A crippling trade war with global repercussions involving the USMCA (United States-Mexico-Canada Agreement) nations prompted by POTUS 47’s attempt to impose steep tariffs as of 12:01 AM Feb. 4 on imports from Mexico and Canada has been temporarily averted. Tariffs on products from China are still set to take effect. In the days leading up to these short-term measures, Canada and Mexico has both responded with promises to swiftly impose retaliatory tariffs.
POTUS 47 and Mexico President Claudia Sheinbaum announced today an agreement on a 30-day pause on the imposition of a 25% across-the-board tariff by the U.S. in exchange for concessions on border security by Mexico while a broader agreement is negotiated. Sheinbaum agreed to reinforce the U.S.-Mexico border with 10,000 Mexican National Guard troops “to help crack down on fentanyl dissemination and illegal immigration into the U.S.,” according to statements from both.
Canadian Prime Minister Justin Trudeau struck a similar deal with POTUS 47, announcing measures he noted were already under way as part of a C$1.3 billion border plan, including deployment of additional technology and personnel to “ensure 24/7 eyes on the border.“ He said the U.S. and Canada would also establish a joint strike force to combat organized crime, fentanyl and money laundering. Prior to this agreement, White House National Economic Council Director Kevin Hassett had said Mexico is “very, very serious” about the tariffs, but that “Canadians appear to have misunderstood the plain language of the Executive Order, and they’re interpreting it as a trade war.”
Describing his threatened 10% tariffs on Chinese goods as an “opening salvo,” the White House’s current occupant said he would likely discuss them with Chinese President Xi Jinping this week. According to The New York Times, “China was still preparing its response on Monday. Its ambassador to the United Nations, Fu Cong, said that China was filing a complaint with the World Trade Organization over the tariffs and would consider retaliatory action.”
The threatened 25% tariffs (energy imported from Canada, including oil, natural gas and electricity, would be taxed at a 10% rate), laid out in an Executive Order POTUS 47 issued Jan. 20, sent shock waves through the North American supply chain, whose backbone is a freight railroad network that spans three nations. For more than 30 years, that network has leveraged the benefits afforded by NAFTA (North American Free Trade Agreement) and its successor, the USMCA, signed into law by the current occupant of the Oval Office during his first term in 2020.
“International trade accounts for an estimated 37% of total U.S. rail traffic, which powers the U.S. economy and creates jobs domestically each day,” says Association of American Railroads President and CEO Ian Jefferies. “As an interconnected network serving the U.S., Canada and Mexico, railroads will be closely monitoring how these policies impact the customers and communities we serve. Freight railroads have long supported policies that strengthen the U.S. economy, enhance supply chain resilience and help keep American industries competitive in a global marketplace. Conversely, policies that unnecessarily increase costs for American consumers and companies should be avoided.”
Said a veteran Canadian railroad executive, who has spent his career at U.S. and Canadian carriers, to Railway Age: “We all benefit when we focus on common ground and a deep and committed history of purpose and value.” Added a veteran U.S. railroad executive, who also has spent his career at U.S. and Canadian carriers, to Railway Age: “We’re focused on navigating these uncertain waters to a place of common sense and good for our nation. Open and free trading borders is that place. Navigating is all we can do at this point. But this, too, shall pass.”
Transnational Tremors
Freight rail traffic crosses the borders the U.S. shares with Canada and Mexico at numerous locations. All six North American Class I’s—BNSF, Canadian Pacific Kansas City, CN, CSX, Norfolk Southern, Union Pacific—with their Class II and III partners, move that traffic. One, CPKC, provides single-line transnational service through all three nations.
“[CPKC Executive Vice President] John Brooks and his team have spent a tremendous amount of time, as we all have, concerned and trying to learn about what may or may not happen to the tariffs,” CPKC President and CEO Keith Creel said on the railroad’s Jan. 29 earnings call. “The bottom line is, we don’t know. What we do know is that despite the perhaps volatile, perhaps uncertain outcome, we still have investment that’s not pulling back, that’s doubling down. I’ve got one customer—a strategic customer only enabled and created because of this transaction, this merger of single-line service where it’s a new product to the market, who made a commitment to me, a commitment kept, and announced facilities expansions. He understands this is a long-term play. This is a railroad built for forever, not a railroad built for 48 months.
“This is not to say we don’t have to navigate that. It’s not to say we’re not going to be close to our customers. But I can tell you this: Trade among these three nations has never been, in my assessment, more critical … Supply chain security became an amplified issue that didn’t exist before and that has really accelerated, not only the expansion of nearshoring and ally-shoring, but the integration of our supply chains. And that’s true in all spaces.
