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Miracle on I-35

Saturday, November 1, 1997

Think free trade is hollowing out the economy?
Take a look at Kansas City, just one of the
nation’s newest export powerhouses.

Free trade and the international agreements that promote it have been very good for Americans. In 1997, U.S. unemployment dipped below 5 percent--its lowest level in decades. Riding a wave of export growth, American manufacturers hired 1.4 million additional industrial workers between 1992 and 1996. In its first three years, the North American Free Trade Agreement (NAFTA) slashed tariffs on U.S. goods entering Mexico by 7.1 percent, and on Mexican goods entering the United States by 1.4 percent. In spite of the peso devaluation that made U.S. exports there more expensive, sales to Mexico have grown by 37 percent. Total trade between the two nations increased by 61 percent, or nearly $50 billion. America’s combined commerce with Canada and Mexico, its NAFTA partners, rose in that time by $127 billion annually.

This windfall from trade would be impressive even if it were confined only to dusty border towns and coastal cities. But the real news is that there is a tremendous river of international commerce rushing right through America’s heartland. In Kansas City, a metroplex of 1.7 million people that straddles the Kansas–Missouri border, unemployment dipped to 3.2 percent in July 1997. This has made NAFTA believers of residents of the region.

"NAFTA’s early results surpassed our most optimistic expectations," says Doug Luciani, an economic-development expert with the Greater Kansas City Chamber of Commerce. Indeed, export figures from the two-state area dwarfed national trends. Missouri sends transportation equipment, chemical products, industrial machinery, and electronics to Mexico. In NAFTA’s first three years, its Mexican exports rose from $540 million in 1993 to $1.09 billion in 1996--a 102 percent increase. Kansas sells livestock, grains, and cars in the Mexican market; it increased exports from $187 million to $643 million in three years, an incredible 244 percent rise.

Many of these goods are shipped through Kansas City, an "intermodal" hub of air, barge, truck, and rail cargo. Total merchandise exports from the Kansas City metropolitan area rose from $2.23 billion in 1993 to $3.99 billion in 1996--a $1.8 billion increase in two years.

Recovery in the Heartland

"When I talk to people about Kansas City," says Agnes Otto, the Chamber’s export-assistance representative, "I tell them about our new industries--our international engineering and telecommunications. But I also tell them about our transportation and agriculture. What amazes me is that the things that made us strong in the beginning are precisely what’s bringing us back."

One leading trader is Farmland Industries, the largest farmer-owned cooperative in North America. Headquartered in Kansas City, it serves 500,000 farmer–ranchers and 13,000 livestock producers. It conducts business in all 50 states and in 70 foreign countries. For its farmer members, Farmland processes and markets grain; for its livestock producers, it slaughters, processes, and markets pork and beef.

"The future economic well-being of American agriculture," says Farmland research analyst Bill Trickey, "is closely tied to our competitiveness in an expanding global market." He notes that U.S. farm producers now earn 25 percent of their gross earnings from exports, and that this will likely increase to 35 percent by 2003.

Trade agreements have been at the heart of this surge in foreign commerce, says Trickey. "In the past six years, our international sales have grown from less than $200 million to over $4.1 billion. In Mexico alone, we have seen our trade, since the passage of NAFTA, grow from less than $50 million in 1992 to $450 million in 1996. We believe that U.S. policy must also be dedicated to the expansion of global markets."

During the NAFTA debate of 1993, Ross Perot decried the "sucking sound" of American automotive jobs hurtling south of the border, lost to cheap Mexican labor. But three years into NAFTA, U.S. manufacturers of transportation equipment--cars, trucks, planes, and boats--employ 250,000 more American workers than in 1993. Kansas City, the sixth-largest auto-assembly center in the nation, now produces cars and trucks for a world market. Ford’s Claycomo plant, just north of Kansas City, added 500 jobs in that time--roughly 10 percent of its workforce. This year, the 5,300-worker plant, which produces the Ford Contour, the Mercury Mystique, and Ford’s world-famous pickup trucks, will export 20,000 pickups to Mexico. The General Motors plant in nearby Kansas City, Kansas, has also thrived. The manufacturer of the Oldsmobile Intrigue and the hot-selling Pontiac Grand Prix increased its work force by 9 percent in the past year, to 3,600.

