Chapter 2: Scan Visits

The scanning team met with government agencies, terminal operators, logistics providers, and shippers to gain a broad understanding of how a selected set of Latin American countries deals with trade issues and the provision of transportation infrastructure, and how shippers and producers have been responding. The following summarizes what the team learned.

Freeport, Bahamas

This visit focused on the new Hutchinson Container Terminal that began operation in 1997 and is now the seventh-leading handler of containers in Latin America. The port handles primarily transshipments of containers (99 percent of the containers moved). This terminal, located only 60 miles (100 kilometers) from Florida, is an example of the rapid growth in transshipment ports in the Caribbean. Other examples include plans to expand transshipment capacity in Puerto Rico, Venezuela's Puerto Cabello, the Dominican Republic's new port in Caucedo near Santo Domingo, and Kingston, Jamaica's, $100 million investment in its port. If all these planned improvements are put in place, the transshipment port capacity in the Caribbean Basin will exceed 6 million TEUs annually, a level much greater than can be supported by the container traffic demand expected in this market. It is likely that ports located on main trade routes that can provide low-cost and rapid transshipment capabilities will be the winners in this competition. The Hutchinson Terminal is poised to be one of these winners.

Scan Results-The growth in the number of containers transshipped in Freeport is impressive. According to Hutchinson officials, about 800,000 TEUs will have been handled in 2002 with an expected increase to 1 million TEUs in 2003 and 2.5 million in 2004 (because of a contract with Mediterranean Shipping Company.) This growth, if it occurs, will place Freeport in the upper tier of container ports in Latin America. The port handles primarily east-west traffic between Asia and the Mediterranean, as well as feeder services into the United States. U.S. ports connected via shipping services to Freeport include Baltimore, Charleston, Houston, Jacksonville, Los Angeles, Miami, New Orleans, New York, Newark, Newport News, Norfolk, Philadelphia, Port Everglades, and Savannah. No conflict appears to exist between southeastern U.S. ports and the Freeport operations (Freeport officials believe Kingston, Jamaica, and Cuba will be their major competitors in the future). When asked, Florida port officials agreed that Freeport could act as an important asset in developing connections to the major east-west services provided through the Hutchinson Terminal. In addition, because of U.S. restrictions on foreign-flagged carriers moving cargo between U.S. ports, several shipping lines bring cargo to Freeport and redistribute from there.

Maersk and Mediterranean Shipping Company were the original investors in the container port. Currently, 350 employees work at the container port, and although unionized, the labor force provides flexible hours to handle ships at any desired times. The port offers 24-hour-a-day operations, with ship arrivals scheduled in advance.

The Hutchinson Terminal in Freeport, Bahamas, has become a major transshipment port in the Caribbean.

Investment in the Freeport container port, along with expansion of airport and passenger cruise facilities, has been significant. Over $168 million has been invested in the container port, with $215 million planned for future expansion. The passenger cruise facilities cost $10 million and the Grand Bahama Airport Company has invested $30 million in the airport and surrounding developments. The $60 million expansion of the container port includes three new super post-Panamax cranes, 16 new straddle carriers, 14 additional hectares (35 acres) of storage area, and a deeper channel and turning basin depth of 52 feet (16 meters). Because of favorable geological conditions, the container port can be expanded easily and rapidly. In fact, terminal operators are looking forward to larger container ships (in the 10,000 TEU range) visiting the terminal because they believe they have the capability of expanding to meet the needs of such ships, while many other ports will face significant environmental challenges and community opposition. The Bahamian government policy has been supportive of port expansion.

SUCCESSFUL PORTS OF THE FUTURE WILL BE MORE THAN JUST A LOCATION TO HANDLE CARGO. THEY WILL OFFER A FULL RANGE OF LOGISTICS SERVICES- CONNECTED GLOBALLY THROUGH THE INTERNET TO CUSTOMERS AND SERVICE PROVIDERS-PROVIDING COMPREHENSIVE LOGISTICS SUPPORT FROM ORIGIN TO DESTINATION.

The container port is part of a much larger economic development strategy that includes developing an international airport, free trade zone, and numerous tourist sites, including a major resort. In a departure from the primary business of transshipment, Hutchinson is examining the possibility of Freeport becoming a distribution center with longer-term warehousing for non-time-sensitive materials while the international airport serves the transport needs for time-sensitive goods.

One of the important issues raised by Hutchinson officials was the need for improved security. They plan to invest in security equipment that will satisfy whatever new U.S. requirements are put in place and to work with the U.S. Customs Service to develop acceptable procedures. Officials are concerned, however, about the impact security measures will have on the timeliness of cargo movement. A major advantage of Freeport with its state-of-the-art facilities and favorable labor conditions is the expeditious transfer of containers. Anything that slows down this transfer could hurt the port's competitiveness.

The Freeport visit provided important insights into the Caribbean Basin's rapidly evolving transshipment market. The Freeport container port illustrates the swift introduction into the market and subsequent impact that private operators can have under a concession arrangement with Latin American governments. The port, which is handling 800,000 TEUs, did not exist in 1996. Four years later, it has a major impact on trade flows. Privatization provides terminal operators with opportunities to respond to changing market conditions quickly, something that might not be available in U.S. ports facing more constrained arrangements.

Another interesting observation from Freeport was the much broader vision of a container port-airport-warehousing-resort development cluster. The developers' strategic vision is to provide a much broader range of services and to complement each with infrastructure improvements. For example, a major airport expansion is intended to provide improved service to the resort built on the island. In addition, it will provide rapid and convenient air cargo service for high-value commodities to and from major U.S. markets. The container port is viewed as a foundation of a much larger vision of a logistics service center that would capture much of the Caribbean market. With the container port, warehousing, logistics firms, and financial management institutions located near one another, Freeport can become not only a place where containers are transshipped, but also a major business center for those interested in Latin American trade. Given its connection to the major east-west trade flows of the Mediterranean, it also could become a major business location for trade that connects to this global trade flow from South America and the United States.

Brazil

São Paulo and Santos, Brazil
Brazil is the largest country in Latin America, both in land mass and population (it is the fifth most populous in the world). It constitutes 70 percent of South America's land surface and 80 percent of its population. Brazil, the eighth largest economy in the world, accounts for 70 percent of the GDP of the Mercosur countries. It has extensive natural resources and has been one of the world's leading economies among developing countries. Brazil faces significant economic and political uncertainty with an ongoing economic recession and the election of a new president. Much of the population is poor, by some estimates close to 130 million, and a growing income gap characterizes recent political events in the country. Even with such uncertainties, Brazil will continue to be a major player in hemispheric trade, if for no other reason than the size of its market. As part of its visit, the scanning team visited São Paulo and the Port of Santos, Brazil's largest port.

Scan Results-Brazil has faced significant economic and political challenges over the past decade. High interest rates, at least by North American standards, have characterized the investment market and limited capital investment. According to one official, taxes on some goods, such as a 42 percent national tax on manufacturing, has constrained the country's production capability and its ability to compete globally.

As with other Latin American countries, Brazil has used privatization strategies to provide additional transportation infrastructure, primarily highways, railroads, and port facilities. The country has 39 highway concessions. Because of the country's economic problems, the highway and railroad concessions have had significant problems achieving a return on their investment.

The railroad system is a good example of the challenges facing privatized services. Brazil has several main railroads, with more than 12,000 miles (20,000 kilometers) in private control. The railroad concessions were given to the largest bidders for a 30-year period. Given the economics of transportation, the only profitable railroads are those that transport iron ore to the northeastern ports. With recent significant growth in agricultural commodities in the western states, primarily soy and wheat, rail transportation plays an increasingly important role in this part of the Brazilian economy as well. For example, the amount of soy transported increased from 6 million tons in 1999 to 14 million tons in 2002. Most of the soy was exported through the port of Parañaqui. Brazilian railroads have had little increase in container traffic, even though the country's major ports have made substantial investments in container facilities. One reason is the cost structure for moving containers by rail, which is double that for comparable rail container movement in the United States or Europe.

BRAZIL
Population	175 million
2001 GDP	$502 billion
Exports/GDP	14%
Trade as share of GDP	19.1%
U.S. exports to:	$15.4 billion
U.S. imports from:	$14.5 billion
Canadian exports to:	C$914 million
Canadian imports from:	C$1,531 million
Top exports: Manufactures, iron ore, soybeans, footwear, coffee

Private companies make investments in the rail system. The Brazilian Development Bank subsidizes capital investment at a level of $200 million a year by providing low-interest loans (in this case, 10 percent). The challenge, however, is that these investment funds can be used only to expand the system, not for maintenance. It is the need for maintenance and rehabilitation that places the most demands on the rail system.

Just over 60 percent of the total freight movement in Brazil is handled by truck. The country has 1.8 million trucks operated by just over 35,000 companies. The average age of the truck fleet is 18 years. For transportation among the Mercosur countries, trucking companies must be prequalified and have a license to operate internationally. About 47,000 Brazilian trucks and 1,000 companies have qualified for the Mercosur market. About 26,000 trucks and 1,400 companies from its Mercosur partners have been qualified to operate in Brazil. Mercosur has established size, weight, and safety standards for intra-Mercosur transport. Brazilian customs officials are implementing information databases and commercial vehicle operator technologies at border locations to speed up the processing of the prequalified truckers. This should help alleviate one of the critical problems with Mercosur trade, which has been the substantial delay at border crossings. For example, one official estimated that trucks are often delayed two to three days at the border coming into Brazil and as much as a week leaving the country.

North America is viewed as an important growth market for Brazilian goods. The agricultural industry in Brazil is looking to Asia as a major market for its products, especially if the Panama Canal is widened to allow larger ships. Meeting participants did point out that significant vehicle delays occur at the borders because of the numerous agencies involved in customs, health, and safety inspections. Little integration appears to exist among different modes of transportation, although corridor studies have been undertaken to determine the feasibility of toll roads. Although the national government provides funds to build roads, much of this investment goes to rural states. More urban states like São Paulo provide their own funding for road investments.

