Journal Issue

Panama: Selected Issues

International Monetary Fund. Western Hemisphere Dept.
Published Date:
November 2016
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Spillovers From The Panama Canal Expansion1

The Panama Canal expansion is a major infrastructure project with large domestic and international spillover effects. The construction of the third set of locks creates new capacity and accommodates much larger vessels. In addition to its direct contribution to growth, increased canal traffic may enhance Panama’s position as a logistics hub creating synergies with other sectors of the economy. The expansion also triggered large port investments in the region to accommodate post-Panamax ships. Since the transportation industry features significant economies of scale, the world as a whole will benefit from lower transportation costs.

A. Short History of the Canal

1. The Panama Canal is a key world trade route. The Canal is a 50-mile waterway that connects the Atlantic and Pacific oceans, and guides ships through a system of locks lifting them 26 meters (85 feet) above sea level. Its history goes back to 1881, when France began to work on the canal. Engineering problems and a high mortality rate among workers brought the project to a halt. In 1904, the United States took over the project, and the canal was completed and officially opened on August 15, 1914. The U.S. continued to fully control the canal until the signing of the Torrijos–Carter Treaties in 1977.

2. After a period of joint American-Panamanian management, Panama took over in 1999, and the canal is now fully managed and operated by the Panama Canal Authority (ACP). In 2014, it generated revenues of about $2.6 billion (5.4 percent of Panama’s GDP), and annual traffic had risen from about 1,000 ships in 1914 to more than 13,000. The canal currently serves various important trade routes within the region and with Asia and Europe, and provides a significantly shorter transit between the Atlantic and Pacific oceans than around the treacherous Cape Horn.

B. Trend-Setting and Trend-Following

3. The Panama Canal determined the standards for a significant part of the ship-building industry over the twentieth century. Ships traveling through the canal have to meet the “Panamax” vessel specifications, mainly determined by the dimensions of the canal’s lock chambers, and the height of the “Bridge of the Americas” at Balboa.

4. Technological advancement and increase in trade volumes have shifted the industry towards larger vessels that exceed the Panamax specifications in recent decades. These larger ships, known as post-Panamax, offer considerable economies of scale, resulting in significant savings in transportation costs, especially important for low-unit-value products. While in 1990 almost all containerships could transit the Panama Canal, by 2006 over 27 percent, and now almost a half of the global containership fleet could not fit into the Panamax standard. Moreover, the trend in new orders for construction of container vessels shows a clear leaning toward post-Panamax.

5. Maintaining the comparative advantage of the Panama Canal on key market segments was a major rationale for the expansion project. For instance, studies prepared in the run-up to the 2006 Referendum emphasized that the expansion project will help the Panama Canal maintain its comparative advantage with respect to Suez on the Asia – US East Coast route. While the Panama Canal offers a considerable advantage in terms of Panamax-size vessel productivity (each vessel makes 6.5 roundtrips on the route compared to 4.7 roundtrips per year on the Suez route) and transportation costs (lower by about a quarter), this advantage is eroding with larger-size vessels.

6. The expansion consists of the installation of a third, larger lane of locks and additional depth throughout the 50-mile passage. The overall investment project, which started in 2007 following the approval by the October 2006 referendum, is estimated at about $5.3 billion. As of March 2016, the expansion work is over 97 percent complete and the expanded Canal is expected to be inaugurated on June 26, 2016. It will double the Canal’s capacity, allowing it to accommodate the larger post-Panamax vessels.2

7. The expansion project has attracted contractors and financing from different parts of the globe. Over a dozen contractors and suppliers from various countries around the world have been involved in the expansion and the project received financing from four continents (Chart 1). While the international content of operations is typically high in projects that are relatively large compared to the size of the host economy, the novelty with the Canal expansion is its contribution to generating (complementary) investments in other countries (Section E).

Chart 1.Geographic Distribution of Contractors and Financing Sources for the Expansion

Sources: ACP website.

