OPTIMIZATION OF FREIGHT TRANSPORTATION WITHIN NAFTA COUNTRIES: FRAMING THE ISSUES

Josue I HernandezEnvironmental Policy AnalysisJohns Hopkins University

Abstract

Transportation supports and makes possible most other social and economic activities and exchanges, making its influence felt in all economic sectors. Optimization in freight transportation is a determinant factor in the success of global manufacturing and marketing strategies. Recent free trade agreements in the Western Hemisphere, such as NAFTA, give a natural advantage to the United States granted its geographical proximity to markets. Despite advances in communications and technology, there are still transportation efficiency and efficacy shortcomings. Further improvements can be achieved through the optimal management of logistics processes. The ISTEA provides the support and resources to engage in research and development activities.

Freight Transportation in the United States

In order to be competitive in global markets, the transportation system of the United

States (U.S.) needs to meet the requirements of shippers and carriers, of consumers and

producers. The role of the transportation system is key for a dynamic economy. According to

the Bureau of Transportation Statistics (BTS), the share of transportation-related final demand

in gross domestic product (GDP) provides the best description of the influence of the

transportation sector in the economy. The transportation-related final demand in GDP (U.S.

DOT, Transportation In the U.S., p.11) is defined as “the value of all transportation-related

goods and services, regardless of industry origin, delivered to the final customer, and includes

consumer and government expenditures, investments, and net exports”. Under this

perspective, transportation inputs in the economy as a share of the GDP has been close to 11

1

percent since 1989, adding $777.2 billion to a $7.25 trillion of GDP in 1995. During the last

years, transportation activity has increased steadily, moving more goods and people,

singularly without an increase in the consumption of resources. The share of transportation to

the U.S. economic activities has remained constant.

During the last years, international trade has become an increasingly important activity

in the U.S. economy. The total imports and exports of goods and services increased from 11.3

percent of the GDP in 1970, to 24.7 percent in 1995 (U.S. DOT, Transportation in the U.S.,

p.2). An extensive network of roads, railroads, waterways, pipelines, and air routes support

freight transportation across the country. The trade of goods, which can be considered a

reliable indicator of freight movement, more than duplicated, from 8.1 percent in 1970 to

19.5 percent in 1995 (U.S. DOT, Transportation in the U.S., p.4). Maritime freight

transportation, involving trade with other countries, also increased from 581 million tons in

1970 to over 1.1 billion in 1995.

According to the Commodity Flow Survey (CFS) conducted by the BTS in 1993,

during a normal day in that year, roughly 33 million tons of goods were carried an average

distance of 298 miles. The US transportation system shipped more than 12 billion tons of

goods, generating a total of 3.6 trillion ton-miles throughout 1993. A nationwide survey of

200,000 shippers provided information about the nature of their goods, what mode was

utilized, and the destination of their products (U.S. DOT, Truck Movements in America, p.1).

The most probable paths used by the carriers were determined by Oak Ridge National

Laboratory. They used advanced network simulation models and data on highways, railroads,

waterways, pipelines, and air routes located in the National Transportation Atlas Database,

published by the Bureau of Transportation Statistics. The data generated accounts for almost

2

all truck activity, but it does not consider U.S. imports, foreign trade crossing U.S. territory,

and national goods forwarded by household, rental, services, and government shippers.

The BTS remarks that during 1993, food and similar products, such as cereals,

account for barely under 15 percent of the total value of shipments. However, they constitute

the largest category of commodity by cost, and the fourth largest category by tonnage. The

most important goods by value were processed products like chemicals or associated

products; transportation equipment; non-electrical machinery; and electrical machinery,

equipment, or supplies. By weight, other important commodity categories contain raw

materials such as petroleum or coal products; non-metallic minerals; and bulk clay, concrete,

glass, or stone.

