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NAFTA’s invisible but critical Mexican trucking debate

New NAFTA would govern North American shipments of export cargo and import cargo in international trade.
Commentary, Free Trade Agreements, Global Logistics, Global Trade Daily, Trucking

NAFTA’s invisible but critical Mexican trucking debate

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The ongoing trade dispute between the US and China (and more recently with Turkey) has understandably pushed the lingering NAFTA negotiations into the recesses of the public’s attention.

Yet for those with a vested interest in North American ground freight, the latest developments in the NAFTA talks – which have seen the US set Canada aside to negotiate separately with Mexico – should be watching those discussions very closely.

While the pivotal debate is focused on rules of origin for autos and the associated labor provisions that will allow US labor to compete at a more equal level with their Mexican counterparts, there are subtler aspects of the US-Mexico relationship that could have a profound effect on the price and availability of ground freight in North America.

When NAFTA was signed in 1993, it liberalized not only trade across North America, but also how goods were moved. Specifically, it was intended to eventually allow Mexican truck drivers to be able to haul loads deep into the US.

That level of free movement, however, is still quite limited on America’s southern border. For years, trucking labor groups concerned about the impact the move might have on employment and business in the US trucking industry, fought the move that would allow Mexican truckers to access US highways, noting their trucks were not up to the safety standards set out by America’s relevant governing bodies. As a result, Mexican truckers were forced to transfer their loads to American truckers at rally points within a few kilometres of America’s southern border.

That changed in 2015 when the US began permitting licensed Mexican truckers to transport their loads into America’s heartland. While American truckers may have lamented the change, it was a welcome initiative to shippers who have witnessed a deterioration in ground transport reliability within North America and increasing ground freight rates due to an ongoing driver shortage.

But the renegotiation of NAFTA has the potential to change the policy once again. Whatever one’s politics with respect to labor competition within the trucking industry, a move to prevent Mexican drivers from accessing the US will only exacerbate an already challenging driver shortage within the industry.

It’s difficult to say which way the policy might go as part of a new NAFTA and the topic has seen scant discussion in public forum, leaving ample room for speculation. However, unnamed sources close to the NAFTA negotiations told Bloomberg last November that the US had asked that a new NAFTA exclude Mexican truckers from access to the US

Much has changed in the negotiations since then. It’s quite possible a renegotiated NAFTA could further relax access to US roadways for Mexican drivers. In this scenario, freight rates could see a decline as could transport times. Conversely, a tightening of access could mean even higher freight rates and lower accessibility of drivers.

Logistics managers who rely heavily on ground freight to transport products, will want to take this into account when planning ahead for 2019. Increased rates will inevitably create budgetary pressures and fewer drivers could mean a greater reliance on the spot market where rates are even higher.

Working with a forwarder that has an extensive ground network can assist in planning ahead and being prepared for supply chain disruptions or delays, limiting operational impact, revenue loss and unexpected expenses.

Of course, most businesses are hopeful NAFTA is successfully renegotiated in a manner that leaves the core tenets of the agreement unaltered and allows for relatively seamless business continuity.

But when it comes to supply chain management, it’s always prudent to hope for the best while planning for the worst.

Mike Meierkort is the President of International Freight & Transportation Solutions at Livingston International.

Truckers deliver shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Logistics, Global Trade Daily, Trucking

Truck driver shortage doesn’t have to mean unlevel playing field for small businesses

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Small and medium-sized businesses across North America have been facing an unusual sort of competitive threat from the big business community over the past few years.

Main Street businesses have always struggled to compete with big-box stores on price with the latter capitalizing on the economies of scale they achieve by purchasing and selling in high volumes.

But now those economies of scale are putting pressure on SMBs to compete on supply chain reliability, which has a reverberating effect on everything from cash flow and inventory control to customer service and market reputation.

The ongoing trucker shortage that has pushed rates up more than five percent over the past year is having a far more profound effect than just increasing the cost of moving goods. While higher rates are certainly cause for frustration, total spend on freight generally doesn’t far exceed five percent of total cost inputs. A five-percent increase on something that only makes up five percent of total spend isn’t something that triggers CFO alarm bells.

But there’s an element of the trucker shortage that goes well beyond cost and ripples through supply chains to wreak havoc on everything from inventory control and warehousing costs to customer service and market reputation. That element is reliability.

Last year, ground freight moved more than 60 percent of the imports and exports between the United States and its NAFTA trading partners. The American Trucking Association estimates it will be short 63,000 truckers by the end of the year. That means that it’s not only more expensive to get goods from supplier to manufacturer to distributor to retailer and to customer, it’s less predictable.

That lack of predictability can be a death knell for small and medium-sized businesses that are under increasing pressure by major retailers and consumers to get their wares to required destinations on time.

To be sure, the higher expectations have been a boon to carriers in the spot market who have been capitalizing on businesses’ that need to get to move goods punctually. But with spot pricing almost one-third higher than standard freight, only those with deep pockets can afford to take advantage without negatively impacting their cash flow in the short term and, ultimately, their bottom line. Herein lies the advantage of big business over their SMB cousins.

In addition, many carriers give priority to transports moving full truck load, rather than less than truckload (LTL), giving further advantage to high-volume shippers.

