POTUS 47 Trade War Sparks Industry Uncertainty
POTUS 47’s trade war has sent shockwaves through the global economy. Share prices are down, old alliances are frayed, and there is a general sense of uncertainty about what comes next.
The North American rail sector is inevitably feeling the impact. Class I railways in the U.S., Canada and Mexico share technical standards and equipment, and networks run seamlessly across borders under a system of free interchange. Canadian Pacific Kansas City (CPKC) prides itself as the first Canadian-U.S.-Mexican Class I, reflecting the opportunities of the North American Free Trade Agreement (NAFTA) of 1992, which was renewed in the United States-Mexico-Canada Agreement (USMCA) of 2020, during the current occupant of the Oval Office’s first term. Likewise, U.S. manufacturers rely on global supply chains, including from territories that may now be subjected to tariffs, pushing the price of certain commodities and components up, and putting production under pressure.
Assessing the extent of the medium- to long-term harm is proving difficult. It is very much a live issue, with the potential to change by the day. Indeed, POTUS 47’s volatility does not help with evaluating what might come next. Requests for comment in mid-March for the purpose of this article to some of North America’s leading industry associations and lobby groups went unanswered, perhaps reflecting the political and economic sensitivity of the issue. Some of those in North America who did speak did so on a condition of anonymity, not wishing their companies or themselves to be connected with the debate.
As IRJ, a Railway Age sister publication, went to press, goods classed as having USMCA preference status—those that originate in Canada or Mexico—are not yet subject to the 25% tariff instituted by the U.S. on Canadian and Mexican steel and aluminum on March 12. This means that products such as fertilizer are continuing to cross borders tariff-free. POTUS 47 had identified April 2 as the day when sweeping 25% tariffs on all trade partners will start, although he has hinted at some flexibility in how these duties are imposed.
For many of the Class I’s, any disruption to cross-border traffic flows presents a potentially sticky situation: 41% of CPKC’s $8.9 billion revenue in 2023 was generated by cross-border traffic, while U.S.-Canada traffic accounted for 32% of CN’s $11.9 billion revenue in the same year. Union Pacific (UP) also has a strong presence in Mexico, with 11% of total volumes in 2023 passing through the country, which has widely been considered a growth market for all the Class I’s.
Speaking at a recent event, Class I executives, while conceding that they could not predict what will happen, tried to allay fears. “We have modeled that there will be some impact from tariffs without a doubt, but not so much as to drive Canada into a recession and the U.S. into a high inflationary mode,” said CN CEO Tracy Robinson, during the 42nd Annual Barclays Industrial Select Conference. CPKC President and CEO Keith Creel also said the situation presents an opportunity for his railway and the sector in general to tap into new markets.
For many of the Class I’s, any disruption to cross-border traffic flows presents a potentially sticky situation.
Among POTUS 47’s reasoning for introducing tariffs is to address a perceived trade imbalance by manufacturing more goods within the United States. As the World Trade Organization (WTO) states, “tariffs give a price advantage to locally-produced goods over similar goods which are imported.”
But for rail the impact may not be disruptive as it might seem. Rail industry production in the United States is already largely a closed shop. Under the latest Buy America requirements all rolling stock and infrastructure procured by government must use U.S.-made steel, components and manufactured products unless it costs 70% more to produce that component in the U.S. Final assembly must also take place in the U.S., effectively creating a domestic supply chain for passenger rolling stock and infrastructure. As a result, neither Alstom, which has production facilities in Canada, the United States and Mexico, nor Stadler, which has a plant in Salt Lake City, expect any major impact on their activities from the POTUS 47 tariffs.
As private businesses, the Class I’s are not subject to such regulations. However, there have been moves from within the sector to regulate itself by supporting federal rules that limit the influence of outside manufacturers, specifically from China. U.S. tariffs on Chinese steel during the current occupant of the Oval Office’s first Administration all but eliminated its presence from the U.S. manufacturing supply chain. The Safe Trains Act, issued by the Federal Railroad Administration (FRA) and which became effective in January, bars Chinese-built railcars and systems from being introduced to North America.
Of greater concern to these domestic manufacturers is the price of steel, which increased in the first quarter of this year as the threat of tariffs intensified. This is breeding caution within the market. David Nahass, President of Railroad Financial Corporation and Railway Age’s Financial Editor, says many companies are now pausing longer-term capital projects until the situation becomes clearer.
“No one, no company or supply professional, wants to be the party that orders a railcar that is subject to tariffs only to have it not be subject to tariffs two weeks, a month or six months later,” he says.
Europe’s rail industry is also watching the issue closely. Europe has been hit with similar 25% tariffs on steel and aluminum, and Enno Wiebe, Director General of the European Rail Industry Association (UNIFE), says the general mood is of caution, not jumping to conclusions too early, and to keep calm and carry on.
To thrive, business needs predictability. Unfortunately, in the current climate, this is in short supply. In spite of the growing negative coverage and downward market trends, POTUS 47 is standing firm on his tariff policy, effectively creating a stand-off with the U.S.’s largest trading partners. For businesses, including those in the rail sector, such uncertainty is unwelcome. Its impact on their investment decisions in the coming weeks and months is likely to prove to be the enduring legacy of the POTUS 47 trade war.
