Cross-border Update: Deciphering your options

It has become clear that the pandemic has pushed shippers and manufacturers to start sourcing raw materials and production closer to home—and now trade among the three North American nations is booming.

Mexico is currently our largest goods trading partner, with $614.5 billion in total two-way goods trade during 2019, the last full year for which statistics are available. Canada is our No. 2-ranked trade partner for the fifth consecutive year, with $611 billion in two-way trade. (China ranks third with $558 billion.)

The trends driving those numbers are numerous. First, there has always been a symbiotic relationship among the three, mostly friendly North American neighbors. In the meantime, cross-border transportation investment has been increasing. For example, a pending $28 billion merger between the Kansas City Southern and Canadian Pacific railroads to finally create a fully “North American Railroad” will only add to that trend.

Over the past year, the United States-Mexico-Canada Agreement (USMCA) replaced the 24-year-old North American Free Trade Agreement (NAFTA). While it’s largely NAFTA 2.0, the new agreement does appear to benefit American farmers, ranchers and agribusinesses. It enables food and agriculture to trade more fairly, and allows the U.S. to expand exports of American agricultural products.

“The great news is that USMCA was not a big challenge at all,” says Beth Pride, president of BPE Global, a global trade consulting company that believes compliance is not only critical to a company’s overall strategy, but is a competitive advantage. “Many importers and manufacturers just had to change the title of the form from NAFTA to USMCA.”

But there were subtle changes, experts say. America’s dairy farmers now have new export opportunities to sell dairy products to Canada. Our northern neighbors can provide new access for U.S. products including fluid milk, cream, butter, skim milk powder, cheese and other dairy products. It also eliminated tariffs on whey and margarine.

For the first time, the agreement specifically addressed agricultural biotechnology to support 21st century innovations in agriculture. The agreement covers all biotechnologies, including new technologies such as gene editing. Specifically, the United States, Mexico and Canada have agreed to provisions to enhance information exchange and cooperation on agricultural biotechnology trade-related matters. In another breakthrough, Canada has agreed to grade imports of U.S. wheat in a manner no less favorable than it accords Canadian wheat, and now does not require a country-of-origin statement on its quality grade or inspection certificate.

All of this has been extremely positive for those carriers capitalizing on their expertise in navigating the Customs and fine print of border-crossing arrangements—deals that can often be quite complicated.

“We have a ton of cross-border business,” says Greg Orr, president of CFI, a unit of Canada-based TFI International. CFI garners about one-third of its revenue from cross-border freight. “A lot of shippers are interested in buying North American products, and if I could find 500 to 600 additional drivers, we would not have any problems finding freight for them to haul right now.”

So, let’s take a deeper dive and explore the most efficient manner in which to ship all that cross-border freight. From ever-shifting Customs fine print, to electronic advance filing of proper paperwork, to a proposed gigantic rail merger that could affect shippers’ options, here’s where cross-border shipping stands in 2021.

Streamlining cross-border logistics

Even though it’s more efficient now than it has been, experts say shipping south into Mexico and north to Canada can be a headache. There are Customs compliance issues, pre-clearance paperwork issues, and then, finally, designing a final distribution network in country.

The following cross-border tenets must be followed.

Goods must be entering or leaving the United States, and remain in the stream of international commerce.
The mere fact that goods originate from a foreign source does not make such goods “foreign” for purposes of immigration laws.
A driver bringing goods from Canada or Mexico may transport those goods to one or several locations in the United States, and may pick up goods from one or several U.S. locations for delivery to Canada or Mexico. But, American drivers may not load, haul or deliver a cargo that is both picked up and dropped off at a destination within either Canada or Mexico.
The entry of the driver must be for the purpose of an international movement of goods.
Drivers may not engage in any activity that qualifies as local labor for hire or “cabotage.” Burden of proof remains with the driver to establish eligibility for entry.

Considering these common challenges of cross-border transport, what can logistics professionals do to plan for the most seamless transaction possible and overcome hang-ups? First, it’s important to work with reputable U.S.-based carriers. The best have longstanding relationships with Canada- and Mexico-domiciled partners that can navigate the red tape at the border.

Competing for rail cross-border efficiencies

Increased North American rail freight traffic is driving two competing bids for an American Midwest railway.

The proposed $28 billion merger between the Kansas City Southern (KCS) and Canadian Pacific (CP), if approved by regulators, would connect customers with six of the seven largest metropolitan regions in North America. That would potentially reduce transit times and provide new product offerings, such as a long-awaited new intermodal service between Dallas and Chicago.

And now there’s Canadian National’s (CN) competing offer to combine with KCS in a cash-and-stock transaction valued at $33.7 billion. Together, CN says it will create “the premier railway for the 21st century, seamlessly connecting ports and rails in the United States, Mexico and Canada.”

The proposed KCS-CP rail would also enable north-south, cross-border shippers to avoid congestion-prone Chicago via CP’s network in Iowa. Because CP and KCS don’t compete head-to-head in any location, shippers’ options would be enhanced because the two networks don’t overlap.

