Freight Rail Moves the Economy

Freight Rail Moves the Economy
AP Photo/Gene J. Puskar

The freight rail sector regularly and deservedly touts that it is an industry that moves industries. By extension, this means moving the economy as a whole. Here’s proof.

Carmakers Toyota and Mazda announced in early August they will collaborate to build a $1.6 billion U.S. plant, producing 300,000 cars a year and employing 4,000 workers. Eleven states are working to lure the operation within their borders. As the Wall Street Journal reports, “experts say the Toyota-Mazda venture is likely to make its decision in part based on labor force and government incentives,” including “tax breaks, free land, infrastructure, training programs and other inducements that can be worth hundreds of millions of dollars.” If history is any indication, another variable that will be front and center is privately owned freight railroads. 

The Rationale for this is obvious. Railroads’ involvement in the automotive industry dates back to the early 1900s. The production volume achieved by Ford’s revolutionary assembly line required a transportation partner of equivalent scale. Consider all the parts needed to make cars or the transportation of cars themselves from the plants that manufacture them. No other transportation mode can move the quantity of goods the distance rail can. 

As David Schwietert, executive vice president at the Alliance of Automobile Manufacturers, recently put it: “Efficiency-wise, in terms of long-haul movements, you can’t beat what railroads bring to the table.” A single train can transport 750 cars, and railroads move about 75 percent of all automobiles sold in the U.S. every year. In 2015, railroads transported more than 17 million autos and 43.6 million tons of basic steel products to auto parts suppliers and other customers. Since about 3 percent of U.S. GDP is derived from the auto industry, that means freight rail is yielding big dividends for the U.S. economy as a whole. 

What does this mean for public policy?

As the Trump administration considers renegotiating NAFTA, policymakers should narrowly target assistance for U.S. workers affected by trade agreements, rather than promoting policies that would unwittingly roll back U.S. participation in international trade. Automakers claim that in 2015 alone, exports of cars and car parts reached nearly $100 billion from U.S. ports — a 100 percent increase decade-over-decade.

As for rail, at least 42 percent of rail carloads and intermodal units, and more than 35 percent of annual rail revenue, are directly associated with international trade. This includes coal and paper and forest products. But is also includes imports and exports of U.S., Canadian, and Mexican automotive products to and from auto factories in dozens of U.S. states, reflecting the deep integration of the North American auto industry. According to the Auto Alliance, “half of the companies listed in the Dow Jones Industrial Average depend on autos for revenue.” Freight railroads, for their part, support approximately 1.5 million jobs, $274 billion in annual economic activity, nearly $90 billion in wages, and $33 billion in tax revenues. This must not be upended by haphazard trade renegotiations.

Rail and auto interdependence also dispels the unwarranted calls to unravel the regulatory framework enacted in 1980 for freight railroads through partial deregulation. Calls to force railroads to open up their lines to competitors without any showing of competitive abuse is a radical reversal that would hinder railroad efficiencies investments. For the auto sector, for instance, this has included investments in 10,000 auto racks from 2011–2015 and a $2 billion investment to serve the auto sector.

Through private-market negotiations, railroads currently engage in what is known as reciprocal switching. The way it works is that a railroad will agree to serve a customer on behalf of another railroad when the latter cannot service the move on its own. The practice can benefit railroads and shippers alike, so long as it occur through private market negotiations, rather than dictates by the Surface Transportation Board (STB). Switching operations on a track from one railroad to the next requires extensive work. As a result, widespread forced switching would significantly compromise efficiency. Besides slowing the overall movement of goods, it would do nothing more than fulfill the narrow interests of select shippers and regulators who simply want to “regulate something.” 

Railroads and automakers are American success stories. Policymakers should build on them.

Edward R. Hamberger is President and CEO of the Association of American Railroads.

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