In order to understand the implications of the Panama Canal's expansion, it is important to understand the potential for dynamism in global trade routes. Changes in demand, trading partners and even technology can alter these routes. The advent of container shipping was one such technological change that allowed the shipping industry to move away from traditional break-bulk shipping to container shipping and bulk commodities shipping. Break-bulk cargo, which is no longer used, was loaded and unloaded by deck crews at ports typically located near city centers.
Basic commodities such as coal, iron ore and grain, along with oil and natural gas, are for the most part shipped on bulk carriers or tankers. Container shipping, however, allows a variety of goods to be transported in standardized containers that are stacked on top of giant ships. Container shipping creates specific port requirements such as onshore cranes to move the containers and ample space for storage. The standardized form of the container makes switching from water transport to land transport easier than it was with break-bulk shipping because trains and trucks can handle the containers without unloading and repackaging the cargo. The new port requirements that came with the rise of container shipping allowed for the emergence of a new type of port, often away from the city's center, that could accommodate container traffic. This in turn caused a shift in the location of some trade activity.
Just as container shipping has made the movement of goods along global trade routes more efficient, large ships increase shipping efficiency by taking advantage of economies of scale. The overall size of the average ship in the global fleet is increasing, whether container carrier, bulk carrier or tanker. Post-Panamax vessels — ships that at present are too large to pass through the Panama Canal — already make up 16 percent of the global container fleet and carry 45 percent of the fleet's capacity. They are projected to make up 27 percent of the fleet (and carry 62 percent of the fleet's capacity) by 2030.
The addition of new, bigger ships could have a cascade effect on the rest of the fleet; as the new ships are used to traffic the longer routes, older large ships would likely be redeployed to more regional routes, which would effectively increase the average size of the entire fleet as the smallest ships are retired. This could affect both container and bulk shipping.
Even after the expansion is completed in 2015, the Panama Canal will not be able to accommodate the largest vessels, including 2 percent of the world's container ships (15 percent of global container shipping capacity) and roughly 17 percent of the current and on-order bulk vessels. However, the larger draft resulting from the canal's expansion will allow some ships that currently use the canal to carry more cargo.
Moreover, post-Panamax ships at full capacity would require ports with depths of 15.2 meters (50 feet). Currently, all major U.S. West Coast ports except Portland have adequate depth. However, on the East Coast many ports are not deep enough to accommodate ships of this size, with the exception of Norfolk, Baltimore and New York/New Jersey ports. Additionally, no Gulf Coast ports currently meet the 15.2-meter depth requirement. Therefore, even after the Panama Canal expansion is complete, smaller ships may still be needed to shuttle goods into most ports.
Potential Effects of the Panama Canal Expansion
The U.S. Army Corps of Engineers has identified three ways in which the expansion could affect trade in and around the United States. First, the project could allow East Coast ports to better compete with West Coast ports for container shipments from Asia. Traditionally, container shipping from Asia to the East Coast involves intermodal transport: Goods are shipped to the West Coast, then transferred to rail before being transported to their destinations on the East Coast. The widening of the Panama Canal could allow all-water trade to proceed more economically and efficiently by allowing the use of larger vessels. Capacity shortages and labor disputes on the West Coast may have already contributed in part to a gradual shift in this direction over the past decade. In 1999, 15.5 percent of Asian container imports used all-water routes to reach the East and Gulf coasts, but by 2009, that amount had risen to nearly 30 percent and remained roughly at that level through 2011.
The expansion of the canal and the concurrent growth of East Coast ports could augment this initial increase in all-water transport, although if tolls along the canal become too high they could negate some of the cost benefits of using the canal. These tolls, which are currently $74 per 20-foot equivalent unit for container ships, are slated to be 10 percent higher in 2013 than they were in 2011. Aware of these rising fees and the shift toward all-water transport, rail companies and associated West Coast ports are investing in improving the efficiency of the rail system in order to keep rail transit costs competitive.
The second effect the expansion could have is the creation of a hub-and-spoke system in the form of regional transshipment hubs, since many Eastern U.S. ports currently cannot accommodate the largest of the post-Panamax vessels. This would allow large ships to arrive at a central transshipment port, where their cargo would then be unloaded and put onto smaller ships that could shuttle the goods to the other ports. This type of system would be particularly convenient for Gulf Coast ports because it could allow transshipment from large hubs in the greater Caribbean Basin through the use of feeder ships. Numerous transshipment hubs — such as Freeport, Bahamas; Kingston Harbor, Jamaica; and Port of Cartagena, Colombia — could be established or expanded to accommodate shippers willing to use them.
The third possible change concerns basic commodities such as agricultural goods that move through ports along the U.S. Gulf Coast. While total agriculture exports or even their destinations may not change, the volume of barge traffic toward the Gulf Coast could increase. The Mississippi River is already one of the main arteries used to export grain from the United States. If larger or heavier-laden vessels had the ability to pass through the Panama Canal, it could become more economical to export an even larger amount of grain and goods via the Mississippi River system — including exports destined for Asia — and aid in the United States' price competitiveness in the global grain market.
However, in addition to rising Panama Canal tolls, the infrastructure of the Mississippi River system could prove to be a limiting factor to cost savings for this route. While capacity is available to accommodate for an increase in the movement of goods, the lock systems on the Mississippi, Ohio and Illinois rivers are old and have experienced an increasing number of unexpected failures in recent years. Maintenance delays, planned or unplanned, could increase the price of moving goods along the Mississippi River.
Shipments of hydrocarbon resources from the Gulf region could also be affected by the Panama Canal project because most liquefied natural gas tankers would be able to fit through the expanded canal, allowing for more economical transport to Asia in the event that the United States begins to produce and export liquefied natural gas from the Gulf Coast region. According to industry estimates, this capability could save roughly $35 per thousand cubic meters compared to alternative routes. However, as with other shipments, high tolls on liquefied natural gas carriers could reduce the economic advantage of using the canal.
The Long-Term View
There are many factors to consider when trying to determine the most economical path to transport goods, including time of transit, fuel costs, potential delays due to natural or man-made choke points and environmental factors. Shifting trade patterns is a slow process and is not as simple as allowing larger ships through a canal. Inland infrastructure and storage may need to be improved or built to accommodate the inflow of goods, and that can take time.
Any or all of these changes in transit could (and to some degree, probably will) occur. However, many of the current transit patterns will also stay in place. Changes resulting from the canal's expansion likely will be different for container shipping versus bulk shipping because of the different port requirements and equipment used by each.
It remains to be seen which route will become most economical in the long term. When the Panama Canal expansion is complete, competition for the cheapest, most efficient shipping route can begin.
