‘It’s Factory North America,’ but Trump Could Hobble It
Posted March 30, 2018 6:46 p.m. EDT
CHICAGO — If North America were a factory, Union Pacific would be its biggest conveyor belt.
Based in Omaha, Nebraska, the company operates the largest rail network on the continent, a conduit that provides us with cereal, lumber, car parts and pretty much everything that touches our lives. That makes the railroad a real-time barometer of the fluctuations in global trade — a physical manifestation of how President Donald Trump’s agenda to remake the rules of commerce will play out.
Roughly 40 percent of the goods that Union Pacific moves touch an international border at some point in their journey, putting the railroad at the center of the global tensions that have arisen as the administration prepares to impose tariffs on goods from China and steel and aluminum from around the world. Seventy percent of rail freight between the United States and Mexico travels on Union Pacific trains, meaning the outcome of the tense renegotiations for the North American Free Trade Agreement will shape the company’s future.
“At its guts, a railroad like Union Pacific is built on people consuming stuff, industry consuming stuff, and trade flows,” said Lance Fritz, Union Pacific’s chief executive. “When those are happening and growing, we thrive. And all of that potentially gets impacted by getting NAFTA wrong or the United States exiting NAFTA.”
These global forces all converge outside Chicago, where six of the seven largest railroads operating in the United States meet, including Union Pacific, Norfolk Southern and Canadian National. Here, roughly 300 workers move containers of barbecue grills, soybeans and socks from trains to trucks. Some of those trucks head out on the nearby tangle of interstate highways for multiday trips across the country. Some drive for Rust Belt factories or nearby warehouses for Walmart and Dollar Tree. Union Pacific was created in 1862, when Abraham Lincoln ordered the company to open the American West by helping to build the first transcontinental railroad. Over the decades since, the company chiseled new rail lines out of impassable terrain and swallowed up its competitors. Today, the company’s trains run on tracks it owns throughout 23 states west of the Mississippi River, and on partner networks in the Eastern United States, Canada and Mexico.
The company’s financial history is inextricably tied to the country’s economic ebbs and flows. Union Pacific saw its beef shipments fall in 2003, after an outbreak of mad cow disease in the United States prompted China to ban imports of American beef. In 2012, a drought shrank the company’s wheat shipments and its revenues from agriculture.
In 1994, the introduction of NAFTA slashed tariffs on products and encouraged companies to invest in supply chains stretching across borders — increasing rail traffic around North America. The year after NAFTA went into effect, Mexico privatized its railroads, creating private commercial partners south of the border.
In 1999, Union Pacific had $700 million in business going to and from Mexico. Today, that figure has ballooned to more than $2.2 billion, with goods like grain and auto parts going into Mexico and finished cars, avocados and televisions coming back.
The company moves more than 100 carloads of beer from Mexico to the United States every day, with each carrying enough beer to provide an American consumer with a daily six-pack for 43 years.
To satisfy a changing diet, Union Pacific is introducing more refrigerated cars to carry meat into Mexico. The company is also investing $550 million on a massive rail yard in Texas that will help serve as a conduit for cross-border trade.
Now the fate of NAFTA — and Union Pacific’s business — is up in the air. All three countries are locked in contentious talks. U.S. trade negotiators have said they believe they are close to completing a deal, though Trump continues to threaten to withdraw from the pact.
“Effectively, it’s factory North America, and the administration is threatening to build a wall in the middle of the factory,” said Emily Blanchard, an associate professor at the Tuck School of Business at Dartmouth College who studies trade.
Fritz has lobbied hard to preserve NAFTA, submitting comments to the government about the pact’s importance, writing opinion pieces and meeting with members of both Congress and the Trump administration. The company is exposed to almost every change the president has proposed, like requiring more of an automobile to be made in the United States and weakening the systems for settling disputes between countries.
“Capital investment is the lifeblood of an economy,” Fritz said. He added that the Trump administration’s proposals would be “the equivalent of killing foreign investment in our economies.”
The railroad is also bracing for tariffs on steel and aluminum that went into effect March 23, as well as a new round of coming levies on products imported from China.
The railroad could see business pick up if U.S. mills start cranking out more metals as foreign competition ebbs — or it could face a decline from industries, like automobiles, that will see their steel and aluminum costs rise. If the Trump administration follows through on tariffs on Chinese products, the tariffs will raise costs and slow sales for a wide variety of goods on the shelves of Walmart and Target.
And if China and other countries retaliate against these trade measures by making it more expensive for American companies to sell products like soybeans, pork and whiskey overseas, as they have threatened to, that too would mean less cargo for Union Pacific.
The company expects its own costs to increase as a result of the tariffs. Union Pacific uses U.S. steel in its railroad cars, locomotives and some of its tracks. But on its most heavily trafficked lines — like its main east-west lines that run from Omaha to San Francisco and California to Texas — it opts for more expensive, ultra-hard rail made by Japan’s Nippon Steel.
While many U.S. allies were granted exemptions from the steel tariffs, Japan so far has not. That Japanese steel, which Union Pacific said is not matched in the United States, is now subject to a 25 percent tariff when it enters the country. Union Pacific is planning to ask the government for a special exemption for the product.
While Fritz said he understood the administration’s desire to ensure that trade is fair, he doesn’t believe tariffs are the answer.
“In general, they’re going to raise the cost of production, or directly raise the cost to consumers,” he said. “So neither is a good thing for the economy.”