If there’s any "sucking sound" in the heartland, it’s caused by the voracious appetite of developing countries like Mexico for U.S. technology. Kansas City’s two international engineering firms know this well. Engineering giant Black & Veatch has rapidly increased its Kansas City work force to support its overseas operations. It sells roughly 80 percent of its power-plant engineering services to foreign nations struggling to develop a technological infrastructure. Of Burns & McDonnell’s $125 million in annual revenues, one-fifth is generated by foreign sales of its engineering, architectural, and consultant services.

Brunson Instrument Co. produces optical tooling devices used to align production machinery. The firm’s foreign sales increased sevenfold over the last four years, from roughly $100,000 in 1992 to $700,000 in 1996. Accounts in Mexico, Korea, Germany, India, Canada, Britain, and Japan now generate roughly a fourth of its revenues. "Probably a reason we’re seeing such growth in foreign sales," says Brunson’s Mike Grafton, "is the export of U.S. technology. When a McDonnell Douglas plant is built abroad, it looks to us to supply the same types of optical tooling instruments their plants use here."

Industrialization also creates a market for environmental protection. BHA Group, in Kansas City, Missouri, makes replacement parts for air-pollution control equipment. In 1992, 18 percent of the company’s $82 million in sales were overseas. By 1996, BHA was generating 27 percent of its $121-million business from Europe and Latin America.

The Little Tigers

"Sure, NAFTA improved our business in Mexico," says Dan Ward, the vice president for finance at one of Kansas City’s most successful small exporters. The firm, Western Forms International, manufactures aluminum support systems for concrete construction. Between 1992 and 1996, Western’s foreign sales increased from $1 million to $10 million; that surge accounted for most of its increase in total gross sales during that period, from $9.1 million to $21 million. Western’s Kansas City staff swelled from 75 to 200.

"The tariff reduction was certainly a significant improvement," says Ward. "That kind of trend is very beneficial for a U.S. company. But the second major thing NAFTA did is harder to quantify. There is now a mindset in the business community to consider foreign trade possibilities. The political initiatives predisposed us to look abroad in a new way."

Statistics bear this out. According to Grant Thornton business analysts, the proportion of mid-size U.S. firms whose foreign sales exceeded one-tenth of gross revenues increased from 27 percent in 1994 to 51 percent in 1996. In the Roaring ’90s, American entrepreneurs are entering markets with all the ferocity of the Asian economic tigers.

Their sheer aggressiveness is exemplified by John Romp, sales director for Certified Safety, a maker of industrial first-aid kits based in Kansas City. Certified started exporting in 1996, registering foreign sales of $100,000. This year, says Romp, they’re on track for $500,000, with markets in Russia, the Middle East, and Latin America.

Exporters experience the bitterness of international competition as well as the joys. Says Barbara Conrad, whose company sells forklift parts in Mexico, Belgium, and England, "Our biggest challenge right now is the protectionist regulations of the European Common Market. Anything the government can do to assure us a level playing field will be appreciated." Bill Trickey of Farmland complains of the trade barriers that nations erect to deny their consumers U.S. meat and produce.

"The continued removal of tariff and nontariff barriers to trade," says Trickey, "is of particular importance to Farmland and its member owners." His organization enthusiastically supports efforts by the Clinton administration and the Republican Congress to renew the "fast track" authority that enables a U.S. administration to negotiate comprehensive market-opening agreements.

"Overall, we’d rather have the market opened," says Dan Armacost, whose employer, Peterson Manufacturing, exports vehicular lights. "We are for free trade on a level playing field. We need less political help than some think we do. Just drop the barriers, and let the entrepreneurs do the work!"

