To what extent will the Panama Canal expansion lower transportation costs and enhance the competitiveness of exports from the United States?
Metcalf, Shelton D.
- Submitted in partial fulfillment of the degree Master of Arts in Law and Diplomacy at the Fletcher School of Law and Diplomacy. The Panama Canal expansion plan, on pace to be completed in 2015, has the potential to alter international shipping routes. The $5.2 billion infrastructure project calls for building a third channel that will accommodate post-Panamax vessels, which will double the capaci... read morety limits for the canal. Additionally, some specialized vessels will be able to use the Canal that previously could not. As a result, exporters, logistics experts, port authorities, vessel operators, and many others are eagerly anticipating its completion. For the United States, the canal expansion is expected to benefit trade between the U.S. Gulf Coast and East Coast and Asian markets because using the canal significantly shortens the distance and transit time between these two locations. The expansion also permits the use of larger vessels that take advantage of economies of scale. In short, the improved canal is believed to reduce transportation costs for U.S. exports using this route, making U.S. export goods more competitive on the international market. However, this outcome is not assured for many reasons. First, other shipping routes have advantages that will compete with the Panama Canal. The main, competing routes from the U.S. Gulf to Asia are through the Suez Canal and around the Cape of Good Hope (South Africa). Second, many U.S. and Asian ports have draft limitations that exclude larger vessels from entering their harbors. Any increase in these ports drafts will take time and large financial investments. Third, the possibility of longer average transit times could counteract the benefits of the Panama Canal. Therefore, it is inconclusive at this point whether the expanded Panama Canal will be better than the alternatives and furthermore, whether it will have a positive impact on U.S. export competitiveness. Additionally, a key factor influencing U.S. export competitiveness via the Panama Canal expansion is the Canal toll rates. The Panama Canal Authority is keen to recoup its investment costs from the expansion project, and higher toll rates are expected. However, it is unknown by how much, or if at all, the rates will rise. To assess the impact of future Panama Canal on U.S. exports, this paper will first evaluate the transportation costs for select U.S. exports using the Panama Canal (based on its current toll rates) and compare them against the transportation costs using the Suez Canal and Cape of Good Hope routes. Second, it will conduct a sensitivity analysis test that compares the derived transportation costs for each U.S. export under different Panama Canal toll fee scenarios. This test will expose how sensitive transportation costs are for each good examined to canal rates vis-a-vis alternative shipping routes.read less