Jean-Jac­ques Ruest

Rail as the Trans­porta­tion Hub of NAFTA: A Com­pelling Case Study

Policy - - In This Issue - Jean-Jac­ques Ruest

When NAFTA came into force in 1994, CN’s op­er­a­tions in the United States were pri­mar­ily lim­ited to the Grand Trunk Western Rail­road from On­tario through Michi­gan to Chicago. To­day, the thir­teen ma­jor states CN con­nects have a to­tal GDP about three times the size of Canada’s. CN has been an un­equiv­o­cal NAFTA suc­cess story.

When the North Amer­i­can Free Trade Agree­ment took shape in the early 1990s, the freight trans­porta­tion world had an en­tirely dif­fer­ent size and shape.

So did Cana­dian Na­tional.

CN was still a Crown cor­po­ra­tion and very much a Cana­dian-fo­cused rail­road. But just as NAFTA would de­fine Canada’s econ­omy for the com­ing decades, the in­flu­ence of the his­toric trade agree­ment also be­came a back­drop to CN’s trans­for­ma­tion.

Since NAFTA came into force in 1994, CN’s share of busi­ness in the United States and across the board has roughly tripled.

Vi­sion­ary CN lead­ers such as Paul Tel­lier, who served as the com­pany’s chief ex­ec­u­tive of­fi­cer from 1992 to 2003, over­see­ing its pri­va­ti­za­tion in 1995, looked at NAFTA and other Canada-US free trade agree­ments and rec­og­nized that trade flows go­ing northsouth would in­crease dra­mat­i­cally.

Canada’s econ­omy was al­ready de­pen­dent on trade with the United States, but NAFTA would so­lid­ify that eco­nomic re­al­ity for gen­er­a­tions to come.

In the mid-1990s, CN’s mar­ket reach into the United States pri­mar­ily stopped in Chicago. The rail­road’s rev­enues were dom­i­nated by Cana­dian busi­ness, along an east-west trade flow, and fu­eled by such mar­kets as grain and for­est prod­ucts.

A sin­gle main route from On­tario through Michi­gan, and on to­ward Chicago—known as the Grant Trunk Western Rail­road—had long given CN a taste of the U.S. mar­ket, es­pe­cially in the au­to­mo­tive man­u­fac­tur­ing in­dus­try.

A bold and sig­nif­i­cant in­vest­ment in CN’s in­ter­na­tional high-clear­ance rail tun­nel be­tween Sar­nia, On­tario and Port Huron, Michi­gan, po­si­tioned CN for new growth. But the com­pany’s then-small U.S. net­work, the Grand Trunk cor­ri­dor, would not it­self be enough to com­pete and thrive in an ir­re­versibly chang­ing North Amer­i­can mar­ket. When NAFTA came into ef­fect 23 years ago, CN’s rail op­er­a­tions in the United States ran at a deficit. That would all be­gin to change in 1998 with CN’s pur­chase of the Illi­nois Cen­tral Rail­road, a game-chang­ing move to re­shape the rail­way’s map and line up with grow­ing northsouth trade flows.

The Illi­nois Cen­tral ex­panded CN’s reach. With hun­dreds of miles of new track, its net­work now ran par­al­lel to the Mis­sis­sippi River, through the rich agri­cul­tural and in­dus­trial heart­land of the United States, reach­ing the Gulf of Mex­ico ports of New Or­leans and Mo­bile, Alabama.

When NAFTA came into ef­fect 23 years ago, CN’s rail op­er­a­tions in the United States ran at a deficit. That would all be­gin to change in 1998 with CN’s pur­chase of the Illi­nois Cen­tral Rail­road, a gamechang­ing move to re­shape the rail­way’s map and line up with grow­ing northsouth trade flows.