Transportation in the U. S. by Mode Type

The transportation of goods by truck has the largest proportion of freight movement in

the U.S. For shipping distances less than 500 miles, trucks dominate by far the U.S.

transportation system. They move close to 75 percent of the value and just over 50 percent of

the weight of all goods forwarded. Oak Ridge National Laboratory calculations for the

Commodity Flow Survey (Table 1) estimates that trucks transported close to 900 billion ton-

miles of goods, with an estimated worth of $4.6 trillion during 1993. The most important

variables that influence the demand for road and rail freight transportation are distance, cost,

quality of service, existing alternatives, and economic and environmental conditions.

Customers are influenced not only by rates and speed, but also by the perceived service

quality of alternative modes of transport.

The importance of intermodal freight transportation has increased in recent years, due

to the economic advantage for shippers of using efficiently connected modes. Intermodal

3

carrying is defined as unitized loads, such as containers or trailers that can be transferred from

one mode to another. An important change in the development of intermodal transportation is

the increased use of the international maritime container, which is revolutionizing the railroad

business almost to the same degree it had previously transformed maritime transportation.

The adaptation of the container as a “container on flat car” (COFC) and its recent “double

stack” (DS), has offered the possibility to the railways to compete with long-haul trucking.

Table 1. U.S. Freight Shipments by Mode

Mode Tons % Tons-mi % Value % (Millions) (Millions) (Billions)

Trucks 6,386 52.5 869,536 24.0 4,403 71.9 Water 2,128 17.5 886,085 24.4 251 4.1Rail 1,544 12.7 942,561 26.0 247 4.0Pipeline 1,343 11.0 592,900 16.3 180 2.9Air 3 0.03 4,009 0.1 139 2.3

Intmod. Tot. 208 1.7 235,856 6.5 660 10.8Unknown 545 4.57 96,972 2.7 244 4.0

Total 12,157 100 3,627,919 100 6,124 100

Source: Pocket Guide to Transportation (U.S. DOT, p. 10), 1998

The share of intermodal movement has increased during recent years. The traditional

combination of rail and truck transportation shipped around 41 million tons of cargo, valued

at $83 billion in 1993. The prices of goods shipped by intermodal transportation are usually

high. According to the BTS (U.S. DOT, Transportation in the U.S. p.11), commodities

shipped by postal, parcel, and courier services averaged $14.90 per pound, while intermodal

shipments using railroads and trucks had an average cost of $1.02 per pound. While the most

expensive transportation costs arise when air and air-truck combinations are used, costing an

average of $22.15 per pound, the least expensive ones are under $0.10 per pound for

railroads, water transportation, and pipeline.

4

Research and Development under ISTEA

The Intermodal Surface Transportation Efficiency Act (ISTEA) was enacted in 1991,

and at that moment, the statistics of transportation in the U.S. had moved through two

completely different stages. The Department of Transportation (DOT) and the Census

Bureau of the Department of Commerce during the 1970s conducted a comprehensive

analysis of national transportation information. Significant data-collection activities in all

modes of transportation originated comprehensive publications such as the National

Transportation Atlas. This shared effort was at its best around 1977. Due to government

deregulation and diminishing federal budgets, many statistical programs were ended. As a

consequence, the federal government did not conduct any comprehensive national analysis of

transportation between 1979 and 1989, and no national multimodal data on commodity

traffic was gathered between the years of 1977 and 1993. The essentiality of this class of

information for the transportation sector kept a high demand for publications.

The Bureau of Transportation Statistics (BTS) was created to generate a set of

knowledge relevant to the interest of policy-makers, and to inform the public about

transportation in the U.S. and its consequences. Its basic functions include the collection,

analysis, and publication of relevant data. The BTS was directed by congress to assess the

current state of the transportation system, how well the information was analyzed, and to

report the statistics in the Transportation Statistics Annual Report (TSAR).

So far, the BTS has delivered the requested information in most of the areas specified

in the ISTEA. Among others, it has initiated attempts with Canada and Mexico to generate a

connected representation of freight transit in North America.

