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Panama Canal Expansion Impact on U.S. Economy

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panama canal Credit: Justin Sullivan / Getty Images

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

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. Therefore, 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.

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, which 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. 

What Is the Panama Canal Expansion?:

The expansion of the Panama Canal will be complete by December 2015. A new third lane will double the canal's capacity. It will accomodate Post-Panamax ships, which are 1,200 feet in length and carry three times the cargo of 965-feet-long Panamax ships.(Source: USA Today "Super-size container ships require larger locks," August 5, 2009)

Five ports carry 70% of U.S. ship imports: 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 will help relieve the congestion to the U.S. transportation system by relieving congestion to the LA/LB port, which receives most of the traffic from Asia.

Panama Canal Only Handles 20% of U.S. Imports from China:

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) - a total of 18.3 days. For this reason, 75% of Asian imports go this way. Only 20% go through the Panama Canal 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)

Expansion Will Lower Shipping Costs:

However, 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, even though it will still take longer. Therefore, it will probably be used by commodities exporters, that are more concerned with cost than time. 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)

Panama 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 U.S. bought the Canal Zone, paying $10 million to Panama and $40 million to the French. In 1914, the Panama Canal was completed, costing $375 million. The U.S. 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 after the expansion is complete. Delays and cost-overruns have plagued the project by a year, and added $1.6 billion to the $5.2 billion cost. (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.

Proposed Panama Canal Alternative:

China has been negotiating with Colombia to finance a 250-mile railway linking its Pacific and Atlantic Coast. It would cost $8 billion, and include building a new port near Cartagena and upgrading an existing port in Buenaventura. Trade between the two countries was $4.8 billion in 2010, and the two are looking to further their alliance. (Source: Global Finance Magazine, March 2011) Updated April 11, 2014

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