C. Internal Spillovers

8. Canal traffic is expected to grow faster than world trade, contributing to Panama’s favorable growth outlook. According to the IMF’s World Economic Outlook (as of April 2016), world trade is expected to grow at an average annual rate of 4.2 percent over 2017-2022. The growth in Canal traffic in the short and medium term is expected to be somewhat decoupled from world trade growth, as some traffic currently using the intermodal system through U.S. west coast ports and the Suez Canal is diverted towards the expanded Canal.

9. Trade diversion is mainly driven by the savings in transportation costs from utilizing post-Panamax vessels. In addition, disruptions caused by strikes in U.S. west coast ports are expected to have a long-term impact on their competitiveness and contribute to diverting business toward the expanded Canal. A report by the Boston Consulting Group (2015) projects an increase in the east coast share of U.S. Asian imports from 35 percent to 50 percent by 2020, against 40 per cent without the expansion. Assuming that Asia-U.S. trade grows in line with world trade, and considering that Asia-U.S. east coast traffic currently represents about a third of total Canal traffic, the implied growth rate of Canal traffic is 6.5 percent.3 If the expanded Canal also gains share in other routes, then the implied rate would be higher.

10. New opportunities around the expanded Canal may enhance Panama’s position as a logistics hub. The expansion has helped generate port investments within Panama, supported several ongoing initiatives for expanding port facilities, and raised the potential for developing LNG terminals and achieving higher use of LNG in Panama. In addition, with the expanded canal allowing for more and larger vessels, there is an opportunity to develop hub-spoke economies moving cargo from smaller to larger vessels for the longer hauls (Hummels, 2007).

11. Future investment projects can create synergies with other sectors of the economy. Such investments include building new container ports that accommodate bigger ships, roll-on roll-off ports for automobile cargo, and LNG facilities with the potential to convert Panama into a regional energy hub. These developments will also create synergies with other sectors where the Panamanian economy acts as a regional hub, such as travel through the national airline Copa, which accounts for about 4 percent of GDP, commerce, and banking.

D. International Spillovers

12. The Canal expansion is one of the largest infrastructure projects in the world, and it has substantial multiplier effects throughout the logistics network in the region. There are about $25bn worth of executed, ongoing or planned port investments to accommodate the post-Panamax ships that will go through the new set of locks (Chart 2). That is roughly 5 times the cost of the expansion project (albeit over time).

Chart 2.Regional Port Investments to Accommodate Post-Panamax Vessels 1/

Completion date in brackets (when available)

1/ Investments in U.S. west coast ports are excluded, as they are less likely to have taken place due to the canal expansion.

Source: Fund staff calculations based on various news and government sources (see Appendix).

13. The expansion will also have large multiplier effects through economies of scale in transportation. International cargo shipping involves strong economies of scale. For example, the annual operating cost per unit of transportation capacity is estimated to be 37.4 percent lower for post-panamax than for panamax container vessels (Rodrigue, 2013). Industry estimates suggest that oil tankers can achieve, on average, 15 percent lower unit shipping costs by using the new larger locks. In our back-of-the-envelope calculation we use the midpoint of these two estimates, and assume that the expanded Canal facilitates a 26 percent drop in trade costs. Fan, Lai and Qi (2015) show that, for a broad class of international trade models, the only first order effect on global welfare from reduction in trade costs is the direct effect. That is, when terms of trade effects can be ignored, welfare gains from lower trade costs equal (to a first order approximation) the savings in trade costs. Using information on the expected share of post-panamax vessels in the world fleet and average ad-valorem equivalents of shipping costs, Chart 3 shows the annual global welfare gains of the expansion for different assumptions on the share of world cargo taking the Canal route.4 In a scenario where the Canal maintains its current share of 5 percent of global trade, the annual global welfare gains exceed the $5.3bn investment, yielding a multiplier of 1.1 within a single year.5

Chart 3.Global Welfare Gains From Lower Transportation Costs

Source: Fund staff calculations.