5

The ISTEA provides the necessary resources and guidance for research and

development activities. Abundant provision of resources is contributed for investigation and

the consequent application of generated innovation to solve existing highway issues. The

creation of a new Applied Research and Technology Program is focused on the test,

evaluation, and implementation of innovations to enhance the durability, efficiency, efficacy,

productivity, and safety of highway, and intermodal transportation systems. As usual,

required funds are available for new construction, but the program will emphasize the

protection, improvement, and increased efficiency of existing facilities.

ISTEA has the authority to initiate an integrated plan at a national level to promote

research and development for the surface transportation. The Research Advisory Committee

and the National Council on Surface Transportation Research are in charge. The function of

the Committee is to provide timely advice to the secretary about issues with respect to

research and development activities in the short and the long run. With the creation of a new

International Highway Transportation Outreach Program, the U.S. highway community will

be able to promote and to transfer domestic transit expertise to other countries. The activities

of the Council include the analysis of technology developments in the U.S. and around the

world; the identification of discontinuities and duplications in the national system; and the

determination potential areas in which productivity, efficiency, safety, and durability of the

national network can benefit.

Global Trade and Freight Transportation

Transportation accessibility nourishes and promotes most of the current social and

economic activities in the nation. Transportation of merchandise is a determinant activity in

the U.S. economy, not only as compared by its proportion in the economic activities of the

6

country, but also by the growing predominance that the transportation and distribution of

commodities have on the performance of essentially all the different sectors of the economy.

The world economy of today is totally different from the world economy that existed

in 1948, when the General Agreement on Tariffs and Trade (GATT) started at Bretton

Woods. Worldwide economic deregulation has changed the economic landscape during the

last two decades. In addition to the increased membership and the reach of the GATT, the

economic benefits for its constituents have also expanded. For instance, tariffs around the

world have diminished from an average of around 40 percent after World War II, to the

present level of about 5 percent (Sager, p.240). However, the increased number of GATT

member nations and the increasing complexity of trade issues considered in GATT meetings

have encouraged the formation of preferential and regional trade agreements.

The start of regional trade agreements is a natural response to geographical

proximity. Normally, members of a regional trade agreement are close geographically and, in

response to lower transport and communication costs, they can be expected to have intensive

trade, regardless of the status of a multilateral trading system such as the GAAT. The

increased globalization of the economy and the need for long distance movement of freight,

people, and information, usually in trips that can be characterized as intermodal, accentuates

the importance of transportation for all economic activities.

The international commercial activity of the 1990s has benefited from a sequence of

free trade agreements. The objective of these pacts, in both a global and a regional scale, is

to develop an even economic environment among pact partners. As trade barriers are

lowered, trade pacts are enabling profound market changes across the globe and are

accelerating global trade activity. Modern market changes include the reduction of quotas

7

and tariffs, more economic stability, and a developed consumerism in many new markets.

However, in order to have a successful free trade agreement, one of the determinant factors

is freight transportation cost.

A trade agreement is justified, in economic terms, if it improves the social welfare of

the participant countries. One way to characterize trade costs, is to locate them among the

polar cases of zero and infinite inter-regional transportation costs, respectively. In order to

have a complete analysis, there is the need of a general model that can manipulate the

intermediate realistic case, where transportation costs between regions are less than infinite,

while greater than zero. Data collected through the period of 1965 to 1990 indicates that

those real values for intra-continental cost range from 10 percent, the proportion of the total

cost of the commodity at which transportation costs are beginning to be a burden, to 16

percent. Hauling through long distances can generate costs greater than the freight value and

insurance amount required by the physical transport of goods. Transportation costs of 16

percent are frequent, but local production and imports from closer suppliers make it

unsustainable on the long run. As expected, negative returns to regionalization may begin to

set when transportation costs reach about 23 percent (Frankel, et. al., p.68). Despite the

obvious importance of distance in transportation costs, and the impact of the latter in the

volume of trade, empirical studies repeatedly underestimate the importance of this factor.

The distances considered by some researchers are usually between the major cities of the

regions in question.

