation will only exacerbate this transportation-related imbalance. Because the peso is worth less in the United States, buying U.S. goods will require more pesos—making U.S. products even more unaffordable to both Mexican companies and consumers.
"That product will cost a Mexican factory purchasing in dollars 20 pesos per dollar now instead of the 15 pesos it cost in the past few years," says Dewart. "They won’t buy raw material from the United States anymore because they can’t afford to. That means even less southbound movement when we need more."
One big issue for companies importing from Mexico into the United States is border delays caused by high volume, customs processes, and restricted crossing hours. "Managing through border complexity is the number-one headache for importers and exporters," Cubias says.
A significant difference between customs in Mexico and other countries such as the United States and Canada, he says, is that Mexican regulations place liability on Mexican brokers, not importers. As a result, Mexican customs brokers are extra cautious because they’re liable for any issues uncovered later.
In addition, because Mexican customs brokers are limited to four ports each, a company importing through several ports might work with more than one broker. While 70 percent of the goods go through Laredo, there are also other land, air, and maritime ports. Regulations aren’t always consistent among them, either.
"Within all of those ports, the brokers and port authorities sometimes have different requirements themselves," says Cubias. "The difference might be something simple, but it still creates issues because they have to know all the different processes in the port to manage them effectively."
Each broker also uses its own power of attorney; shippers must sign one for each broker involved. UPS recently leveraged its more than 25 years in Mexico by negotiating a new, single national power of attorney that covers 27 ports of entry. As a result, shippers using UPS have less paperwork and more efficient customs clearance into the country.
The volume at Laredo creates backups that could be alleviated by expanded hours at crossing points. "Commerce works 24/7, but borders work 9 to 5," Cubias says. "Allowing trucks to cross at different hours would be easier than building more bridges and crossings."
"A change is critical to operations going forward, especially with volumes expected to increase," agrees Alex Graniewicz, managing director of Mexico for Penske Logistics.
Stodder at DHS cites recent collaborations designed to help alleviate border congestion. The United States and Mexico are test-piloting cargo pre-inspection in two locations. One is for southbound air freight out of Laredo; the other is for northbound agricultural products in Mesa de Otay on the Mexican side of Baja, Calif. A third pilot location in San Jeronimo, Mexico, near border cities El Paso and Ciudad Juarez, will pre-inspect U.S.-bound shipments of electronic goods. DHL Express is also test-piloting a pre-clearance process for air freight in Mexico City.
In addition, DHS is working with the Mexican government to prioritize border infrastructure improvements designed to help facilitate flow.
Air and Sea Transport Offer Solutions
DHL Express advocates shipping by air so freight can literally fly over inland highway or border congestion. Air delivery also offers speed as an advantage, notes Antonio Arranz, DHL’s country manager in Mexico. "DHL can deliver to many cities in Mexico in 24 hours," he says.
More use of marine transportation can help alleviate both the trailer shortage and customs backup, according to Raul Alfonso, executive vice president and chief commercial officer at Port Tampa Bay, Fla. He makes the case for more timely and less expensive transportation by sea between Mexico’s east coast and Florida’s west coast ports. To prepare, Port Tampa Bay has been upgrading its facilities to support anticipated freight increases.
The port is constructing a 130,000-square-foot on-dock cold storage facility designed to attract more marine shippers. A recently completed direct expressway between the port and a major interstate that offers quick and easy access to the region’s growing number of distribution centers is another significant improvement.
"Look at the possibilities for short sea transportation," Alfonso says. "By sea, it’s about three days from Veracruz to Port Tampa Bay, and you reduce supply chain issues." In comparison, he says, over-the-road transport between Mexico City and Orlando takes four days plus border delays. He estimates that shippers could save 15 to 20 percent on trucking costs using this strategy instead.
Investing in Security
Security for both products and workers in Mexico is another concern. FreightWatch International reports 1,087 cargo theft incidents in the Mexican trucking industry in 2015, a 73-percent increase over 2014. Compare that to the United States, which reported just 754 incidents with significantly more goods traveling more miles.
Mexico’s FEMSA Logistica invests in training and technology to keep both drivers and cargo safe, including ISO 39001 certification for road safety. "We average .126 accidents per million of kilometers driven; in the United States, that number is about .6. Our record could be considered as a top industry benchmark in Mexico," says Ramiro Delgado, FEMSA Logistica’s operations director in Mexico.