Location, Location, Location

"I’ve been at the Greater Kansas City Chamber of Commerce seven years now," says transportation specialist Doug Luciani. "Even as late as 1993, we used to apologize for our location. We’d say, ‘Sorry, we can’t service your mass markets.’ But location is now our strongest selling point. The flow of trade in this country has traditionally been east-west: Long Beach to Chicago. Under NAFTA, a comparable north-south axis is emerging. We are uniquely positioned to serve them both."

U.S. Interstate Highway 35 defines this axis. It stretches 1,585 miles, starting at Laredo, Texas, on the Mexican border, then passing north through San Antonio, Dallas, Oklahoma City, Wichita, Kansas City, Des Moines, Minneapolis–Saint Paul, and the port of Duluth, on Lake Superior near the Canadian border. En route, it intersects interstates 30, 40, 29, 70, 80, and 94. Seventy-four percent of the trucking traffic between Mexico and the United States takes I-35 through Texas. By 2000, 5 million trucks a year will cross the border at Laredo.

The federal deregulation of trucking in the 1980s lowered average land freight costs nationwide by 20 percent, and the industry has been growing ever since. During NAFTA’s first two years, the U.S. transportation fleet increased by 182,000 truckers. A massive river of trade traverses America’s heartland, and Kansas City is a major port of call. Although Kansas City is only the 26th largest metropolitan area in America, it ranks fifth in trucking tonnage. Some 300 motor freight companies have terminals there, including Yellow Corp., owner of the nation’s largest "less-than-truckload" carrier. Area freight haulers employ 30,000 people.

The Missouri River still provides slow, low-cost bulk transportation for grain, gravel, fertilizer, petroleum products, scrap metal, and construction materials headed for the Mississippi River via St. Louis. Industry analysts credit Kansas City’s modest land freight costs in part to the competition provided by barge traffic on the river.

Kansas City International Airport (KCI) now moves more air cargo than any other facility in a six-state radius including Arkansas, Iowa, Kansas, Missouri, Nebraska, and Oklahoma. It handles about 1 million pounds of cargo per business day. Since NAFTA’s passage, freight tonnage at KCI has increased an average of 20 percent per year.

But the city’s most spectacular transportation success derives from the rebirth of freight rail. "Kansas City is in existence today because of its access to the interstate highway of its time: the Missouri River," says Mayor Emanuel Cleaver. "As railroads were inching their way west, a group of visionary Kansas Citians decided that if they were the first to build a railroad bridge across the Missouri River, the city would prosper. The Hannibal Bridge was opened in 1869, testimony to the city’s grit and determination. Today, nearly 130 years later, Kansas City boasts the nation’s second-largest rail center, next to Chicago." Nine major railroads serve Kansas City. Seven have intermodal terminals there, enabling them to transfer cargo to and from trucks.

The railroads, deregulated in the 1980s, are regaining the long-haul pre-eminence they once held in the days before the interstate highway system revolutionized trucking. Now the price for shipping a rail boxcar of auto parts from the Detroit area to Ford’s Claycomo plant is one-third of the cost of shipping it by truck. Recently, however, the trains have teamed up with their erstwhile rivals, flatbed trucks. Railroad operators have built giant intermodal yards in hub cities like Kansas City, where truck and train cargos can be unloaded, sorted, remixed, and reloaded en route to their final destinations.

Consider, for instance, the mixing facility that the Norfolk and Southern Railroad is constructing for Ford Motor Co. in Clay County, Missouri, just north of the Missouri River. You could think of the facility as akin to an airline hub--except that the passengers are new cars riding auto racks. Ford has numerous plants in the eastern United States, each producing only a limited range of models. But the dealerships of each region require a mix of all Ford models. So, at the Norfolk and Southern hub, the "passengers" are unloaded and resorted according to their destined markets.