The recent market changes and the drop of trade barriers have encouraged traffic

shifts, moving to new, untapped locations. For instance, economic improvements in

MERCOSUR countries have allowed U.S. exports growth of over 40 percent to this region

8

from 1993 to 1996. As a consequence, shippers are now transporting different types of

products to new locations, as new markets open. Economic development in different regions

of the world demand products from industrialized countries. Commodities like railroad

equipment, power station components, and industrial equipment, are being transported from

all points on the world to new, and often distant, locations. Freight transporters are

confronting new demands. Carriers must be able to manage the challenge of physically

moving these goods to unusual destinations. They must also consider cost-related new

complications, such as the improbability of any sort of back-haul from these places.

Trade in the Western Hemisphere

In the Western Hemisphere, as in the rest of the world, the natural determinants of

trade are the physical proximity of related countries, their sizes and GDP, and whether they

share a common language or a common border. It is a normal practice that countries, even

without the formation of regional trade areas or preferential trading arrangements of any sort,

trade more with their neighbors than with other countries, in a large part because of freight

transportation costs.

Most of the regional trade agreements in the Western Hemisphere that were

established in the past did not initially come to much, such as the 1960 Central American

Common Market (CACM), the 1960 Latin America Free Trade Association (LAFTA) or the

1969 Andean Pact. However, recent trade agreements have been more serious, for example,

the Canadian-US Free Trade Agreement negotiations were successfully concluded in 1988,

and the treaty went into effect in 1989. MERCOSUR was negotiated between Argentina,

Brazil, Paraguay and Uruguay in March 1990, scheduling an elimination of all regional

tariffs by the end of 1994. Colombia and Venezuela revitalized the Andes Pact in the 1990-

9

1991 period. The North American Free Trade Agreement (NAFTA) started negotiations

between the Canadian, Mexican, and U.S. governments in 1992, and went into effect on

January 1st, 1994.

The North American Free Trade Agreement

According to information provided by the BTS Trans-border Surface Freight Dataset,

released by the Census Bureau in 1995, nearly $274 billion worth of goods moved by land

between Canada and the U.S., up 10.5 percent from 1994, the first year NAFTA was in

effect. By freight worth, 68 percent of this traffic moved by truck, 20 percent by rail, and 4

percent by pipeline. The rest moved by other surface modes. Trade between Mexico and the

U.S. moved by land during 1995 was over $97 billion worth of goods, up 7.8 percent from

1994. By value, 81 percent of this trade moved by truck, and 14 percent by rail. Along the

U.S.-Mexican border, there were approximately 11,000 truck crossings from Mexico to the

U.S. on an average weekday of 1995. This represents a 27 percent increase from 1992, and

there are strong indications that the trend will continue into the future.

There is evidence that NAFTA is making improvements on both the dimension and

composition of trade flows. During 1994, NAFTA’s first year, trade between the NAFTA

partners grew by 17 percent over 1993, reaching a record of $350 billion. Recent

developments suggest shippers are likely to see more opportunities for efficiency as private

investment and lowering trade barriers force market changes forward. For example, the

Mexican government is privatizing the national railroads, speeding the sale of its container

terminals, and improving the performance major highways. These changes should improve

inland transportation efficiency. However, meaningful improvements will likely take several

years to implement.

10

Meanwhile, changing market dynamics resulting from the NAFTA have allowed U.S.

businesses to increase their share in the North American market, for instance, U.S. auto parts

started to get a competitive advantage over Japanese ones to supply auto manufacturers in

Canada and Mexico. This competitive advantage has been driven by reduced tariffs,

integrated rules of origin and amplified transportation arrangements. Combined, these have

lowered costs and reduced cycle time. Other companies are taking advantage of new market

opportunities by relocating production. For example, market changes generated by NAFTA

compelled Kodak to repatriate some of its production back to North America from Europe;

in order to accommodate expected increased film exports in the region.

However, companies and governments need to be aware that in the long run, unstable

market forces can block commercial opportunities in emerging markets like Mexico.

