United States-Mexico Transportation: Full NAFTA Implementation Essential
The North American Free Trade Agreement (NAFTA) is a comprehensive rules-based agreement among the United States, Canada and Mexico that came into effect in January 1994. With transportation, NAFTA set a definite timetable allowing the provision of motor carrier services, investment in trucking, and passenger bus service.
On Dec. 18, 1995, the border between the U.S. and Mexico was scheduled to open for international delivery of goods by truck into border states. In addition, on the same day, both the U.S. and Mexico were to liberalize their foreign investment rules under NAFTA for the trucking industry. None of these provisions have been implemented.
While NAFTA gives each country the right to enforce its own standards on foreign trucks, those who criticize the Clinton administration say that this provision of NAFTA was delayed for political reasons-including objections from organized labor and consideration of the 1996 election campaign. No matter what the reason for the delay, the U.S.-Mexico Chamber of Commerce believes strongly that these NAFTA provisions are critical to facilitate the movement of goods between the U.S. and Mexico.
In addition, the U.S. government sees it in the interest of U.S. businesses to have a rules-based trading system in the hemisphere; indeed, the U.S. government considers NAFTA a model for other nations in the hemisphere. The whole concept is that rules are to be followed. Until this blemish on NAFTA implementation is corrected, the U.S. is in a difficult position when arguing for other countries to follow particular trade rules.
The failure to open the U.S.-Mexico border under the NAFTA timetable has become intertwined with the failure to solve a number of other NAFTA-related transportation issues as well as a number of business issues in Mexico. These include: beginning a process to open up transportation companies to investment from across the border, removing restrictions on scheduled passenger bus service across the border, providing expanded operational capabilities in Mexico for U.S. and Canadian small package delivery operations, use of 53-foot trailers, Mexican restrictions on truck leasing and several pending investment disputes with Mexico.
Border States and International Trucking - Current Status
One person close to the NAFTA transportation negotiations noted that when they were completed, no one liked them. These were difficult negotiations with many competing interests to satisfy. In the truck transportation area, NAFTA created a timetable for the removal of barriers for cross-border trucking services.
On Dec. 18, 1995, the United States and Mexico were to have allowed access to each other's border states for the delivery and backhaul of cargo.
By the year 2000, U.S. trucks will be able to conduct cross-border transportation to and from any point in Mexico; Mexican trucks will be able to carry cargo across the border to and from any point in the United States.
Leading up to the Dec. 18, 1995, date there was much activity to get ready for this border opening, including, an extensive industry safety training program sponsored by the border states, the three NAFTA governments and the industry.
Senior government representatives from both California and Texas told the press their states were prepared for the border opening and U.S. Department of Transportation officials reassured Congress on the safety issues. U.S. diplomats thought that Mexico might decide to postpone this provision and had developed contingency plans. It was U.S. Transportation Secretary Federico Peña, however, who announced that Mexican trucks would continue to have access only to commercial zones in the United States until safety and security concerns were addressed. While NAFTA permits the U.S. to restrict Mexican trucks after Dec. 18, 1995, for safety reasons-and U.S. government officials assert that this is the cause of the delay-industry representatives believe that this decision was made for political reasons.
First, NAFTA requires, and the U.S. is insisting, that Mexican trucks meet all U.S. safety regulations. Since December 1995, officials on both sides of the border have worked to further improve trucking safety.
California (24 percent of truck traffic from Mexico ) opened two permanent truck inspection facilities at its two major border locations, Otay Mesa and Calexico, which cost $15 million each; and established a system to inspect all Mexican trucks entering the United States at least every 90 days.
Texas (66 percent of truck traffic from Mexico) has already hired 109 of the proposed 150 additional enforcement personnel to meet the NAFTA safety requirements. In addition, eight of the thirteen federal truck inspectors have been allocated to Texas.
Arizona (10 percent of truck traffic from Mexico) is considering establishing a permanent truck inspection facility at Nogales which has the majority of this truck traffic and has assigned two full time officers to NAFTA outreach. These officers have trained 781 Mexicans in U.S. commercial motor vehicle safety requirements.
New Mexico (less than 1 percent of truck traffic from Mexico) has installed new inspection facilities at Anthony on I-10 just north of El Paso, Texas.
Mexico joined the Commercial Vehicle Safety Alliance (CVSA), an organization of state and provincial officials that works to assure that compliance and enforcement procedures, particularly roadside inspection procedures, are consistent from jurisdiction to jurisdiction.