“You can talk about automotive. If you really got into the details line-by-line, commodity by commodity, many engines and transmissions are built in the U.S. to go to Mexico to produce the vehicle that comes back to the U.S. and goes to the consumer market. The fact is, we’ve got 75% of production capacity in the U.S. and 25% that’s got to come from somewhere else based on what we consume on an annual basis. So that type of interdependence, that type of need, is woven into this economy … We feel it was our responsibility to ensure that our investors understand we don’t have our head in the sand. We’re not sitting on the sidelines. We’re going to be engaged. We’re going to be at the table. We’re going to be involved.
“I’m going to be involved at the table as far as working with the business communities and the Government in Canada. I’m going to do so in the U.S. and in Mexico. We have a vested interest to make sure our shareholders and our customers’ interests are represented … We’re going to see exceptional growth among the three nations … I personally went down to Mexico City and met with President Sheinbaum the week before Christmas and had a very productive discussion with her about all our business, about what our network entails and how we can align and help her achieve Mexico’s ambitions. At the same time, the partnership of the trilateral trade among the three nations resonates in a unique way. It makes too much sense not to resonate. So, at the end of the day, we don’t know where to put the pen exactly … A pragmatic approach will carry the day, and we’re going to come out on the high side, not on the low side.”
“Serious Sticker Shock”
“With more than 90% of railcars manufactured for use in North America in Mexico and Canada—the majority in the former—railcar buyers and manufacturers are in for some sticker shock if the planned tariffs hold,” notes Railway Age Financial Editor and Railroad Financial Corp. President David Nahass. “An average grain hopper car has a sticker price of approximately US$110,000. After the COVID pandemic with its increased steel prices, that price might have peaked at US$120,000. With the proposed tariffs (and not accounting for any additional commodity price increases, which seem likely), that price would be US$145,000. That’s some serious sticker shock. Furthermore, discarding the guardrails of the USMCA could mean that export taxes imposed by Canada and Mexico currently waived under USMCA could be applied to a U.S. purchaser. Adding any kind of export or VAT (value-added tax) could push that price up even higher.
“That doesn’t account for the additional impact on the price of components manufactured in Mexico and China. The two largest component supply companies, Amsted and Wabtec, both manufacture or ‘cast’ material volumes of their componentry outside the U.S. Whereas anything imported from China to Mexico or Canada won’t face a secondary tariff, we do not know what could happen for items cast in Mexico that need to be shipped to Canada for application. Ditto for items manufactured in the U.S. and then exported to be added to a railcar. Apply the threatened reciprocal tariffs imposed on a U.S.-produced product being sent to Canada or Mexico, and railcar purchasers could be looking at being double-dipped. That’s taxation without representation.
“Who wins in the tariff battle? Railcar lessors or all types. If all new car prices rise by 25%, expect lease rates to increase on a concomitant basis. That ten-year-old hopper car being leased for $600 per car per month today coming up for renewal in 90 days? Try $750 per car per month on for size. Icing on the cake? Expect railcar lessors to want to lock in terms at these higher prices to make whatever bank can be made before resolution is reached on the duration and actual impact of the tariffs.”
Impacts on Railroad Customers
U.S. Chamber of Commerce Senior Vice President and Head of International John Murphy released the following statement regarding POTUS 47’s announcement that the Administration will implement 25% tariffs on Canada and Mexico, and 10% tariffs on China:
“The President is right to focus on major problems like our broken border and the scourge of fentanyl, but the imposition of tariffs under IEEPA (International Emergency Economic Powers Act) is unprecedented, won’t solve these problems, and will only raise prices for American families and upend supply chains. The Chamber will consult with our members, including main street businesses across the country impacted by this move, to determine the next steps to prevent economic harm to Americans. We will continue to work with Congress and the Administration on solutions to address the fentanyl and border crisis.”
“In his first few hours in office, the President outlined the broad contours of his ’America First Trade Policy,’” the National Association of Manufacturers said on Jan. 22, prior to POTUS 47 following through on his tariff threats. “Among the primary objectives: to ‘reduce dependence on foreign nations for critical supply chains,’ ‘promote investment and productivity’ and “enhance our [n]ation’s industrial and technological advantages.’
“The President did not announce new tariffs. His Executive Order instruct[ed] key agencies to begin looking at underlying concerns about unfair or unbalanced trade, specific concerns regarding trade with China and matters related to economic security. The findings could form the basis for the Administration’s choice of remedy, potentially leading to more tariffs and other policy measures.
