Panama Canal Expansion Impact on U.S. Economy

How the Expansion Lowers Your Food Bill

Panama Canal expansion
A rail car pulls a massive cargo ship through the Miraflores locks as it crosses the Panama Canal.. Photo by Joe Raedle/Getty Images

What Is the Panama Canal Expansion?

The expanded Panama Canal will open on June 26, 2016. The expansion adds a new third lane. That doubles the canal's capacity. Most important, it accommodates Post-Panamax ships. They a are 1,200 feet long and carry three times the cargo of 965-feet-long Panamax ships. That efficiency reduces U.S. food costs. (Source: Today "Super-size container ships require larger locks," August 5, 2009.

 "Panama Canal Expansion," CBS News, June 23, 2016.)

The Panama Canal connects the Atlantic Ocean to the Pacific Ocean via the Caribbean Ocean. The Canal is more cost effective than shipping another 5,000 miles around the southern tip of South America.

The Canal is more complicated than just digging a long trench across the shortest point, the Isthmus of Panama. First, the sea level of the Caribbean is eight inches lower than the Pacific. Second, the different tides between the two oceans must be accounted for. Third, the Isthmus at Panama itself rises 26 meters above sea level.

To solve these problems, ships go through a series of three locks. They lift them up to Gatun Lake, and then lower them through three more locks back down to sea level. It takes, on average, 13 hours to move through the Canal's 51-mile length.

Why Is the Canal Important to the U.S. Economy?

The Panama Canal keeps the cost of imported goods down, helping to reduce inflation.

It also allows U.S. exporters better access to China and other Asian markets.

Five ports carry 70% of U.S. ship imports. They are the ports at Los Angeles/Long Beach (LA/LB), New York/New Jersey (NY/NJ), Seattle/Tacoma, Savannah, and Oakland. All of these, and the port of Charleston, either already can or will be able to receive Post-Panamax ships by 2018.

Traffic is expected to double to these ports by 2030.

Expansion of the Panama Canal makes the U.S. transportation system run more effectively. That's because it relieves congestion to the LA/Long Beach port. It receives most of the traffic from Asia.

How Expansion Lowers Shipping Costs

The fastest way to get cargo from China to the U.S. east coast is by ship (12.3 days for a ship to go from China to the U.S. west coast) and rail (6 days from the west coast the east coast). That's a total of 18.3 days. For this reason, 75% of Asian imports go this way.

Only 20% take the Panama Canal route because it's longer, at 21.6 days. The rest goes through the Suez Canal directly to the U.S. east coast, which takes 21 days. (Source: USDA, Impact of Panama Canal Expansion on the U.S. Intermodal System, January 2010)

But rail doesn't carry as much cargo as the Post-Panamax ships. One ship carries as much as 16 trains. That means the Panama Canal expansion will be more cost effective, despite being longer.

Commodities exporters, who are more concerned with cost than time, are most likely to use it. For example, U.S. natural gas exporters will be able to serve Asia. Without expansion, the Canal is too small for LNG ships.

High-value, time-sensitive goods, such as electronics, will still use West Coast ports and rail. Therefore, the Canal expansion could take another 35% of current West Coast freight. (Source: World Trade 100, "Trade in the Americas: Expanding the Panama Canal for the 21st Century," November 2, 2007)

Canal History

The French began building the canal in the late 1800s. They gave up when they ran out of money and lost too many workers to tropical diseases. In 1904, the United States bought the Canal Zone It paid $10 million to Panama and $40 million to the French. In 1914, the Panama Canal was completed, costing $375 million. The United States ran the Canal until 1999 when it turned it over to Panama. (Source: USDA Panama Canal Study)

Panama receives $1 billion in tolls from the Canal. This will double or even triple now that the expansion is complete. It's been delayed by a year, and cost overruns added $1.6 billion to the $5.2 billion price tag. (Source: WSJ, Panama Canal's Woes Ripple Globally, February 18, 2014)

More on Post-Panamax Ships

Post-Panamax ships carry 5,000-8,000 containers, have widths of 14 to 20 containers, and need a channel 17 meters deep. Super Post-Panamax vessels more than 13,200 containers. These ships carry 27% of the world's cargo. The Panama Canal must expand to accommodate these ships and remain competitive.

More on Trade

Continue Reading...