Port of Santos-São Paulo's Port of Santos, located only 36 miles (60 kilometers) from the largest concentration of population in South America, is the largest port in Brazil. São Paulo has 22 million inhabitants and represents 40 percent of Brazil's GDP. If the Port of Santos served just this huge consumer market, it would still be an important Latin American port. The major export is coffee, while other significant commodities include soybeans, bananas, sugar, cotton, machinery, and vehicles. The Port of Santos is also a major transshipment port for goods and commodities produced in all the Southern Cone countries (Brazil, Argentina, Chile, Uruguay, Paraguay, and Bolivia). Last year, for example, Santos overtook Buenos Aires as Latin America's second-largest handler of containers.

Handling more than 50 million metric tons each year, the port has about 8.4 miles (14 kilometers) of quay with 63 berths and 125 acres (500,000 square meters) of warehouses. It handles 11 percent of Brazil's foreign trade in volume and 24.4 percent in value. It also moves 300 million tons of domestic cargo. About 18 percent of its exports ($2.6 billion a year) go to the United States, and 25 percent of its imports ($3.3 billion a year) come from the United States.

The São Paulo Port Authority took over port management in 1993, with the state of São Paulo and other municipalities holding the majority of the capital stock. The port authority is responsible for dredging, maintaining access channels, providing landside access, and administering the port. The Port of Santos was one of the first in Brazil to implement the Ports Modernization Law instituted by the Brazilian government in the early 1990s. The law's privatization provisions have resulted in almost 80 percent of the port area being turned over to private operations under a 25-year concession agreement. A goal of the privatization was to spur private investment to make the port more efficient. Since the law's implementation, about $360 million has been invested in the port by concessionaires, with another $330 million under agreement.

A significant change in the labor market has been brought about by the privatization of many port operations. In 1997, all labor relations were consolidated into one organization, which fought for financial hardship allowances for those who stood to lose their jobs after privatization. The impact on labor has been stark. In 1993, before the modernization law took effect, the port authority had 7,372 employees. After privatization, the number dropped to 1,197 employees. In 1993, non-port authority employees numbered about 28,000, while today the number is 10,860. The result of lowered labor cost has been a significant decline in average cost-per-container moved. Before privatization, the average cost was $500 per container, while today it is just over $200. Labor costs represent 60 to 70 percent of this cost. The labor reduction also created political problems for the port. About 2,000 employees took early retirement before privatization, which the port authority had to pay for out of its annual revenues. For many years, this burden severely restricted the amount of funds available for reinvestment in port facilities.

Land access to, and distribution within, the port are two important issues. The port is served by a soon-to-be completed toll road that provides high-capacity, highspeed access to São Paulo. Almost 90 percent of the export-import cargo is carried to or from the port by trucks. Five railway companies, under concession since 2000, serve the port. The port had a goal of having 10 million tons of cargo carried by rail by the end of 2002, a goal that was met. Investment in rail services in the port property and use of concessions have dramatically increased the productivity of rail car use. Twenty percent of container traffic to and from the port is handled by rail, about 20,000 TEUs per month. Rail investment in infrastructure on port property is an important component of improved access to the port. Without corresponding investment in rail infrastructure
in other parts of the country, however, the use of rail for moving goods to and from the port will be limited. Initiatives are being developed that will allow leasing of rail infrastructure for private operators, generating investment dollars. Rail services, in combination with inland water barge, represent an important access mode for agricultural commodities, especially soy.

Other strategies have been used to improve the port's productivity. The port is operated 24 hours a day with a 24-hour reservation system for trucks because of congestion on the local road network, and port planners are considering an internal truck-only road to provide more efficient truck movement. A strategic plan for the port includes channel deepening, application of intelligent transportation system (ITS) technologies, truck storage facilities, and the creation of a free trade zone. Finally, port officials are concerned about new security clearance requirements that might entail increased investment in new equipment, although they expect terminal operators to shoulder much of the burden of increased costs.

In the future, the port expects a substantial increase in visits from cruise ships, and it has built a new passenger cruise terminal in anticipation. In addition, the port is developing a concept of a super port that would be able to handle greatly increased trade volumes resulting from the Free Trade Area for the Americas.

Argentina

Buenos Aires, Argentina was one of the leading nations in the world in the 1990s in privatizing large portions of public infrastructure. This was done primarily in response to economic difficulties and because the Argentinean government wanted to become more competitive in the international market. Although strong government policies managed to pull Argentina out of economic crisis in the early 1990s, Argentina once again faced significant economic problems over the past five years. Beginning in late 1999, foreign investors became worried about Argentina's ability to pay its large public sector debt, especially in the wake of Brazil's January 1999 currency devaluation. Argentina's economy is closely linked to Brazil's, which generates concern about the impact of the Brazilian currency devaluation on the Argentine economy. The International Monetary Fund provided a large loan in 2000 to avoid major economic collapse, but production fell from already low levels and unemployment continued to rise throughout 2001. The Argentinean peso was devalued, only to cause additional popular unrest.

ARGENTINA
Population	37.5 million
2001 GDP	$269 billion
Exports/GDP	11%
Trade as share of GDP	18.1%
U.S. exports to:	$3.9 billion
U.S. imports from:	$3.0 billion
Canadian exports to:	C$132 million
Canadian imports from:	C$350 million
Top exports: Edible oils, fuels and energy, cereals, motor vehicles

The state of the economy has been reflected in political instability over the past few years. A new president in 2001 announced that Argentina would default on its international debt obligations, and yet another new president in 2002 abandoned the peso's link with the dollar, a move that was followed by currency depreciation and inflation. Argentina continues to face significant economic problems that will likely require strong economic measures that will be unpopular.

Scan Results-As noted above, Argentina was one of the first South American countries to allow privatization in transportation infrastructure, especially in port and highway operations. For example, of the 22,800 miles (38,000 kilometers) of roads in the country administered by the national government (out of 230,000 kilometers), 6,000 miles (10,000 kilometers) are under concession management. Roads under concession management support 82 percent of the nation's motor freight movement.

The Port of Buenos Aires presents a good case study of how privatization policies have been implemented. The port, the most important in Argentina and one of the most important in Latin America, faced serious problems before a national port reform law. Labor costs were high and little public investment had been made in port infrastructure in previous decades. Unlike other Latin American countries, Argentina had not emphasized global trade in its national economic policy and had not invested in the transportation infrastructure necessary to support such trade. In the early 1990s, a new president began transforming the nation's economic policy to one based on private initiative and operation of key components of this infrastructure. One of the most important aspects of this initiative was labor reform. The intent of labor reform was to eliminate restrictive labor practices, promote stable relations between labor and terminal operators, and reduce the number of laborers at the ports. The Port of Buenos Aires saw the number of port employees drop from 5,100 in 1989 to 400 in 1994.

One consequence of the privatization law was the introduction of increased competition in the Argentinean port industry. Several meeting participants noted that some of Argentina's ports appear to spend more time competing with each other than with foreign competitors, such as Montevideo. Because of fairly high labor costs and longer distances involved (and transport costs), Argentinean ports need to develop a nationally coordinated strategy that will attract trade opportunities.

Meeting participants discussed the importance of logistics for modern economies, and the critical role information systems will play in managing the transportation component of the supply chain. Quality transportation requires a much broader perspective than now exists in much of the Argentinean transportation industry. For example, many transportation companies are family-owned and have little interest in risky investments in different types of services. Multimodal transportation is not a concept that has been adopted by many service providers in Argentina. The trucking industry needs to think seriously about how it will survive economically in the future. For example, Brazilian trucking costs are a third those of Argentinean companies, while Chilean costs are half those of Argentina. In an economic market severely strained by rising costs and declining demand for services, such cost differentials can become critical to the survival of the trucking industry. In addition, cabotage (delivery of goods from origin to destination within a country) by foreign trucks is not allowed within Mercosur countries. For example, Argentinean trucks cannot deliver goods to Brazil and then turn around and deliver Brazilian goods to Chile.

It is interesting to note that one productivity improvement transportation officials have considered is increasing the size of trucks allowed on the road. In particular, they have debated introducing a 70-ton truck into the Mercosur market. One problem with this new truck design, however, is that many bridges on Mercosur roads are unable to support such a load, requiring the truck to ford the river where feasible. This would not likely provide the competitive advantages the truck's proponents desire. This issue is still being discussed.

Argentina is trying to develop coastal shipping to take the place of truck and rail operations serving the gateway ports. Not only would such shipping be more environmentally benign, it would present lower costs to shippers. One participant noted, for example, that the average cost per ton-kilometer was 8 to 10 cents for trucks, 3 to 6 cents for rail, and 1 cent for water. However, only recently has any significant governmental attention been given to river transportation. The key question facing government officials, given the basic approach adopted for transportation investment in the country, is how to spur private interest in improved river feeder service to the nation's ports.

Unlike Brazil and Uruguay, Argentina is clearly focusing on regional trade, and not as much on global or even hemispheric trade. This is not surprising, since Brazil is Argentina's leading trade partner. It was striking how, in comparison to other countries, discussions focused on trade in the Southern Cone countries and little on global trade. This is perhaps a result of the difficult economic times the country faces.

Argentinean officials' observations included the following:

• Transportation is not integrated with national economic or trade policy. Apparently, over the past 10 years, the national government's responsibility in transportation has shifted from one government agency to another. This constant changing appears to have resulted in a lack of commitment to an integrated transportation system.
  
• The national program for infrastructure privatization resulted in significant investments in highways and ports. The economic downturn has affected travel and the use of toll highways, as well as the level of imports and exports. The national government does not have revenues to invest in such infrastructure, and needed maintenance on important parts of the country's transportation infrastructure is being deferred. Meeting participants appeared to believe that efforts to privatize railways have not succeeded.
  
• Border crossings, especially within Mercosur, are a significant problem. Participants believe a strong disconnect exists between national customs agencies' actions and Mercosur free trade policies. They believe this problem must be addressed before Mercosur reaches its full potential as an economic market. In addition, several participants pointed out that rail track gauge has not been standardized within Mercosur, and several rail border crossings require a transfer of goods from one railroad to another.
  
• Port of Buenos Aires officials are concerned about future requirements for higher security procedures for goods destined to the United States. Given the precarious economic conditions at the port and the cost of the likely required scanning devices (ranging from $3 million to $4.5 million each), officials are worried that the necessary investment resources will not be available to meet U.S. requirements. It is expected that the shipper or service provider will have to be responsible for such investment.
  
