2020 Cross-border Update: Even more confusion ahead

There were years when discussions about cross-border trade issues were rather static and staid. We would suggest that all shippers really needed were reliable U.S.-based trucking or rail partners with good networks and Customs knowledge on all sides of the border in order to safely transport goods into the three North American nations.

Well, 2020 is not one of those years.

At press time, the U.S., Canadian and Mexican borders were still closed (as of March 23) to non-essential travel such as tourism and recreation in an effort to contain the spread of COVID-19. The allowable exception is travel related to cross-border supply chain and logistics moves, which, of course, were deemed an economic necessity.

On top of the pandemic, another major challenge is a layer of fine print found in the new United States-Mexico-Canada Agreement (USMCA) that will directly affect North American auto manufacturers and their shippers—and perhaps other industries as well.

Then there’s the standard cross-border hang-ups regarding microscopic details of Customs paperwork—now done through e-mail, texts and other electronic forms—as well as standard language and cultural issues that must be respected if American manufacturers are to make inroads for sourcing, manufacturing and new potential markets.

However, it’s safe to say that these ongoing headaches are worth it in order to take advantage of what the U.S. Chamber of Commerce believes is burgeoning trade among the three North American entities. The staggering numbers speak for themselves.

• $1.4 trillion: That’s the amount of trade that flowed across the borders of the U.S., Canada and Mexico in 2018, the last full year figures are available. That amounts to $3.8 billion daily or about 4% of the GDP of the United States.
• 120,000: Canada and Mexico are the top two export destinations for U.S. small and medium-sized enterprises—and more than 120,000 of these companies sell their goods and services to our North American neighbors.
• $39 billion: U.S. agricultural exports to Canada and Mexico quadrupled from $8.9 billion in 1993 to $39 billion in 2017. According to the U.S. Chamber of Commerce, at least $1.7 billion worth of goods and services flows between the U.S and Mexico borders every day.

And according to the United Nations’ International Trade Center, after China, Mexico and Canada are the two largest trading partners for U.S. manufacturers and shippers. Trade with Canada and Mexico supports 12 million American jobs, while 49 U.S. states count Mexico or Canada as one of their top three merchandise export markets, according to the U.S. Chamber of Commerce.

Let’s look at the latest trends in cross-border logistics, enlarge some of the fine print of the new USMCA trade agreement that replaced the 26-year-old NAFTA Agreement, and examine how COVID-19 may be altering cross-border freight movements for the rest of 2020.

Challenges for carriers

What are the most important challenges facing carriers in cross-border freight? Well, there are ever-shifting Customs compliance issues, multiple rules for setting up efficient distribution networks to reduce idle times, and a slew of other matters regarding proper procedures for quickly clearing the border efficiently.

Greg Orr, president of CFI, a major north-south truckload carrier that has more than 25 years of experience transporting loads into Mexico, says that this stew of tiny details is by far the biggest thing any new cross-border shipper needs to grasp. “Creating and building those south-of-the-border relationships is beyond important,” he says. That’s because U.S.-based carriers can’t carry loads into Mexico beyond a 12-mile to 16-mile “free trade zone” at the border.

CFI, for example, has established about 80 “core carriers” in Mexico with longstanding relationships that it relies on to deliver more than 100 full truckloads a day inside that country. According to Orr, his organization can call on an additional group of 50 carriers for occasional deliveries south of the border.

But now there’s the issue of a new master trade agreement—USMCA—that governs all freight movement among the three nations. And, according to experts who have given the agreement a closer look, it’s complicated.

Beth Pride, president of BPE Global, a market analyst with more than 25 years of experience in global trade and international logistics, says that the biggest issue in USMCA is what’s called “Section” tariffs.

Although Canada and Mexico are not currently subject to the Section 232 tariffs on aluminum and steel imports, Pride says there’s an overarching threat from the Trump administration that the U.S. could impose them at any time—a move that would amount to significantly increasing the cost to manufacture and move those items (see sidebar).

“And with that looming threat, retaliatory tariffs could come in to play,” Pride says. “Industry would love to see the U.S. agree to reciprocal tariffs with its trading partners. This way, countries would agree to a set rate of duty among countries—providing manufacturers with fixed costs versus variable costs that change without any notice.”

