North American Freight Market Insights

TOP STORY: Mexico, Canada, and cross-border trucking under USMCA

In July 2020, a law was implemented to support trade across North America. The agreement goes by different names, in Mexico it’s titled T-MEC, in Canada it’s CUSMA, and in the United States it’s known as USMCA.

This updated agreement provides trade certainty between the three countries for at least the next 16 years, during which other global trading relationships are being reviewed. Chapter 7 of USMCA outlines ambitious new requirements and goals that should reduce friction from the border crossing process while ensuring safety.

Our market reports for the coming months will discuss the valuable trade relationships between these three countries.

Intra-Mexico trucking market summary
In the United States, demand is outstripping supply at unprecedented levels for longer than historical norms. So how does Mexico’s truck market look?

While capacity is strained against demand in Mexico, demand is not growing at the same pace as in the United States. There has been no analogous support in Mexico. Current production growth in Mexico is based in part on the rebound of the U.S. economy as well as businesses choosing to nearshore to Mexico.

Mexico faces a similar supply constraint as the United States: a lack of drivers. But the reason for the shortage is different. The number one reason drivers are hard to find in Mexico is due to an increased risk of security.

Driving a truck with valuable contents can be a dangerous job and security continues to be a challenge on Mexico’s roads. The result is Mexico’s carriers struggle to grow and unlike in the United States, there isn’t a pattern of owner/operator startups occurring.

In addition to the driver shortage, there is an imbalance of freight volumes—especially for northbound capacity. There has always been an imbalance of southbound freight versus northbound, but the economic environment of 2020 and 2021 has exacerbated this imbalance.

As such, we recommend being flexible on planned costs and building in additional lead time to book capacity from the interior of Mexico to border crossing points.

Cross-border services
T-MEC/USMCA codified the trade relationship between the United States and Mexico. It settled investor and business nerves about the continuation of NAFTA and is the foundation to supply chain diversification strategies.

U.S. businesses with supply chains originating in China are reevaluating further expansion in China because of the trade war and higher tariffs. Now, these businesses have increasingly looked at nearshoring in Mexico to leverage cross-border trucking into the United States and Canada. This apparent growth of northbound exports from Mexico is foundational to this month’s market insights.

Immigration and jobs also continue to be part of critical conversations about Mexico and U.S. policy. In the United States, the trucking industry discusses the impact of B-1 visas and cross-border truck capacity provided by drivers from Mexico.

B-1 visas
B-1 visas grant Mexico’s drivers the ability to deliver freight in the United States. Most drivers provide the service from Nuevo Laredo to a crossdock facility in Laredo transloading to U.S. drivers for final delivery and then return to Mexico empty or with a southbound load. They can also execute "direct" loads from Mexico to the final destination in the United States and take loads from the United States back to Mexico. There is a similar situation for Canada’s drivers in the United States and U.S. drivers in Canada.

Today, reports of Mexico carriers hauling intra-U.S. freight—called cabotage, which is not allowed under the B-1 visa—raises concerns for many in the trucking industry. This practice is more concentrated in Texas and the immediate region. Claimants of the activity argue that pricing is compressed in key lanes because Mexico carriers offer lower pricing than U.S. carriers.

The outlined situation is not a new one, but the market is seeing an apparent shift in how B-1 visas are used. The reason for the change is increased enforcement by Customs and Border Patrol (CBP) around the proper use of B-1 visas.

This activity has reduced active capacity for intra-Texas and the surrounding region as Mexico drivers don’t want to risk losing their B-1 visa by continuing to run intra-U.S. freight illegally. Instead, many drivers use their B-1 visas legally by running direct loads between Mexico and the United States and benefiting from the current high truckload pricing.

One key trade lane that may benefit from this shift in capacity is between Mexico and Michigan, which supports the automotive industry. Despite added capacity on some direct loads, the market is severely out of balance. These shifts are not yet material enough to be broadly felt.

Direct services
Another reason for the change of capacity is that some B-1 visa holders have shifted to longer direct loads, effectively reducing the available northbound and southbound border-transfer capacity.

While there is some capacity shifting from cross-border service to direct, the actual capacity for direct loads is small and it exists in limited lanes. The real impact is the imbalance caused by Mexico’s export traffic, which far exceeds imports.

We recommend continued strategy conversations with your C.H. Robinson account manager about service needs, available capacity, and business processes designed to get the greatest performance from today's market.

Mexico Carrier Demographics Reference: Secretaria de Comunicaciones y Transporte www.sct.gob.mx
Cabotage Reference: https://www.freightwaves.com/news/sources-mexican-b-1-visa-truckers-conducting-illegal-runs-in-us

TOP STORY: Demand outpaces supply; assets are not where they need to be

High levels of loaded truck and ocean containers are being used as mobile storage at consignee locations. This means continued challenges for intermodal transport in accessing enough containers to meet demand.