Two years later, the ad­di­tion of the Wis­con­sin Cen­tral rail­road net­work across the re­source-rich Dairy State brought new mar­kets that con­tinue to evolve. For ex­am­ple, the high­qual­ity frac sand found across North­ern Wis­con­sin to­day moves on CN’s net­work to nat­u­ral gas drilling op­er­a­tions in Al­berta and Bri­tish Columbia, and to lo­ca­tions across the United States. Frac sand, used in the hy­draulic frac­tur­ing process to ex­tract petroleum prod­ucts from rocks, rep­re­sents one of the com­pany’s fastest grow­ing busi­ness units.

Later pur­chases of Great Lakes Trans­porta­tion with its re­gional rail­road in Min­nesota and fleet of bulk ves­sels op­er­at­ing on the Great Lakes, and later the El­gin, Joliet & Eastern Rail­way in busy sub­ur­ban Chicago, filled in the gaps for CN.

Since the in­fancy of NAFTA, the com­pany has trans­formed it` self—from a transcon­ti­nen­tal

Cana­dian rail­way to the North Amer­i­can in­dus­try leader reach­ing three coasts and 16 U.S. states.

CN’s net­work taps ports on the Pa­cific, At­lantic and Gulf coasts and the rail­way made new part­ner­ships with the ports of Prince Ru­pert, Hal­i­fax, Montreal, Van­cou­ver, Mo­bile and New Or­leans, and sig­nif­i­cant in­vest­ments with in­land in­ter­modal ter­mi­nals in Min­nesota, In­di­ana, Wis­con­sin, Illi­nois and Michi­gan.

The move­ment of raw ma­te­ri­als, ad­vanced in­dus­trial prod­ucts, or goods ready to be con­sumed al­ways in­volves a com­bi­na­tion of dif­fer­ent modes of trans­porta­tion through a bor­der­less lo­gis­tics jour­ney.

The net­work’s reach puts CN in the sweet spot of a North Amer­i­can econ­omy rich in man­u­fac­tur­ing, au­to­mo­tive, mer­chan­dise, agri­cul­tural, en­ergy com­modi­ties and con­sumer prod­ucts, while con­nect­ing Asia and Euro­pean trade flows to cen­tral Canada and the U.S. Mid­west.

With this re­mark­able ge­o­graphic change, CN also rein­vented it­self in­ter­nally to play a lead­ing role in the dy­namic trans­for­ma­tion of the in­te­grated North Amer­i­can sup­ply-chain needed to move the prod­ucts we all use from fields, factories and other con­ti­nents to our store shelves.

The move­ment of raw ma­te­ri­als, ad­vanced in­dus­trial prod­ucts, or goods ready to be con­sumed al­ways in­volves a com­bi­na­tion of dif­fer­ent modes of trans­porta­tion through a bor­der­less lo­gis­tics jour­ney. Take your car seat. The elec­tri­cal com­po­nents that al­low you to po­si­tion that seat just where you want it start in an ocean con­tainer in Asia, be­fore head­ing to the Western United States by train to join with other parts that make up the mo­tor. It moves in other con­tain­ers and trucks to and from Mex­ico be­fore land­ing in an as­sem­bly plant in On­tario. The fin­ished ve­hi­cle is later loaded onto a CN spe­cial­ized rail­car and heads to a dealer near you.

That’s one small ex­am­ple of how our econ­omy and the things we con­sume de­pend on trade and a seam­less sup­ply chain.

CN had to ex­pand ge­o­graph­i­cally and evolve the way it does busi­ness to pro­vide our cus­tomers with an ef­fec­tive sup­ply chain ac­cess­ing these rich, vast and di­verse mar­kets.

For lead­ing trans­porta­tion and lo­gis­tics com­pa­nies like CN, trade agree­ments such as NAFTA, the CanadaEuro­pean Union Com­pre­hen­sive Eco­nomic and Trade Agree­ment (CETA), and Trans-Pa­cific Part­ner­ship (TPP) open new mar­kets and mean ever in­creas­ing change in our com­pet­i­tive land­scape.

CN’s ex­pan­sion and fo­cus on sup­ply chain col­lab­o­ra­tion po­si­tioned us to com­pete and win in new mar­kets, with new trade rules.