Developing markets typically experience cycles of economic unrest, characterized by

political turmoil, trade imbalances, and currency fluctuations. For example, since the

commercial tariffs opened to Mexico in 1994, there were episodes of political strife, export

surges and recedes, and a major devaluation of the peso.

Addressing the Issues

The rules of the game are changing along the implementation of the free trade pacts

and are driving changes in the fundamental rules of the logistics structure. These dynamics

are providing freight forwarders with many opportunities and challenges that previously

were not part of their decision alternatives. The implications of these rule changes can have

immense consequences for both shippers and carriers. This perception is supported by an

American Management Association survey, in which half of the 146 companies surveyed

feel that trade globalization will have the greatest impact on their business in the coming

11

years (Zubrod, p.62). These companies can have new opportunities as changes in trade flows

occur: they can reduce costs by rationalizing and relocating sourcing and production to

different locations, by minimizing transportation costs. They can also take the opportunity to

serve with reasonable profits a broader consumer base in the newly expanded markets.

Policies established by governments can significantly affect the amount of traffic and

therefore the utilization and efficiency of a transportation system. Prevalent examples of

government rulings include energy pricing and taxation, mode imposition, infrastructure

utilization pricing, etc. Changes in the regulation of transportation can have a powerful

impact on the operation and competitive environment of transportation firms. The

deregulation effort of the 1980s, particularly in North America and currently starting to gain

momentum in Europe, has seen governments remove numerous rules and restrictions. The

main effects can be seen in the entry of new firms in the market and in the fixing of tariffs

and routes, resulting in a more competitive industry and in changes in the number and

characteristics of the transportation firms. Simultaneously, more stringent safety regulations

have been imposed, resulting in complicated planning and operating procedures.

As producers of commodities look to capitalize on new opportunities brought by

market changes, they also encounter new challenges. For example, small and medium-sized

companies are finding themselves under strong competition, missing free trade opportunities

because they lack the scale and financial agility to react quickly to changing trade flows. In

the case of large corporations, that do have the scale and financial agility to extend a portion

of their supply chain to newly liberalized markets, they are mostly restrained because of

limitations of the transportation infrastructure. As an example, exporters sending raw

materials to Mexico for manufacturing, face new logistics challenges such as transportation

12

equipment shortages, long and unpredictable inland transit times, and long delays at the

customs.

Even as shippers stretch their supply chains across unfamiliar and distant markets,

they are continuously raising expectations for reduced cycle times, lower inventory levels

and increased market responsiveness. As producers of goods are restructuring their logistics

networks, they are also looking for different alternatives to meet their transportation needs,

looking at the way they buy transportation services. Consequently, their key purchasing

factors for logistics services are now based on capabilities such as mobilizing and managing

increasingly complex information and physical flows at reasonable prices.

Carrier Demands

Freight carriers in North America are increasingly facing constant changes in the

process of supplying production and distributing commodities, as requests from NAFTA

shippers arrive. To meet those changes transportation providers need to accommodate to

frequent shifts in buying behavior, just-in-time (JIT) deliveries requests, and increased

complexity in information. Those carriers who want to participate and succeed in the

evolving global market require three new capabilities such as access to information and

technology, increased scale throughout the world, and the ability to integrate the components

of the supply chain.

Access to Information and Technology. Transportation providers can obtain earlier

access to useful information such as raw material orders, target cycle times, and sales

forecasts, linking up with shippers. Current demands for information are related with the

domestic transportation of international trade, costs of transportation, motor vehicles

availability, and railroad geography and condition, among others. There are sophisticated

13

systems that can provide carriers with the ability to manage both information and physical

flows by linking with information centers. The centers can provide internal analysis, such as

planning and execution information, purchase order data, and shipment interface

information.

Scale Expansion. One of the fundamental skills of transportation providers is the

ability to be immediately responsive, with cost-competitive, seamless global service. This

capability requires a certain critical mass of the transportation firm to efficiently mobilize

commodities for customers anywhere in the world. Some small and medium-sized

transportation forwarders are finding themselves able to compete only in price, and may

eventually be driven out of business. They are disadvantaged because of their inability to

provide the reliability of service or the physical equipment needed to flexibly respond to the

demands of shippers.