Couple this trend of inactive assets with domestic volume and maintained high levels of imports (most recently the increased volume from the Suez Canal incident) and intermodal service is experiencing stress similar to truckload and LTL markets.

Seek committed intermodal volume awards to ensure the best experience the market can offer in a tight market such as this. If you’re seeking spot market intermodal services, we’ve found the following lanes create the greatest opportunity for current market conditions:

• California inbound (any intermodal lane into CA is attractive)
• Any intermodal lanes on the eastern core (East of the Mississippi river)
• Mexico inbound from the United States (any intermodal lane into Mexico is attractive)
• Chicago and Wisconsin inbound intermodal lanes

TOP STORY: What impact will legislation have on reducing the driver shortage?

This month we offer updates to some of the most common questions on regulatory and legislative insights related to the truck driver labor pool.

• Will 18-20 year old drivers be approved to help with the driver situation?
  

  The Drive Safe Act aims to establish a national internship program for 18-20 year old truck drivers. It has a challenging path toward enactment. If Democrats opt for a reconciliation path to pass infrastructure spending, policies like the Drive Safe Act will not be included per the rules.
  However, if Congress passes a traditional infrastructure package of both spending and policy, there will be many safety advocates opposed to the Drive Safe Act. Even if the Drive Safe Act passes in 2021, a program will not likely be up and running until well into 2022.

• How impactful has the Drug & Alcohol clearinghouse been to the truck driver labor pool?
  

  The Drug & Alcohol clearinghouse has been active for over 16 months (including the 2020 COVID-19 lockdowns). This makes any trends difficult to discern.
  Testing decreased in April–June 2020 along with the lockdowns. One pattern that may be discernable is a notable increase in pre-employment queries of the clearinghouse the past three months, potentially indicating a more active driver environment when compared to 2020.

• Will driverless trucks help alleviate the driver labor situation soon?
  

  In short, no. Beyond technology advancements, there is a portfolio of regulatory and legislative activity that needs to happen before driverless trucks are performing interstate transport.
  Autonomous trucking regulation or legislation chatter has quieted. Meera Joshi has been named the nominee to lead the FMCSA and once she is confirmed, her regulatory agenda will become clearer later this year. We can expect state level testing in controlled environments to continue.

• What impact does the recent court ruling on California AB-5 (or independent contractor status) have on for-hire trucking?
  

  In short, no immediate change. While the issue of independent contractor status in trucking will be discussed as both legislation (PRO Act) and in the courts, impacts to overall capacity may be limited and slow in developing.
  We anticipate the AB-5 court decision may eventually be challenged at the U.S. Supreme Court. Regardless of the outcome of the debates, a clear trend of growth among smaller carriers has emerged in the industry.

TOP STORY: Stimulus contributes to strong economy and labor challenges

The U.S. economy continues to experience an impressive rebound with 2021 GDP now forecasted to grow 7% Y/Y. The COVID-19 pandemic created a 10% reduction in economic activity or 10% “output gap” versus pre-COVID-19 levels in the second quarter of 2020.

The CARES Act, with its $2.3T stimulus cash (>10% of the U.S. economy), dropped into the economy in various programs, including $292B of cash stimulus payments, to shore up that output gap or hole. The 2020 stimulus successfully stabilized the economy and reduced this output gap to only 2% by the end of 2020.

Entering 2021, we have seen combined stimulus packages totaling $2.8T (14% of the U.S. economy) to fill that 2% output gap. This drives very strong growth, leading to dynamic shocks of supply and demand across a wide range of supply chains—from labor and materials to components, including semiconductors and trucking equipment.

The full re-opening of the economy in the second half of 2021 is a continued organic tailwind to growth. The figure below shows the size of the economy each year (dollar GDP), the GDP growth rate, and estimates the relative size of the Federal stimulus packages in 2020 and 2021.

It is likely an infrastructure package will mean more Federal stimulus in 2021. However, due to the second-half timing and longer duration of impact from an infrastructure package, the growth from this won’t be experienced until 2022 or beyond.

Retail is a key component to the economic recovery. The below chart shows the direct correlation of each stimulus package and the retail growth response. You can see 2020 drove an 18% growth rate, the late December 2020 package did not deliver funds until early 2021, resulting in another 8% at that point, and the February 2021 package drove another 10% growth.

A key result of these retail spikes is supply chain elasticity. Accordingly, retail and supply chains supporting the industry are struggling with demand planning and replenishment. Global forwarding freight planning and capacity issues arise as well based on the ability of North American transportation to support these spikes.

We believe there are several factors exacerbating the existing truck driver shortage, including extended unemployment benefits, family childcare access/affordability, and a fear of exposure to COVID-19. A few states are discontinuing the extended unemployment insurance benefits before September to stimulate workers to return to work.

While there is a possibility of one more stimulus package in the late third or fourth quarter, it is becoming increasingly less likely or needed and political support for another stimulus package is diminishing.