Panama Canal and Its Impact on U.S. Economy

How It Lowers Your Food Bill and Creates U.S. Jobs

Ship crossing through Panama Canal
••• Photo: Michael Runkel/Getty Images

The Panama Canal connects the Atlantic Ocean to the Pacific Ocean via the Caribbean Ocean, and it allows ships to avoid sailing another 5,000 miles around the southern tip of South America. The canal's engineering is complex. It's more involved than digging a long trench at the shortest point, which is the Isthmus of Panama. First, the sea level of the Caribbean is eight inches lower than the Pacific. Second, the two oceans have different tides. Third, the Isthmus of Panama rises 26 meters above sea level.

The Panama Canal solves the problem of different sea levels by sending ships through a series of three locks. First, the locks lift the vessels up to Gatun Lake, and then they lower them through three more locks back down to sea level. On average, it takes 8–10 hours to move through the canal's 51-mile length.

Canal History

The French began building the canal in the late 1800s but 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 because it wanted to expand its shipping and naval power between the Atlantic and Pacific Oceans. It paid $10 million to Panama and $40 million to France. U.S. engineers decided a canal lock would protect ships from landslides in the Andes Mountains, and U.S. doctors found treatments for the tropical diseases of malaria and yellow fever.

The canal construction created jobs for Pittsburgh steel mills, Portland cement factories, and General Electric machinery. 45,000 workers went to Panama to work on the canal itself, and between 10,000–15,000 of them died from accidents and diseases. In 1914, the Panama Canal was completed after costing $375 million.

The United States owned the canal inside the country of Panama, but in 1977, President Carter signed a treaty that promised to turn the canal over in 1999. The agreement allowed the United States to intervene anytime that its use of the canal was threatened. By that time, the canal cost more to run than it returned in profit to American companies; railroads were much faster, and their costs had fallen. The treaty also improved relations with Panama and the rest of Latin America, but many Americans saw it as an American retreat from its global power.

Canal Expansion

The expanded Panama Canal opened on June 26, 2016. The expansion added a new third lane, which doubled the canal's capacity. Most importantly, it accommodated Neopanamax ships. Each one is 1,200 feet long and carries three times the cargo of 965-foot-long Panamax ships. Between 2016–2018, at least 5,000 Neopanamax ships went through the canal, and Panama receives $1 billion in tolls from it—which will double or even triple now that the expansion is complete. Cost overruns added $1.6 billion to the $5.2 billion price tag. 

How the Expanded Canal Affects You

The expanded Panama Canal keeps the cost of imported goods down, which lowers inflation. These five U.S. ports received 70% of U.S. ship imports:

  1. the LA/LB ports at Los Angeles/Long Beach
  2. the NY/NJ at New York/New Jersey
  3. Seattle/Tacoma
  4. Savannah
  5. Oakland

Not only does the canal create more U.S. jobs, but the expansion also makes the U.S. transportation system run more efficiently. For example, it relieves congestion at the LA/LB port—where most of the traffic comes from Asia—and it's given U.S. exporters better access to China and other Asian markets. It's become cheaper to ship through the Canal than ship to Los Angeles and move through goods by rail and truck.

How the Canal Lowers Shipping Costs

The fastest way to get cargo from China to the U.S. East Coast is by ship and rail, which takes 18.3 days, including 12.3 days to go from China to the U.S. West Coast. Cargo on a train takes six days from the West Coast to the East Coast, and for this reason, 75% of Asian imports take this route. Before the expansion, only 20% of cargo ships from Asia took the Panama Canal route because it took 21.6 days. The remaining 5% of China's trade to America goes through the Suez Canal in Egypt, which takes 21 days. 

The canal’s expansion could take 35% of West Coast freight, and expanding the canal makes this longer route more profitable for commodities exporters, who need to cut costs more than they need to reduce time. The expansion will also open the Asian market for U.S. natural gas exporters. Before the expansion, the canal was too small for liquefied natural gas ships. High-value, time-sensitive goods, such as electronics, will still use West Coast ports and rail.

More on Neopanamax Ships

Neopanamax ships carry 5,000–8,000 containers. Each ship is 14–20 containers wide, and requires a channel at least 17 meters deep. Super Neopanamax vessels haul more than 13,200 containers and carry more than 27% of the world's cargo. To remain competitive, the Panama Canal had to expand to accommodate these ships.