• Port access is a significant issue. Many of the ports are located in central city locations, so both rail and highway access must compete with normal city traffic when serving the port. This is particularly a concern for truck traffic, which for the Port of Buenos Aires carries 85 percent of the cargo going to and from the port (8 percent goes by rail and the rest by water).
  
• Dredging is a critical and expensive issue for the port. Because of the current in the Rio de la Plata, silt builds up continuously in the river channel that provides port access. A concession was given to a company in 1993 to dredge the channel, but government subsidies were required to keep the concession solvent. The government has had to reduce these subsidies, creating uncertainty about the feasibility of continued dredging under this arrangement. This is not an insignificant issue, since 70 percent of Argentina's maritime trade uses this channel.
  
• Data on traffic flows and goods movement is lacking. Little national planning occurs on prioritizing transportation investment, but several groups are working with the government to define important trade corridors.
  
• Several participants also stated that the transportation industry needs an increase in professionalism. This need exists at all industry levels, from the actual service provider (e.g., truck drivers) to the highest levels of government and business.
  

Uruguay

Montevideo, Uruguay has been one of most economically and politically stable countries in Latin America for the past decade, but the downturn in the Latin American economy has hit Uruguay hard. About 19 percent of the labor force is unemployed, with those under the age of 25 especially affected. One reason for this level of economic impact is that the Uruguayan economy depends on the economic fortunes of Argentina and Brazil, which together account for about half of Uruguay's total exports. Over the past two years, both Argentina and Brazil have faced significant economic problems. These economic problems, in connection with a declining exchange rate, have resulted in serious economic challenges to the country's coalition government. In addition, the beef industry, traditionally one of Uruguay's most important exports, was seriously affected by an epidemic in the beef herd that caused many nations, including the NAFTA nations, to restrict beef imports.

Uruguay, which has a highly educated population, has been able to establish a hemispheric presence in the software development and support market. Uruguay exports more software than Brazil and Argentina combined. This educated labor force has been attractive to several financial management firms (including Prudential and Merrill Lynch) that have located offices in Montevideo.

As a Mercosur member (the Mercosur headquarters is located in Montevideo), Uruguay plays an active role in proposing policies and infrastructure principles to enhance Mercosur trade. This is not surprising, since Uruguay is the main land corridor between Argentina and Brazil. The Uruguayan transportation system is much more developed than those of its neighbors, with over three-fourths of its road network paved. The road network represents the highest density of any Latin American country. On the other hand, the rail network, which is not heavily used, has received little investment attention.

URUGUAY
Population	37.5 million
2001 GDP	$269 billion
Exports/GDP	11%
Trade as share of GDP	18.1%
U.S. exports to:	$3.9 billion
U.S. imports from:	$3.0 billion
Canadian exports to:	C$132 million
Canadian imports from:	C$350 million
Top exports: Beef, grain, leather, fruits and vegetables, fish

Scan Results-Uruguayan officials see that their country's economic success depends to a large extent on what happens in neighboring countries Argentina and Brazil. Uruguay's position between two much larger economies and its location at the head of the Rio de la Plata, which serves the agricultural hinterland of Brazil and Paraguay, places the country in an advantageous position as a logistics center for much of southeastern South America. The Uruguayan government and private sector have fostered this position through a variety of policies and investment strategies. Uruguay has used national policies as a way of attracting industry and trade. Uruguay has had free trade zones since 1923. Federal legislation guarantees free trade zone participants exemption from all corporate and national taxes, value-added taxes, customs duties and sales taxes, social security taxes for foreign workers, as well as no time restrictions for goods stored in warehouses.

Similar to other Latin American countries, Uruguay's economic development began around its main port, the Port of Montevideo. Over half of the country's population lives in the Montevideo metropolitan area, which still relies heavily on the port for the economic health of the region. The port is well positioned on the Rio de la Plata in that the river's currents deposit silt on the other side of the river along the Argentine coast and in particular at Buenos Aires. Dredging the harbor and its approach channels is not as big a problem for the Port of Montevideo as it is for the Port of Buenos Aires.

Because the port is an emerging logistics center in South America, private terminal operators are willing to provide much of the investment in port facilities. As in other Latin American countries, the national government in 1992 allowed for the privatization of some parts of port operations. Similar to Freeport, privatized port terminals have put significant capabilities in place in a short time to take advantage of the competitive market. The Group Katoen Natie terminal in Montevideo, for example, represents an investment by a global Belgian company that specializes in logistics services and port operations. This company's strategy was to invest in a container terminal in the Port of Montevideo that could act as a regional hub for container transshipment. The port's attraction to the company included its central location in the southeastern South American market, free trade zone status, competitive times to major destinations compared to Buenos Aires, low port costs, and river connection to the inland production areas of Brazil, Argentina, and Paraguay via the Rio Paraña.

In addition to the port, a major free trade zone called Zonamerica in the Montevideo suburbs is becoming an important distribution center for the Southern Cone countries. Zonamerica is designed to act as a "business platform meeting international standards that not only offers world-class infrastructure and services, but also the ideal environment to the competitive development of business and knowledge generation." (http://zonamerica.com). The basic concept of Zonamerica is to combine fullservice resources (e.g., accounting technical support, customer service centers, and order processing) with the benefits of a free trade zone. Businesses located in the Zonamerica free trade zone are exempt from national and corporate sales taxes and customs duties. In addition, they enjoy a free exchange of foreign currency and are beneficiaries of subsidized telecommunications and energy costs. Value-added functions are being performed in Zonamerica distribution centers that customize products and goods for the Latin American market. Located 10 minutes from Montevideo's international airport and 30 minutes from Uruguay's main port, Zonamerica has become a Latin American model of an effective, fullservice logistics platform for international business.

Although Uruguay has tendered concessions in the Port of Montevideo, the use of concessions for other transportation infrastructure is relatively new. The government is planning to issue a mega concession to construct and maintain 763 miles (1,272 kilometers) of roads that will be tolled. In addition, the government plans to place Montevideo's international airport under a concession arrangement. An initial bid must be at least $15 million with an annual minimum fee of $2.5 million, depending on the number of passengers using the airport. Little interest in significant investment in the rail system is apparent, although the lumber industry is interested in rail and barge improvements to get their product to the Port of Montevideo.

The visit to Montevideo afforded scanning team members an opportunity to better understand Mercosur policies on trade and transportation, and trade flows among Mercosur countries. A brief history of Mercosur is necessary to understand the status of trade and transportation in this market. The Latin American Free Trade Association was established in 1960 by the Treaty of Montevideo with the intent of creating a free trade area among the signatory countries. The extent of coverage of this free trade area and the types of commodities to be included were left to bilateral negotiations between individual countries. To harmonize land transportation rules and regulations, Argentina, Brazil, and Uruguay signed an Agreement on Land Transport in 1966 that emphasized consistent standards for granting permits, insurance requirements, and compatible customs procedures. This initial agreement has served as the basis of most land transportation agreements since. Uruguayan officials identified the major achievements as harmonization of driving licenses, medical standards for drivers, language requirements, safety rules, rail safety, and road control devices.

The Latin American Free Trade Association did not foster the types of trade relationships the signatory countries desired, so it was replaced in 1980 with the Latin American Integration Association (ALADI). ALADI defined an economic preference zone intended to provide incentives for countries to liberalize bilateral trade. Brazil and Argentina signed commercial agreements in 1986 to implement such bilateral agreements, with the provision that other Latin American countries could join if they adopted similar policies. In 1991, Paraguay and Uruguay joined to form Mercosur. The member countries agreed to a common external tariff (CET) on 85 percent of the goods crossing the border, with exceptions granted for specific categories of goods and for countryspecific products. The CET covers 96 percent of 9,414 tariff items, and full coverage is scheduled to occur in 2006. A customs union was established with specific organizational constructs for dealing with mutual issues. For example, working subgroups were established to recommend to the Mercosur Council changes in policies that member nations should adopt. One subgroup focuses on transportation and infrastructure issues.

Participants in the scanning meetings believe that the Mercosur's record of accomplishment been mixed. For example, Uruguay was the first Mercosur country to require safety standards for trucks according to Mercosur policy. Brazil did not adopt such standards because of the perceived difficulty in enforcing the requirement. Mercosur permits member countries to enforce commonly adopted policies. The basis for a fair and equitable customs union is the concept of reciprocity, in which all countries party to an agreement undertake similar actions and recognize the actions of others. Uruguay had to enter into a separate agreement with Brazil on this issue because government officials believed onesided enforcement of vehicle safety standards would create a competitive disadvantage for Uruguayan truck companies spending additional dollars to maintain safe vehicle conditions. A similar issue with Argentina was resolved only when Uruguay applied a toll to all Argentine trucks on Uruguay's roads and in the process created a political crisis that was resolved at the highest levels of government.

Inland water transportation facilities, such the Katoen Natie Terminal in the Port of Montevideo, are underused.

Another disappointment is Mersocur's difficulty getting members to develop consistent bordercrossing procedures to foster more efficient crossborder movements.

Observations made by Uruguayan participants during this visit included the following:

Uruguay, and the Port of Montevideo in particular, wants to expand its market influence and is looking to Asia, Europe, and North America for market opportunities. Government officials and business representatives believe the southeastern United States is a particularly promising market.

• Officials suggested that increased security requirements could be viewed as a niche market for the Port of Montevideo and that high levels of security at the port would make it a desirable gateway into the NAFTA market. Private terminal operators assume they will bear the cost of security equipment necessary to compete in the global market.
  
• Border crossings are an important constraint to more efficient movement of trade by land. The customs, health, safety, and immigration authorities of all three countries-Argentina, Brazil, and Uruguay- have not developed common approaches to expediting movement across national borders. Argentina and Uruguay, for example, jointly built a site that would house an integrated approach to inspections and documentation. Uruguayan Customs is willing to staff the site 24 hours a day while Argentinean
  Customs cannot, so the site is not being used to its full potential. Another border-crossing issue is the lack of interoperability of rail services among Mercosur countries. For example, rail lines have been constructed with different track gauge, creating a need for transshipment at the border. Such a requirement seriously affects the competitiveness of rail transport for international trade.
  
