Most supporters of free trade have long viewed cross-border integration of the trucking sector as a cornerstone of the economic integration of North America. So when the North American Free Trade Agreement (NAFTA) went into effect in 1994, a key provision not only opened international traffic in a narrow band along the U.S.-Mexico border in 1995 but also called for the opening of long-distance truck traffic in 2000. That process has been delayed indefinitely, however, because of legislative and legal tactics of U.S. labor, owner-operator and citizen advocacy groups who fear the loss of U.S. jobs to Mexican drivers. Opponents of Mexican trucking in the U.S. also argue that Mexican trucks are unsafe, citing widespread safety violations and the common practice of using cross-border trucks to transport illegal narcotics to the U.S.

But the big question, experts say, is whether the long-standing failure of the two countries to resolve the trucking dispute is damaging the global competitiveness of Mexican and U.S. companies. After the U.S. Congress cut off funding for a cross-border trucking pilot program a year ago, the Mexican government withdrew NAFTA-mandated tariff preferences on US$2.4 billion worth of imports from U.S., effectively raising the cost of those products in Mexican markets. Rather than seek compromise, independent U.S. truckers say they want to renegotiate NAFTA to eliminate its trucking provision entirely. NAFTA supporters say that is impossible.

The good news about the North American Free Trade Agreement (NAFTA) is that bilateral U.S.-Mexico merchandise trade more than quadrupled from US$81 billion in 1993, the year before NAFTA went into effect, to US$367 billion in 2008. The bad news is that more than 70% of that value moves by truck, and cross-border U.S.-Mexico transportation is highly inefficient, experts uniformly agree. Academics and other business analysts say these inefficiencies are thwarting NAFTA’s full potential to create jobs, boost living standards and make both the U.S. and Mexico more competitive with manufacturers in Asia, Europe, and elsewhere.

Despite NAFTA, U.S. and Mexican trucks must deliver their cargo-laden trailers to the U.S.-Mexico border, where they then hire short-haul “drayage” haulers to pull the trailers across the border, which they later return to Mexico or the U.S. Long-haul trucks on the U.S. and Mexican side then pick up those trailers and take them to their ultimate destinations. When will the old system be replaced by something more streamlined and efficient? Sixteen years after NAFTA seemed to provide a clear answer, no one really knows. The issue is more contentious than ever, now that the U.S. and Mexican economies are suffering from the global recession, and trucking companies are enduring financial losses.

Wrong Turn

How did things go wrong? When NAFTA went into effect in 1994, it opened a 25-mile commercial zone along the U.S.-Mexico border to Mexican truck traffic by 1995, and called for the opening of Mexican truck traffic to all U.S. states by January 1, 2000. That process has been delayed because of the legislative and legal tactics of U.S. labor unions – notably the Teamsters – and U.S. owner-operator truckers who fear the loss of their jobs to lower-cost Mexican truckers. After agreeing to end the current system when it signed NAFTA, the U.S. government has since refused to implement the NAFTA trucking provisions, despite a 2001 NAFTA dispute settlement panel decision that found the U.S. restrictions violated its NAFTA obligations.

In 2004, the U.S. and Mexico agreed to a short-term joint demonstration pilot program that went into effect in September 2007. In that program, the U.S. allowed up to 100 Mexico-based trucking firms to transport international cargo beyond the commercial zones, and Mexico allowed up to 100 U.S. trucking firms to transport international cargo into Mexico. Originally scheduled to last for just one year, the program was extended by both countries in August 2008. But U.S. funding for the program was cut off in March 2009, forcing an abrupt end to the pilot program. Mexico responded by temporarily withdrawing NAFTA-mandated tariff concessions worth US$2.4 billion on imports of 89 products from the U.S. (Mexico has, however, allowed U.S. trucks to continue to travel within Mexico.)

For U.S. companies, the stakes are significant, not simply because of the loss of NAFTA tariff concessions on those exports to Mexico. “We are starting to hear from our members that the competitive advantage the U.S. gained from NAFTA is on the decline,” says Patrick Kilbride, director of the Americas at the U.S. Chamber of Commerce. “Regional cooperation is essential to our economic competitiveness,” and U.S. companies need to view Mexico’s success as something positive for the U.S.