About 35 per­cent of CN’s busi­ness in­volves trans-bor­der trade, and when com­bined with what is strictly do­mes­tic U.S. traf­fic, half of CN’s to­tal

rev­enue comes from busi­ness that touches the United States. That make Montreal-based CN one of Canada’s in­dus­trial cham­pi­ons.

Last year, CN moved about $100 bil­lion worth of goods be­tween the United States and Canada. The ma­jor states CN now con­nects have a to­tal GDP about three times the size of Canada’s GDP. Of the 13 main states CN op­er­ates in, Canada is the largest trade cus­tomer in all but one of them, with the value of the goods traded with Canada to­talling more than $240 bil­lion a year.

An ef­fi­cient sup­ply chain means a grow­ing econ­omy and more jobs for Cana­di­ans and Amer­i­cans alike. In the 13 pri­mary states CN serves, trade is re­spon­si­ble for nearly 2.4 mil­lion jobs.

As trade agree­ments such as NAFTA are re-ex­am­ined, CN con­tin­ues to in­no­vate in or­der to serve other emerg­ing eco­nomic blocks and trade cor­ri­dors.

CN’s goal is to open one new in­land con­tainer ter­mi­nal a year in the United States bring­ing new trans­porta­tion prod­ucts to fa­cil­i­tate trade op­por­tu­ni­ties.

Tech­nol­ogy is also play­ing a greater role in these new op­por­tu­ni­ties as larger ves­sels, greater fuel ef­fi­cien­cies, and sup­ply chain col­lab­o­ra­tion bring much-needed im­prove­ments to old trans­porta­tion net­works.

CN’s Car­goCool ser­vice is one ex­am­ple of new think­ing in old trans­porta­tion sec­tors. In­vest­ments in tem­per­a­ture con­trolled con­tain­ers are al­low­ing new prod­ucts and more pro­duce—rang­ing from poul­try to veg­eta­bles to cos­met­ics and medicines—to move by rail.

Nowhere in the world is there a more suc­cess­ful or bal­anced trade re­la­tion­ship than ex­ists be­tween the United States and Canada. Free trade has ben­e­fited all three NAFTA coun­tries and is con­tribut­ing to growth and pros­per­ity through­out North Amer­ica, a trade area that is now the big­gest eco­nomic zone in the world, ac­count­ing for a quar­ter of the world’s GDP.

Louisiana Con­gress­man Gar­ret Graves said, “CN is help­ing move Louisiana’s econ­omy for­ward, cre­at­ing jobs and link­ing our state to na­tional and global mar­ket­places.”

The Globe and Mail has called CN a NAFTA suc­cess story and the rail­way will con­tinue to sup­port a dy­namic and in­te­grated North Amer­i­can sup­ply-chain, fu­elling con­tin­ued op­por­tu­nity and pros­per­ity for our part­ners, cus­tomers and neigh­bors on both sides of the bor­der.

Jean-Jac­ques Ruest is Ex­ec­u­tive Vi­cePres­i­dent and Chief Mar­ket­ing Of­fi­cer of CN with re­spon­si­bil­ity for providing strategic di­rec­tion and lead­er­ship for the com­pany’s sales, mar­ket­ing and sup­ply chain so­lu­tions groups. CN_Mar­ket­

In this ex­cerpt from his new mem­oir, My Peer­less Story,

Alvin Cramer Se­gal tells the in­side story of how the Cana­dian ap­parel in­dus­try, and par­tic­u­larly Peer­less, be­came big win­ners un­der the Canada-U.S. FTA and later, the NAFTA.