Supply Chain Integration. Another important advantage is the ability to integrate and

aggressively manage the components of the regional supply network. Transportation

providers are the link between shifting global supply and demand locations. To be

successful, freight forwarders require the management capability to orchestrate real-time

information across different modes and geography.

An overview of the U.S. transportation system clearly indicates that despite extensive

transportation infrastructure and technological advances, connections between the different

transportation modes are typically the weakest links in the national transportation system.

Bottlenecks at transfer terminals can result in costly delays, as currently happens in most

West Coast international maritime ports. Historically, the national railroad network has been

divided in eastern and western railroad companies, with one of the railroads providing coast-

14

to-coast service on a single set of tracks. A strong NAFTA concern is about whether north-

south transportation costs could obstruct the growth of trade among the U.S., Canada and

Mexico. However, highway, railroad, and water links provide states in the Midwest

comparatively good access to eastern Canadian cities, which, in turn, have relatively good

access to the U.S. Gulf Coast ports. U.S. trade with Canada is concentrated in the

industrialized Northeast and Midwest. Trade with Mexico is even more concentrated

geographically, remarkably with Texas and California.

As a summary, the tasks ahead to develop a transportation system that can enhance

the commercial performance of companies, individuals, and governments in the NAFTA

countries, given the current competitive global pressures to dominate markets, are as follows:

identify what kind of information is needed in order to carry sound transportation planning,

and design the means to collect it; develop a NAFTA-wide inventory of modes of freight

transportation; locate where there are bottlenecks and where there is under utilization; and

identify present and future sources of supply and demand, across all different kinds of

commodities, from natural resources to manufactured products.

Based on existing and forecasted information, planners have to develop transit

scenarios that can meet present and future transportation needs in an efficient and effective

way. In case the analytical tools identify non-existing better alternatives, economists should

run benefit-cost analyses to evaluate the construction of new railroads, highways, intermodal

installations, maritime ports, etc. Planners should also maintain awareness of potentially

disturbing factors that can affect freight transportation, such as oil prices, demography

changes and migration, regional policies towards trade, depletable resources, global

environmental concerns, etc.

15

Basically, what is needed is to create a NAFTA scheme, capable of recognizing

inefficiencies and opportunities, making the right decisions, building up infrastructure, and

above all, capable of and prone to provide timely and meaningful information to the public.

The market place will make optimization run efficient trade in North America.

Transportation Models

Transportation anywhere in the world is a complicated field, with multiple players

and levels of decision, where investments are usually capital intensive and the

implementation takes a long time. Freight traffic needs to be flexible enough to react to

changes in the political, social, and economic trends. It is a field where timely and efficient

methods and instruments are needed to help and to improve the planning and decision-

making processes. For the benefit of the NAFTA region, the freight transportation industry

has to accomplish high efficiency in terms of economic efficiency and service quality.

Economic performance today is not just in terms of regional optimization; North

American dependence in imported oil, cheaper and better foreign technology, raw materials,

among others, can exercise a negative effect in the trade balance.

Industry is aware of these competitive trends, and it is adapting to new paradigms on

production and management. Practices such as small or no inventories associated with JIT

supply, production, and distribution; quality control of the entire logistics process driven by

customer demands and requirements, etc., compels high service standards on the

transportation industry. This applies, in particular, to absolute delivery time and reliability of

the transportation sector.

The Council of Logistics Management (Fawcet, p. 18) has defined logistics as “the

process of planning, implementing, and controlling the efficient, effective flow and storage

16

of materials, finished goods, services, and related information from origin to the location

where they are used or consumed”. The success of business competing in global markets

depends in the implementation of sound management of logistics strategies.