“What comes next? Three comprehensive reports are due by agencies to the President by April 1. Issues to be investigated include persistent trade deficits, unfair trade practices, currency manipulation, importation of counterfeit products and contraband, China’s compliance with the ‘Phase One’ deal, and review of the U.S. export control system.
“Tariffs on Canada, Mexico and China? The EO tasks the Commerce Department with assessing unlawful migration and fentanyl flows from Canada, Mexico and China. (Editor’s Note: 5% of “unlawful migration” comes across the U.S./Canadian border. According to a 2020 USDEA Intelligence Report, Mexico and China, not Canada, are the primary sources of fentanyl coming into the U.S.) Those findings are also due April 1. Prior to that date, the President could issue a separate EO using international emergency powers. This would enable him to impose tariffs sooner.
“Building on past success: The President cited the China Phase One deal, the USMCA and Section 232 tariffs as successful elements of his first-term agenda. Expect USMCA review to kick into gear. The EO also instructs the United States Trade Representative to begin its public consultation processes in preparation for the six-year review of the USMCA and to assess the impacts of U.S. participation in the agreement.
“NAM’s view? Speaking to CTV from the Canadian Embassy on Jan. 20, NAM President and CEO Jay Timmons said, ‘We are in a global economy, and we want to be able to produce as much as we can. We need the entire continent of North America to be able to do exactly that. The United States, Canada and Mexico—because of the USMCA that was negotiated and implemented a few years ago (and signed by POTUS 47)—has the opportunity to take on together some actions to thwart problematic, market-distorting practices that are coming out of other countries, specifically China.’
“In another EO, the President pulled the U.S. out of the Organization for Economic Co-operation and Development global tax deal on the grounds that the agreement ‘allows extraterritorial jurisdiction over American income but also limits our nation’s ability to enact tax policies that serve the interests of American businesses and workers.’”
TD Cowen Insight
By Jason H. Seidl (Railway Age Wall Street Contributing Editor), Elliot Alper and Uday Khanapurkar
The U.S. Class I’s have direct exposure to cross-border trade as well as seaborne imports that drive international intermodal. Union Pacific likely has the highest exposure at present, given El Paso and Eagle Pass service, its 26% Ferromex stake, and international import shifts to the West Coast. In our 4Q24 proprietary rail shipper survey, ~26% of shippers stated they had pulled forward shipments due to tariff fears. Mexico accounted for 11% of Union Pacific revenue in 2023. Canada was undisclosed. For CSX, Mexico plus Canada is 10%-15% of revenue, with Canada a slightly larger share than Mexico. Norfolk Southern likely has similar ranges as CSX
TL (truckload) players tend to have larger cross-border exposure than LTLs (less than truckload), which have negligible exposure, leaving aside any broad-based economic impacts from the tariffs themselves. Cross-border tends to be a small percentage of brokerage business. Trucking has less direct exposure to seaborne trade than the railroads.
The parcel consolidators and freight forwarders have the highest exposure to international trade, given that global commerce touches every piece of the revenue base. They also have material exposure to the de minimis exemption that drove robust airfreight volumes in 2024 and strong volumes in UPS and Fedex ground economy offerings.
Generating Bad Feelings
Aside from the economic effects, there are the social effects of POTUS 47’s actions.
“To say Canadians are angry would be hard to overstate,” a retired Canadian railroader and consultant told Railway Age. “Your President has been clear that his goal is economic impacts to force Canada into the U.S. or as a subordinate state. Canadians are waking up to the reality that the U.S. is not a trusted partner in the new world order. More critically, the Republicans no longer support trade and economic policies that deeply integrated our economies and in many cases our role in world conflicts.
“Let’s be clear. This man says that these tariffs would come unless Canada got serious about the drug and immigration crisis at the northern border. The crisis doesn’t exist. The U.S. captured 45 pounds of fentanyl in a full year on the Canadian border. Seriously? What is the threshold to remove sanctions? 20 pounds? 11 pounds? 6 pounds? It doesn’t matter.
“There are two quotes worth noting from Canadian leaders: 1) This economic war is simply not on the radar of the average American, and it is all-compelling for the average Canadian, so we need to act as if we’re alone. 2) The U.S. President is not interested in what we currently offer—oil, automobiles, lumber, etc.—as he covets our vast deposits of minerals and, notably, rare earth minerals (Canada has 23, China 32). It is increasingly clear that this is full-out attack on sovereignty by a hostile Administration. Canada will need to decide to submit or use poison pill options like embargoing all rare earth minerals to the U.S. in preference to the European Union, for example.
