The Panama Canal’s Next Century

This month marks the hundredth anniversary of the Panama Canal. Work on a major expansion is in full swing. If all goes well, deeper channels and a third set of locks, wider, longer, and deeper than the two constructed in the early 1900s, will enable larger ships to cross the isthmus by the end of 2016. As I saw on a recent visit, the $6 billion or so being spent on canal construction and the billions more going to build a new metro system are fueling an economic boom. Yet as Panamanians celebrate the canal’s centennial, concerns about the future are not far below the surface. The canal’s next century may be a challenging one.
To start with, it’s no sure bet that enough ships will use the enlarged canal to cover the cost of construction. The expansion was conceived at a time when world trade was growing about 7 percent per year, as it had done since the aftermath of World War II. But the growth of trade has slowed considerably since economic crisis arrived in 2008, meaning that there will be far fewer ships passing through the expanded canal than its promoters envisioned. In addition, a growing number of manufacturers are concluding that Mexico is a better location from which to serve the North American market than Asia. While many ships carrying Japanese-made cars to the U.S. East Coast transit the Panama Canal, Japanese models produced in Mexico will move to U.S. and Canadian dealers by road or rail.
Then there is the matter of competition. For many decades, the Panama Canal had no competition. Starting in the 1970s, large volumes of cargo bound for the East Coast began moving through West Coast ports, and the water/rail route became a direct competitor to the canal’s all-water route. More recently, some ocean carriers have been moving cargo between Asia and the U.S. East Coast via the Suez Canal, which can accommodate larger vessels than the Panama Canal. According to some estimates, more than one-third of the container traffic between Asia and the East Coast now moves through Suez rather than Panama, a shift encouraged by steep increases in Panama Canal tolls. And now there is serious discussion of a Chinese-backed canal through Nicaragua. While it seems unlikely that such a canal could be completed by 2019, as its promoters promise, a Nicaraguan canal could siphon off Panama’s traffic at some point in the next decade.
How will Panama respond? One possibility would be to cut tolls. The Panama Canal Authority has yet to disclose how much vessels will have to pay to transit the enlarged canal, but comparatively low rates could draw carriers back from the Suez route and also make life hard for the sponsors of the costly Nicaragua project. Trouble is, lower tolls could squeeze the Panamanian government, which receives a large share of the Canal Authority’s profits.
Another option would be to give ship lines inducements to use the canal. The canal is now 100 percent owned by the government, and selling shares to ship operators seems to be out of the question for political reasons. Nor are there discussions about offering bargains to carriers that would sign contracts guaranteeing to use the canal; the Canal Authority has never done this. But the Canal Authority is toying with the idea of offering volume discounts, so that carriers moving large amounts of cargo through the canal would enjoy lower tolls per unit of cargo. This concept involves some complications. For example, many carriers participate in alliances in which they book blocks of space on other carriers’ ships in addition to running their own vessels, and it would have to be decided which cargo would count in determining the volume discount. But volume discounts might be a way to tie some ship operators more closely to Panama and to discourage them from using a competitive routing.
It is the third response, though, that seems most promising. Manufacturers are making increasing use of Panama not just as a transit location, but as a place to do final manufacturing of products destined for multiple markets in the Caribbean and Latin America. Shoes from Vietnam and drugs made in Mexico are offloaded in the port of Colon, at the Atlantic end of the canal, and the products inside are then customized for individual markets within the region. This can mean anything from adding price tags in Venezuelan bolivars or inserting warranty documents compliant with Costa Rican law to making physical modifications. In many cases, the cargo is repacked on pallets for individual retail outlets. The pallets headed to each country are then stowed in separate container, so that when the container arrives in-country, the local distribution center needs only to load the pallets aboard delivery trucks. This kind of value-added work creates jobs in Panama. But it also gives shippers reason to insist that their cargo move through the Panama Canal, assuring that the expensive new facilities will see a steady flow of freight.

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