• Montevideo, and in particular the combination of the port and free trade zones, is developing along the lines of a logistics service center. Not only does the physical movement of goods receive attention from government policy, but business is also encouraged to develop full logistics service capabilities to augment the transportation component of the supply chain.
  
• Ministry of transport officials are aware of the condition and performance of the transportation system. Uruguay was the only nation able to present the scanning team with a compendium of upto-date data on all modes of transportation. The ministry also has conducted studies of different transport corridors and has identified both needed physical improvements and institutional and financial strategies necessary to make these improvements happen. It was apparent to the scanning team that Uruguayan officials are quite knowledgeable about the role transport plays in the health of Uruguay's economy and the importance of linking transportation investment to national economic goals.
  

Chile

Santiago and San Antonio, Chile's location on the southernmost tip of South America and its elongated shape create significant transportation challenges to Chilean business and trade. The country, about twice the area of California, extends 2,580 miles (4,300 kilometers) north to south and is on average only 108 miles (180 kilometers) wide. It has 15 million inhabitants, with the greatest concentration in the central metropolitan region of Santiago, which has about 5.2 million inhabitants. This region represents 40 percent of Chile's population and produces 47 percent of its GDP. Much of the industrial manufacturing and export services occur in this central region. Most traffic flows are along the north-south axis serving this central region, resulting in long trips.

Given these geographic challenges, Chile has developed aggressive trade policies to participate in the world market. Its market-oriented economy benefited greatly from economic reforms during the 1990s that provided greater private participation in the economy. With 2,700 miles (4,500 kilometers) of Pacific coastline, Chile is well positioned to trade with the Asian-Pacific basin. Because of its strong mining industry, Chile has developed a vibrant export business in raw materials, especially copper. With its economic and financial record, Chile is considered one of the most desirable investment opportunities in South America. One strategy to foster trade has been to establish free trade agreements with several leading trading nations. Recently, Chile and the United States completed negotiations for a free trade agreement, the only such agreement between the United States and a South American country. Canada has had such an agreement with Chile for many years.

CHILE
Population	15.4 million
2001 GDP	$64 billion
Exports/GDP	31.8%
Trade as share of GDP	51.4%
U.S. exports to:	$3.1 billion
U.S. imports from:	$3.5 billion
Canadian exports to:	C$369 million
Canadian imports from:	C$641 million
Top exports: Copper, fish, fruits, paper and pulp, chemicals

Scan Results-Chile has one of the most stable economies in South America. Realizing that their geographic location creates significant challenges for international trade, Chilean officials have been aggressive in promoting trade relationships with countries outside of the Southern Cone. In 1996, for example, Chile entered into a free trade agreement with Canada and by 2002 a similar agreement was negotiated with the United States. In addition, Chile is an associate member of Mercosur. Chile is only an associate member because officials believe that some of the tariff policies adopted by the Mercosur countries are too high for global competitiveness and are a way to protect Mercosur industries rather than promote free trade.

Key to the success of Chile's trade policy is having transportation and, in particular, a port infrastructure that can support trade flows. Chile has a long and dynamic history of national port policy (see box below). Before 1981, Chile's ports were state-owned enterprises with specific arrangements for labor and port operations. To increase efficiency and competition, private stevedore companies were allowed in 1981 to perform freight transfer services, removing what had been a government monopoly on such operations. Although increased competition resulted in improved port productivity, it did not achieve another government goal, which was to increase private investment in port infrastructure. With increasing trade and greater demands on port operations in the 1990s, the government reformed the system and created independent state-run companies in the 10 largest ports in 1997. The goals of this national policy were to decrease the cost of operations at the ports, increase private investment in infrastructure, transform Chile into a logistics service provider for the Southern Cone countries, and decentralize port management to regional port authorities. These new port authorities were authorized to grant concessions to private companies for operating terminals in their ports. Under a concession arrangement, private companies were responsible for operating and managing the terminals in exchange for an initial concession fee and annual fee based on cargo moved. In 2000, the first ports to use concessions under this arrangement were Valparaiso, San Antonio, San Vicente-Talcahuano, and Iquique. Over $300 million was provided to the Chilean government in these initial bids.

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Changing Policy Toward the Maritime Industry: The Case of Chile

1836 Sailing Law (Ley de Navegación)-Specified, among other things, that 75 percent of a Chilean maritime company should be national, that is, "a ship is Chilean if it is built in the shipyards of the republic, or if in another nation, it becomes the property of a Chilean natural or legal citizen, for licit contract." Captains of Chilean vessels had to be naturalized or legal citizens
of Chile.

1939 Law 6415-Reserved 100 percent of cabotage traffic, as well as 50 percent of the load of foreign trade, for Chilean ships. 1956 Law 12041, Development of the Merchant Marine (Ley de Fomento de Marina Mercante)-Established exceptions on imports fuel tax, etc., for Chilean merchant marine vessels.

1960 Law 290-Created the Port Company of Chile (EMPORCHI) as a government agency responsible for operating Chilean ports. 1974 Law 466-Modernized exemptions of Chilean merchant ships from certain taxes, but maintained the 50 percent reservation for international trade and 100 percent for cabotage traffic.

1978 Law 2222, Sailing Law (Ley de Navegación)-Conserved the principles of the 1836 law.

1979 Law 3059, Law of Merchant Marine (Ley de Marina Mercante)-Eliminated the requirement that 50 percent of foreign trade had to be handled by Chilean ships.Also eliminated government subsidies and tax exemptions.

1980 Law 18042-Modified the Law of the Port Company of Chile (Ley de la Empresa Portuaria de Chile), ending the exclusive
operation of EMPORCHI at Chilean ports.

1980 Law 18032-Ended the system of licensing for stevedoring, opening this activity to any worker.

1990 Law 18966-Turned over stowage services, cargo transfer, and berthing activities to private companies. EMPORCHI would administer only the port.The result was to leave property ownership and administration in the hands of a state company and make port services the responsibility of the private sector under a multioperator system.

1997 Law 19542, Port Modernization Law (Ley de Modernización de los Puertos)-Promoted private sector participation to accelerate modernization of Chilean ports.Ten state port companies with terminals for public use were created.These companies are responsible for administering the ports.The provision of port services is established by concession and bid, with specific berths and terminals operated by private firms.

Sources: Hoffman, January (2001), Transporte Marítimo Regional y de Cabotaje en América Latina y el Caribe: El Caso de Chile, (LC/L 1598-P), Serie Recursos Naturales e Infraestructura, vol. No 32, Santiago, Chile: ECLAC; Directemar, www.directemar.cl; and Nuñez, Sergio (1992) Efectos Prácticos Producidos por la Política de Eliminación de la Reserva de Carga y la Mayor Apertura del Sector Marítimo en el Caso Chileno in Políticas de Transporte Marítimo en el Grupo Andino y las Comunidades Europeas.

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The use of concessions is not unusual, but the Chilean model is somewhat different from those found in other countries in that the government places more restrictive ownership requirements on concessionaires. The intent of these restrictions is to avoid a monopoly operation at the port. For example, a company cannot own more than 15 percent of a concession if it holds more than 15 percent in another terminal or private port in the same region. Also, a maximum 40 percent ownership is allowed for a partner company (such as a shipper) that operates more than 25 percent of the cargo transfers at the concessioned terminal or more than 15 percent of transfers at other ports in the region. Because of the concern for achieving competitiveness in a dynamic global market, these concession agreements also include performance standards such as maximum berth time for ships and a maximum port tariff. The port authority is authorized to assess fines if the minimum performance level is not achieved. An important characteristic of this national privatization program has been the desire to keep some general access to port terminals by providing at least one terminal that is accessible to all shippers. As noted below, this provision has created some controversy.

In general, the perception among public and private officials is that this new approach to port management has been successful. Public port capacity has doubled and the costs of doing business at Chilean ports have declined. Problems have arisen, though. The ports have found that the multiple terminal operators awarded concessions have varying levels of competence in conducting business. Many ports have been slow to develop consistent and understandable logistics support procedures. Some officials consider the investment portfolio the government offers unattractive, especially given hard economic times. Many in the labor movement have not been happy with this new structure. For example, the number of workers in the state-owned port companies declined from 1,800 workers to 480 workers after a new national privatization law took effect. The private terminal operators were allowed to negotiate their own agreements with labor outside of a national labor union structure. Worker protests pressured the government to offer a $30 million severance package for those who lost their jobs following implementation of the new ports law.

Another problem has occurred between the concessionaires and the port authorities. According to the concessionaires, part of the negotiated agreement was that the port authorities would not compete with the concessioned terminals. In one case, a private terminal operator filed for arbitration stating that the port authority was investing in the public terminal of the port and allowing container traffic- which the private operator believed was reserved for the private terminal-to be handled at the public terminal. The operator claimed that his own dollars- the money he bid to get the concession-were being used to compete against his operations. The government has instituted a public-private council to mediate future disagreements over interpretations of concession contracts.

Even with these concerns, the experience with port concessions has been so favorable that additional concessions are being bid in the ports of Valparaiso and Antofagasta, the latter serving the mining regions of northern Chile. Five of the seven berths in Antofagasta will be sold to private investors. The concession agreement will require the winning company or consortium to invest $18 million to upgrade infrastructure and port technology.

The use of concessions has not been limited only to ports. Similar arrangements have been made for railroads, airports, and highways. For a nation that is long and narrow geographically, connectivity is a critical national concern. To provide this connectivity, the government has turned to the private sector. Of the 48,000 miles (80,000 kilometers) of roads in the country, 1,800 miles (3,000 kilometers) have been built and operated under concessions, with investors coming primarily from Spain, Italy, and Germany. The government is considering tendering concessions for maintaining existing roads. Maintaining the road system is critical for the nation's economy, since about 95 percent of Chile's freight moves by truck. The trucking industry, which is dominated by small owner-operator companies (only 0.7 percent of the companies own more than 10 trucks, and 91.3 percent have just one or two trucks), faced difficult economic times. With a devaluation of the currency, a downturn in the economy, and rising fuel costs, the industry does not fully support the use of tolls, an additional cost out of its pockets, to maintain the road system.