How to streamline the system

So what can Mexican manufacturers and their U.S. customers expect in cross-border trends and new efficiencies post-USMCA?

Deepak Chhugani, founder and CEO of Nuvocargo, a digital freight forwarder and customs broker for U.S./Mexico trade, says that, due to the pandemic, transportation companies have yet to see any big changes at the border. In fact, after March 20, he says that meant an immediate 15% reduction in traffic at the Laredo, Texas, crossing where most of the U.S./Mexico trade transport takes place.

“There was an even bigger reduction in traffic at the Tijuana crossing, which typically had a larger proportion of consumer travel,” says Chhugani. “And truck drivers tell us that there are no new procedures that they’re being asked to follow at crossings.”

However, with the shutdown, Chhugani says that Mexican carriers with extra capacity are lowering prices to get their trucks moving—just as their U.S. counterparts are doing. So, cross-border shipping rates are plummeting as carriers have excess capacity. “We expect that will become much more common,” he adds.

As cross-border traffic returns to more normal flows, the biggest issue for shippers will be the removal of barriers to the flow of product. “That comes down to ensuring that accurate classification, valuation and country of origin data is clearly communicated in advance of any shipment,” says BPE’s Pride.

Eric Meyer, executive vice president of operations for Landstar, the nation’s 4th-largest collection of truckload carriers, supervised the opening of a facility in Laredo in 2017. He says it can transload about 250 shipments a day to provide end-to-end solutions for transporting freight across the U.S.-Mexico border.

According to Meyer, first-time Mexico shippers should make plans to fill out all paperwork—which is done mostly electronically now—as precisely as possible. If done correctly, cross-border traffic can be as simple as moving freight across town. “Paperwork can cause the most disruptions and delays,” he says. “So, pre-file as much Customs paperwork as possible, and this shouldn’t be costly or time consuming.”

According to Meyer, electronic filing has helped—and he expects that to continue. “There is more paperwork than you expect, and Mexico is quickly catching up to Canada’s cross-border Customs efficiencies. Mexico has made huge strides over the years to automate the process,” he added.

Where are we headed?

The new USMCA is scheduled to take effect July 1, barring delays due to COVID-19. Experts say that there are subtle, but significant differences than the measures
contained in NAFTA.

One industry directly affected by USMCA is the auto sector. That’s because buried in the fine print is a provision that by 2023 at least 75% of parts in an automobile must be North American, up from 62% required under NAFTA. And in a concession to organized labor, the agreement stipulates at least 40% of workers in the North American auto supply chain must be paid at least $16 an hour.

“In Mexico, that’s still an issue,” says CFI’s Orr. “The big things we could see out of this are higher labor costs, lower margins and increased cost to consumers. Potentially that’s less freight for us moving forward. There are more layers as this unfolds…it’s like an onion.”

According to Pride, it’s going to be hard for shippers and manufacturers to prepare for these changes due to the fact that the U.S. must implement uniform regulations. However, she says that there’s a real concern that COVID-19 will affect when these regulations will be published. “As we’ve seen with prior initiatives by this administration, companies may not have enough time to review the regulations and ensure compliance with any changes,” she says.

Pride’s biggest concern will be changes to rules of origin. Currently, there’s an existing published USMCA rules of origin, but there’s no assurance that the rules won’t change. That leaves companies to evaluate how the rules of origin, as currently written, impact their operations and also leaves them wondering if they’ll need to reevaluate them every time there’s an update to the proposed regulations.

“The hope is that the new rules of origin are simpler, and that the standard for qualifying for an origin is easier so companies could stand to see more items qualify for USMCA than they did under NAFTA,” Pride adds.

But clearly, the landscape is changing. CFI’s Orr says shippers can forget about those old stereotypes of Mexican trucks just being old hand-me-downs from defunct U.S. carriers. Today’s Mexican fleets are outfitted with the latest telematics, communications and safety gear as the most modern U.S.-based fleets.

“Our partner carriers in Mexico have as much technological capacity as we do—sometimes more,” says Orr. “In the U.S., we can track a shipment of widgets anywhere in the country, and we can do the same thing in Mexico.”

And that’s the goal of efficient cross-border trucking—making it seamless and efficient.