According to Kilbride, the Chamber has been “pushing hard” for the U.S. and Mexico to announce a compromise to the crisis in May, when Mexican President Felipe Calderon visits the White House. A temporary “solution” could include an agreement to re-instate the pilot program. However temporary, that would be especially welcome for U.S. agricultural exporters. “Agricultural groups have been particularly hard hit,” says Kilbride, “because Mexican tariff rates have snapped back up to what they were before NAFTA.” In some cases, Mexican tariffs are now as high as 45%, compared with zero tariffs before the U.S. ended the pilot program. U.S. potato exports to Mexico have dropped by 50% as a result.

Safety: A ‘Red Herring’?

U.S. opponents of the NAFTA trucking provision argue that it makes no sense from an economic or safety perspective to revive the pilot program, even on a temporary basis. In April, 78 members of Congress proposed to the Obama administration that the United States renegotiate NAFTA so that it no longer includes the trucking provision. The group – composed of 72 Democrats and six Republicans – said in a joint letter that Congress is unlikely to approve any cross-border trucking program with Mexico. “The safety concerns are just too big an obstacle to overcome,” said Rep. Peter DeFazio, D-OR, in that letter to U.S. Transportation Secretary Ray LaHood and U.S. Trade Representative Ron Kirk.

“Mexico has no hours of service regulations,” agrees Norita Taylor, a spokesperson for the Owner-Operator Independent Drivers Association, which represents U.S. truckers. Hours of service regulations stipulate how many hours a driver must stop and rest, “so the absence of such rules means that Mexican drivers often work too many hours” and cannot operate their vehicles safely, says Taylor. “There is no mandatory testing for alcohol and drug use by drivers. There are no certified labs in Mexico, so there is no way to verify if [a Mexican driver] has passed.”

Perhaps more to the point, U.S. critics of the NAFTA trucking provision also argue that its permanent implementation would kill U.S. trucking jobs. “Should the border be fully opened to Mexican trucks, the low wages of Mexican drivers will drive U.S. trucking companies out of business,” the Congressmen said in their letter. “This continues a disturbing trend of American job losses through outsourcing. The difference is that we are allowing foreign workers making foreign wages to enter our nation and unfairly compete for American jobs.” James P. Hoffa, general president of the Teamsters Union, which represents the U.S. truckers, linked Mexican truck traffic to the highly charged issue of cross-border drug smuggling. "Mexican trucks are not only a danger on our highways but they’re the number-one way drug traffickers smuggle illegal narcotics to hundreds of American cities," Hoffa said in a statement. “A lot of drugs come across the border on large trucks,” creating headaches and risks for U.S. truckers, says Taylor.

Supporters of the NAFTA provision counter that Mexican trucking standards have improved significantly. A report published by the U.S. Department of Transportation’s Inspector General last September asserts that Mexican trucks are as safe as U.S. vehicles and Mexican truck drivers have better safety records than their U.S. counterparts. During fiscal year 2008, more than 220,000 inspections were performed on Mexican trucks by the DOT’s Federal Motor Carrier Safety Administration. Following those inspections, only 1.2% of Mexican drivers were placed out of service for a violation, as compared to nearly 7% of U.S. drivers who were inspected. Overall, 21.2% of Mexican trucks – compared with 21.8% of U.S. trucks – were placed out of service for safety reasons or because they had violated some other regulation. Says the U.S. Chamber’s Kilbride, “The standards issue is a red herring because it doesn’t matter what standards are inside Mexico. When those trucks enter the U.S., they are held to the same safety standards as U.S. trucks.” In response, Taylor says the sampling of Mexican truckers who participated in those tests was “cherry picked” to include only the best truckers, and is not representative of the entire sector.

Economic Boon – or Disaster?

Supporters of the NAFTA trucking provision counter that revoking the provision would be harmful for the U.S. economy. Laura Baugham, president of Trade Partnership Worldwide, a Washington, D.C.-based consultancy, says, “Failure to implement the NAFTA agreement imposes a cost on activity in the U.S. economy. That cost gets passed along on all different levels, and ultimately finds its way to U.S. consumers in the form of higher prices.” Baugham, along with Joseph Francois, managing director of Trade Partnership Worldwide and professor of economics at Johannes Kepler University in Linz, Austria, analyzed the costs to U.S. consumers and labor markets. According to Baugham, since the cross-border trucking pilot program ended in March 2009, U.S. companies and consumers have been bearing the drayage costs associated with transferring cargo from Mexican trucks to U.S. trucks – an estimated US$739 million a year – which are passed onto U.S. consumers.

