The Panama Canal expansion: business as usual or game-changer?



Dr. Jean-Paul Rodrigue, Hofstra University, New York, USA, & Dr. Theo Notteboom, President of ITMMA, University of Antwerp, Antwerp, Belgium


Panama’s centennial: a new beginning

In 2014 the Panama Canal will celebrate its centennial, an event that will not just simply be factual, but will also correspond to a new phase in its operations, if everything goes according to plan.

The estimated US$5.25 billion expansion project will add a new set of locks and ancillary projects (dredging and widening) able to handle containerships in the 12,000-15,000 TEU range, depending on ship design and load configuration. This has triggered a wide range of speculations, from a ‘game-changing’ event fundamentally impacting global freight distribution, to another range of assessments where the expansion would have limited or no perceptible impacts. This divergence in opinion underlines that global freight distribution, the strategy of maritime shipping companies and terminal operators and supply chain management have become so complex and interrelated that it is unclear for many actors how the expansion will pan itself out. While what is known is fairly straightforward, such as the operational characteristics of the expanded canal, it is by far supplemented by what remains uncertain, namely trade flows, shipping network configurations and the growth of the amount of transshipment in the region. The problem in assessing the potential impacts of such a capacity expansion project is that in reality the consequences are multidimensional and prone with feedback effects, some of which may even be unintended consequences. There are thus many unknowns in this equation, namely how the multiple actors will react and to what extent the variety of converging and diverging strategies will lead to shipping service reconfigurations. For instance, how the strategic Pacific Asia – North American trade segment is going to be serviced? How much cargo is divertible from the West Coast to the East Coast through the all-water route? To what extent North and South American importers and exporters are going to be impacted by the availability, the cost and the reliability of transport services in a post-expansion era?

It can be inferred that the expansion of the Panama Canal is going to be a game-changer, but the new rules of the game are not clear. This article summarizes a study funded by The Van Horne Institute of the University of Calgary. It is an attempt to shed some light on key elements that will have an impact on the outcomes of the expansion on global shipping networks and trade flows. It focuses on macroeconomic factors, particularly the expected shifts in the structure of production; operational factors that the expansion may provide for the maritime shipping industry, namely economies of scale and slow steaming; and competitive factors related to how other transport chains may anticipate and react to the changes brought by the expansion, particularly the cost structure.

The canal expansion and global economic changes

The expansion project takes place in an economic environment prone to uncertainties since the financial crisis of 2008–2010 future trade growth prospects are being reassessed. One major uncertainty revolves around demand saturation for the American economy, which has been an important driver for the traffic transiting the canal over the last century. For instance, it has become clear ex-post that the American housing bubble of 2001–2007 was associated with a staggering level of debt-based consumption; once the bubble collapsed, so did its associated artificial level of consumption. The US today is facing a major government debt crisis that will affect future public spending and might trigger a downward pressure on US consumption levels.

Economic opportunities in North America, particularly on the short- and medium- terms, appear to be more limited and would thus imply lower growth levels they were previously anticipated in port development plans, which prior to 2008 tended to be very optimistic. This is compounded by long-term demographic trends such as aging, where a growing share of the population will be involved in wealth consumption (retirement) as opposed to wealth creation. This would involve changes in the level and composition of the cargo carried by maritime shipping.

Globalization is therefore not a static process, particularly since comparative advantages are constantly shifting. While East Asia has been a driver for global economic growth for decades (for example, Japan, South Korea, Taiwan and Hong Kong), it is the Chinese economy that has the most deeply impacted the global structure of production and trade. For several manufacturing sectors, the exploitation of comparative advantages within the North American Free Trade Agreement (NAFTA) were essentially by-passed by the ‘China effect’. This was accompanied with a surge in transpacific trade and cargo handled by West Coast ports. The Panama Canal obviously benefited from such a growth pattern, particularly for the all-water route between East Asia and the American East Coast that gained in popularity in the first half of the 2000s after uncertainties related to labor issues along West Coast ports and the capacity of the American land bridge to handle expected cargo volumes. For a variety of reasons, the comparative advantages of China are being eroded, particularly for labor intensive activities, which imply a redistribution of elements of the manufacturing base to other locations, namely Southeast Asia and South Asia (Figure 1). Although the interior provinces of China could represent development opportunities, accessibility and reliability issues in freight distribution make this alternative prone to risks.


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