Reliable decision-making induces the development of policies and operating

strategies that can be operative over long time horizons. These decisions determine the

design and construction of physical infrastructure (highways, railroads, loading and

unloading terminals, etc.), where to locate the facilities, on what lines to add capacity or

which ones to abandon, etc. The above issues can be collectively recognized as logistics

system design. With this unified approach, regional, national, and international levels of

integration can be examined, and strategic models and plans for the freight transportation

industry can be considered simultaneously.

The models most frequently used are the following.

Location Models. The sitting of one or several facilities, in this case transportation

infrastructure, are considered location problems by the systems engineering discipline. The

most frequent objective is to facilitate the transportation of goods or the supplying of

services along a given transportation network. They can be classified as follows.

Covering problems are usually dealing with the optimal location of public facilities such as schools, post offices, and libraries. These models position infrastructure at the vertices of a network, so that the remaining vertices are covered by the chosen facility. One of the objectives can be to minimize the total cost of locating them.

Center problems frequently originate when there is the need to locate emergency facilities such as ambulance, police, and fire stations. Center models position infrastructure at vertices of a network to minimize the distance between a vertex and a facility.

Median problems are reasonably applicable to freight distribution, usually in the form of intermodal terminals, storage and distribution centers. Median models locate infrastructure at vertices of a network and designate demands to these

17

facilities to minimize the total weighted distance between facilities and demand areas.

More complicated location problems can arise in production and transportation

planning. For example, the models for a multi-commodity site location. The formulation

could aim to determine the logistics design of the land distribution and transportation of an

international freight transportation company. The planning scheme could include the

determination of inland depots, the assignment of customers to depots for each commodity

type, and direction of operations and the determination of the main repositioning flows of

empty containers to counter the regional differences between supplies and demand.

Currently, there are computer applications that can work through new communications

technology such as the Internet. Model 204, a product of Computer Corporation of America,

is database software that can be able to handle complex information needs, such as the ones

required by the logistics problem stated above.

Network Design Models. Network design problems are considered a generalization of

location formulations. They are graphically represented by nodes or vertices connected by

links. The vertices usually represent origins or destinations of some transportation supply or

demand of commodities. The links can have several properties such as distance, carrying

capacity, and costs.

From a planning perspective, freight transportation can be divided in operations that

are concerned primarily with long-distance movements of commodities, such as railroad

transportation and less-than-truckload (LTL) trucking, and those that execute several pickup

and delivery operations, over relatively short distances. The first case is often recognized as

the service network design problem, and the second type of operations is frequently

identified as vehicle routing problems.

18

Spatial equilibrium models can be useful for companies, governments and

multilateral organizations interested in a wider perspective of a regional economic

performance. Decision-makers can improve the quality of their analysis and resolutions if

they integrate spatial modeling in their information package. This analytical tool is embodied

in the theory of competitive spatial market equilibrium, which investigates and examines

trade and transportation expenses between different locations, with explicit supply and

demand characteristics.

The prediction of multicommodity freight flows over multimode networks is an

important component of the economics of transportation. However, perhaps due to the

inherent difficulties and complexities of such problems, the study and modeling of freight

flows at the regional, national or international levels have not yet achieved full development.

Conclusions

Within the NAFTA context, freight transporters must find ways to improve their

resources and capabilities. In order to serve more complex global demands and to face the

competitive challenges of a deregulated environment, transportation providers need to

establish strategic associations with both shippers and other carriers to meet the North

American success requirements. By cooperating with and partnering with shippers,

transportation providers can become more integrated with their customers. There is the

strategic need to share information, facilities, equipment, and personnel since their joint

performance can improve decisions, costs, and reliability.

By cooperating with and partnering with other transportation providers, carriers can

develop virtual global transportation networks and take advantage of someone else’s scale of

competence. This “virtual scale” gives carriers, regardless of their size, access to integrated

19

supply chain skills, more flexible service, and better resource utilization. Transportation

providers can become more informationally integrated and physically interdependent. As a

possible result of this cooperation, we could see a new class of carrier in North America,

very different from the common definition.

Transportation systems comprehend a great deal of material and human resources.

