Source: The Guardian
Nine months ago, the Panamanian government inaugurated a new and widened section of its isthmian canal. Just ten years prior to the June 2016 completion, the Panamanian people had voted overwhelmingly to undertake the five-billion dollar expansion project, targeted at accommodating larger, post-Panamax ships. Opponents of the canal worried less about the certainty of future profits and more about inefficient implementation, running over budget, and unending construction. While the expansion did take two extra years to complete and ran over budget, the Canal Authority completed the project in summary fashion. Now, with the canal twice as wide as before, Panama is poised to reap profits. On the bright side, current numbers do suggest that Panama will profit handsomely from its widened canal, but regional and global trade pressures could detract from the canal’s long-term returns. So, when will Panama start to see returns and how will the new expansion effect the hemisphere?
A mere nine months after the expansion became operational the economic outlook for Panama is good. In fact, the IMF has projected that Panama will have the highest GDP growth rate in Latin America and the Caribbean in 2018. The impressive 6.1 percent projected growth outstrips every other country in the region by at least 1.6 percent. Panama need not wait either. The 2016 fiscal year, which ended last October, was the third most profitable in the canal’s century-long history. Larger vessels, which can navigate the newly expanded canal, accounted for 18.3 million of a total 330.7 million Panama canal tons, or around 1/15 of the total tonnage, while only being able to cross the isthmus for a third of the fiscal year. This suggests a 20 percent increase in tonnage per annum in years to come. The widening has also made the canal more competitive internationally as it has diverted 20 percent of cargo going from Asia to Europe from the Suez route in just nine months.
Source: World Maritime News
The expansion may even have a beneficial effect on foreign direct investment, with companies like Dubai port operator DP World meeting with the Panamanian government to invest in Special Economic Zones and ports along the canal.
The expansion project does not benefit Panama alone; the widened canal increases maritime traffic to ports in nations equipped to take larger ships. Port cities on the American East Coast expect an increase in traffic as well as the calling of larger, more capacious vessels. In the past few years, state and federal government have undertaken the deepening and modernizing of port cities in order to accommodate the projected spike in traffic. Savannah is currently dredging its port, Miami and Baltimore have implemented modernization projects worth hundreds of millions, and, in 2016, the federal government passed the Water Resources Development Act, which attempts to prepare the East Coast and Gulf area for larger ships. Natural-gas-rich Trinidad also stands to gain substantially because the new expansion will allow natural gas to pass through the canal for the first time.
However, Trinidad and Tobago and Panama have two of the highest GDPs per capita in all of Latin America and the Caribbean, and the U.S. is not in dire need of increased trade. The expanded canal is not the panacea to hemispheric development that some make it out to be—after all, transportation infrastructure frequently siphons trade away from less efficient areas to more efficient ones. In other words, the expanded canal will most likely enrich the already rich and put economic pressures on less developed areas.
If neighboring countries less developed than Panama are left as they are, they will continue to lose their share of regional trade to Panama’s economy of scale advantage. As Panama corners the market on inter-oceanic trade, these countries will fall into self-perpetuating traps of underdevelopment. It becomes necessary for governments to react in order to avoid the tar pits of underdevelopment caused by isolation from trade and other factors like violence and weak governance.
The pressures caused by the canal expansion are already materializing within the hemisphere. In fact, every other Central American country (with the exception of El Salvador, which will benefit as a small natural gas producing nation with a coast on only one ocean) has moved to compensate for the expansion by investing in their inter-oceanic infrastructures. Honduras and Guatemala revived an old proposal for an inter-oceanic railroad in 2016, Nicaragua ceremonially began construction on its own canal in 2014, and Costa Rican authorities saw a proposal for a costly network of railroads, highways, and ports dubbed a dry canal. Even Southern Mexico has taken note of its disadvantage as the government of Oaxaca has announced plans this March for a direct Veracruz-Salina Cruz highway, pipeline, and railroad.
Source: The New York Times
In reality, not all of these countries have the funds, expertise, or political will to see these large projects through to fruition, and if they did, they would not contribute to their national or to regional development as expected. Panama’s expansion is dependent on the use of mega-ships that carry more cargo and thus save on fuel and transportation costs. Today, those mega-ships are not at capacity—contractions in global trade and sweeping protectionist policies have decreased the total traffic of goods on the high seas. With less trade, the expansion could end up being a bust, and, if neighboring countries create viable, cost-effective inter-oceanic infrastructures like those proposed, the distribution of trade will only become diluted and returns for these multi billion dollar projects will become less and less for individual countries.
Guatemala and Honduras are ranked 111th and 112th respectively (out of 160 nations ranked) on the World Bank’s Logistics Performance Index, and are in dire need of infrastructural development. However, that does not change how mega-projects like those proposed work best within a regional framework especially due to the small size of each of these individual nations. Cooperation is also vital to solve already existing issues such as violence and illicit trafficking. If these countries begin to compete and withdraw into themselves, not only will their investments generate lower rates of return, but trans-border issues of drug trafficking and violence will be without remedy as regional cooperation is considered vital to alleviate these issues.
Not only are pressures to compete with the canal bad for the region, but the expansion itself could fuel more protectionism. The current wave of protectionist trade policies originated largely from widespread loss of jobs due to internationalization and mechanization. Unsurprisingly, the canal’s expansion contributes to both of these processes. The US West Coast stands to lose substantial amounts of Asian cargo to the East Coast now that the widened route is open and more cost effective than shipping goods by land. That loss in trade will only fuel anger and discontent with international trade in the area. Even on the East Coast, port modernization required to accommodate larger ships from the canal’s expansion will end up putting many dockworkers out of work in the coming decade due to automation.
The same is true in Panama. If the country cannot build up proposed industry along the canal in Special Economic Zones within the decade, it will see a falloff in FDI and potential increase in unemployment. These looming factors of protectionist fervor will only decrease traffic across the canal and hurt the profitability of the multi-billion dollar expansion further.
It has only been nine months since the first ship passed through the doubly wide canal and already increases in maritime traffic have had a measurable impact on the Panamanian economy as well as the economies of other trade-savvy nations in the hemisphere. However, the project will continue to put divisive pressures on Panama’s neighbors as they attempt to redirect international trade to their own shores. If protectionist policy and regional competition for trade continue, the expansion project may not pay off for the Panamanian government, as mega-ships may not be an economical option in a world that trades fewer goods. In order to guard against such issues, Panama and other regional players should cooperate on trade and on further developments in transportation infrastructure. Unfortunately, there is very little precedent for this, evinced by the fact that Panama has its own free trade agreement with the US while CAFTA-DR groups all of Panama’s less developed Central American neighbors together.
It is in the hemisphere’s best interest to harmonize trade policy across developed-developing lines. Otherwise, countries may end up with costly infrastructures and insufficient trade to pay for them.