Time for a peak-season surcharge in US-Mexico trade?

The imbalance in trade between the U.S. and Mexico, with significantly more northbound versus southbound freight between Mexico and the U.S., was intensified during the recent peak season and left shippers scrambling to find truck and rail capacity in order to move the increasing amount of northbound freight. As a result, carriers were forced to reposition empty equipment in order to meet the demand, which led to a reduction of profits, and in many cases, causing them to operate at a loss.

As the growth in the number of exports from Mexico to the U.S. shows no signs of slowing down, the challenges that come as a result of the trade imbalance will not go away. Capacity will continue to be in high demand, especially during peak season, and carriers will continue to have to reposition more empty equipment in order to meet that demand.

This cycle is not healthy for the transportation industry, and we need to find ways to encourage capacity into the market. It’s time to examine the consequences of the trade imbalances and develop a solution for addressing the challenges that come as a result.

Imbalance in Northbound and Southbound Trade

The imbalance is increasingly hard to ignore. The U.S. imported $16.9 billion in goods from Mexico in March via truck while only exporting $13.3 billion, according to the U.S. Bureau of Transportation Statistics. This disparity increased at the start of peak season, which typically runs from April through July, as $15.8 billion in goods were exported to Mexico from the U.S. in April, while Mexico shipped $20.2 billion to the U.S., according to BTS data.

This imbalance has continued to grow in recent years as Mexico has become a preferred country for manufacturing and more and more companies near-source operations from Asia to Mexico. While this wasn’t a significant issue during the recession, economic recovery and improving market conditions have led to a great deal of the Asian goods that flowed through the U.S. into Mexico now being shipped into Mexico directly via ocean or produced within the country itself, vastly disrupting the balance of inbound/outbound capacity. This trend isn’t expected to slow down or correct itself in the near future, particularly considering the improving economic landscape.

Trade Imbalances Bring Challenges

The imbalance in northbound and southbound trade has created a shortage of truck and rail capacity, making it much more difficult and expensive to source northbound capacity. As a result, shippers have been left scrambling to find available capacity and, in some cases, paying a surplus to attract carriers to shorter lanes. Further straining the already volatile market is the expectation from many shippers that transportation brokers and logistics companies will absorb these additional costs.

While the imbalance in cross-border trade is consistently an issue, the challenges that result from that imbalance are further exacerbated during peak season. While it is not uncommon to see one trailer moving southbound into Mexico for every 2-3 trailers northbound, during the past peak season, the difference grew in some markets to one truck traveling southbound for every five trucks heading north.

Yet, while this imbalance is impacting shippers in many ways, the effects are being felt more by carriers as many are forced to reposition equipment in order to meet shipper demand. In many cases, carriers are sending partially-filled or empty trucks to southern lanes in order pick up the excess freight. This is forcing carriers to operate at a loss as they move available equipment to those lanes.

While some carriers have the equipment and cash flow to operate at a loss and reposition equipment as needed, many do not. As a result, some carriers have turned down loads or made shippers wait until they have full or mostly-filled trailers or railcars before moving equipment southbound.

Time to Change the Market Model

Last year’s peak season was the worst we’ve experienced in a decade. Carriers were trying to minimize their losses, brokers were operating at a loss while trying to locate equipment, and shippers were struggling to find capacity at higher costs. Historically, this isn’t a productive or profitable cycle, and with the continued shift of international production to Mexico likely to only make it worse, it is important to begin to take the necessary steps to break out of it in the years to come. Carriers can’t continue to operate at a loss or withhold capacity during the peak season, and it’s time for the market to take a close look at this issue and find new ways to address it.

This situation is very similar to what ocean carriers deal with during peak season. However, to compensate for the imbalance of trade during these high-demand months, ocean carriers implement peak-season surcharges. This incremental increase during peak-season months enables them to operate as the market demands, without the risk of incurring significant losses. This pricing strategy has served the maritime industry well, and as cross-border transportation faces similar challenges, it’s time to consider implementing a peak-season surcharge for Mexico.

While implementing a PSS will not thrill shippers, we need to consider what is best for the industry as a whole. Current market rates are below what the industry needs to supply the amount of equipment required to meet demand. We need to encourage capacity into the market, and one way to do that is with money. Forcing carriers to respect a rate that was negotiated months in advance isn’t going to make the carrier community happy, or encourage them to go out of their way and reposition their equipment.

Yes, shippers might pay a cheaper rate, but they may also lose on service and the ability to meet the demands of their customers, which ultimately can be much more expensive. Additionally, by operating at a loss, carriers will not buy new equipment, which could lead to even more capacity issues long-term.

The current model doesn’t encourage a healthy market. But in order to make an impactful, sustainable change, we need to work together to create a mutually beneficial shipper-carrier environment. Both shippers and carriers will have to make changes and approach the situation as true partners. Carriers and 3PLs alike have not yet approached the market in a united front to demand a PSS. The need is obvious, but the question remains whether all parties can become organized and forward-thinking enough to make the necessary changes.

A peak-season surcharge is something that demands a serious discussion. Ocean and air have already decided that market conditions dictate the necessity of a peak-season surcharge. Why aren’t we doing the same for Mexico truck and rail?

Troy Ryley is managing director for Transplace Mexico, and has been involved in Mexico and Latin America logistics since 1993. Contact him at troy.ryley@transplace.com.

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