They exhibit complicated relationships and tradeoffs among the several decisions and

management policies affecting the system. The policies concerning any entity interested in

the good performance of trade are the following.

Strategic policies involve long-term planning, and the decisions are made at the

highest management levels. They usually require considerable capital investments over a

long period of time. Infrastructure such as physical networks, construction of service

facilities, and resource acquisition are good examples. New infrastructure can be constructed

or improve existing ones. Decisions also include the abandonment of underused and

unprofitable facilities.

Tactical policies are for medium-term planning, and they look for an efficient use of

resources aimed to get better performance of current facilities. This type of decision

addresses issues located between the long-term and day-to-day operations. Route choices,

type of services to operate, and repositioning of supplies are among the tactical decisions

made at this level.

Operational policies involve local management in very active surroundings. Its

domain is the short-term planning, where the time factor plays a significant role. Activities

such as the scheduling of services, maintenance activities, and crew management, are

relevant operational decisions.

20

Efficiency in freight transportation is good not only for shippers and transporters, but

also to the entire NAFTA economy. Therefore, the participation of governments in providing

data, communications, and physical infrastructure at the expense of taxpayers, is going to

come back in the form of improved social welfare.

In the case of Canada, for example, transportation is a sector that presents special

problems for the government at all levels. It is one of the few economic sectors in which all

indicators are moving in the wrong direction. In addressing the challenge, Canada will

require the work and cooperation of all levels of the public sector, in many different facets of

societal and economic activities. One aspect of this challenge will require a stronger reliance

on transportation demand management (TDM) in order to reverse current indicators.

In the U.S., despite recent investments in information systems, logistics information

capabilities are still inadequate to support strategic business decision-making. Capturing,

analyzing and disseminating relevant information in a timely manner is a major challenge to

support global operations of freight carriers. As a consequence of a demanding marketplace,

excellence in logistics has become the objective of manufacturers throughout the NAFTA

countries. The rationale is that optimization in logistics allows manufacturers to effectively

and efficiently produce and deliver a more competitive product/service package to their

customers, wherever they operate in today’s global market. What this all means, is that

expanding trade activity has prompted market changes that have, in turn, transformed the

mechanisms for international supply chain management. Recent developments suggest that

global logistics is becoming an activity indexed by cooperation and integration capabilities.

The future success of freight transportation firms will depend in finding ways to

compete on information and management service capabilities, rather than on a traditional

21

asset-based capability. What is at stake is not only the future of the freight forwarders, but

also the economic well being of suppliers and consumers to which they provide services.

Confronted with other economic regions, the European Community is gearing up, the

ultimate casualty may be the North American economy. It is up to the governments of

Canada, Mexico, and the United States to provide the adequate support to facilitate and

enhance trade in the NAFTA area.

References

Fawcett, S. E. and Clinton, S. R. (1997) “Enhancing Logistics to Improve the Competitiveness of Manufacturing Organizations” Transportation Journal V31 N1.

Frankel, J., Stain, E., Wei, S. (1995) “Trading Blocks and the Americas: The Natural, the Unnatural, and the Super-natural” Journal of Development Economics V47 N1.

22

Lustig, N. C. (1997) “NAFTA: Setting the Record Straight” The World Economy V20 N5.

Sager, M. A. (1997) “Regional Trade Agreements: Their Role and the Economic Impact on Trade Flows” The World Economy V20 N2. Check.

U.S. Department of Transportation Bureau of Transportation Statistics (1998) “Pocket Guide to Transportation” U.S. Department of Transportation.

U.S. Department of Transportation Bureau of Transportation Statistics (1997) “Transportation in the United States: A Review” U.S. Department of Transportation.

U.S. Department of Transportation Bureau of Transportation Statistics (1997) “Truck Movements in America” TranStats May 1997.

Zubrod, J. F. and Barron, M. B. (1996) “Trade Pacts Fuel a Transformation in the Rules of Global Logistics” Transport &Distribution V37 N4.

23