Cross-Border Freight Brokers Not Panicking Yet About Mexico Tariffs

Cross-border freight brokers are not panicking over President Trump's announcement of tariffs on Mexican exports into the United States – yet.

Last week the White House said that it would levy tariffs of 5 percent on all Mexican goods entering the U.S. – worth nearly $400 billion annually – beginning on June 10, with the duty increasing by another 5 percent every month through October. The President's stated goal was to induce Mexico to staunch the flow of Central American migrants through Mexico to the U.S. southern border.

The United States-Mexico-Canada Agreement (USMCA), negotiated and drafted as an update to the 1990s-era North American Free Trade Agreement, has yet to be ratified, and Mexican officials warned that the new tariffs could present a hurdle to that agreement.

Early disruptions to the border crossings caused by the transferral of customs agents to immigration duties have largely been overcome. Current wait times at the Laredo World Trade Bridge average about 75 minutes; wait times at the Bridge of the Americas in El Paso average 60 minutes. In the early chaos of those personnel shifts, wait times could exceed eight hours.

On April 4, President Trump threatened to close the U.S.-Mexico border within a year if the Mexican government did not act to stop the flow of drugs; the next day he met with Border Patrol agents in Calexico, California. Predata signals measuring online concern about the border (SIGNAL.BORDERUSAMEX), protectionist threats to NAFTA (SIGNAL.NAFTAPROTEC), the border towns of El Paso and Juarez (SIGNAL.USMEXEPJU), and San Diego/Tijuana (SIGNAL.USMEXSDTJ) spiked shortly thereafter.

(Chart: FreightWaves SONAR)

Some of the most important commodities that cross the U.S.-Mexico border by truck include oil and gas pipeline steel, automotive parts, fresh produce, beverages, sugarcane and cattle.

"I would be very surprised if some type of concession wasn't made," said Troy Ryley, president of Redwood Mexico at Redwood Logistics. Prior to Redwood, Ryley led Mexico logistics operations for Transplace Mexico, Expeditors International and Maersk Logistics. "There is risk in the current situation, but the chance of getting to a point where there isn't some type of concession to delay implementation of the tariffs is not extremely high."

Ryley pointed out that deliberately disrupting Mexico's economy in search of a positive outcome on immigration issues was counter-productive.

Peak season in Mexico, which usually runs from May through the first week of July, is always difficult, although this year capacity has not been as tight as in 2018. Last year, U.S.-based fleets kept their equipment north of the Rio Grande to take advantage of historically rich spot rates; this year the difference between rates in the two countries is not as stark. Ryley said while there has been a significant effort by Mexican transport carriers to increase their assets in the country, covering freight remained a challenge in certain markets.

"Depending on the market, shippers need three to four or six to seven northbound trailers for every one coming southbound," Ryley said. "One of the stresses on southbound equipment is that there used to be a lot of raw materials freight from the U.S. to Mexico, but now it's from Asia or Europe through the ocean ports." That shift in supply chains, Ryley explained, has led to a further imbalance between southbound and northbound freight flows.

Redwood has been working with its U.S. clients to help them grow more comfortable transloading freight onto Mexican equipment at the border, and running its Mexican carriers in loops from the border into the interior and back.

"Mexican truckers have done a better job this year holding higher prices that help offset deadheading some equipment southbound to cover northbound loads," Ryley said. "In more extreme cases you still see the Mexican carrier charging clients the deadhead where clients are struggling with capacity, and that mechanism becomes more complex the further south you get."

In the Bajío region of central Mexico, where industrial production is concentrated, it's very difficult to source northbound capacity unless the broker already has a trailer moving down into the area Ryley said. Mexico City – one of the largest cities in the world – is more balanced, although it consumes more freight than it produces.

But some of the most important verticals in the northbound Mexico-U.S. trade, like automotive parts and fresh produce, cannot be pulled forward in time to avoid tariff deadlines. Automotive supply chains are very lean and are run on a just-in-time basis to control the cost of carrying inventory, and agricultural commodities can only be harvested at specific times and stored for limited durations.

"Some clients will push orders up – companies that can accelerate production and get another seven days of bumper stock, but they can't create months of bumper stock on such short notice," Ryley said.

Matt Silver, the chief executive officer of Forager Logistics, a Chicago-based third-party logistics provider (3PL) specializing in cross-border freight, agreed that his customers could do little to avoid the tariffs.

"There isn't a way to avoid the tariffs," Silver said. "And they're not going to take a 5 percent hit on their margins; they're going to increase their prices."

Silver did say that Forager's beverage customers, already gearing up for peak volumes brought on by warmer weather, have been pushing as much freight to the border as possible.

"Customers are asking us if we can set up storage and short- to medium-term warehousing at the border," Silver said. "But the feedback I've gotten from people in Laredo and El Paso is that they don't think [the tariffs] will go into effect. We're already starting to see walk-back from what was originally threatened."

Forager has been able to build solid relationships with small- and medium-sized carriers to secure capacity out of problem markets like Queretaro, the major manufacturing hub in Bajío, Silver said.

"We have some freight that goes inbound to that area, and some of our customers are paying round-trip rates to deadhead from Laredo to Queretaro," Silver said. Trucks charge from $1,000 to $1,100 northbound from Queretaro to Laredo, a distance of 570 miles, and about $800 to go south on the same lane. But if Forager's brokers can manage to run their carriers' assets in a loop, roundtrip rates only amount to about $1,600, Silver said, which saves his customers money.

Ben Enriquez, senior vice president of Mexico Logistics at Transplace, agreed that truckload capacity was hard to find in central Mexico.

"The market reaction in general is that exports have increased dramatically these past couple of days, creating capacity issues in the interior of Mexico," Enriquez said. "In the corridor between Monterrey, Mexico City and Guadalajara, capacity is constrained."

Enriquez said that shippers that store inventory in warehouses on the Mexican side of the border are looking to shift the freight to the American side, but may run into trouble finding short-term leases from realtors. He had the sense that the industrial real estate agents were receiving lots of telephone calls, and that markets like Laredo, which normally run at fairly high rates of utilization, will fill up in a week's time.

Transplace has a fairly diverse customer base in Mexico, and many of its shippers are increasing production rates to move freight ahead of the tariffs. Enriquez said that Transplace was facilitating the pull-forward of consumer packaged goods, home appliances, electronics, cleaning supplies and other commodity types.

In the conversation with Enriquez, Bajío came up again.

"Bajío and the south, that's the area where the capacity crunch is being felt the most – a lack of equipment," Enriquez said. "There has not been a slowdown since the month-end surge [at the end of May]."

Enriquez said that he was encouraged by the Mexican government's quick response to the tariff announcement and willingness to work with the Trump Administration.

"In the very short-term, we'll see what the outcome is," Enriquez concluded.

Image sourced from Pixabay