Size Matters: How An Expanded Panama Canal Will Keep China In Business

New renovations will let even "Post-Panamax" ships cross the isthmus, altering the economics of global shipping to the advantage of countries that produce cheap goods for the developed world.

What a difference a century makes. One of the greatest engineering feats of all time when it opened in 1914, today the Panama Canal is one of the biggest bottlenecks in worldwide trade. Even as the canal’s share of container traffic bound from Asia for the East Coast quadrupled over the last decade, more than a third of the world’s container ships have simply outgrown the canal. Facing growing threats from West Coast and Canadian ports, alternate routes through the Suez and Arctic, and even planned rail lines across Central America, Panamanian voters approved the canal’s $5.25 billion expansion in 2006. When the new locks come online in 2014 or so, essentially tripling the canal’s capacity, the world’s trade routes may never be the same.

Because of its lock system (as well as simple questions of the width of the canal and depth of the water) only ships of a certain size can pass through the canal. These ships are called Panamax ships. But cargo shippers were not content with their capacity. "Post-Panamax" vessels such as the Emma Maersk are capable of carrying 12,000 or more 20-foot equivalent units (TEU), compared to 4,500 on a current Panamax.

In shipping, bigger is almost always better. The annual operating costs of a Post-Panamax vessel per container are more than 50% less than a Panamax ship, which has been a significant advantage for West Coast ports, where containers that travel straight across the Pacific from Asia are loaded onto rail and sent to the rest of America, no canal necessary. A larger canal means passing along those lower costs to the East Coast—which is why the Port of Charleston is spending $1.3 billion to enlarge its capacity—as well as providing a hedge against higher oil prices.

In a report about the canal expansion published last year, logistics expert and Hofstra University associate professor Jean-Paul Rodrigue noted that "maritime shipping has less fuel price sensitivity than trucking and rail," meaning that increased shipping could help offset $100-per-barrel or higher prices. A minor consequence could be that, instead of dropping cargo off for shipment by rail, "New Panamax" vessels would permanently circumnavigate the world via the Panama and Suez canals, offloading cargo at transshipment hubs like Singapore and Kingston, Jamaica, onto smaller ships for final delivery. (Somali pirates, take note.)

More important is whether those fuel savings will be enough to preserve China’s cost advantages in the face of rising wages and fuel prices. As then-CIBC World Markets chief economist Jeff Rubin declared during the 2008 oil spike, "Globalization is reversible. Higher energy prices are impacting transport costs at an unprecedented rate. So much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today." A firm believer in the inevitability of $200-per-barrel oil, Rubin foresees the decline of China as an export hub, a second chance for Mexico to become NAFTA’s factory, and an American resurgence in manufacturing in low-cost/high-weight goods like steel. New Post-Panamax economies of scale could help offset that, unless the savings are eroded by canal tolls (which nearly doubled between 2006 and 2009) and the possibility of carbon taxes, as Post-Panamax ships are some of the largest polluters in the world.

Seeing an opportunity in the form of those tolls, Panama’s neighbors have launched their own plans to upstage the canal. The government Honduras envisions a trans-oceanic railway as part of its post-coup, "Open for Business" strategy, resurrecting a dream first proposed in 1854. At the opposite end of Central America, Colombia is in talks with China to build a new railway and city across the isthmus as a way to appease China’s bottomless appetite for energy with Colombian coal. Neither country has begun hacking their way through the jungle yet, but the canal’s expansion should ensure Panama remains a vital link in the world’s supply chains.

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[Image: Flickr user gailf548]

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