Most railroads operate under 25-year concession arrangements, but Argentina has great difficulty attracting new rail service because of the geographic barrier created by the Andes Mountains. One 24-mile (40 kilometer) section of rail line has an average grade of 6 percent. This challenge is important not only to the railroads, but also to future economic growth. For example, the United Nations examined the possibility of developing mega-ports on Chile's Pacific coast to serve all of the Southern Cone nations. The study's conclusion was that inadequate rail and road crossings in the Andes significantly limit trade movements to and from the east. In addition, because the national rail system is electrified, doublestack rail cars could not be used, significantly reducing productivity of rail movement.

Some attention is being given to increasing the use of coastal shipping for north-south movements, which now handles just under 5 percent of internal freight movement by weight. Coastal shipping is recognized as more efficient than other modes (one unit of horsepower can move 330 pounds, or 150 kilograms, of freight by truck, 733 pounds, or 333 kilograms by railroad, and 8,800 pounds, or 4,000 kilograms, by coastal shipping).(J. Hoffman, Transporte maritime regional y de cabotaje en America Latina y el Caribe: el caso de Chile, CEPAL/ECLAC, Santiago, Chile, September 2001.) Substantial institutional and financial disincentives, however, work against the use of more efficient coastal shipping for cabotage operations. For example, only national carriers can do intra-coastal shipping by law, and most carriers serving the cabotage market are not active in international shipping.

Many officials interviewed during the scanning study commented on Chile's desire to be a logistics service center for the Southern Cone countries. This role supports a national strategy for stronger trade relationships with NAFTA, the European Union, and Asia. Large freight distribution centers have been built in the outskirts of Santiago, and major improvements have been made to rail and highway infrastructure. Several officials noted, however, that border crossings are still a barrier. Standardization of forms and procedures is needed to expedite cross-border transportation, and although the Southern Cone countries have entered into an International Surface Transportation Agreement to promote more efficient flows among the countries, much remains to be done. For example, Mercosur has identified 13 transportation corridors that should receive priority on infrastructure investment and operations coordination (e.g., how to coordinate rail and highway operations in the Andes during the winter). Five border corridors were identified between Argentina and Chile with a required investment of $315 million. About $160 million was spent between 1996 and 2000, but economic problems mean continued investment most likely will be postponed. In addition, Chilean officials recommended that information technology be better used at the border to expedite movements, but no unified data management systems are in place.

Government and business representatives look to the NAFTA, European, and Asian markets as key trading partners. Chile is eager to have a free trade agreement with the United States (such an agreement was finalized a month after the scanning study), as well as to become a NAFTA member. One official noted that the commercial destiny of Chile is linked to NAFTA and Japan. One of the uncertainties associated with this linkage, however, is the role security will play in defining how goods will move between trading blocks. Chile views itself as a security gateway to the United States and plans to invest in equipment and implement procedures necessary to satisfy U.S. requirements. Because of its distance from the NAFTA market, Chile realizes that it must invest in such infrastructure if it wants to compete. The strategy appears to be one of marketing Chile's ports as the best way to gain entrée into the U.S. market. In other words, Chile views security as a market niche.

When asked to identify the major trade challenges facing Chile, in particular NAFTA, officials raised the following issues:

• Border crossings and paperwork (or the lack of information systems) are continuing problems. Officials commented that much progress has been made with surrounding countries and Mercosur in fostering trade relationships, but there are still problems with paperwork.
  
• Although Chile is better than most South American countries in viewing its transportation system in national terms, no common vision exists for how this system serves the logistics process or how the pieces fit together. No national investment policy for transportation is apparent.
  
• Of particular concern is how customs procedures and requirements fit into the logistics process and how they link to Chile's international trade strategy.
  
• Chile has made great strides in fostering an increasing role for private companies in transportation infrastructure and services. Little interaction among the public and private sectors is apparent, however, when policies are being formulated.
  
• Port capacity is likely to be an important issue in the near future, especially if a Free Trade Agreement for the Americas is created. Similarly, providing adequate access to the ports so that transportation costs are kept under control will be an important challenge.
  
• The concession approach to port terminal operations has resulted in increased private port investment. Obviously, investors want to recoup investment costs and are marketing their terminals aggressively. Some officials believe this means Chilean ports are competing with one another, instead of looking at a larger strategy of how Chile fits into the global market. A presidential decree is apparently under development to address this issue. It is expected to state that ports provide social benefits to the entire country, not just single ports or regions.
  
• Chile collects little data on transportation movements, so few strategic analyses can be undertaken on likely future needs. Chilean officials expect a free trade agreement with the United States and an FTAA for the hemisphere to be accompanied by technology exchange and support for conducting such studies.
  

Port of San Antonio-The Port of San Antonio is one of newest and most modern ports in Chile. The port is located about 60 miles (100 kilometers) from Santiago and 30 miles (50 kilometers) from Valparaiso, Chile's traditional port of call. Because of its convenient location near the manufacturing center of Chile (its market area includes 60 percent of Chile's GDP-producing regions) and landside constraints to capacity expansion at the Port of Valparaiso, the Port of San Antonio has become Chile's leading container port in a short time. The primary markets for port exports (by weight) include North America (30 percent), Central America (24 percent), South America (23 percent), and Asia (14 percent).

Congestion on strategic port access roads is a problem throughout Latin America.

The Port of San Antonio is a good example of the "concession model" of port operations.(This section benefited greatly from L. Boske, Maritime Transportation in Latin America and the Caribbean, Report Number 138, Lyndon B. Johnson School of Public Afairs, University of Texas, Austin, Texas, 2001.) The port authority, called the Empresa Portuaria de San Antonio, administers common areas of the port and coordinates cargo handling at the public terminal, which is accessible to all operators. Empresa provides the infrastructure and port equipment at this terminal, but private operators provide cargo-handling services. A six-member board directs the Empresa Portuaria. The president of Chile appoints five members, and the sixth member is a non-voting representative of labor. Private terminals are operated under a concession with Empresa. The main container terminal (San Antonio International Terminal or STI) is a joint venture between Stevedoring Services of America and the Sudamerica Agencias Aéreas y Maritimas S.A. For the use of this terminal, the joint venture paid $121.3 million and agreed to a surcharge of $7.50 per ton for the duration of the contract, which is 20 years with an option to renew for another 10.

The concession arrangement has not been without controversy. Both STI and the Empresa Portuaria entered arbitration proceedings because of disagreements over terms of the concession agreement. According to STI, the agreement did not allow the public port authority to invest in other terminals that would compete directly with STI. Such investment was made in the public terminal, however, and incentives were provided to attract container ships to this public terminal in direct competition with the STI terminal. The arbitrator's decision restored the competitive conditions to close to those that existed when the terminal concession first began.

The 1997 reform law resulted in a significant change in the role of unions that was important for the economic competitiveness of the port. After 1997, unions no longer could assign labor to terminal operations under concession arrangements. These terminal operators have now entered into their own arrangements with their employees. By the end of 2000, 1,000 workers had signed contracts as full-time employees of the private terminal operators.

It is no coincidence that the Port of San Antonio became the leading Chilean container port after privatization of some port operations. From 1990 to 2001, the number of TEUs handled by the port increased from 50,000 to 420,000 a year. This growth resulted in part from a substantial investment by STI of more than $60 million in infrastructure for its operations. Productivity has improved dramatically with this investment and with new labor arrangements-35 box moves per hour today compared to 10 to 18 per hour six years ago. From 1999 to 2001, the number of tons moved per hour has increased by 22 percent and the amount of time a ship is at the dock has decreased by 12 percent.

The port has ambitious expansion plans that will allow it to handle bigger container ships and to serve as a distribution center for all of the Southern Cone countries. The port has a capacity of 14 million metric tons and, assuming an 8 percent annual growth rate, will exceed that capacity in 2010. Part of this expansion will include improvements such as dredging to a 14-meter depth that will permit larger ships, including 4,500-TEU ships. Ships larger than this are not expected to visit the port because San Antonio serves as a feeder service to Panama, where transshipment to larger vessels occurs. Larger vessels are simply not needed in the Port of San Antonio.

Issues raised by port officials during the scanning study included the following:

• Land access is an important constraint to port growth. About 10 percent of the cargo handled by the port arrives or leaves by rail, while the rest is handled predominantly by trucks. Truck weight limits constrain how much cargo each truck can handle, so a large number of trucks access the port through the town. Accordingly, the port is planning a bypass road to provide access to the port and lessen truck traffic through the community.
  
• Although the institutional model for Chile's ports has been to decentralize port management to the 10 major ports, the central government still must approve budget expenditures. This approval process is viewed as perhaps occurring too far away from where the needs are for appropriate decisions to be made.
  
• Border crossings are an important issue for the future growth of the port and its ambitions to serve a market area extending beyond Argentina into Mercosur. It often takes half a day to cross the border to Argentina. This is too long for a logistics process that is time-sensitive and requires reliable transportation services.
• No major changes to security have occurred since the September 11, 2001, terrorist attacks in the United States. Port officials expressed concern about new mandates for security procedures, but as in Uruguay, suggested that high-quality security at their port could make them a desired gateway into the NAFTA market. Existing security procedures have been enhanced over the past three years by the use of technology (primarily new surveillance systems), resulting in a 95 percent decline in lost cargo.

Panama

Panama City and Colón, Panama
Ever since Balboa became the first European to see the Pacific Ocean in 1519, Panama has been an important crossroads of world trade. In colonial days, the Isthmus of Panama served as the major land bridge between the Spanish conquests on the western coast of South America and the sea lanes to Spain. With the completion of the Panama Canal in 1914, Panama became, along with the Suez Canal, one of the most strategic water passages in the world for both commerce and defense. By using the Panama Canal, a ship traveling from the east coast of the United States to Japan saves 3,000 miles (4,800 kilometers) over the shortest allwater route. A ship from the west coast of South America traveling to Europe saves 5,000 miles (8,000 kilometers). On December 31, 1999, the United States ceded control over the Panama Canal Zone to Panama. Panama became the gatekeeper of the east-west trade flows of more than 80 countries that use trade routes through the canal. In addition, Panama has received significant U.S. private investment totaling an estimated $35 billion, compared to $3.3 billion for the rest of Central America.