“The pivot in Canadian politics is breathtaking as the U.S. government becomes more unreasonable. Take away the discounted oil Canada sells to the U.S., and the trade deficit is fully on Canada’s side. This is personal this time, as my border city has more trade daily over our bridge than the U.S. has daily with Japan. These 25% tariffs will wipe out Canadian manufacturers living on single-digit margins. By the end of the second quarter, my wife and I will have to help family members make mortgage payments.”
From a Canadian official: “[We] have fought and died with you around the world in defense of values that we share” and ”have come to the aid of the Los Angeles fires.” The Washington Post reported prior to Jan. 20 that “Mexico and Canada are sending firefighters and equipment to help battle the blazes scorching Southern California, an expression of solidarity, their leaders said, and recognition of the assistance the U.S. extends to its neighbors in times of need … Mexican President Claudia Sheinbaum said a team of firefighters was on its way to Los Angeles … She said the team was carrying ‘the courage and heart of Mexico.’”
Several Canadian Provincial Premiers pulled U.S. alcohol from their shelves and said they would restrict procurement opportunities for U.S. firms. They urged a boycott of U.S. goods and called on Canadians to vacation elsewhere. And in what one observer called “an uncharacteristic response from Canadians that drives home the feelings,” Canadians booed The Star-Spangled Banner at NBA and NHL games played in Canada over the weekend.
The Washington Post also published the following editorial from Canadian Member of Parliament and former Deputy Prime Minister Chrystia Freeland, prior to Jan. 20:
“Dear American Neighbors,
“All of a sudden, some of you have begun to cast a covetous gaze to the North. All it took was one ‘joke’ at the dinner table in Mar-a-Lago and a few social media posts, and suddenly a New York Times columnist is seriously suggesting that Canada become the 51st State. But I have some news for the advocates of Manifest Destiny 2.0. We are glad to have you as neighbors, but we have no interest in joining you. Canadians are proud and independent. We’re going to keep it that way.
“We admire so many things about you: your spirit of enterprise, your love of freedom, your embrace of change. We share those qualities—along with a universal, single-payer healthcare system, $10-a-day childcare, gun control and abortion rights. We are proud to be a bilingual country, which includes the distinct society of Quebec—the only majority-French-speaking jurisdiction in North America. We are committed to reconciliation with the Indigenous peoples who have been here from time immemorial, and we believe in a multicultural society, rather than a melting pot.
“Some of you don’t like our way of life. That’s fine. We aren’t asking you to become Canadian. But we do expect you to respect who we are and our long history of friendship with the United States. We know that some of you, including the incoming President, have expressed concerns about your trade relationship with us. We find that puzzling. After all, Canada is your biggest customer—larger than China, Japan, Britain and France combined. And isn’t the customer always right?
“We don’t undercut American wages with weak environmental or labor standards, as China does. If anything, our rules are stricter than yours. And aren’t you better off relying on a neighbor and an ally to supply you with the additional energy you need? We have also heard complaints that our security relationship is imbalanced. It’s not. America has flourished in large part because of the security that comes from having a stable, friendly and prosperous neighbor along its vast northern border. Imagine how different the American century would have been if you’d needed to spend time and money protecting yourself against a threat from the north.
“So, because our relationship is friendly and mutually beneficial, Canadians are asking: Why are you threatening us? The answer is as simple as it is sad: We are just one piece on your geopolitical chessboard. You’ve chosen to humiliate your friends before moving on to tackle your true adversaries. Here’s the thing, though: The threats won’t work. We will not escalate, but we will not back down. If you hit us, we will hit back—and our blows will be precisely targeted. We are smaller than you, to be sure, but the stakes for us are immeasurably higher. Do not doubt our resolve. Loyalty works only if it is reciprocal. If you choose to treat us like an adversary, we will find friends who know just how much we have to offer.
“There is a much better way than threats. The fact is, ‘we’re more than friends and neighbors and allies; we are kin, who together have built the most productive relationship between any two countries in the world.’ Those were the words of President Ronald Reagan about Canada. They are truer today than ever.
“We have the opportunity now to strengthen our economic relationship, by supplying you with critical minerals you need and the energy to power your AI ambitions. We can make our continent more secure by investing heavily in our Arctic and in continental defense. And we can help in your effort to end China’s unfair trade practices and the global financial imbalances they create. Let’s work together. During more than 150 years, we have already accomplished so much. Canadians believe the best is yet to come—for both of our countries.”
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