Af­ter a lot of ru­mours, in mid1985, ne­go­ti­a­tions fi­nally started for what would be­come the Canada-U.S. Free Trade Agree­ment (FTA). Many Cana­dian in­dus­tries were wor­ried that big Amer­i­can com­pa­nies would put small Cana­dian ones out of busi­ness. The Cana­dian gov­ern­ment wanted ad­vice and in­put from all those in­dus­tries in Canada that would be im­pacted by the FTA and formed Sec­toral Ad­vi­sory Groups on In­ter­na­tional Trade (SAGITs) for each in­dus­try. Be­cause of the tex­tile-ap­parel war—which I had been de­lib­er­ately fu­elling at ev­ery op­por­tu­nity– the gov­ern­ment had the wis­dom to fi­nally sep­a­rate tex­tiles from ap­parel. On our own SAGIT, we could talk to gov­ern­ment about the flawed sys­tem of du­ties on tex­tiles, which had to be changed once and for all.

On the ap­parel SAGIT, I rep­re­sented men’s fine cloth­ing. Joe Schaf­fer and El­liot Lif­son rep­re­sented ladies’ dresses, Peter Ny­gard rep­re­sented ladies’ sports­wear, Oscar Ra­jsky rep­re­sented the shirt in­dus­try, Jack Kivenko rep­re­sented the cot­ton jeans in­dus­try, and Claude Lapierre rep­re­sented the lin­gerie in­dus­try. There were oth­ers on the SAGIT rep­re­sent­ing ad­di­tional sec­tors of the ap­parel in­dus­try as well.

Reg­u­lar SAGIT meet­ings were held for three years, and I gath­ered a tremen­dous amount of knowl­edge through­out the pro­ceed­ings. At the very out­set, I was in­tro­duced to the words “im­ports” and “quo­tas” and be­gan to gain a full un­der­stand­ing of their mean­ing and im­por­tance to our in­dus­try. Fab­ric avail­abil­ity was in the in­ter­est of ev­ery sec­tor rep­re­sented on our SAGIT. We could fi­nally get down to en­sur­ing ac­cess to fab­ric and raw ma­te­ri­als with­out con­tend­ing with the tex­tile in­dus­try’s agenda. Dur­ing the SAGIT ne­go­ti­a­tions, it be­came very clear that the ap­parel in­dus­try needed ac­cess to raw ma­te­ri­als not made in North Amer­ica to com­pete un­der free trade. U.S. re­tail­ers didn’t need more of what they al­ready had; they needed some­thing new. All sec­tors of ap­parel man­u­fac­ture—from ladies’ lin­gerie to dresses and ladies’ out­er­wear to men’s cloth­ing and out­er­wear—had the same prob­lem: ac­cess to suf­fi­cient va­ri­eties of fab­ric to meet the de­mands of North Amer­i­can fash­ion re­tail­ers. Be­cause our com­pany had tran­si­tioned into pro­duc­ing wool suits, my is­sue with tar­iffs was all about wool. Wool was the fab­ric of choice in the men’s fine-tai­lored cloth­ing sec­tor, and the big­gest in­put cost in a men’s suit.

As the sole rep­re­sen­ta­tive of the men’s suit in­dus­try on the ap­parel SAGIT, I made duty-free ac­cess to wool-worsted fab­ric a key de­mand. I made it clear to our fed­eral ne­go­tia­tors that we wanted duty-free ac­cess to the hun­dreds of mills in Italy and the rest of the world. This would en­able us to com­pete in the U.S. The tex­tile and wool lob­bies in the U.S. had tremen­dous in­flu­ence over the U.S. free trade ne­go­tia­tors. In one meet­ing, one of the

U.S. ne­go­tia­tors stood up and, ges­tur­ing with his hands, said, “Canada is go­ing to be­come a fun­nel for wool suits com­ing into the U.S. mar­ket.” Wool tex­tiles was their ma­jor fo­cus, and it be­came a po­ten­tial dealbreaker for the U.S. ne­go­tia­tors, who in­sisted on im­pos­ing a quota on all types of gar­ments com­ing into the U.S. from Canada, even though their main con­cern was men’s wool suits.

I made duty-free ac­cess to wool­worsted fab­ric a key de­mand. I made it clear to our fed­eral ne­go­tia­tors that we wanted duty-free ac­cess to the hun­dreds of mills in Italy and the rest of the world.

