Trump tariffs would put cross-border rail traffic in the crosshairs

President-elect Donald Trump’s plans to impose 25% tariffs on goods imported from Mexico and Canada could have a chilling impact on cross-border rail traffic, which has been one of the few sources of volume growth for North American Class I railroads.

Trump announced the plans last night in a social media post, saying that he would sign an executive order on Jan. 20, 2025, his first day in office. The order also would hit goods produced in China with an additional 10% tariff.

In his 2016 campaign, Trump called NAFTA the worst trade agreement ever and pledged to rip it up. Instead, the treaty was modernized and given a new name, the United States-Mexico-Canada Agreement. It went into effect in July 2020.

Canadian Pacific Kansas City — the only railway to link Canada, the U.S., and Mexico — faces the most risk if the tariffs are imposed.

In 2023, some 41% of CPKC’s $8.9 billion in revenue was tied to cross-border trade: 16% from Canada to the U.S.; 12% from the U.S. to Mexico; 6% U.S. to Canada; 5% Mexico to the U.S.; and 2% for traffic moving between Mexico and Canada.

CPKC is relying on a combination of trade growth, single-line service, and market share gains from trucks and other railroads to help pay for the 2023 $31 billion merger of Canadian Pacific and Kansas City Southern.

“In spite of all this talk about tariffs, these three countries have never needed each other more,” CPKC CEO Keith Creel told the RailTrends conference earlier this month, before Trump put particulars around his plans for tariffs on imports from Canada and Mexico.

Creel noted that “there was a lot of aggressive rhetoric” about North American trade after Trump was elected in 2016. Yet while USMCA was being negotiated, trade grew 20%, Creel says.

And since the pandemic hit in 2020, manufacturers and retailers have been trying to diversify their supply chains, which has included near-shoring of manufacturing to Mexico.

“How do you unwind that,” Creel says, “and why would you?”

Canadian National is not far behind CPKC in its dependence on North American trade. Some 32% of its $11.9 billion in 2023 revenue was tied to U.S.-Canada cross-border traffic.

CPKC and CN’s cross-border traffic includes metals and minerals, forest products, petrochemicals and plastics, and auto parts and finished vehicles.

Mexico is an important traffic source for Union Pacific, the only railroad to serve all six U.S.-Mexico gateways. In 2023, 11% of the railroad’s volume — or roughly 891,000 loads — is tied to Mexico.

UP considers cross-border traffic to be an important source of traffic growth. Last year, UP’s Mexico cross-border traffic was 59% intermodal and automotive, 21% bulk (mostly grain), and 20% industrial products.

Automotive, beer and beverages, and intermodal shipments represent 86% of northbound loads from Mexico, UP says. Southbound shipments primarily consist of auto parts, intermodal shipments, agricultural products and metals.

BNSF Railway is far less dependent on Mexico, which represents just 3.8% of its overall volume, a railway spokesman says. That translates into 342,000 annual loads. Cross-border traffic to and from Canada represents another 4% of BNSF’s overall volume.

The eastern railroads — CSX and Norfolk Southern — are less dependent on Mexico traffic, but they nonetheless see Mexico as a growth market, particularly for automotive and intermodal business. CPKC and CSX, for example, are banking on growth in intermodal, automotive, and forest products traffic through their new Alabama interchange via the former Meridian & Bigbee Railroad.

Cherilyn Radbourne, an analyst with TD Securities, says the Mexico market represents “a meaningful proportion” of the $1.5 billion in revenue synergies that CPKC is targeting through 2028.

“In the short term, we could see a volume benefit as shipments are pulled forward to get ahead of the proposed tariffs,” she says. “Beyond that, we would expect cross-border volumes to be negatively impacted by increased tariffs.”

Independent analyst Anthony B. Hatch says the negative impact of Trump’s trade policies will far outweigh any regulatory changes that would benefit the railroad industry.

If Trump’s tariffs ignite a trade war with Mexico and Canada, they are likely to reciprocate with tariffs of their own on U.S. products that they import. Mexican President Claudia Sheinbaum said Mexico would impose tariffs on U.S. goods if Trump goes ahead with his plans.

“In any trade war scenario, every country knows that the U.S. is most vulnerable on ag,” Loop Capital Markets analyst Rick Paterson said at the RailTrends conference. “You maximize the pain for U.S. farmers, then let the ag lobby do your work for you in terms of nagging the administration for a change in trade policy.”

Jason Miller, a supply chain professor at Michigan State University, says the auto industry will be disproportionately affected by tariffs, which would affect $200 billion worth of parts and finished vehicles that cross the borders annually.

Some 70% of the crude oil that the U.S. imports comes from Mexico and Canada, Miller notes, which would raise gasoline prices.