A Man, a Plan, a Canal, Panama

By: Dr. M. Ray Perryman
Published in syndication August 10, 2016

In June, work was completed on an expansion of the Panama Canal, with hopes of increased trade between Asia and the US Gulf and East Coasts. The canal was originally completed in 1914 at a cost of more than $350 million dollars. It took a decade to build the lock canal stretching roughly 50 miles to connect the Pacific and Atlantic Oceans. The canal eliminates the need to travel around the southern tip of South America and shortens a sea journey from Asia to the US East Coast by some 8,000 miles.

In 2015, 340 million tons of goods passed through the Panama Canal, representing about 6% of global trade in terms of capacity. However, as international shipping rates have fallen because of uncertain international trade levels and an oversupply of ships, shipping companies are increasingly using larger, more efficient ships. These vessels are too large for the original canal locks, making it necessary for the Panama Canal to expand in order to be able to compete in the evolving economy.

The Panama Canal expansion took nine years and cost $5.4 billion. It doubles the canal's capacity through adding a third lane with larger locks. While previously the canal could only accommodate ships that carried a maximum of 5,000 containers, the new locks can accommodate ships carrying up to 14,000 containers. The new locks use reinforced steel, which did not exist at the time of the original construction, and a staggering 4.4 million cubic meters of concrete (significantly more than is in Hoover Dam and the accompanying power plant facilities).

In Panama, the project has created an estimated 30,000 jobs and is expected to spur further investment from the private sector in support services located along the canal, including a new container terminal outside Panama City. Not only will the expansion increase the level of traffic and size of ships, but also generate higher toll revenues for the country. The toll is roughly $90 per shipping container, and the canal's executives anticipate a 16% to 17% revenue increase within the first year. It is expected that the larger ships will move more perishable cargo like produce, fish, and meat to the East Coast ports while new liquefied natural gas producers will take advantage of the canal to export to new Asian markets.

In response to the anticipated increase in trade, US ports are also expanding in order to accommodate larger ships. East and Gulf Coast ports have spent over $150 billion on infrastructure improvements including dredging for deeper harbors, expanding terminals, and improving rail and road connections to docks. Although a majority of containerized freight from Asia has historically arrived at West Coast ports to be then transferred to rail or freight trucks to reach the rest of the continental US, even before this year, problems with shipping congestion and labor disputes have shifted more imports bound for the eastern part of the US to East and Gulf Coast ports. These ports now receive close to 34% of containerized imports from Asia, compared to a little over 29% two years ago.

Nine out of the 10 fastest growing import ports in the US in 2015 were found along the Gulf and East Coasts and not a single West Coast port made the list (the 10th fastest growing port was San Juan, Puerto Rico). This trend will only continue with the completion of the Panama Canal expansion, as an estimated 10% of US import container traffic from Asia is expected to shift from the West Coast to other terminals by 2020.

Texas is poised to benefit from the shifting trade routes. About 20% of all US port tonnage moves through the state's ports, and three Texas ports (Houston, Beaumont, and Corpus Christi) are among the 10 busiest in the country. According to the Texas Department of Transportation (TxDOT), Texas ports invested over $300 million from 2010 to 2014 in improvements as Texas hopes to become even more competitive in global trade. The Port of Houston, for example, is expecting to see 5-6% annual growth in trade over the next few years. Houston is a logical gateway for any shipments bound for the central US, and trade with Asia accounts for approximately a third of the port's container volume.

While there is a lot of potential for import growth, the Panama Canal expansion may have an even greater impact on Texas exports such as liquefied natural gas. With continued updates to port and transport infrastructure, Texas can take advantage of the increased trade coming and going through the Panama Canal. By increasing the efficiency and lowering the cost of shipping, the expansion can enhance economic activity around the world. As a major gateway and the leading state for exports, Texas can only benefit from this major enhancement to global transportation infrastructure.