KCS president and CEO Patrick Ottensmeyer has said that “it just feels like the right time and the right circumstances” to combine these rail giants. They currently share a rail yard in Kansas City, Mo., and they are working together to ship Canadian crude oil to the Gulf Coast.

Rail executives say that the North American supply chain is continuing to be an attractive source of investment, at least partially because of surging cross-border freight volumes. Furthermore, Mexico can attract foreign investment in manufacturing and industrial activity, they added.

“The stars have aligned to make this deal happen,” said CP President and CEO Keith Creel when the merger was proposed earlier this year. “Creating this network at this moment just makes tremendous sense to help participate and drive all those opportunities.”

It also continues a long-term merger trend in railroads. At the turn of the 20th century, there were about 1,200 railroads. That number dropped to around 410 by 1955. Then the number dropped to just 76 Class I railroads. Today, pending approval of the KCS-CP merger, there would be just six Class I railroads, plus about 500 Class II and Class III carriers.

The proposed merger would entail combining the two smallest Class I railroads from a revenue perspective, and it would connect Canada’s origination network with KCS’s destination network. The merger is “not about cuts, line rationalizations or cutting headcount. It’s about growing this business, growing our network,” Creel said.

Shippers must have necessary shipping documents prepared before the truck reaches the border. If not, expect massive delays. Shippers must also make sure that they have proper cargo insurance. If your freight is in Mexico, most U.S.-based carriers don’t cover the full value of the product.

It’s also more important than ever to attempt to have as much visibility to your freight as you would on a domestic shipment. When you tender your freight to the best U.S. carriers, they should have the ability to pinpoint the exact location of your trailer. And, of course, never wait until the last minute to do any of the above.

“We cross about 125 trailer loads a day into Mexico,” says CFI’s Orr. “It’s not an easy process. However, for those of us who have done it for years, it can work like clockwork.”

Experts say that the first thing to keep in mind in shipping across the southern border is to avoid the urge of thinking of Mexico as the 51st state. It’s a sovereign nation, with its own language, Customs and heritage. Don’t be the “ugly American” of shipping.

And keep in mind that there are three steps to take advantage of the fine print of USMCA—eligibility, qualification and certification. Exporters must correctly classify items and look up whether they fit under specific harmonized tariff schedules. Some companies mistakenly assume that all items are eligible for USMCA, but experts say they’re not.

Once an exporter determines its item is eligible for USMCA, they must review the Rules of Origin for that item. Every tariff eligible for USMCA must be qualified by either something called Tariff Shift or Regional Value Content. Some tariff numbers qualify for one, but not the other. “It takes a pretty significant amount of technical knowledge of the Code of Federal Regulations to find out if you’re eligible or qualified for USMCA coverage,” says BPE’s Pride.

The final step is relatively simple. Certification requires the exporters to create a USMCA certificate, for which there is a standard form.

There are other remedies. First, try to partner with a member of the Customs Trade Partnership Against Terrorism (CTPAT), one layer in U.S. Customs and Border Protection’s (CBP) multi-layered cargo enforcement strategy. Through this program, CBP works with the trade community to strengthen international supply chains and improve border security.

CTPAT is a voluntary, public-private sector partnership program that recognizes that CBP can provide the highest level of cargo security only through close cooperation with the principal stakeholders of the international supply chain such as importers, carriers, consolidators, licensed Customs brokers and manufacturers. Since its inception in November 2001, CTPAT has grown to more than 11,400 certified partners spanning the gamut of the trade community.

These partners include U.S. importers/exporters; U.S./Canada trucking companies; U.S./Mexico trucking companies, rail and sea carriers; licensed U.S. Customs brokers; U.S. marine port authority/terminal operators; U.S. freight consolidators; ocean transportation intermediaries and non-operating common carriers; Mexican and Canadian manufacturers; and Mexican long-haul carriers.

All told, CTPAT members accounted for over 52% (by value) of cargo imported into the U.S. Not using CTPAT is considered a risk best avoided, experts say.

CTPAT members are also eligible for a reduced number of CBP examinations, front of the line inspections, shorter wait times at the border, assignment of a government-trained supply chain security specialist to the company, access to the Free and Secure Trade (FAST) Lanes at the land borders, and the possibility of enjoying additional benefits by being recognized as a trusted trade partner by foreign Customs administrations in Canada and Mexico.

Where are we headed?

Surging demand for North American freight, the alluring pull of moving supply chains closer to home, proposed rail efficiencies, and savvy north-south trucking operators all foretell continuing cross-border freight levels.

However, it’s incumbent on shippers to know the ins and outs of the ever-changing subtle changes in trade regulations to take advantage of those efficiencies. Your in-house teams must be trained properly on how to produce a classification matrix that contains every item that is shipped across borders.

This must include such data as a Harmonized Tariff Schedule number, Schedule B number, Export Control Classification Number, Export License Authorization and Country of Origin data, among other fine print Customs information.

“We’ve learned that even a pandemic can’t stop demand for cross-border movements,” says Pride. “Best-in-class companies will treat border shipment declarations as equally important as invoicing customers. And if you don’t understand the process, you will have customer satisfaction issues.”