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Impact of the Panama Canal Expansion

panama-canal-expansion

The Panama Canal was completed in 1914 at a cost of $375 million. It connects the Pacific Ocean and the Atlantic Ocean via the Caribbean Sea. It saves ships more than 5,000 miles from travelling around the tip of South America. The United States built and owned the canal until 1999. A treaty signed in 1977 between President Jimmy Carter and Panama set the terms for the turn over. At that time, Panama took over the operations of the canal. The economics of the Panama Canal expansion are substantial. In fact, Panama receives over $1 billion in tolls annually.

Recent Expansion

On June 26, 2016 the Panama Canal opened a third new lane. The total cost of the expansion came to $5.25 billion. The expansion also doubled the canal’s capacity (and should double or even triple the toll revenue). More importantly the expansion allows Post Panamex ships to go through. These huge ships are 1,200 feet long and can carry three times the cargo of the 965 foot long Panamex ships. The bigger ships also carry 27% of the world’s cargo, so Panama had to increase the canal size just to remain competitive. The increased capacity lowers your food costs.

The increased capacity of these ships not only keeps the cost of imported goods down, but also reduces the cost of exported goods such as US grain and liquefied natural gas. This makes these exports much more price competitive in the rapidly growing Asian markets.

In the US, five ports take 70 percent of ship imports. These ports are:

  • Los Angeles/Long Beach
  • New York/New Jersey
  • Seattle/Tacoma
  • Savannah
  • Oakland

These ports had to invest in infrastructure to accept the larger container ships. They all (plus the port of Charleston) can or will be able to receive Post Panamex ships by this year. Traffic is expected to double at these ports by 2030. The Panama Canal expansion certainly relieves congestion at the Los Angeles/Long Beach port. Most of that traffic comes from Asia.

Expansion Results

Results of the canal expansion? Cargo through the canal increased 23 percent in the first nine months of 2017. That has increased traffic on the US east coast ports by 29 percent. It has become cheaper to ship through the canal than to ship to Los Angeles and move the goods via rail and truck.

For the US, the Panama Canal economics include lower costs for imported goods and thereby reduced inflation. The canal expansion also creates more US jobs due to US exporters having better access to China and other Asian markets.

Competition

The Panama Canal is not without competition. The Suez Canal, which connects the Red Sea and the Mediterranean Sea, also recently expanded its size to accommodate even larger ships. Additionally the Egyptian authorities have been discounting the toll rates heavily by as much as 65% to attract ship traffic. Other competition looming is coming from Nicaragua, Honduras and Guatemala. Nicaragua is planning its own massive interoceanic canal financed by Chinese investors. Honduras and Guatemala are planning a joint rail network linking Pacific and Atlantic ports. While the increased competition would be good for lowering costs of goods, it would not be good for Panama.

Panama’s Growth

Panama has experienced one of the highest growth rates in Latin America averaging 7.6% from 2004 through 2015. While much of that growth was due to the construction surge in Panama City, the canal expansion contributed as well. In 2012 the Panamanian government created the Panama Savings Fund, a sovereign wealth fund. It is now valued at about $1.5 billion. The government plans to use annual payments made by the Panama Canal Authority in excess of 3.5% of GDP to the fund. The fund is to be used to compensate for economic downturns and natural disasters and pay off public debt.

The impact of the Panama Canal expansion extends way beyond the country’s shores. It has far reaching economic effects throughout the Americas. As a hub for global shipping and logistics, consumers in the east and west benefit from its expansion into the 21st century.