The Panama Canal Expansion’s Possible Implications for Southwest Economies

For U.S. importers to the east coast, shipping by water will still take longer than sending cargo cross-country by rail from the west. But the water route will cost less.

By Lorne MatalonJune 27, 2016 10:51 am, ,

This story comes to us from the Fronteras Desk, a public media collaboration focused on Mexico & Latin America.

The Panama Canal is a force in worldwide commerce. It leverages its location at the intersection of two oceans and two continents and is responsible for a total of 15 per cent of Panama’s GDP. Its number one customer is the United States.
I traversed part of the Panama Canal near its Pacific entrance at Ciudad de Panamá with tug captain Luis Estribi. He was guiding a vessel from China, the Tai Prosperity, through the canal’s Pedro Miguel locks as the vessel made its way to the Port of New Orleans. The Tai Prosperity, a carrier of bulk commodities such as grain, is classified as a Panamax ship.

SEE MORE: Photo Gallery: The Panama Canal Expansion

Panamax is a worldwide maritime shipping standard measurement that refers the maximum size vessel that can pass through the canal’s original locks. But today, Panamax is passé. Now it’s all about post-Panamax, vessels that can carry up to three times the cargo as Panamax vessels. But post-Panamax vessels were too wide for the existing Panama Canal.

The U.S. Army Corps of Engineers says post-Panamax ships now carry 45 percent of the world’s cargo. But the Corps also says by 2030, post-Panamax vessels will account for 60 per cent of the world’s container shipping. The Panama Canal needed wider and deeper locks to remain commercially relevant. Following a 2006 referendum by the Panamanian people approving the construction of post-Panamax locks, the project has seen multiple delays, legal disputes, and huge cost overruns.

“The project has been challenged in all senses,” said Oscar Bazan, Executive Vice President of Business Development at the Panama Canal Authority, known by its Spanish acronym ACP, or Autoridad del Canal de Panamá. “With the contractors, legal issues, claims, but I mean, we are moving forward,” he said.

That is something that tug captain Lew Stabler says should have taken place years ago. Stabler was born in the Canal Zone that the U.S. ceded to Panama as part of the Torrijos-Carter Treaty, also known as the Panama Canal Treaty. The canal was jointly run by Panama and the U.S. until Panama took full control at 12 noon on December 31,1999.

“They had to do it,” said Stabler of the expansion. “It’s like being an airline and deciding, ‘Well, I don’t really want to use jets. I’m going to stay with the props.’ You’re not going to have the customers, not going to have the business. You’re just going to go belly up.”

Construction on gargantuan new locks in Panama has been mirrored in the United States as both countries prepare for the post-Panamax era. In Charleston, South Carolina, rail already takes post-Panamax cargo from Europe and sends it inland. From New York/New Jersey to Baltimore, Savannah and Miami, workers are either planning or actually dredging, raising bridges and upgrading docks.

“We will deepen our harbor to accommodate this tremendous new trend toward big container ships,” said Jim Newsome, CEO at the Port of Charleston.

There will be winners and losers, said Noel Maurer. He is Professor of International Business at George Washington University and co-author with Carlos Yu of “The Big Ditch,” an economic history of the Panama Canal. Maurer said among the winners are U.S. exporters of grain and cotton.

“You’re talking about a drop in shipping costs equal to about three per cent of the market value of  the product. That’s big,” said Maurer. He also projected that the cost of shipping coal to China for electrical generation there will fall by approximately ten dollars per ton.

“And given that steam coal goes for about 50 dollars a ton in China,” he continued, “it’s a huge benefit to eastern coal producers who are going to able to ship their product much more cheaply to China.”

However Maurer said the perhaps the biggest winner in the short term will be U.S. agribusiness. “American cotton and grain that is currently not competitive in Asian markets will become competitive. So for American agriculture, that is a big deal,” he said.

For U.S. importers to the east coast, shipping by water will still take longer than sending cargo cross-country by rail from the west. But the water route will cost less.

Focusing on the U.S. west coast, the Panama Canal expansion may threaten some of the four million jobs in California, Oregon and Washington specifically tied to Asian imports. Many of those jobs are in the ports of Seattle, San Francisco/Oakland and Los Angeles/Long Beach.

Michael Nacht, the Goldman School of Public Policy at the University of California at Berkeley and his collaborator Larry Henry, the founder of ContainerTrac Inc. a company that tracks shipping containers for the seaport and rail industries, have researched the potential impact on west coast ports implied by the Panama Canal expansion project.

Writing in the San Francisco Chronicle, they wrote that the impact could be profound:

“The West Coast ports, including the Port of Oakland, have enjoyed decades of success serving as the point of entry for billions of dollars worth of goods, mostly from China and East Asia. Imports from Asia to the United States generated 9 million American jobs, 4 million in California, Oregon and Washington, in 2014, according to the Pacific Maritime Association. Cross currents in international trade, however, suggest a highly turbulent period lies ahead.”

In Panama, tug captain Luis Estribi said he has been frustrated by the delays. But he said he is proud of the expansion, and the legacy of the 102-year-old Panama Canal. “We are still nowadays, we are wondering, how these engineers, how they built it. It was just amazing how they thought of every single detail. Every part of the canal has its own story.”

Estribi and other captains are looking forward to training in the new locks. The union representing tug captains and deckhands, known by its Spanish acronym UCOC, has claimed repeatedly that it has not received sufficient training. The ACP has denied that claim saying that some training has taken place in simulators. That ideological battle in Panama is a footnote for senior managers of U.S. east coast ports and the rail that services those ports. Many of those executives have said previously that they are crafting revised economic models based on the the new locks becoming operational.

They have been concerned about a series of delays, followed by assurances that the locks will open on a given date, only to see the Panama Canal Authority subsequently reverse itself in anticipation of another delay. Now that the new locks are operational, the concern looking ahead is falling demand in Asia for U.S. goods such as oil and natural gas. The Panama Canal Authority has said it is that its revenue model with respect to the new locks is in large measure deopendent on sustained Asian demand for U.S. Liquid Natural Gas (LNG).

The New York Times has published an investigation into the challenges faced by the upgraded Panama Canal. The report by Walt Bogdanich, Jacqueline Willams and Graciela Méndez said the challenges include both financial and environmental considerations.