COMMENTS OF PATRICK J. OTTENSMEYER, PRESIDENT AND CEO, KANSAS CITY SOUTHERN, ON NEGOTIATION OBJECTIVES REGARDING MODERNIZATION OF THE NORTH AMERICAN FREE TRADE AGREEMENT WITH CANADA AND MEXICO
Hearing Room of The United States International Trade Commission Tuesday, June 27, 2017
Company history
Kansas City Southern (KCS) was founded in 1887. It has endured much and prospered during its 130-year history, facing challenges at times.
During the mid-1990s, large mergers in the U.S. rail industry threatened The Kansas City Southern Railway Company’s viability, but with the completion of the North American Free Trade Agreement (NAFTA) in 1994, new opportunity arose for the company, its shareholders, employees, and its customers.
In 1995, KCS closed an agreement with Grupo TMM, a Mexican-based ocean shipping and logistics company, to pursue purchase of the concession of one of Mexico’s soon-to-be privatized rail lines.
Also in 1996, KCS and Grupo TMM submitted their bid for the Mexican Northeast Line rail concession, the premier Mexican rail corridor, and in 1997 were awarded the concession, marking the beginning of TFM, the privatized, northeast railroad of Mexico.
In 2005, KCS acquired Grupo TMM’s interest in TFM, making TFM a wholly-owned subsidiary of KCS and renaming TFM as Kansas City Southern de Mexico (KCSM).
Kansas City Southern’s North American network is strategically focused on the critically important north/south freight corridor connecting key commercial and industrial markets in the central United States with major industrial cities in Mexico.
KCS owns all of the stock of KCSM. Through its 50-year concession from the Mexican government, KCSM operates a key commercial corridor of the Mexican railroad system and has as its core route the most strategic portion of the shortest, most direct rail passageway between Mexico City and Laredo, Texas.
KCSM serves most of Mexico’s principal industrial cities and three major seaports, providing exclusive rail access to the United States and Mexico border crossing at Nuevo Laredo.
Importance of NAFTA to U.S. Rail Industry, KCS and its customers
NAFTA is critically important to the U.S. rail industry, including KCS.
According to a study done by the Association of American Railroads in March (AAR Study), at least 35 percent of U.S. rail revenue is derived from international trade.
In 2014, there were 329 million tons of exports handled, 171 million tons of imports moved by rail, and 11 million tons of international transit freight involving all major rail commodity types. The study estimated that 50,000 rail jobs, worth over $5.5 billion in wages and benefits depend on international trade.
In addition, the AAR Study pointed to significant U.S. freight rail revenue ($75.1 billion), tons (1,879.4) and units (32.2) derived from international trade.
KCS understands that today, over $1 trillion in annual trade takes place between the three NAFTA trading partners and trade with Mexico alone has nearly quadrupled since NAFTA was implemented. This trade is critical to the U.S. economy, 14 million U.S. jobs are supported by NAFTA and U.S.
Modernization of NAFTA is a worthwhile goal but cannot come at the expense of disrupting these vital trade flows
Certainly, a 23-year-old agreement should be reviewed and updated to include issues not contemplated when it was originally negotiated; however, this should not come at the expense of disrupting vital North American trade and its importance to U.S. interests.
I have joined 16 other CEOs of major U.S. companies in a letter to President Trump outlining our support for the administration’s efforts to modernize the agreement. In that letter, we offer to work with the administration to promote free and fair trade with Canada and Mexico, ensuring a level playing field, stimulating economic growth and job creation for American workers, farmers, and businesses.
High-level U.S. negotiation objectives
U.S. negotiators should enhance the job-sustaining flow of trade across our borders, which has reached $1.3 trillion. Returning to the high tariffs and other trade barriers that preceded NAFTA is not in the interests of U.S. workers, farmers, and exporters.