Under the Land Transport Standards Subcommittee (LTSS), established under NAFTA, the U.S., Mexico and Canada have agreed on critical safety areas that would be reviewed and approved before a carrier could begin cross-border operations.
The U.S. has negotiated agreements with both Canada and Mexico on commercial drivers licenses (CDLs), which assures that the standards in effect in all three countries are comparable. The U.S. and Mexico share data bases on CDLs. Drivers must be at least 21 years old and be able to communicate in the language of the country in which they are operating.
The Border - Reducing Congestion
Currently all goods crossing the U.S.-Mexico border by truck are handled by short-haul drayage companies. Goods moving to Mexico are off-loaded on the U.S. side of the border to a drayage company which transfers the goods to the Mexican side of the border to a Mexican trucking company. The short-haul truck then returns empty to the U.S. to pick up another load. This transfer is repeated for goods heading north. The extra handling as well as the extra trucks passing customs gradually will be eliminated as the transportation aspects of NAFTA are carried out. The extra handling and the delays caused by the current system add significantly to the cost of trade between the U.S. and Mexico.
Operations management at ports of entry also remains a major challenge. Five independent agencies and employee unions on the U.S. side are responsible for operational inefficiencies.
And at the U.S. Border Infrastructure Conference held in August 1996 in San Antonio, Texas, U.S. officials emphasized that there are real and serious issues of law enforcement at the border. Illegal immigration continues to be a problem. Goods passing through the border must be checked for contraband and narcotics. Vehicles must be inspected for safety.
The General Services Administration has invested considerable sums in improvements to border stations as well as construction of new ports of entry. There is general consensus that the basic border transportation infrastructure is adequate but that there is a need for some additional construction so that existing facilities can be fully utilized. Both governments need to provide 24-hour customs inspections and services at major border crossings.
As the U.S. Customs Service is not expected to obtain the authority to hire more personnel, they are looking to solve their problems through the use of technology, including electronic data interchange. New technology is being tested to speed the processing of documentation. And already there are four X-ray machines available at the border, and another four planned for installation over the next year, which permit an entire truckload to be checked for contraband in about 20 minutes.
There is a real tension between the need to process goods coming into the United States quickly and efficiently and the need to reduce the flow of narcotics. There has been a movement both in the U.S. and in Mexico to encourage certain border infrastructure requirements to be carried out by the private sector.
Business Anti-Smuggling and Interdiction Coalition
BASIC is a voluntary program for corporate participants to establish self-imposed standards in the areas of security, safety and logistics that will significantly hinder drug traffickers from using legitimate business shipments to smuggle illicit drugs into the United States. This alliance of private-sector firms is supported by the U.S. Customs Service and is an initiative led by the U.S.-Mexico Chamber of Commerce with the Border Trade Alliance. It involves seminars to impart knowledge of "best practices" and ideas on packing and shipping which can reduce the danger of illegal use of cargo.
Investment in the Trucking Industry
Under NAFTA, Mexico has agreed to:
U.S. and Canadian investment of up to 49 percent in carriers established in Mexico that transport international cargo as of December 1995.
Investment of up to 51 percent in 2001.
In 2004, 100 percent foreign investment in these truck and bus companies, but not those which carry only domestic cargo.
Under NAFTA, the U.S. agreed to:
Permit Mexican carriers to establish Mexican-owned or controlled subsidiaries in the United States to transport international (but not domestic) cargo between points in the United States by December 1995.
Neither government carried out the agreements scheduled for December 1995. Moving forward on these investment provisions is dependent on opening the border states to foreign trucks.
In January 1994, Mexico and the United States lifted all cross-border restrictions on charter and tour buses. The lifting of the restriction on regularly scheduled buses, which was to have occurred in January 1997, has been delayed pending the opening of the border to trucks. Likewise, Mexico delayed its investment liberalization provisions, scheduled to take effect in December 1995, which would have permitted U.S. and Canadian investment in bus companies. NAFTA still calls for Mexico to permit 51 percent ownership in 2001 and 100 percent ownership in 2004. NAFTA requires the United States to permit 100 percent Mexican ownership in U.S. bus companies by 2001.