14. Savings due to lower transportation costs are not retained as rents within Panama. The significant savings generated by the use of larger vessels could offer an opportunity for the Canal to capture higher fees without affecting its competitive position. Nonetheless, the new toll structure in force since April 1, 2016 implies that tolls per unit transported through the Canal (containers or DWTs) actually decline, implying that Panama does not retain these savings as rents (Chart 4).

Chart 4.Panamax and Post-Panamax Tolls

(savings in percent)

1\ Container: 5k TEU vs 12k TEU at 75 percent capacity; dry bulk: 52.5k DWT vs. 165 DWT at 75 percent capacity.

Source: Staff calculations based on ACP fee structure.

E. Conclusion

15. The Canal expansion will have far-reaching effects both within and outside of Panama. The canal is expected to re-gain some of the market share that it had lost to other maritime routes due to vessel size limitations. Panama can benefit from the increase in passing cargo and the opportunities it creates for other value-added activities along the logistics chain. At the same time, the change in transportation technology will affect the shipping industry and final consumers around the world. Seaports in the region have been upgrading their infrastructure to capture some of the new business generated by the ships that now take the Panama route. The savings from the fall in transportation costs due to economies of scale can also be substantial. Although there is considerable uncertainty in the estimates, our calculations suggest that the canal expansion project has an impressive social rate of return.

Appendix I. World Port Locations
Port LocationSource
Baltimore (U.S.)“Panama Canal’s Growth Prompts U.S. Ports to Expand,” The New York Times, Aug 20, 2012

“PORT OF PHILADELPHIA: Controller Studies Southport’s Potential,” Philly Record, Jun 18, 2015

“Port suffers a setback,”The Baltimore, Aug 29,2014

“Panama Canal Expansion Has U.S. Ports Rushing,”Governing, Jul 2012
Charleston (U.S.)“Ports, Shipping Companies Retool for Bigger Panama Canal,” The Wall Street Journal, Feb 17, 2014

“Panama Canal’s Growth Prompts U.S. Ports to Expand,” The New York Times, Aug 20, 2012 break/>“Racing To Be Ready – U.S. Ports Prepare for Post Panamax Era,” Business Facilities, Sep 24,2013

“Charleston seeks to be ‘Top 5’ container port by 2020,”American Shipper, Sep 15,2015
Savannah (U.S.)“Savannah port volume growth deceleration points to weaker West Coast Diversions,” Journal of Commerce, Sep 21,2015

“Savannah Harbor Expansion Project’” US Army Corps of Engineers, Mar 21, 2013

“Rising Tides,” GeorgiaTrend, Jan 2015

“Progress and Pollution: Port Cities Prepare for the Panama Canal Expansion,” Environmental Health Perspectives
New Orleans (U.S.)“Racing To Be Ready – U.S. Ports Prepare for Post Panamax Era,”Business Facilities, Sep 24,2013

“Heavy plant investment fuels strong breakbulk import growth in US Gulf,”Journal of Commerce

“Alabama Port Already Bulked Up for World’s Giant, Post-Panamax Ships,” Business Alabama, Oct 2015
Everglades (U.S.)“Harbor Deepening and Widening,” Port

“PORT OF PHILADELPHIA: Controller Studies Southport’s Potential,” Philly Record, Jun 18, 2015
Miami (U.S.)“Miami is betting big that expansion of Panama Canal will bring in megaships,” Sep 21,2014

“Ports, Shipping Companies Retool for Bigger Panama Canal,” The Wall Street Journal, Feb 17, 2014

“Panama Canal Expansion Has U.S. Ports Rushing,”Governing, Jul 2012

“Port of Miami enters big ship era,” American Shipper, Nov 2015

“South Florida ports make regional pitch for cargo,” American Shipper, Oct 1,2015
Jacksonville (U.S.)“The siren song of deep water: Ports race to accommodate post-Panamax ships,” AlJazeera, Mar 9,2015

