Canadian Rail Lockout Threatens to Disrupt Trade

After weeks of failed contract negotiations with the Teamsters' union, Canada's two primary rail lines have shut down freight operations and started a lockout. The suspension of service affects a massive quantity of cross-border trade between Canada and the United States, and Canadian commodities shippers like farmers, miners and wood products companies will quickly feel the effects.

In a statement, rail carrier Canadian Pacific Kansas City (CPKC) said that it was acting in the public's best interests by initiating the lockout early. 

"Delaying resolution to this labor dispute will only make things worse," the rail line said on Thursday. "CPKC is acting to protect Canada’s supply chains, and all stakeholders, from further uncertainty and the more widespread disruption . . . [from] a potential work stoppage occurring during the fall peak shipping period."

The shutdown will be felt more acutely in some industries than others. The Canadian automotive manufacturing industry exports a large share of its finished vehicles to the United States, almost exclusively by rail, and auto deliveries from Canadian plants will likely be delayed. Key auto components that are made in Canada and shipped to assembly plants in the U.S. Midwest could also be held up in transit. The same is true for Canada's farmers as they enter the fall harvest season: there is no substitute for rail for delivering large volumes of Canadian grain for export or for domestic users, like hog producers.  

Canadian ports in British Columbia also rely heavily on rail to carry imports to inland markets, including the U.S. Midwest. The B.C. port of Prince Rupert has the biggest grain terminal in Canada, as well as a large and growing container terminal, and is particularly dependent on CN to carry cargo to and from its docks.

"[Prince Rupert Port Authority] urges Canadian National Rail  and Teamsters Canada Rail Conference  to continue negotiating in good faith toward an agreement. This affects the supply chains of goods that Canadians rely on every day," the port told local outlet Northern View. "Canada’s trade depends on an outcome that keeps supply chains moving."

As a sign of container-on-rail's importance to Prince Rupert and the Port of Vancouver, intermodal container freight makes up the largest share of all Canadian rail cargo, more than a third. 

"Operations will grind to a halt and everything will have to move to the road for both domestic and international containerized freight," Paul Brashier, vice president of global supply chain at ITS Logistics, told CNBC. "This demand can drive rates through the roof."

Ocean carriers have responded to the shutdown by diverting cargo to non-Canadian routes. Hapag-Lloyd has added a $350 per box surcharge for B.C.-to-inland U.S. deliveries in order to reroute cargo that can no longer cross Canada by rail, and other leading ocean carriers are making adjustments to their service networks. 

So far, the administration of Prime Minister Justin Trudeau has signaled that it wants the rail lines and the union to work out an agreement at the bargaining table. Canada's parliament could pass legislation to force the Teamsters back to work - as many business associations are asking it to do - but leaders of Trudeau's pro-labor coalition have emphasized that they do not want to tip the scales in favor of rail employers.