Mexico's Secretariat of Communications and Transportation (SCT) published a study of the country's 16,000 miles of rail in October 1996. Only 10 percent of the track was classified as "good." Half the track was classified as "bad" or "very bad," and the rest was classified as "fair." The SCT had hoped to raise $2 billion from the privatization of these rail lines. Its first attempt raised an offer of only $30 million for the 900 mile Chihuahua-Pacific Line in northern Mexico and the sale was canceled.
The 2,500 mile Northeast Line is the primary rail link between Mexico and the U.S. and is considered the best of the Mexican rail systems. The shipping firm Transportación Maritima Mexicana (TMM) and its American partner Kansas City Southern Industries won the right to buy this railroad with its bid of $1.4 billion, far more than other bidders. The winners determined their bid based on the prospective business estimated from a detailed survey of 120 current and prospective customers which found that many firms were not shipping by rail because of the lack of a reliable schedule and the lack of security. To meet the security concerns, the operating entity established by this joint venture, Transportación Ferroviaria Mexicana (TFM), is installing fenced and lighted yards with well paid security guards. Now goods will be cleared through customs on the U.S. side of the border in a fenced and secure yard, eliminating delays caused by the former process of customs clearance on the bridge between Laredo and Nuevo Laredo. For security reasons, the trains will not slow down over the bridge until they reach the secure rail yard. This privatization was completed in July 1997 and operations under this new entity have begun. However, customs inspectors are not available 24 hours per day at the secure rail yard, a shortcoming that delays the movement of goods crossing the border by train.
In March 1997, SCT opened bidding on the 3,875 mile North-Pacific line, Mexico's second most profitable. Three Mexican-U.S. joint venture teams bid on this route, which was won in July 1997 by a joint venture including Union Pacific Corp. and has been renamed Grupo Ferroviario Mexicano (GFM).
Even before these privatizations, rail traffic was growing substantially, maintaining its share of the transportation of goods between the U.S. and Mexico. Principal rail shipments include auto parts and chemicals, frequently between different plants of the same firm. The upgraded service expected from these privatizations will greatly facilitate the movement of heavy loads between the U.S. and Mexico.
Maritime operations are excluded from NAFTA, except for land-side aspects of port activities, such as terminal and dock ownership and operation, stevedoring services, and equipment ownership and operation. Mexico has been carrying out port privatization over the past three years. For some ports, the port operations were privatized, in others the port authority. U.S. firms can own no more than 49 percent of port operations and therefore have joined with Mexican firms to purchase certain port operations.
Shipping by sea in containerized vessels is the lowest-cost means of shipping goods if there is a balance of trade using the same type of container. For example, shipping fresh produce from Mexico to the U.S. would require the use of refrigerated containers. These refrigerated containers also would have to be used to ship products from the U.S. back to Mexico. It is not economical to ship empty containers from the U.S. back to Mexico or from Mexico to the U.S.
With the improved port operations in Mexico, there is a great potential to increase trade by sea, particularly from the east coast of Mexico to the east coast of the United States. This would facilitate moving goods from southern Mexico to the United States.
X-ray capability also is needed at the ports to minimize drug smuggling, a measure that would complement BASIC.
NAFTA excludes air services, except for repair and maintenance and specialty air services. Restrictions on specialty air services, such as mapping, surveying, crop dusting, aerial photography, fire fighting, advertising, glider towing and heli-logging, are phased out in all three NAFTA countries over a six-year period.
The U.S.-Mexico Civil Air Agreement dates to 1960 and because it could not anticipate current issues is quite restrictive. While the agreement restricts each city pair to one airline from each country, in practice exceptions are made to permit two carriers. A formal amendment to the 1960 agreement permitting two airlines from each country for each city pair is close to approval.
Since convenient and low-cost air transportation facilitates trade, the Mexican government should examine liberalizing its civil air agreement with the Unites States along the lines of the U.S.-Canada agreement. Canadian airlines have prospered under an "open skies" agreement, which basically eliminates government decision-making on which planes will fly which routes. There have been 78 new routes established between the United States and Canada and a U.S. government official estimated that 40 to 50 Mexican cities would be covered by direct flights from the United States under an "open skies" agreement, up significantly from the current 27.
Mexico chose not to exempt package express service, such as that offered by UPS, from NAFTA. Prior to NAFTA, foreign companies were restricted to operating vehicles of less than four metric tons (8,800 pounds) cargo capacity on Mexican federal highways. This limits the number and weights of packages which can be handled by a truck. Even with these limits, UPS began Mexican operations in 1989. Mexican package express service companies did not have this restriction-they could seek the permits needed to carry cargo in larger trucks like any other Mexican trucking company.
