The North American Free Trade Agreement will now travel by train. Canadian Pacific Railway Ltd. (CP) announced the purchase of Kansas City Southern (KCS) for $ 29 billion, with the goal of creating a 20,000-mile rail network that tours Canada, the United States and Mexico.
Keith Creel, CEO of Canadian Pacific Railway, said in a press release that this transaction “will be transformative for North America as it will represent significant positive impacts for our respective employees, customers, communities and shareholders.”
Creel added: “We will soon witness the first rail line between the United States, Mexico and Canada, the result of the union of two railroad companies that have focused on providing quality service to their customers. Admittedly, CP and KCS have been two top-performing Class I companies for the past three years, so the merger was logical.”
Brenda Romo, a specialist in North American Affairs from the University of the Americas, in Puebla, explained that the post-Covid economy has forced the three partner countries of the North American Treaty to re-concentrate in a geographic block in the North of the continent to transport products and people. “Globalization will not be stopped, but it will be redefined, by the Covid pandemic. The United States will force its companies to sacrifice part of the considerable profitability they obtain by producing in China, in exchange for greater economic and national political security by relocating to North America,” said Romo.
The deal will allow Canadian Pacific Railway Ltd. to compete with Canadian National (CN), its biggest rival. Canadian National has enjoyed access to all three coasts since acquiring Illinois Central in 1998. Now, CP will also extend its reach to Mexico where KCS cross-border traffic has grown by more than 10% annually due to increased volume of intermodal products, automotive and refined, Romo explained.
CP also gains access to the dozen Gulf of Mexico ports currently served by Kansas City Southern and Kansas City Southern Mexico (in 1996, KCS was granted a 50-year concession to operate what was then called the Northeast Mexico Railroad ). Last year, CP regained access to the Canadian Atlantic, with routes to Saint John and New Brunswick, through the acquisition of Central Maine & Quebec.
Canadian Pacific Kansas City, the result of the fusion
Creel will be the CEO of the joint venture, which will be named Canadian Pacific Kansas City (CPKC), and whose main headquarters will be in Calgary, Canada.
To finance the merger, Canadian Pacific Railways will issue 44.5 million new shares and plans to raise $ 8.6 billion in debt. According to estimates by both companies, Canadian Pacific Kansas City will generate total revenues of $ 8.7 billion and will operate along 32,186 kilometers of railroad tracks; in addition, it will employ about 20 thousand people.
CP and KCS assured that they will launch a new intermodal service that will link Dallas and Chicago, where the traffic will be able to connect with the existing service to the East and West of Canada. Canadian Pacific Railway also plans to optimize existing long routes through Kansas City Southern, transporting mainly crude oil and grains to and from the Gulf of Mexico, Creel reported.
The merger will also unite the automobile production areas in Canada, the United States (Detroit) and Mexico (Puebla and Querétaro), and will create a new single-line service for vehicles produced in Mexican assembly plants destined for consumer markets. in the western United States and Canada.
Romo said: “Nothing better exemplifies the trilateral relationship and the economic forces behind this continental consolidation of rail networks such as the automotive one”, adding: “A car produced in North America is assembled in Mexico, with parts from the three countries, and it may end up selling in Chicago or Vancouver. The merger of KCS and CP seeks to offer the assembly companies an immediate solution to move that car, from its parts to the agency, without having to change the railway company ”.
A commercial, political and security game
The agreement between CP and KCS comes just as trade between the three nations is expected to rebound under Joe Biden. Just days after his inauguration, the president of the United States spoke with the leaders of Canada and Mexico, his first calls with foreign counterparts, where issues from trade to climate change were discussed.
The idea is to encourage the transfer of the manufacture of some low-cost products from Asia to America, now that the United States seeks to get rid of China, said Romo. As part of the transaction, both Mexico and Canada would benefit as they are key suppliers of automobiles, electronics and food, as well as major customers of grains, fuels and consumer goods, Romo said.
The health, political and national security crisis that the COVID pandemic has meant revealed to Americans what the Germans always knew: manufacturing is a matter of national security and relocating the supply chain in remote areas, sooner or later, compromises the integrity of the countries.
In that context, connecting Mexican labour with US technology and Canadian resources and water can only be done efficiently, given the scale of production, through railways, Romo said.
By Silvia Méndez