As Secretary Wilbur Ross and others have pledged, the administration’s pursuit of negotiations following the procedures established in the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, known as TPA, will provide a more predictable environment for business. Pursuing the TPA statute’s negotiating objectives and following its consultation procedures will build broader support in Congress and the U.S. business and agriculture communities for this effort.
It is in the U.S.’s interest for the Administration to proceed quickly and trilaterally. Uncertainty about the future of America’s terms of trade with Canada and Mexico would suppress economic growth and may cause political reactions that undermine U.S. exporters and their significant growth opportunities in these markets. Further, maintaining NAFTA’s three-party framework is critical to ensure a strong, profitable market for U.S. exports, to avoid disrupting the substantial, existing flow of commerce and the American jobs that depend on it.
Finally, U.S. negotiators should try to achieve trilateral uniformity for Customs and Border Control, agricultural, and other border crossing procedures to improve the fluidity and security of freight moving across the U.S., Canadian and Mexican borders.
Preserving Chapter 11 and ISDS critical for U.S. foreign investment most important need to retain in NAFTA. Retaining NAFTA’s
investment protections is critical for U.S. companies with foreign investment like KCS. Under NAFTA, the governments of Canada and Mexico agreed to investment rules that guarantee U.S. investments will not be subject to discriminatory treatment and will be compensated in the unlikely event of expropriation. Enforcement of these obligations through Chapter 11’s investor-state dispute settlement (ISDS) is critical.
The investment protections are consistent with the due process protections guaranteed by the U.S. Constitution. Decisions that result from investment arbitration cannot overturn the policy decisions, laws, or regulations of any country. All such decisions can do is award compensation when a government expropriates property or otherwise tramples on the rule of law. Under trade or investment agreements the United States has entered into with 54 countries, just 13 disputes have been brought against the United States and decided over the past half century, not losing a single one.
ISDS protects U.S. companies from foreign governments’ arbitrary actions. It has been invaluable to U.S. companies and their millions of shareholders who otherwise would have been subjected to expropriation or discriminatory treatment simply on the basis of their nationality. Attempts by NAFTA partners to eliminate or change ISDS and its investment protections would deny an important mechanism for settling disputes and benefit no one but foreign governments engaging in discriminatory practices against U.S. companies.
For these reasons, foreign investment protection and ISDS have earned strong Congressional support.
U.S. negotiators must protect U.S. foreign investment in production because production needs to be proximate to consumer markets, and because U.S. investment in foreign transportation infrastructure facilitates U.S. exports. KCS believes there are very significant and growing opportunities to increase U.S. agricultural, energy, petrochemicals and plastics exports to Mexico.
Mexico’s ambitious reforms to liberalize its energy sector provide the U.S. great growth opportunity in energy and finished petroleum product exports. Without the past and future investment in Mexican rail infrastructure, these opportunities could not be realized because these products would not get to Mexican markets.
Without Chapter 11 under NAFTA, future investment in this vital export infrastructure would be uncertain. Investment protection is the most important need to retain in NAFTA.
Conclusion
NAFTA was negotiated 25 years ago. That alone gives rise to reviewing the agreement and updating it for today’s economy. The agreement has been generally good for the U.S. and North America’s competitiveness in the world; however, it can be made stronger, modernized and more inclusive of economic activity that was not included or relevant 25 years ago.
For these reasons, KCS supports the administration’s notice of intent to enter into negotiations with Canada and Mexico That said, modernization cannot come at the expense of disrupting the trade flows that are vital to U.S. exporters, most especially agricultural exporters. To do so would impose a severe penalty on the 14 million American jobs depending on the agreement and the livelihoods of American families who depend on those jobs. This is especially true in rural America.
We urge the administration to approach negotiations with our North American partners with a positive, win-win attitude.
We believe the focus should be on enhancing the job-sustaining flow of trade across our borders; avoiding the high tariffs and other trade barriers that preceded NAFTA; following the procedures established in the TPA; and proceeding quickly and trilaterally