My bat­tle cry, dat­ing back to the Lum­ley Task Force al­most 10 years ear­lier, was “Duty-free ac­cess to raw ma­te­ri­als not made in Canada,” and it brought ne­go­tia­tors to an im­passe. I be­came the key spokesman for the ap­parel in­dus­try on fab­ric avail­abil­ity, an is­sue par­tic­u­larly cru­cial to the men’s suit busi­ness. U.S. ne­go­tia­tors re­ally only cared about pro­tect­ing the Amer­i­can tex­tile in­dus­try, pri­mar­ily the wool tex­tile sec­tor. Their team didn’t seem to care about ap­parel mak­ers in the U.S. that weren’t us­ing wool. At the eleventh hour, U.S. ne­go­tia­tors im­posed a quota on gar­ments com­ing into the U.S. that used im­ported tex­tiles not made in North Amer­ica. Wool was such a sen­si­tive is­sue that the Amer­i­cans ended up with two sep­a­rate quota cat­e­gories: one for wool and one for ev­ery other fab­ric used in the other sec­tors of ap­parel.

Asim­i­lar quota was im­posed on ap­parel com­ing into Canada from the U.S. The Amer­i­cans had the same op­por­tu­nity with their quo­tas, al­though it was never uti­lized. Un­der the quota sys­tem, ev­ery

We had an­other ma­jor ad­van­tage un­der the free trade talks. Since many other in­dus­tries in Canada were against the FTA, the Cana­dian gov­ern­ment needed the sup­port of the ap­parel in­dus­try, which was a ma­jor em­ployer.

gar­ment made of fab­ric for­eign to North Amer­ica was mea­sured in square me­tre equiv­a­lents (SMEs) per gar­ment, not by quan­tity of gar­ments. Quota de­pended on how much fab­ric was used. A suit had five SMEs, a jacket had three, and a pair of pants had two SMEs, and so on. The en­tire wool quota in the FTA rep­re­sented less than two per cent of the U.S. re­tail suit mar­ket. Peer­less’s pro­duc­tion at that time could have used the en­tire Cana­dian wool quota. I tried to de­mand more quota, but the U.S. ne­go­tia­tors wouldn’t agree. To me this meant that the FTA wasn’t free trade at all, but a pro­tec­tion­ist trade agree­ment favour­ing the tex­tile in­dus­try. The ap­parel SAGIT com­mit­tee also de­cided how the ex­port quota would be di­vided among Cana­dian man­u­fac­tur­ers. The only ex­pe­ri­ence we had was with the ap­parel quota sys­tem used in South­east Asia, so we copied it: if a com­pany ex­ported a cer­tain amount of SMEs in one year, the gov­ern­ment gave them the same SME quota for the fol­low­ing year.

We had an­other ma­jor ad­van­tage un­der the free trade talks. Since many other in­dus­tries in Canada were against the FTA, the Cana­dian gov­ern­ment needed the sup­port of the ap­parel in­dus­try, which was a ma­jor em­ployer. By this time, I was a lead­ing voice on the ap­parel SAGIT, and I saw this as an op­por­tu­nity to have some long-hoped-for changes made. I was able to con­vince my col­leagues to sup­port the gov­ern­ment pas­sage of the FTA on con­di­tion that the Cana­dian In­ter­na­tional Trade Tri­bunal’s un­fair sys­tem of rules and reg­u­la­tions was clar­i­fied and sim­pli­fied in or­der to re­move the du­ties on fab­rics not made in Canada.

To se­cure our sup­port for the pas­sage of the FTA, the Cana­dian gov­ern­ment of­fered ap­parel man­u­fac­tur­ers the ex­tra­or­di­nary pro­vi­sion of du­tyfree ac­cess to fab­rics for five years, as a pe­riod to ad­just to free trade. How­ever, the gov­ern­ment had one im­por­tant con­di­tion: man­u­fac­tur­ers would re­ceive duty-free ac­cess only on raw ma­te­ri­als sched­uled for ex­port to the

U.S. Of­fer­ing U.S. re­tail­ers fab­rics they didn’t al­ready have was cru­cial for the suc­cess of Cana­dian ap­parel man­u­fac­tur­ers in the new mar­ket. To this day, I am very proud of my part in mak­ing this hap­pen; it changed the way ap­parel man­u­fac­tur­ers op­er­ate in North Amer­ica.