And while many trailers incorporate GPS technology, FEMSA Logistica has integrated technology that enables the use of GPS on the trucks and/or GPRS by giving drivers smartphones with GPS tracking and more. A phone app allows the company to track driver and shipment location, and deliver information that can re-route around recently identified traffic or security problems. The software integrates with supply chain tracking systems.
Many analysts say that the progress in the 20-plus years NAFTA has been in effect outweighs some of the challenges. For example, the nation’s manufacturing and transportation infrastructure have improved significantly, making Mexico an even more attractive home for foreign companies looking for quick access to U.S. customers.
A new $9-billion airport scheduled to open in logistics hub Mexico City in 2020 is a bright spot. Burkhart points out that roads are generally in good shape in manufacturing hubs such as Monterrey, Bajio, and Mexico City, but that doesn’t apply nationwide. "Outside those clusters and into southern Mexico and the west coast between Acapulco and Mazatlan, it becomes rural territory and the growing areas for agricultural products," says Burkhart. "Those roads aren’t at the same level as in other parts of the country." Security is worse there, too, he adds.
Rail plays a small, but important role in Mexico, particularly for automotive and appliance manufacturers. Even so, railroads are operating at 60 to 70 percent capacity, says Delgado.
It’s no secret that many companies—particularly those in the United States—locate manufacturing in Mexico to take advantage of low-cost labor. But an educated and skilled workforce is another advantage the country offers for both production and logistics.
"We’re encouraged by what we see from a talent perspective," says Burkhart. "Mexico’s universities educate capable, English-speaking people who can run plants and manage strategy. We aggressively recruit that talent."
"The profile of the international logistics specialist and frontline employee in Mexico is someone who has traveled to the United States, speaks two to three languages, and holds a college degree," says Dewart. Every Yusen Logistics Mexico employee has a college degree, and all Yusen and C.H. Robinson employees are bilingual.
Georgia Tech facilitates that talent with its Trade and Logistics Innovation Center in Mexico City. Established in 2011, the partnership with Tecnológico de Monterrey focuses on improving Mexico’s logistics performance and increasing its trade competitiveness through education, research, and consulting services. The program includes opportunities for Mexican students to earn master’s degrees in supply chain engineering or industrial engineering at Georgia Tech in the United States.
"The quality, service level, and commitment of the people are why companies—including German automakers—keep bringing new projects to Mexico," says Graniewicz.
U.S.-Mexico Trade Future
Logistics talent also makes it possible for service providers to commit to the region in significant ways. Yusen Logistics, for example, is building a 53,280-square-foot warehouse in an industrial park in the Bajio region, an auto assembly cluster. From there, the 3PL plans to offer automotive supply chain services to manufacturers and their Tier 1 and Tier 2 suppliers.
UPS has also expanded its services in the region by introducing express, expedited, and standard delivery options for all shipments regardless of size. The expansion makes the carrier the only one offering guaranteed delivery for LTL and package shipments.
The future of trade between the United States and Mexico continues to revolve around the nations’ interdependency with each other and Canada. Industry leaders, though, know they must continue to be flexible.
"The biggest thing we’re contending with is the lack of economic growth in the United States," says Burkhart. "If the GDP goes up even a couple of points, it will have a tremendous impact on Mexico. We’ve been in a dull market for such an extended period that when demand does increase, there will be limits on capacity. We’ll have to be more creative than ever before to satisfy U.S. demands."
Many envision the three NAFTA countries as a unified trading bloc in much the same way as the European Union. There, goods flow across borders duty- and tariff-free. "Within NAFTA, we have the potential to be the largest trading bloc in the world, and we need an agreement that allows goods to flow more freely across the borders," says Dewart.
Stodder harkens back to the tone of the 2016 North American Leaders Summit attended by the Mexican and U.S. presidents and Canada’s prime minister. "The vision of that summit addressed the opportunities that the close relationship between the three countries brings to our people," he says. "It’s not only for security against terrorism and migration flow, but we should be looking at North America as an integrated opportunity."
"Mexico has become a manufacturing country," says Arranz. "That’s creating a lot of noise in the United States, but the reality is that many items also come to Mexico from America. People need to understand how integrated the two countries are."