After NAFTA came into effect in January 1994, Mexico delayed issuing the permits for the use of larger trucks. After a year of delay, the U.S. express package companies asked the U.S. government to initiate the NAFTA dispute resolution process under NAFTA Chapter 20 to seek national treatment for express package delivery. This is a three-step process starting with government-to-government consultations, followed by a meeting of the trade ministers, and finally, the appointment of a panel to determine whether there has been a violation of NAFTA. The U.S. express package industry requested this case be suspended after the first step, as progress appeared to be made in several meetings with senior Mexican officials. It has now been over one year since Mexico drafted implementing regulations which restrict express package delivery, for example, requiring all packages of 10.5 oz. or less to be handled by the postal monopoly. If this regulation were made final, it would have a big impact on all express package delivery companies, including Airborne Express, which has developed a successful business in Mexico by affiliating with an existing Mexican company. The Mexican government has promised that a revised draft will be circulated for comments before it is approved.
The delay in the border opening has given the Mexican government a reason to delay this process further and to tie national treatment for package express service firms to the opening of the border to trucks. Now that many of the safety issues holding up the border opening are being solved, Mexico is delinking these two issues and is arguing that the express package dispute is a non-NAFTA issue. The United States government is insisting that these two issues (among others) be resolved together.
Another issue for all three NAFTA countries is the use of 53-foot truck trailers on most major roads. All three countries permit the use of the large trailers; however, Canada requires large cabs while Mexico precludes large cabs. Finding a common set of standards for this important transportation tool is critical for the efficient use of trucking in North America.
Both the border opening to trucks and the express package delivery rest on NAFTA rules. It is critical for NAFTA and for the future use of NAFTA as a model that these two blemishes in implementation be solved quickly. All three governments should also work to overcome technical barriers to efficient cross-border transportation.
Conclusion and Recommendation
Effective transportation systems between the three NAFTA countries is essential for the full realization of the benefits of free trade. The delay in opening the border to international trucking into the border states is significantly increasing the cost of moving goods between the U.S. and Mexico. There is good news, however, with the upgraded facilities expected with privatization the Mexican railroads will greatly lower the cost of moving goods between the two countries. In addition, there is excellent potential to increase the movement of goods by sea and by air.
Now that the second anniversary of the scheduled opening of the U.S.-Mexico border to trucks carrying international cargo has come and gone with no solution, it is clear that there must be some action forcing event to induce change. The U.S.-Mexico Chamber of Commerce strongly recommends to both the U.S. and the Mexican governments, that the remedies built into NAFTA be used. Specifically, the Mexican government should use Chapter 20 of the NAFTA to induce the opening of the border states to international trucking and the U.S. government should re-instate its use of Chapter 20 to encourage a solution to the express package delivery problem. Both uses of Chapter 20 should be interpreted as a normal way for governments remedies standards. This announcement should include implementation of the investment provisions, the bus provisions and the express package provisions of NAFTA. Both countries should also announce a plan to unify rules for 53 foot truck trailers.
If there is no immediate agreement on this list of NAFTA and business issues, then both countries should continue the Chapter 20 process and insist that dispute resolution panels be appointed. Mexico should do this on the access of trucks to the border states, and the U.S. should do this for the express package delivery.
This delay in implementing some key aspects of NAFTA is a thorn in the U.S. argument that NAFTA is an example of a rule-based trading system and that rule-based trading systems are important to give confidence to investors that rules will not be changed arbitrarily (for political reasons). In the long run, getting these problems solved will be a plus for rule-based systems. It will be more of a plus for the facilitation of goods crossing the U.S.-Mexico border.
Dr. Harrington is a senior economist at the U.S.-Mexico Chamber of Commerce and author of the NAFTA Forum papers, which examine U.S.-Mexico commercial issues.
The preceding paper is part of the United State-Mexico Chamber of Commerce's NAFTA Forum series, which considers general trade issues and sector-specific concerns between the two nations. The information contained herein is for informational and educational purposes only.
Albert C. Zapanta, President
John Harrington, Senior Economist and author of NAFTA Forum series
Jeff Sparshott, Director of Communications
United States-Mexico Chamber of Commerce
1300 Pennsylvania Avenue NW, Suite 270
Washington, DC 20004-3021
Tel: 202-371-8680 Fax: 202-371-8686
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