Beyond that, U.S. exporters have also been bearing the costs of Mexican tariffs that were re-imposed on imports from the U.S. because the U.S. had broken its NAFTA commitment to enact the trucking provision. “We estimate that the net negative impact of continuation of drayage and Mexican retaliation cause U.S. exports to decline by US$2.6 billion” a year, says Baugham. “We further estimate that the impact on U.S. employment of the failure of the U.S. to implement the trucking provisions of NAFTA, coupled with Mexican retaliation, equals 25,600 [lost U.S.] jobs.” Baugham dismisses the truckers’ argument that the U.S. economy will suffer if Mexican trucks gain full access to the U.S. “Truckers are only looking at it from their perspective. Their win is the other side’s loss. There are more losers than winners” when Mexican trucks are prevented from circulating in the U.S. “You don’t understand that unless you do a full, thorough analysis,” Baugham adds.

Long-term Stakes for Mexico

The inefficiencies of cross-border trucking supply chains impose a major toll on the Mexican economy as well, says Arnulfo R. Gomez, professor of international trade at Anahuac and Iberoamerican universities in Mexico City. Gomez notes that although NAFTA was intended to improve Mexico’s export competitiveness, “there has been no advance in our competitiveness; no increase in the value added of our exports, and no generation of wealth” since Mexico joined NAFTA. According to Gomez, rather than find innovative ways to streamline the U.S.-Mexico transportation supply chain, the Mexican government has focused instead on forging a series of 12 free-trade agreements with a total of 44 different foreign countries, including Chile, Costa Rica, Japan and the European Union. Ironically, “Mexico has a deficit with 32 of those countries,” says Gomez. “Instead, they should be consolidating our competitive position with the U.S.”

Although NAFTA – like those other trade pacts — was touted as a boon to Mexico’s global competitiveness, “Mexico has fallen from being the 12th ranking exporter in the world in 2000 to 16th place in 2008, and our exports per capita fell from 51st spot to 68th position,” says Gomez. “As an economic power, Mexico fell from 9th to 13th spot and our per capita GDP fell from 48th spot to 57th during this period.” He adds, “Unfortunately, Mexico’s agenda for competitiveness is almost non-existent, and the little that the [Mexican] government attempts to do is focused more on deregulation of import procedures” rather than on modernizing Mexico’s transportation sector. “Despite the fact we are a neighbor of Canada and the U.S., and were the first country with preferential access to both countries, we have not been able to achieve the integration that was predicted when we negotiated NAFTA. On the contrary, day by day, we are becoming less and less important in the trade of the region.”

Gomez has proposed a number of measures that would make the cross-border flow of traffic speedier and more efficient. These include the standardization of hours of U.S. and Mexican hours of operation, so that there aren’t any gaps in their operations; standardizing the registration period of Mexican vehicles and providing them with permanent registration so that it is easier to trace the history of each vehicle; eliminating barriers that impede vehicles from traveling the first 20 kilometers [12 miles] inside each other’s territory without delay; and the standardization of international licenses for vehicle drivers, in order to create a record of the vehicle operators.

This much, at least, seems certain: Trade experts in both countries dismiss the notion that NAFTA might ever be renegotiated as mere political posturing by opponents of Mexican trucking. “There is so much stuff in NAFTA that Canada and Mexico didn’t get [when NAFTA was initialed] that they would ask to renegotiate if the U.S. tried to open up NAFTA again,” says Baugham. “You open up NAFTA for renegotiation, and all that stuff is on the table again.”

Daniel Griswold, director of the Center for Trade Policy Studies at the Cato Institute in Washington, D.C., agrees. “The Mexicans have already compromised by engaging in this pilot program. [The current situation] is an ongoing embarrassment for the United States. The banned Mexican trucks have been proven to be safe, but we refuse to allow them because they are driven by Mexicans. Mexico has been very patient for 15 years. It is hard to see how you can compromise what has already been compromised.” Griswold is pessimistic about finding a solution to this highly charged political issue. “The [U.S.] administration is in a tight spot. They know the U.S. is wrong about this, but politically, President Obama doesn’t want to cross the Teamsters, so we are left with a lot of empty talk and no action. I don’t see any resolution any time soon.”

Is the International Diversification Potential Diminishing for Foreign Equity Inside the US?