Unfortunately, those who don’t take advantage of spot pricing face a far more ominous set of consequences. They may save on freight, but they run the risk of souring crucial relationships with their supply chain partners and/or end consumers whose expectations for on-time shipments is at unprecedented levels.

In other words, lower volume shippers face the impossible choice of opting to narrow already thin profit margins or compromise their market reputation.

There are two critical steps smaller businesses with lower shipping volumes can take to mitigate against having to make such choices. The first is to plan ahead. Booking freight well in advance helps not only to save on cost, but ensure the availability of a transport to move your goods.

The second is to work with carriers and freight forwarders who can offer enhanced reliability. While it’s true that the added reliability may come with higher-than-average freight rates, the rates are still significantly lower than spot pricing and offer what the spot market can’t – a transport guaranteed to be available for your shipment.

This may be easier said than done in certain instances and industries. In many cases, new orders may demand shorter lead time and the move from brick-and-mortar retail to e-commerce has put ever-greater pressure on expedited delivery of finished goods, many of which are being fulfilled directly from manufacturers rather than through the retailer.

But for those with the flexibility to plan in advance, there’s tremendous opportunity to save cost and market reputation by ensuring goods arrive at their destinations on schedule.

The alternative isn’t much of an alternative at all.

Mike Meierkort is the president of International Freight & Transportation Solutions at Livingston International.

Impacts of new alliances on shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Logistics, Global Trade Daily, Ocean Carriers, Ocean Ports

Worried About The New Container Shipping Alliances?

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On April 1, while many Americans were indulging in the levity of practical jokes, a major milestone was taking place in the world of global trade that likely went unnoticed by the vast majority of business owners.

That milestone was the initiation of a new set of alliances among ocean carriers that was coordinated in the aftermath of the high-profile Hanjin bankruptcy in October 2016, and in response to dwindling global trade activity that has prohibited many carriers from being able to fill their ships’ capacity.

The new regime will see the world’s ocean carriers organized into three key alliances, each of which will have a stronger or lighter presence on international waterways than they had previously. For example, the Wall Street Journal reports that 2M (an alliance consisting of Maersk and MSC) will have a far heavier presence in Europe-Asia where it will hold 34 percent of the market, versus North America-Asia where it will hold only 17 percent of the market.

These alliances will be critical to American businesses, particularly those in consumer goods. Container shipping moves the vast majority of the world’s manufactured goods and does so through increasingly larger vessels being unloaded at international ports.

While the new alliances could eventually lead to greater predictability for shippers and perhaps more consistent pricing, the short term is likely to be a period of disruption as carriers and ports find their footings in the new world order of global ocean freight.

That disruption will inevitably affect the global supply chains of US businesses that rely heavily on the free flow of imports from around the world and the transport of finished products to key global markets. Those businesses will need to take preemptive steps to mitigate the impact of that disruption, or to ensure it’s managed in a manner that doesn’t adversely affect cash flow and/or relationships with customers and vendors.

Here are four things business should consider to help themselves through this transitional period:

Review carriers. Business that are not forced to change their carriers as a result of the new alliance aren’t immune to disruption. The new alliance model will mean some carriers that have used the same ports for years will now be docking elsewhere, which could lead to delays in processing at their new ports of call. Shippers should also look into whether their container ship will be traveling direct to port or as a transshipment, the latter of which will lead not only to additional transit time, but potentially additional costs.

Set expectations. Making an international supply chain work means communicating and collaborating regularly with vendors, suppliers, distributors and carriers. It’s critical to let your supply chain partners know if the new alliance structure may lead to delays and disruptions. Doing so allows them put in place their own contingencies so that they’re able to minimize the disruption to the overall supply chain. This will limit the amount of additional cost businesses may need to incur and will result in fewer delays and disappointed customers.

Evaluate the cost impact. Carriers that use different ports than they had previously may be subject to higher docking and processing fees, which they will inevitably download to shippers via transport fees. But the potential cost impact doesn’t end there. Most goods being processed at seaports are destined for inland destinations. New ports being used due to the shift in carrier alliances could be farther away from their final inland destinations, leading to additional ground transport costs. It’s also worth considering that lengthier processing times at ports could lead to longer idling times for ground carriers, once again adding to the overall cost of getting goods from point A to point B.

Avoid single-carrier use. Many businesses have been using the same carrier or alliance for years, but during times of disruption it’s worthwhile being flexible. Businesses should be consulting with their trade advisory partners to determine whether it makes sense to stick with their traditional carriers, or if the new alliance structure means a change (with some redundancy built in) might make more sense, at least in the short term. Being proactive means avoiding delays and headaches at international ports and border crossings that not only disrupt supply chains but potentially tarnish relationships with partners and consumers.

To be sure, the new alliance structure won’t grind global sea transport to a halt, but it’s more than likely some level of disruption will take place in the short term – disruption that could have adverse effects in the long term. Businesses would be wise to proactively consider how they can minimize the impact on them, rather than deal with the transitional pains as they arise.

Mike Meierkort is the president of International Freight and Transportation solutions at Livingston International, a trade services firm specializing in customs brokerage, freight forwarding, global trade management and trade consulting.