Train magazine reports that Kansas City tripled its intermodal business between 1990 and 1994. Soon thereafter, the Burlington Northern Santa Fe Railroad allocated $95 million to triple the capacity of its mammoth intermodal center in Kansas City, Kansas. The revamped facility will have the capacity to regroup and reclassify 2,400 rail cars daily.

Kansas City is enjoying a national rediscovery of its strategic location for commerce. Japanese-style "just-in-time" inventory control helped make the city an export giant in a world where the rapid, precisely-timed flow of products and supplies can cut costs.

"Inventory is the enemy," says Loy English, an industrial engineer at Ford’s assembly plant in Claycomo. "No good results from holding production materials out of production. You pay tax on inventory, it spoils, it gets damaged, it gets stolen. Holding inventory confuses the schedules of your suppliers, and increases their costs. That, in turn, increases your costs."

Ford is trying to trim its own shipping time, factory to dealership, from four or five weeks to 15 days. Firms supplying parts to Ford’s assembly plant moved into the Kansas City area, and brought their jobs with them.

The Great NAFTA Railroad

The Kansas City Southern Railway (KCSR) directly owns about 2,900 miles of U.S. track, mostly north-south, in Missouri, Arkansas, Oklahoma, Louisiana, and Texas. Recently, KCSR and a Mexican partner, Transportacion Maritima Mexicana, bid on a 50-year concession to operate Mexico’s Northeast Railroad. The partnership, Transportacion Ferroviaria Mexicana (TFM), submitted the winning bid--$1.4 billion--and now controls 80 percent of the railroad’s stock.

"What KCSR’s purchase does," says Doug Luciani, "is take an emerging trade flow between Canada, the U.S., and Mexico, on a north-south axis, and connects it with a single line that is north-south oriented." TFM now crisscrosses Mexico’s major industrial, technological, and agricultural regions, home to 80 percent of Mexico’s population. The Northeast Railway links KCSR to four deep water ports, including one (Lazaro Cardenas) on the Pacific.

The four ports could become southern intermodal connectors for a Free Trade Zone of the Americas. But the acquisition has implications for east-west trade as well. Says Doug Luciani, "Taking goods to Kansas City and shipping through [Lazaro Cardenas] to the Pacific Rim should provide a strong alternative to shipping through Long Beach for many destinations. Shippers can avoid the queue, the longshoremen. It may be faster, and eventually less expensive." Landon H. Rowland, the CEO of KCSR’s parent company, told his shareholders, "Our railroad network makes us the NAFTA Railway and the spine of economic integration of the North American marketplace."

A Landlocked Trading Port?

The KCSR purchase creates a network of North American intermodal trade corridors running both north-south and east-west with Kansas City as its center. This would advance the Chamber of Commerce’s long-term plan to make Kansas City a nontraditional inland port.

"If you’re going by rail into Mexico right now," says Luciani, "it can take two weeks or two months to get across the border. As a nontraditional inland port, Kansas City could become the export platform for everything going to Mexico within a 24-hour shipping radius."

Last year, the U.S. Treasury Department chose Kansas City to host a prototype customs facility. In essence, the designation would turn Kansas City into a border town in the heartland, with ultra-modern capacity for customs processing. The new facility and the system it oversees would streamline customs procedures that now add 4 to 6 percent to the cost of international commerce.

Truckers would file export route plans in Kansas City. Their cargos would be electronically inventoried and sealed. Drivers would prepay all highway taxes and tolls, thus eliminating time-consuming stops. On-road "weigh-in-motion" technology would replace weigh stations. To combat smuggling and theft, drivers would be electronically tracked for deviations from the route plan. At the real border, customs officials would scan the driver’s on-board computer for compliance with the route plan. After a quick inspection of the tamper-proof cargo seals, the freight would be cleared to its final destination.

The wise trade policies of the Reagan, Bush, and Clinton administrations have brought the benefits of global trade and competition to the American hinterland. Through international trade agreements, and the "fast track" negotiating authority that makes them possible, government taps the heartland’s native genius.

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