A Canadian Pacific freight train travels around Morant's Curve in the Rocky Mountains near Baker Creek, Alta. on Dec. 3, 2021. Canadian Pacific Railway's 2023 takeover of the Kansas City Southern railway expanded Calgary-based CP control of a rail network down the spine of the southern U.S. and on to Mexico’s auto-making and agricultural heartlands, as well as ports on both coasts.Jeff McIntosh/The Canadian Press
U.S. president-elect Donald Trump’s proposed 25-per-cent tariffs threaten to disrupt North American free trade. The move could also undercut the business case that drove the US$27-billion formation of Canadian Pacific Kansas City Ltd. CP-T.
Keith Creel, Canadian Pacific Railway’s top executive, touted the US$27-billion takeover of Kansas City Southern railway and its Mexican network as an industry-beating move to tap continental free trade.
The deal, approved in 2023, gave Calgary-based CP control of KCS’s U.S. and Mexican rails that extend down the spine of the southern U.S. and on to Mexico’s auto-making and agricultural heartlands, as well as ports on both coasts.
In speeches to investors, Mr. Creel described the deal as transformational. The “merger that we’re putting together will allow additional free trade to flow between these three nations,” he said in 2022.
Skip ahead to late 2024, and Mr. Creel is reassuring those same investors the railway can withstand a Trump trade war. He says the railway will continue to grow even in the face of the 25-per-cent tariffs that economists warn will hit trade volumes, drive inflation and possibly cause a recession.
Both major Canadian railways have extensive U.S. networks built through takeovers intended to capitalize on north-south free trade. Montreal-based Canadian National Railway CNR-T took over Illinois Central in 1999 gaining a railway from Chicago to the U.S. Gulf Coast.
CP, meanwhile, also built a U.S. network but went no farther south than Kansas City until the KCS takeover. The deals signal the importance of free trade and underline that most goods are flowing north-south and not over the traditional east-west routes. The Trump tariffs threaten to upend this.
Still, Mr. Creel, at an investors’ conference on Dec. 4, noted Mr. Trump warned in his first term of a trade war, and instead renegotiated the North American free-trade pact. This spurred a rise in shipments among the countries that will continue, he said.
Analysts and investors are not so sure.
CPKC’s share price fell by 8 per cent in the weeks leading up the Nov. 5 U.S. election, betting Mr. Trump would win and raise trade grievances. The stock continued falling in the weeks after, and a brief rebound was dashed on Nov. 25, when Mr. Trump said he would levy 25-per-cent tariffs on Canada and Mexico if the countries did not stop the flow of illegal migrants and drugs.
Toronto-Dominion Bank’s Cherilyn Radbourne said both CPKC and Canadian National Railway Co., which has a large U.S. network, will see freight volumes drop should the tariffs be levied.
Trans-border shipments made up one-third of CN’s revenue and 41 per cent of CPKC’s revenue in 2023. She said both railways will see a short-term rise in freight volumes as shippers try to get ahead of the tariffs. “Beyond that, we would expect cross-border volumes to be negatively impacted by increased tariffs,” Ms. Radbourne said in a research note.
CP outbid CN in its months-long pursuit of Missouri-based KCS, paying a premium for the railway that brought access to new markets. CPKC now offers customers longer hauls with fewer interchanges, a time-saving and efficient service.
The railway has partnered with Americold Realty Trust to build a chilled container facility in Kansas City that will send pork and beef to Mexico. The hub will have Mexican food inspectors on-site to ensure rapid shipments south and a “seamless border,” Mr. Creel recently told investors.
The two companies are also looking at new facilities in Mexico, taking meat south and bringing Mexican fruit and vegetables north, including to Loblaw Cos. Ltd. L-T stores in Canada, he said.
CPKC said on Dec. 17 it completed a second bridge connecting Mexico and Texas over the Rio Grande, doubling its capacity to move freight between the countries. The railways opened an automotive yard near Dallas in June for finished vehicles moving among the three countries.
“Even if some tariffs get implemented, I still think there’s such an advantage, especially in Mexico to the U.S., that leads to a good outcome uniquely for our network,” Mr. Creel said.
CIBC World Markets chief economist Avery Shenfeld said even if Mr. Trump spares Canada or Mexico the tariffs, there will still be tense negotiations ahead. “Trump’s willingness to brandish the tariff weapon so quickly, before even getting to his desk in the Oval Office, portends a long road ahead for both Canada and Mexico to preserve what they negotiated during Trump’s first term,” Mr. Shenfeld said in a note to clients.
Christian Wetherbee, managing director of transportation research at Wells Fargo Securities in New York, believes CPKC’s stock sell-off overshot the actual risk of Trump tariffs.
Mexican trade accounted for 22 per cent of CPKC’s 2023 revenue, or $3-billion, he said. Of this total, 55 per cent is U.S. exports to Mexico; 23 per cent is Mexican exports to the United States; and 1 per cent is Mexico to Canada.
“The mix is likely underappreciated by investors,” Mr. Wetherbee said. “I am a firm believer that the relationship between [the U.S.] and Canada, and the U.S. and Mexico in particular is one that has the potential to grow from here, even with Trump.”
Still, he said if Mr. Trump levies the tariffs when he takes office, freight volumes will slump the following year, a shift Mr. Creel did not count on when he crafted the deal to buy KCS.
“I think strategically [the takeover] still makes sense but maybe how much you paid for it could be in question,” Mr. Wetherbee said.
Editor’s note: A previous version of this article incorrectly stated that Canadian National Railway took over Illinois Central in 1989. The deal was approved in 1999. This version has been updated.