For the past several years, the broken supply chain has been foremost on the minds of American voters. As an issue that has broad-ranging implications for the economy and consumers, it has raised so much attention that in his recent State of the Union address, President Biden highlighted the fact that he “signed a bipartisan bill that cut shipping costs by 90 percent, helping American farmers, businessmen and consumers.”
The jury may still be out on how much credit the president can take for resolving supply chain issues and how effective his efforts have been thus far, but his administration is currently in the midst of reviewing a proposed merger that, if approved, could have negative implications for the freight rail industry and the supply chain more broadly.
Freight rail is one of the key links in the supply chain, moving 19.3 billion tons of goods annually, or about 1/3 of all U.S. exports. This is why it is so important that the Surface Transportation Board (STB) gets the decision right on the proposed merger between Canadian Pacific (CP) and Kansas City Southern (KCS), the sixth- and seventh-largest U.S. railroads by revenue.
While mergers, in many cases, can benefit the economy, the consumer, and shareholders, this one would further condense an already shrinking market and create less competition for shippers and for the country to depend on. In the last 50 years alone, the number of Class I railroads in the United States has declined from 63 to just seven. With little room left for consolidation in freight rail, bringing the total Class I railroads in the country to just six seems unwise.
The monopolistic advantage the newly named Canadian Pacific Kansas City (CPKC) railway could employ to charge any price for vital supply chain routes or divert shipments altogether would be exacerbated by the fact that it would be the only railroad to extend through all of North America. With such a competitive advantage over their peers, the new CPKC railway would be provided with a level of control over key interchanges and routes that would give them the power to raise rates, create bottlenecks, and divert competitor freight.
Antitrust concerns have become so great that some shippers have even entered into litigation against several Class I railroads for alleged price fixing. According to Stephen Neuwirth, an attorney involved with the case, the railroads responded to these accusations with “arguments that would have left them effectively immune from antitrust laws.” That is hardly a ringing endorsement for further consolidation in the rail industry.
Such a merger could be detrimental not only to our economy and supply chain but also to workers at American railroads and ports. Keith Creel, the CEO of Canadian Pacific Railway, has already discussed how the new railway could capitalize on the merger by diverting freight from U.S. ports to those in Mexico, such as the Port of Lazaro Cardenas. Several Federal Maritime Commissioners have spoken out regarding their concerns about such an arrangement, stressing the importance that America “maintains our infrastructure as well as our operational capabilities” as “the pandemic reinforced how important these resources are within the global supply chain as well as the impact that they have on local communities, businesses, and jobs.”
All this stands in stark contradiction to previous efforts President Biden has touted in securing the supply chain. In July 2021, for example, he signed an executive order titled “Promoting Competition in the American Economy,” highlighting the importance of healthy market competition. Specifically within the order, it encouraged the STB to “further competition in the rail industry and to provide accessible remedies for shippers.” This merger would do the opposite.
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Recently the Department of Justice (DOJ) Antitrust Division sent a long-awaited letter to the Surface Transportation Board to reiterate its concerns with the proposed merger. The second letter the DOJ has written on the matter, it clearly refutes arguments made by the Canadian Pacific and Kansas City Southern that the STB should “infer that the Antitrust Division does not believe the transaction has the potential to cause harm.” They continue that “no such inference should be drawn” and closed with an appeal for the STB to “thoroughly examine the competition concerns raised by commenters and ensure that this transaction would not exacerbate these trends.”
A full assessment of the facts will find that the Canadian Pacific-Kansas City Southern railway merger poses a serious antitrust concern. In an economy trending towards a recession, now is not the time to put more stress on the supply chain, job market, or economy. As they complete their final review of this merger, commissioners at the Surface Transportation Board should take this all into account and act accordingly.
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