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U.S. railroads caught in the middle of new tariff threat

The railroad industry is “concerned” about a possible disruption of the North American supply chain should the U.S. impose tariffs on imports from Mexico.

Railroad companies with more exposure to trade with Mexico, such as Kansas City Southern (NYSE: KSU) and Union Pacific (NYSE: UNP), saw their stocks dip upon the news that President Donald Trump is considering slapping tariffs on Mexican imports as a way to push Mexico to take steps to stop the flow of illegal immigrants into the U.S. President Trump is proposing to impose a 5 percent tariff on Mexican imports starting on June 10, with that percentage increasing up to 25 percent on October 1.

For now, the rail industry is taking a wait-and-see stance. The American Association of Railroads (AAR) said it watching to see what customers will do. The group also said it is “most keenly focused and interested” in seeing Congress ratify the trade agreement between the U.S., Canada and Mexico, known as USMCA.

“Any action that impedes [USMCA’s] passage is concerning, such as tariffs that create barriers to commerce. We are watching what our customers say and do, particularly the auto and agricultural industries that move a lot of goods to and from Mexico,” AAR said.

“The rail network and the supply chain is integrated across North America and policymakers should do what they can to promote more trade – not less – across the continent,” the group said.

Meanwhile, Kansas City Southern not only has an operating arm in Mexico, it also serves 90 percent of auto assembly plants in Mexico and has four automotive distribution facilities and access to three major Mexico ports on the Pacific and Gulf Coasts.

Kansas City Southern “is aware of the President’s tweet yesterday but is not able to estimate what impact such action might have on the flow of its cross-border freight. KSU’s cross-border traffic represents approximately 40 percent of our total traffic. Sixty percent of our cross-border traffic originates north of the border and is exported from the U.S. to Mexico, including grain exports originating in the Midwest states forming the US Corn Belt. Forty percent of our cross-border traffic originates in Mexico and terminates in the U.S., including a substantial amount of freight from U.S.-based companies such as the auto sector,” the railroad said.

“KSU hopes that such action will not be necessary and that efforts of the U.S. and Mexican governments to stem the flow of immigrants through Mexico to the U.S. border are not tied to the vital commerce that exists between the two countries and Canada. KSU appreciates and strongly supports the President’s leadership on Congressional passage of the USMCA and believes it will bring needed improvement over the NAFTA agreement and certainty about North American competitiveness going forward,” the railroad further said.

BNSF (NYSE: BRK) and Union Pacific did not return requests for comment, but their role in facilitating cross-border movement is core to their identities. Union Pacific touts itself as the only Class I railroad to serve all six gateways between the U.S. and Mexico.

While U.S. Census data on imports doesn’t break down the imports by transport mode, at stake are potentially billions of dollars. For the first three months of this year, U.S. imports of goods from Mexico totaled $86.6 billion.

Of that, U.S. imports of advanced technology, a category which includes electronics and products for the aerospace and information and communications industries, totaled $13.8 billion in the first quarter of this year. U.S. imports of automotive parts and vehicles from Mexico totaled nearly $32.3 billion.

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