The broken supply chain has been a major topic of American voters’ attention for several years. It is a broad-ranging issue with wide-ranging consequences for the economy as well as consumers. President Biden recently highlighted the fact that he signed a bipartisan bill to cut shipping costs by 90%, which will help American farmers, businessmen, and consumers.
While the jury is still out on whether the president deserves credit for solving supply chain problems and how effective his efforts were, his administration is currently reviewing a merger proposal that could have serious implications for freight rail and the wider supply chain.
Freight rail is a key link in the supply chain. It moves 19.3 billion tonnes of goods each year, which accounts for about 1/3 of all U.S. exported goods. It is crucial that the Surface Transportation Board (STB), which is the sixth and seventh largest U.S. railroad respectively, makes the right decision on the merger of Canadian Pacific (CP), and Kansas City Southern.
Although mergers can in some cases benefit shareholders, the economy, and the consumer, they are not always a good idea. This merger would condense a shrinking market, create less competition for shippers, and make it harder for the country’s dependence on them. The number of Class I railroads has dropped from 63 in the United States to seven over the past 50 years. It seems foolish to reduce the number of Class I railroads in the United States to six, as there is not enough room for consolidation in freight railways.
Canadian Pacific Kansas City (CPKC), the new railroad, could use its monopolistic advantage to charge any price for critical supply chain routes or divert shipments entirely. This is due to the fact that it would be North America’s only railroad. The new CPKC railroad would have a competitive advantage over its peers and would have the ability to control key interchanges and routes, which would allow them to raise rates, create bottlenecks, or divert freight from competitors.
Some shippers have taken to court several Class I railroads accused of price fixing, citing antitrust concerns as the reason. Stephen Neuwirth, an attorney who was involved in the case, said that railroads responded with arguments that would have made them immune from antitrust laws. This is not a strong endorsement for rail industry consolidation.
This merger could have a negative impact on our economy, supply chain, and workers at American ports and railroads. Keith Creel (CEO of Canadian Pacific Railway) has already spoken out about how the new railroad could profit from the merger by diverting cargo from U.S. ports and bringing it to Mexico’s ports, such as the Port of Lazaro Cardenas. Several Federal Maritime Commissioners voiced concern about this arrangement. They stressed the importance of America “maintaining our infrastructure as well our operational capabilities” after the pandemic.
This is in direct contradiction to the previous efforts of President Biden in securing supply chains. For example, in July 2021, he signed an executive decree titled “Promoting competition in the American Economy” that highlighted the importance of healthy market competitiveness. The order encouraged the STB to “further competition within the rail industry” and provided accessible remedies to shippers. This merger would reverse that.
The Antitrust Division of the Department of Justice (DOJ), sent an eagerly awaited letter to Surface Transportation Board, reiterating its concerns about the proposed merger. This is the second DOJ letter on the subject. It clearly refutes the arguments made by Kansas City Southern and Canadian Pacific that the STB should “infer” that the Antitrust Division doesn’t believe the transaction has the potential for harm. The DOJ appealed to the STB to “thoroughly analyze the competition concerns raised in comments and ensure that this transaction does not worsen these trends.”
An exhaustive analysis of the facts will reveal that the merger between Canadian Pacific and Kansas City Southern railroads is a grave antitrust risk. The economy is in recession and now is not the right time to place more pressure on the supply chain, the job market, or the economy. The Surface Transportation Board commissioners should consider all of these factors and take action as they review the merger.
