Rail as the Transportation Hub of NAFTA: A Compelling Case Study
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_Marketing@cn.ca
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.