Scan Results-As one of the most important crossroads of global trade, Panama has taken steps over the past five years to become an even bigger player in international commerce. The national government has adopted policies to encourage business development and provide Panama with competitive advantages over other Latin American countries. When the United States turned the canal over to the Panamanians in 1999, the canal's role in Panama's national economic strategy changed. While the United States viewed the canal primarily from a strategic defense perspective, Panama considered it an important economic resource that could be used to attract development. Major new container ports have been built on both coasts, free trade zones have been created, and the combination of being a nexus of intercontinental fiber optic cables and a center of commerce has created an economy focused on service provision. Indeed, the Panamanian economy is 80 percent service oriented, the highest percentage of any developing country in the world.

PANAMA
Population	2.9 million
2001 GDP	$10.2 billion
Exports/GDP	32.7%
Trade as share of GDP	42.9%
U.S. exports to:	$1.3 billion
U.S. imports from:	$290 billion
Canadian exports to:	C$38 million
Canadian imports from:	C$10 million
Top exports: Bananas, shrimp, sugar, coffee, clothing

Not surprisingly, port development became a critical component of the government's policy to increase trade-related sectors of the economy. In 1994, the national government instituted a policy of port privatization that used concessions to private companies as the major means of encouraging private investment.

This privatization program has been successful and Panama's port facilities are considered some of the finest in the world. As in other countries, though, labor unions were not part of the new system, so compensation had to be given to those who lost their jobs.

Panama's road system has not received as much attention as maritime transportation. Not only national government officials see the need for improved road connections, but also business representatives and Panama Canal Authority officials. In particular, many of those the scanning team interviewed discussed the importance of the Pan American Highway. This road is the major north-south highway in the country and provides important connectivity in Central America. The government is investing $90 million to provide four lanes to Costa Rica, of which 87 miles (130 kilometers) still have two lanes. Government officials believe that when these scheduled improvements are finished, road connections to Costa Rica and Central America will be good. In southern Panama, the government is rehabilitating about 80 miles (120 kilometers) of highway to Colombia, but a 67-mile (100-kilometer) section through the Darien Gap has no road at all. The Darien Gap is one of the most difficult, and yet most environmentally important, terrains in the world. With dense jungles and swamps, it has been difficult to build any kind of infrastructure connecting Panama with Colombia. The Darien Gap is also considered a biological defense against organisms that thrive in South American environments and that would intrude on North American ecological systems if they could bypass the barrier the gap creates. One school of thought suggests the Darien Gap should not be penetrated with improved access to the south.

Echoing sentiments from other Latin American countries, government and business representatives complained about the long delays at the border with Costa Rica because of customs inspections. One official noted that Mexico can transport goods to Guatemala in 22 hours because of its fairly good road system and efficient customs procedures. It then takes an average of nine days to get to Panama because of road conditions and customs inspections.

As in other Latin American countries, gas tax revenues go to the general fund. No dedicated tax for transportation investment exists. The government has used concessions to build new roads in the country, most noticeably from Panama City to Colón. About 20 miles (30 kilometers) have been built so far, and although the government wants to continue expanding
westward, low demand for the road and low toll revenues have been a deterrent to investors. It is estimated that a new toll road would have to be subsidized by as much as 60 percent of its capital and operating cost just to break even. In addition, the Panamanian government has explored the possibility of widening existing roads rather than building new toll roads.

Panama has also become a regional center for air cargo. The international airport at Panama City serves several air cargo providers, and a new airport is being planned as part of the Colón Free Trade Zone, the only airport in the world located in such a commercial zone. This could be an appealing inducement for industry and service providers that rely on airfreight for fast and reliable delivery of goods.

Because Panama has been so successful in providing a competitive economy for world trade, some officials are wary of what a Free Trade Area for the Americas (FTAA) would do to the country. If conditions and arrangements similar to those in NAFTA or Mercosur are part of an FTAA, Panama may have to change many laws and policies that provide great benefit to the country. For example, one business representative questioned the point-of-origin policy that requires goods from within a trade block to originate within the boundaries of that trade group. What happens if goods go through a free trade zone in Panama? Would the point-of-origin designation be lost? This would need to be spelled out clearly in any trade negotiations. Such an agreement would likely include many issues besides trade, such as child labor, environmental concerns, institutional requirements, and transparency of government actions. As one official noted, Panama was the last country to join the World Trade Organization (WTO) and it could be the last to join an FTAA, given the many requirements that might not be in Panama's best interests.

The Panama Canal-The Panama Canal is the most important economic asset for Panama, and it clearly has global importance as well. The canal handles about 4 percent of world trade, and 13 to 14 percent of total U.S. seaborne trade. Of the 15,000 vessels transiting the canal each year, about 9,000 are either going to or coming from U.S. seaports. Japan and China are the second- and third-largest users of the canal. The Panama Canal Authority, the agency that runs the canal, expects significant increases in ship passages through the canal over the next 20 years.

The Panama Canal raises and lowers vessels through a series of locks and inland water resources. The key to the operation is the man-made Gatun Lake, which is 26 meters above sea level. Water at this higher elevation is used to fill locks that descend to sea level on either side of the lake. Every time a vessel passes through the canal, 55 million gallons of fresh water are lost from the inland lake. Only certain-sized vessels, those with no more than a 100-foot beam and a 39.5foot draft, can fit into the canal locks. These are called Panamax vessels. In 2002, vessels that reached these maximum dimensions represented about 38 percent of the vessel transits through the canal.

Given the canal's depth and size limitations, many of the largest container ships must off-load containers at either the ports of Balboa on the Pacific Ocean or Colón on the Atlantic Ocean onto rail cars for shipment across the Isthmus of Panama. In many cases, ships go through the canal at 70 to 80 percent capacity because of the need to off-load containers. This transfer of containers to rail is expensive for the shipper. The cost of moving a TEU by ship through the canal is about $90, while handling the TEU by rail, which includes transfer activities at both ports, raises the cost to about $270. The Panama Canal Railway Company, which has a long history of serving cross-isthmus travel, has been given a 50-year concession to provide such service. Channel and terminal constraints at the Port of Balboa have limited this transfer operation, but investments are being made to improve this capability. The rail travel time between ocean terminals is 50 minutes.

One of the most important changes over the past five years has been the degree to which Panama has become a major transshipment location for containers. From less than 300,000 TEUs a year in the late 1990s, the number of transshipments has reached over 2 million TEUs, with forecasts suggesting even larger amounts. This transshipment movement occurred largely after substantial investments were made in terminal capacity on both coasts. In Balboa, for example, $200 million is being invested by the HutchinsonWampoa Group to improve terminal capacity and operations to handle 450,000 TEUs. The Manzanillo International Terminal, which handles over 1 million TEUs, has improved its capacity to 1.5 million TEUs with a $300 million investment program, and the Colón Terminal can handle 400,000 TEUs.

The Manzanillo Terminal is the second-most capitalized container port in the world after Hong Kong. Only two-thirds of the vessels using this terminal go to or come from the Panama Canal. It also has become a major transshipment location for containers coming from Asia and destined for the west coasts of North or South America. Market studies for Stevedoring Services of America, the company that runs the terminal, shows a likely doubling of container flow by 2020, with most of this trade in the east-west Asia-to-Europe market. The philosophy of the terminal operators is that in a highly competitive market users will choose the most efficient ports, and they expect to be one of those ports (now averaging 40 TEUs per crane per hour).

Passage of a significant share of the world's commerce through the Panama Canal has raised important security concerns. One U.S. official noted that, after Canada and Mexico (because of the borders they share with the United States), Panama is the most important security challenge for the country. Twenty-one U.S. government law enforcement agencies are represented in Panama. They focus mainly on the flow of drugs from South America, but more recently they have initiated intensive efforts to monitor cargo flow for potential terrorist attacks. It is revealing that after the September 11, 2001, terrorist attacks in the United States, the U.S. Coast Guard called all of its vessels except those deployed in Panama back to U.S. waters to protect against potential waterborne attacks at ports. The Panama Canal was considered so critical to U.S security that the Coast Guard kept its vessels on station. In addition to security concerns surrounding the canal, U.S. security forces must focus attention on Panama's maritime activity. Panama has the largest merchant marine in the world, with about 6,500 vessels flying the Panamanian flag. Monitoring the movements of such ships, and perhaps more important, the seamen who serve on them, is a monumental task.

"THE FUTURE SUCCESS OF A FREE TRADE AGREEMENT FOR THE AMERICAS IS TIED CLOSELY TO THE EXISTENCE OF AN INTEGRATED HEMISPHERIC TRANSPORTATION SYSTEM. FROM A LOGISTICS PERSPECTIVE, THE TRANSPORTATION SYSTEM OF ONE COUNTRY MUST BE CLOSEL LINKED TO THE TRANSPORTATION SYSTEM OF ITS TRADING PARTNERS."
- Panamanian businessman

The Canal Authority is planning new ways to accommodate modern demand. Enhancements to the canal are being contemplated that would allow the passage of larger ships. The authority concluded this plan was needed after experiencing several problems. In 1995, for example, nearly 120 ships waited as much as five days to transit the canal because of routine maintenance on one of the locks. In addition, recent episodes of el Niño reduced the amount of water available to operate the canal. As a result, the authority temporarily had to reduce allowable vessel draft by three feet, which affected the maximum loads that could be carried through the canal. Some of the need for expansion also relates to the larger vessels now used for international trade that cannot use the canal. For example, about 60 percent of the container ships ordered since 1999 are post-Panamax and cannot fit through the locks. The canal can now handle ships with 14 containers across, and the Canal Authority is looking at enhancing the canal to handle ships that carry 19. In fact, many of the world's ports have postPanamax cranes that can be used to load and unload such vessels. One strategy the authority has adopted to manage demand better is to allow vessels passing through the canal to reserve a slot (with an additional fee) to guarantee a position at the front of the queue.

Figure 4b. Average vessel size (tons).

The canal's capital investment program over the past several years has exceeded $1 billion and includes widening of the Culebra Cut, new tugboats and locomotives, information systems, and a telecommunications network. The key investment question, however, is whether the critical choke points of the canal-the locks-should be expanded to allow larger vessels. The Canal Authority has engaged two groups to devise a strategy for new locks, one of which is the U.S. Army Corps of Engineers.