As talks con­tin­ued, the FTA was sched­uled to come into force on Jan­uary 1, 1989. No one in the in­dus­try knew which com­pa­nies would win or lose when it came into ef­fect, but I was in­tent on be­ing one of the win­ners. Look­ing back, it would be easy to at­tribute Peer­less’s suc­cess to sim­ple good for­tune. Yes, a lot had to do with tim­ing. How­ever, mak­ing the right choices dur­ing the late 1970s and early to mid-eight­ies placed us in a po­si­tion to take ad­van­tage of the dra­matic changes that came with the FTA. I wasn’t just fly­ing on hunches; a lot of strategic plan­ning had gone into the choices I made.

One im­por­tant fac­tor was that we didn’t have to ne­go­ti­ate with an in­ter­na­tional union to make changes to our fac­tory. Since we had our own legally ap­proved union, the Fra­ter­nité des Tra­vailleurs de Vête­ments pour Hommes or the “Fra­ter­nité,” we had been able to pro­duce the en­gi­neered suit much sooner and more eas­ily than our com­peti­tors. The Fra­ter­nité was cer­ti­fied by the Que­bec De­part­ment of Labour but still un­rec­og­nized by the Amal­ga­mated In­ter­na­tional Union (then called UNITE), which was des­per­ate to take over the Fra­ter­nité.

As well, I had learned a lot about im­port and ex­port tar­iffs, du­ties, and quo­tas from my col­leagues on the SAGIT. The slow tran­si­tion we made over the years from man-made fab­rics to wool, in or­der to im­prove the qual­ity of our suits and get them into a bet­ter seg­ment of the mar­ket, turned out to be one of the smartest busi­ness de­ci­sions I ever made. His­tor­i­cally, be­cause wool worsted fab­ric was sourced from the Bri­tish Em­pire, Canada had a favourable duty rate on any wool prod­ucts com­ing from the UK (un­der the Bri­tish Pref­er­en­tial Tar­iff, BPT). Cana­dian man­u­fac­tur­ers paid eight-per-cent duty on Bri­tish wool while Amer­i­cans paid 40 per cent duty on the same fab­ric. This meant that Peer­less had a dis­tinct ad­van­tage even be­fore the Free Trade Agree­ment. Un­der the FTA, so long as there was avail­able quota, we would pay no duty at all on our suits en­ter­ing the U.S. That gave us an in­cred­i­ble ad­van­tage over U.S. suit man­u­fac­tur­ers.

Ad­di­tion­ally, our labour costs were down be­cause the Cana­dian dol­lar had weak­ened against the U.S. dol­lar, and, as a re­sult our prod­uct was even more com­pet­i­tive. We had a fab­ric ad­van­tage, the right prod­uct, and no in­ter­na­tional union stop­ping us from mak­ing changes. It was the per­fect com­bi­na­tion of ideal con­di­tions and unique op­por­tu­ni­ties. I went away for my year-end hol­i­day know­ing that Jan­uary 1, 1989 would be the start of a new era for Peer­less. But in my wildest dreams, I never imag­ined how high we would fly.

Ex­cerpted from My Peer­less Story by Alvin Cramer Se­gal. By per­mis­sion of McGill-Queen’s Univer­sity Press, Montreal and Kingston, 2017.

* Source: Peter B. Dixon and Mau­reen T. Rim­mer, “The De­pen­dence of US Em­ploy­ment on Canada, 2013”, Cen­tre of Pol­icy Stud­ies, Vic­to­ria Univer­sity in col­lab­o­ra­tion with the U.S. In­ter­na­tional Trade Com­mis­sion

Alvin Se­gal with Que­bec labour leader Louis Laberge at a 1989 sym­po­sium on the Canada-U.S. Free Trade Agree­ment.

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