Building a Panama Canal for the New World Economy
Building a Panama Canal for the New World Economy
Michael Bomba, a PhD from the University of Texas at Austin, sees the estimated $5.2 billion canal improvement project as a natural response to significant developments in maritime trade over the past two decades. A third set of locks will allow for increased ship traffic along this strategic waterway.
The first trend has been the significant increase in global trade. According to statistics from the World Trade Organization (WTO), total global trade increased fivefold between 1985 and 2005 to approximately $20 trillion. During this same period, the total global tonnage of traded goods moved by ship roughly doubled to 7.1 billion tons, according to the United Nations. More specifically, and relevant to cargo transiting the Panama Canal, U.S. imports continue to increase and replace many of the consumer goods once produced domestically. A large and increasing share of these goods comes from China and the larger East Asian market.
The dominance of large retailers in North America, and their efforts to minimize transportation costs and supply chain risks, has given rise to a second trend. To satisfy demand, companies have built distribution centers close to markets and near maritime ports. Until recently, most imports from Asian countries went through ports along the Pacific Coast of the United States, with the vast majority of goods arriving at the Los Angeles and Long Beach ports. Much of the cargo would then be transferred to intermodal trains and carried to destinations around the United States. (Intermodal freight is moved inside standardized metal containers, which allow the freight to be transferred between modes of transportation without directly handling the cargo).While this process continues to be the dominant method for shipping Asian imports, transportation costs and concerns about reliability have made other options more competitive.
These factors have led to a third trend affecting the canal—the growing list of alternatives to the ports of Los Angeles and Long Beach. Increasingly, shippers are sending Asian cargo destined for the eastern and southern United States directly to ports along the Atlantic Coast and Gulf Coast. By minimizing land transport, overall transportation costs are reduced and deliveries are more reliable. This "all-water route" usually involves bringing ships through the Panama Canal, but shippers are also starting to use the Suez Canal to move goods from Asia to the United States. Cargo is also being sent to other Pacific ports in the United States, such as Tacoma, Seattle, and Oakland, and a new container port will soon be opening in Prince Rupert, Canada. Ports along the Mexican Pacific Coast, namely Lázaro Cárdenas, may also begin unloading U.S.-bound containerized cargo and then sending it by rail to its final destination.
The growing size of containerships, many of which are unable to use the Panama Canal, is the fourth overarching trend. During the mid-1980s, carriers began to introduce Panamax ships, which are the largest vessels capable of transiting the Panama Canal. Panamax ships typically have a capacity of about 4,400 TEUs (When describing intermodal containers, the term TEU stands for twenty-foot equivalent unit, which is the unit of measure for one standard twenty-foot long intermodal container. Most intermodal containers are 40-feet long, so one 40-foot container is equal to two TEUs). With increasing frequency, carriers are now ordering Post-Panamax ships—vessels that are too large to transit the Panama Canal’s locks. In just a short period of time the size of Post-Panamax ships has grown significantly. In 2007, vessels with a capacity of more than 14,000 TEUs will be ready for use.
The current proposal to expand the Panama Canal responds to each of these trends. Current infrastructure is being upgraded so that the waterway can handle significantly larger ships along with more traffic. However, canal improvements are beginning well after the international shipping environment has already changed. Behind the curve, the ACP has potentially foregone hundreds of millions of dollars in revenue. Another possible consequence, as was pointed out in a recent Journal of Commerce editorial, may be that carriers along alternate routes will develop their own infrastructure and secure market share before the new canal locks begin operation. Delayed improvements also have resulted in the canal approaching its transit capacity. Operating at the near breaking point, carriers increasingly experience costly delays and other problems, all of which have prompted them to look for alternate routes. For its part, however, the ACP had little choice but to wait. Funding a $5.2 billion infrastructure improvement project in the private finance market is a serious decision for a country with a GDP in 2005 of only $15.5 billion. Before moving forward, the ACP’s leadership had to be convinced that investors in the expansion project would be repaid.
For shippers, ongoing unease with canal transit times are now being coupled with concerns regarding projected tariff increases over the next eight or nine years. Increased ACP revenue will be necessary to pay for the canal’s new set of locks. Shippers and carriers, frequently unable to pass along higher operating costs to customers, strongly oppose any new rate increase. However, a more objective assessment indicates that maintaining the status quo would likely lead to much higher transportation costs. Carriers would increasingly be forced to use less efficient and more congested land-based routes to move imported goods around North America. Like the ACP, railroads have been cautious about adding new capacity and will pass any improvement costs on to customers through higher rates. Thus, canal improvements will provide a new capacity for moving Asian goods to the Atlantic and Gulf Coasts of North America at the same time that a competitive alternate shipping route helps to keep transcontinental rail prices in check.
As the world economy continues to grow, shippers, carriers, and policymakers must realize that low transportation costs can no longer be taken for granted. If shippers want to maintain or improve the reliability of global supply chains, the private sector will have to accept a growing share of the burden for building new transportation infrastructure.
Michael Bomba earned a PhD in Public Policy from the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. He has worked as a Research Associate at the Center for Transportation Research at the University of Texas at Austin.