Funding for canal improvements relies on tolls paid by transiting ships. User fees that cover operating costs have been the basis for the toll structure ever since the United States first started charging for passage. The most expensive toll to pass through the canal is $208,000, while the average toll is $55,000. The canal is now being run under a profit-center philosophy that calls for financing for canal improvements to be independent from the national government and covered by tolls. The Canal Authority is considering levels of investment that range from $5 billion to $12 billion, all of which will have to come from canal user revenues.

Figure 4a shows the change in tolls for the Panama Canal since it first opened in 1914. In 2002, the Canal Authority instituted a tiered approach to tolls. Tolls are applied in 10,000-ton increments by vessel type based on laden and ballast tons, plus a unit charge per displacement ton. This new toll structure is based on the concept that different types of vessels incur different costs. In addition, the authority is conscious of the competitive economics of the U.S. rail-intermodal land bridge (i.e., the rail connection from the U.S. West Coast to the Midwest and eastern seaports) and changing vessel size that might make transits around the tip of South America more economical.

The process of developing a new toll structure for the canal has faced not only economic challenges, but political ones as well. One Canal Authority official noted that when an initial proposal to raise tolls was suggested, ambassadors from many of the world's leading nations showed up at a public meeting to register their country's disapproval. Figure 4b indicates that the average size of vessel transiting the canal has steadily increased.

The Panama Canal Authority is monitoring closely the changing economic structure of world trade and the role of the canal. For example, officials consider the U.S. land bridge the major competition to the canal. In addition, both government and business officials believe that opening Cuba to a free market could have potentially significant impacts on container movement in the Caribbean. Officials believe that expanding NAFTA southward or developing a Free Trade Area for the Americas would increase substantially the amount of freight passing through the canal, and in many cases, processed in Panamanian ports.

         

Expanding the canal to allow passage of post-Panamax ships would have a significant impact on the global market. For example, several officials mentioned that larger ships passing through the Panama Canal would allow Brazil to compete more effectively in the Asian market with its growing agricultural industry (at the likely expense of the United States.)

Free Trade Zones-Panama is one of the world's leaders in the use of free trade zones to foster international trade. The concept of a free trade zone in Panama was first introduced to President Roosevelt in 1936, and enabling legislation was finally passed in 1948. A free trade zone under this legislation allows commercial activities to occur in a clearly defined location without companies having to pay taxes or fees to the host government. The best example of such an operation is the 900-acre Colón Free Trade Zone (CTFZ) located near the Colón harbor on the Atlantic coast. In 2002, more than 2,000 companies were registered to participate in the CFTZ. The highest cumulative sales occurred in 1998 at more than $10 billion. The products going through the CFTZ are aimed primarily at the Asia-toLatin America market. Goods are shipped from Asia to Colón, taking between 14 and 21 days. These goods are modified to meet market-specific requirements through value-added activities within the zone and then are shipped by road, air, or sea to final destinations in Central or South America.

The CFTZ has evolved into a complete logistics service provider. As one meeting participant noted, the logistics challenges now facing companies and countries include globalization of the production process, use of sophisticated technology (often Web-enabled), complete supply chain management from resource to consumer, a desire for shorter lead times in delivery, diversification and outsourcing of services, and continual emphasis on reducing costs. Figure 5 shows the concept of the changing logistics challenges facing both producers and shippers. Instead of shipping to individual countries, today's shippers are shipping to distribution centers where value-added activities can occur. With the product now well positioned to serve a regional market, the final leg of the logistics process is transporting the product over a safe, fast, and reliable system to its final destination. The CFTZ provides all of the services to act as a full-service logistics platform in such a scheme.

The management company running the CFTZ leases buildings to firms for use in conducting business. The original investment in buildings is recouped over time, with 70 percent of the lease payment going to CFTZ management and 30 percent to the government. More than $1 billion has been invested in infrastructure and buildings for the free trade zone. CFTZ officials estimate that about 15,000 jobs have been created by business operations in the zone. The CFTZ management company has signed memoranda of understanding with other companies to develop industrial parks and an airport within an expanded free trade zone boundary. This complex, referred to as the Multimodal Center of the Americas, will provide a central location for value-added activities and transportation access to the entire Western Hemisphere. With access to four ports, a rail service, highways, an airport, and customs control (located in the zone itself), the CFTZ is positioning itself as a premier logistics center in Latin America. Not only will it be able to handle goods with low sensitivity to travel time as it does now, but with an airport located in the free trade zone, it also has the potential of becoming an attractive location for high-value, time-sensitive goods as well.

Between 13 and 14 percent of U.S. seaborne trade passes through the Panama Canal.

Panama was one of the most important visits on this scan. The country's entrepreneurial energy in taking advantage of its location and changing logistics processes is impressive. The canal clearly represents a substantial economic asset, and the Canal Authority views it not only as a transportation facility, but also as an economic engine for the country. Expansion of the canal could have important market impacts on the United States and on global trade flows. It will be important to keep track of investment plans in Panama to assess the future impacts on both the U.S. and NAFTA economies.

Mexico

Mexico City and Querétaro, Mexico
Mexico is one of the most trade-oriented countries in the world. In 2000, almost 60 percent of its economy was related to trade. About 83 percent of Mexico's foreign trade is with the United States and Canada, and 69 percent of this trade (by value) is transported by truck. The economies of the United States and Mexico have become closely tied. The maquiladora plants in the border Mexican states play an important role in the manufacturing process of many U.S. industries. The maquiladora industries were created primarily because of the low-cost labor available in Mexico. Mexico's position as the fifth-leading importer in the world and the eighth-leading exporter is directly related to the maquiladora industry. With the second-largest population in Latin America, Mexico is also a large consumer market for U.S. goods. This is likely to be even more important in the future, given Mexico's young population.

Scan Results-Mexico consciously has adopted a national policy of promoting international trade as a means of raising its living standard. Proximity to the largest consumer market in the world-the United States-has provided a unique opportunity for Mexican industries and transportation providers to participate in the global market. As noted earlier, Mexico leads the world in the number of free trade agreements it has signed with other countries. The most important of these agreements is NAFTA. Even though NAFTA has been beneficial to all three member countries, Mexican officials believe that some hurdles remain, especially in transportation.

MEXICO
Population	103.5 million
2001 GDP	$618 billion
Exports/GDP	27.6%
Trade as share of GDP	60.8%
U.S. exports to:	$101.5 billion
U.S. imports from:	$131 billion
Canadian exports to:	C$2,721 million
Canadian imports from:	C$12,120 million
Top exports: Manufactured goods, oil and oil products, silver, fruit and vegetables, cofee, and cotton

Mexico went through a successful national port restructuring process in 1993 when the national government decentralized decisionmaking to the ports themselves. A new port administration was created for each public port with the authority to provide concessions to private companies for building and operating new infrastructure on port property. Mexico now has 19 such administrations. This new institutional structure opened opportunities for investment in port facilities. For example, private business invested more than $1.5 billion in new equipment and infrastructure from 1995 to 2000, while the port administrations invested another $330 million. The number of non-petroleum terminals doubled, container terminals increased from seven to 12, grain terminals expanded from three to eight, bulk minerals terminals grew from seven to 12, and liquid bulk terminals grew from five to 11.

Figure 6a. Rate of growth in cargo handled through Mexican ports, 1990-2000.

Figure 6b. Rate of average annual growth in container cargo handled by Mexican ports, 1990-2000.

Figure 6 shows the results of both Mexico's strong economic growth and the existence of this new tradeserving infrastructure. After the new ports law was passed in 1994 and private investment in port infrastructure increased, the rate of average annual growth in cargo handled (in tons) rose to 5.7 percent from 2.0 percent. If one removes petroleum, plaster, and salt (i.e., the largest volume of bulk commodities moved through Mexican ports), the annual average growth rate reached 10 percent, up from 5 percent before the privatization law. The corresponding differential for container traffic (in TEUs) was 18 percent, compared to a 16 percent average annual growth before 1994. Although the impact of privatization is hard to pinpoint, it appears likely that the new port investments and marketing activities of private terminal operators after the national law was passed had a lot to do with this impressive result. In addition, the substantial new port investment resulted in a 52 percent increase in jobs between 1994 and 2000, from 12,092 to 18,416 employees.

One reason Mexican ports became more attractive to shippers was the impressive increase in productivity that accompanied the privatization process. In the ports of Vera Cruz and Manzanillo, the turnaround time for container ships has been reduced from 51 hours to 19. The container cargo handling rates have quadrupled in Vera Cruz to a rate of 86 containers per ship-hour. Figure 7 shows the impact of port restructuring in Vera Cruz from 1990 to 1999. For both containers and bulk commodities, productivity rates have increased, and except for bulk commodities, have shown a steady improvement over this period.

Of interest in the recent record of port operations has been the shifting in market share among Mexican ports. In particular, Vera Cruz in the Gulf of Mexico and Manzanillo on the Pacific Coast have captured the greatest market share in container traffic for their markets, 64 percent and 90 percent respectively. Both ports have made significant improvements in infrastructure and information systems. In both cases, however, road and rail access has been a limiting factor in providing even better service to Mexico and the NAFTA market. In Manzanillo's case, doublestack rail service is available to Mexico City, the only such service in the country. Both ports have ambitious plans for expansion to handle both larger vessels and larger numbers of containers.

Several other ports are in various stages of defining their market niche in both Mexico and NAFTA trade. The port of Altamira in northeastern Mexico has attempted to develop coastal service with the United States and has built new petrochemical facilities. The port of Progreso in the Yucatan has positioned itself to be a gateway to the southeastern United States and could possibly serve the growing maquiladora industry that has moved to this part of Mexico and Honduras. The port of Coatzacoalcos on the Gulf Coast has started ferry service to Tampa.

The port of Ensenada, located just south of the U.S. border on the Pacific Coast, experienced an unexpected increase in containers when the labor strike hit the U.S. West Coast ports in fall 2002. An additional 11,000 TEUs showed up over a two-week period. About 9,000 of these containers, originally destined for West Coast ports, were transported to the United States by truck. The port is trying to attract investors to develop new rail service from the port to the U.S. border and make it a viable alternative to the Long Beach-Los Angeles port complex in California.

In most cases, Mexican port officials indicated they believe great potential exists for better water transportation access to the United States, especially across the Gulf of Mexico. Most ports pointed to inadequate land access to their site as a strong limitation to such increased traffic. Port officials also noted that many shippers have a mindset geared toward trucks rather than maritime as the mode of choice to the U.S. market.

Figure 7. Impact of port restructuring on the Port of Vera Cruz.

Numerous Mexican participants in the scanning team's meetings commented that Mexico's future success as a trading nation will depend on the ability of the Mexican transport industry to integrate itself into the continent's logistics system. This is especially important when considering global competitors who have developed efficient, low-cost production and transportation processes. For example, one participant noted that it is more expensive to produce and move a bicycle from Guadalajara into the United States than it is to produce and transport a bicycle from China. Many participants indicated Mexico's transportation system should be able to provide higher levels of productivity than now exist. Mexican government officials and transport operators have been looking at developing integrated intermodal corridors as a means of offering more efficient and reliable transportation service. Two examples of a corridor approach to transportation planning include the Plan Puebla-Panamá and the Trans-Pacific Multimodal Security System.

"IT IS IMPORTANT TO HAVE A GOOD TRANSPORTATION SYSTEM TO SERVE NAFTA TRADE FLOW; HOWEVER, IT IS EVEN MORE IMPORTANT TO HAVE A SEAMLESS LOGISTICS SYSTEM."
-Mexican business representative

The Plan Puebla-Panamá is an initiative of Mexico's President Vicente Fox, who was looking for a coordinated public and private investment strategy to increase the living standard in Central America, including the southern portion of Mexico. The population of this area is estimated at about 60 million people. The transportation component of this initiative was to better connect the region's major urban and rural areas through improved highways. As shown in Figure 8, Atlantic and Pacific corridors were selected for priority investment. The goals of Plan Puebla-Panamá are to provide enhanced regional accessibility throughout Central America and improved connections to North America.

The second example of a corridor approach to planning and one that emphasizes the intermodal nature of efficient transportation is Mexico's TransPacific Multimodal Security System (TPMSS). Mexico introduced this system when it hosted the Asian Pacific Economic Cooperation meeting in 2002. It is customary for the host country to develop a prototype process, concept, or technology to spotlight during the meeting. Mexico decided to focus on the efficient and safe movement of containers from Asia to the U.S. market through movement of freight. The TPMSS was designed to use advanced surveillance systems and information technologies to monitor and inspect cargo as it proceeded along its path to the final destination. From the perspective of transportation, dry runs of container movements were undertaken. Containers were transported to Mexico City via rail from the port in Manzanillo in a record 31 hours (including clearing customs). In another demonstration, a container ship was unloaded at the port of Lázaro Cárdenas on Mexico's Pacific southwestern coast with containers transported by rail to Laredo, Texas, in a total of 96.5 hours. The third demonstration moved 62 containers off a ship in Manzanillo, cleared them through customs (six containers were selected for inspection), and transported them via doublestack rail cars to Nuevo Laredo in a record 71 hours. In each case, Mexican officials believe coordination of both customs and transportation actions provided support for a worldclass logistics system in Mexico. Strategies to make this happen included conducting all government inspections at the same time and location, extending operating hours for customs, and handling containers seamlessly during rail transport.

Figure 8. Transportation corridors identified as part of the Plan Puebla-Panamá.

One of the most important components of the NAFTA logistics system is crossing the U.S.-Mexican border. Almost everyone participating in the scan meetings noted the difficulty in developing a world-class logistics system when significant delays occur at border crossings. The discussions on this issue were tempered by the fact that the United States had just recently allowed qualified Mexican trucks to travel away from the border. This had been part of the original treaty, but had been delayed for a variety of reasons. Mexican officials still believe that Mexican truckers are being discriminated against, especially at State-run inspection sites (e.g., English tests administered to Mexican drivers are thought to be beyond what a U.S. driver could pass). Specific observations about the border included the following:

• The traditional process of transferring cargo at the border to trucks whose sole purpose is to transport cargo to U.S. transportation services, which then continue transporting the cargo to the final destination, adds significant time and cost to the logistics process. Now that Mexican trucks can move across the border, this transfer step will most likely be unnecessary. Strong constituencies exist, however, that might want border strategies put in place to continue this practice.
  
• Several participants recommended that inspections occur long before the border so that the congestion that occurs at border crossings can be partially alleviated by prequalifying truck and rail transportation services. For example, one rail official noted that trains are often stopped on the bridge that connects the two countries, tying up other trains that might be following along the same track.
  
• Border inspections are limited by the hours of operation for the inspection agencies. Officials believe 24-hour-a-day operations are warranted at some locations.
  
• Intermodal rail service, especially from Mexico's southernmost ports (e.g., Manzanillo) has grown slowly. The market is somewhat limited by today's level of service and customs delays at the port and the U.S. border. As demonstrated in the TPMSS example, however, rail can become competitive with trucks if the right conditions are provided for the service.
  
• Numerous efforts are under way to use ITS technologies to improve efficiency of movement across the border. Mexican officials, in particular, thought that greater effort could be made to integrate the exchange of information between U.S. and Mexican inspection agencies with better information systems.
  
• Improved facilities are needed at many border crossings. Such infrastructure improvements are likely to be expensive, but funding is necessary if more efficient transportation is to be achieved. For example, several suggestions were made for providing dedicated lanes for trucks either preregistered or preinspected before reaching the border. Others noted that as far as they knew, the NAFTA bank established to fund infrastructure at the border has yet to fund a single project.
  
• The most important mechanism for coordinating border improvements is the Joint Working Committee, which has provided an important forum for discussing better flows across the border. Some suggested that perhaps the mission of this group should be enhanced to include a more direct linkage to private industry and to enlist its support for developing a business plan for the border. By looking at the border from a logistics perspective, with a clear mandate for improved security, a better concept for border transportation may evolve.
  
• Better coordination is needed in analyzing border issues. This relates to everything from data collection to development of better analytical tools for assessing the effectiveness of different strategies.
  
• A one-stop shopping concept should be considered in developing a rational logistics system for crossborder movements. One shipper noted that his firm deals with 15 different agencies for shipping across the border. His firm, which has a long record of dealing with such movements, is treated the same as a new owner-operator with no track record. A way of dealing more expeditiously with those who have a record of safe and secure movement of cargo is needed.
  

Mexico's Trans-Pacific Multimodal Security System Typical steps in this system to monitor and inspect cargo include: Initial security screening occurs at the shipper's origin or at transshipment in Singapore. Singapore sends advance notification to Mexican and U.S. Customs with "pre-clearance" information. When containers arrive in Mexico, they proceed through X-ray or gamma ray arc inspection, but they do not clear Mexican Customs.Any suspicious containers are removed from the "in-bond" regimen. Cargo is transported to the U.S. border on the doublestack unit trains tracked by a GPS system and monitored by intelligent transportation system (ITS) technologies during the entire journey. When the train reaches the U.S. border, the containers pass through another X-ray or gamma ray arc inspection and clear U.S. Customs through the electronic manifesting system.Any suspicious containers are inspected further. Under GPS tracking, cargo travels non-stop on Kansas City Southern or Union Pacific trains to inland trade processing centers. Customs inspections occur at these centers. Cargo is sent to final destinations. Source: http://www.tpmss.com

Figure 9. Number of maquiladora firms by year.

Officials working for the Secretaría de Economía stated that NAFTA has had positive impacts on the Mexican economy. Until recently, Mexico enjoyed a 17 percent annual growth in GDP, primarily because of its participation in trade-related industries. Mexican exports have quadrupled since NAFTA was signed, and export-related jobs carry a 37 to 40 percent higher wage rate than other jobs. Since 1994, about three million jobs have been created, 50 percent of which can be attributed to trade that occurred in response to the free trade agreements Mexico has signed (70 percent of this can be attributed to NAFTA). Since 1994, Mexico has enjoyed $147 billion in direct foreign investment. Mexico now faces strong competition, however, from Asia, and in particular China, in the low-wage market. In the Mexican domestic market, for example, Chinese textiles and toys are already cheaper than those produced by Mexican industry. Foreign investment that used to come to Mexico now goes to Asian countries. As Figure 9 shows, the number of maquiladora plants has declined for the first time. Mexican surveys of the firms that are closing indicated that a large number are relocating to Asia to take advantage of lower labor costs. This is a significant issue when one considers that the maquiladora industry represented about 41 percent of Mexico's exports in 2001.

Although the loss of maquiladora plants is a concern, some view this change as a natural evolution to a higher living standard for Mexico's citizens.

Toll roads are the major means of providing new road infrastructure in Latin America.

Developing higher value-added industries that provide higher-paying jobs necessarily will cause a shift in the low-end market. It is likely that some commodities, such as textiles, will experience a significant shift in production location, which will have an impact on transportation needs in both Mexico and the United States. Higher-value products also require more reliable and time-sensitive transportation services. Secretaría de Economía officials strongly support additional investment in ports, highways, and railroads that could provide such transportation service in light of the needs of a world-class logistics support system.

Mexico is also interested in extending the NAFTA concept south, and several memoranda of understanding have been signed with Central American companies to establish rules of reciprocity, such as exchanging truck trailers. Mexico also wants to diversify its markets and become less dependent on the U.S. economy for its own economic health. Both the United States and Panama represent important nodes of competition that will have to be considered in Mexico's future.

Security issues were discussed at length throughout the visit in Mexico. Officials understand that the border represents a potential security risk to the United States and that it is necessary to ensure all steps in the logistics chain leading to the border are secure and safe. Without security completely engrained into Mexico's economic relationship with the United States, some officials worry that Mexico will lose the competitive advantage of its proximity to the U.S. market. The key question is how to provide high levels of security while still preserving similarly high levels of transportation efficiency. This will require a smarter approach to border crossings, more use of advanced technology for monitoring and tracking cargo, and better institutional relationships among the many agencies involved in border inspections. In many ways, security is becoming a market niche that will strongly influence global trade flows in the future.

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