“PORT OF PHILADELPHIA: Controller Studies Southport’s Potential,” Philly Record, Jun 18, 2015

“JaxPort to get $27.5 million in state funds for port improvements,” The Florida Times, Jacksonville, Sep 25,2013
Massachusetts (U.S.)“Panama Canal expansion to have major impact on Boston,” The Boston Globe, Mar 16, 2014
New York/New Jersey (U.S.)“New York Ports Losing to Baltimore on Panama Canal Growth,” Bloomberg Business, Jul 17,2014

“Progress and Pollution: Port Cities Prepare for the Panama Canal Expansion,” Environmental Health Perspectives

“The Post-Panamax Effect: How the Panama Canal Expansion is Reshaping America’s Ports,” Blueprint, CBRE, Jul 21,2015
Philadelphia (U.S)“PORT OF PHILADELPHIA: Controller Studies Southport’s Potential,” Philly Record, Jun 18, 2015
Virginia (U.S.)“Virginia aims for $670 million in new port investment,” American Shipper, Nov 20,2015

“Fitch Upgrades Virginia Port Authority’s Port Facilities Revenue Bonds to ‘A+,’” Business Wire, Feb 27,2015
Sidney (Canada)“Nova Scotia port starts marketing campaign for container terminal,” American Shipper, Jul 9,2012
Melford (Canada)“Mega Container Ship Port for Eastern Canada?,” The Maritime Executive, Sep 24,2015
Manzanillo (Mexico)“Manzanillo readies for Panama Canal expansion with new cranes,” Jul 2, 2015
Veracruz (Mexico)“APM Terminals Wants In on Veracruz Port Expansion,” World Maritime News, Sep 3, 2015

“Veracruz, Lazaro Cardenas focus of major Mexican port investment,” Journal of Commerce, Jul 9, 2015
Quetzal (Guatemala)“Guatemalan port prepares for post-Panamax ships,” Journal of Commerce, Sep 3, 2014
Limon (Costa Rica)“APM Terminals Moin Prepares to Expand Costa Rica’s Refrigerated Export Capabilities,”Oct 19,2015

“El proyecto de puerto para contenedores de Limón-Moín, Costa Rica,” IDB
Cuba“Keep your eyes on Cuba as big business docks in Port Everglades,” Sun-Sentinel, Aug 18, 2015

“Puerto cubano de Mariel espera ser enlace principal con ampliación Canal Panamá,” El Nuevo Herald, Apr 14, 2015
Kingston (Jamaica)“Making Jamaica’s logistic hub a reality,” Jamaica Observer, Apr 9,2014

“Jamaica Investment Opportunities,” Trade and Investment
Cartagena (Colombia)“A $200 Million Expansion Project at this Caribbean Port,”The Caribbean Journal, Aug 24,2015

“Puertos duplicarán capacidad frente al Canal ampliado,” Capital Financiero, Jul 7, 2014

“Colombian port of Cartagena to be expanded to handle post-Panamax ships,”Fox News Latino, Aug 14,2015
Buenaventura (Colombia)“Expertos en el movimiento de contenedores,”Cinco Dias, Sep 3,2014
Callao (Peru)“Big hardware arrives in Callao,”Maersk, Sep 3,2014

“Empresarios temen que los puertos de la región desplacen a panameños”, Panama America, Sep 16,2014

“Port of Callao,” World Ports Source
Iquique (Chile)“Chile’s Iquique port plans $80 million expansion,” Journal of Commerce, Sep 17, 2014
Antofagasta (Chile)Plan Nacional de Desarrollo Portuario, 2013, p. 111
San antonio/ Valparaiso (Chile)Plan Nacional de Desarrollo Portuario, 2013, p. 111
North Abaco (Bahamas)“Ampliación y apertura de nuevas vías interoceánicas abren el apetito del Caribe,”Mundo, Jan 18, 2015
Martinique“Martinique Eyes Future as Logistics Hub,” Caribbean Journal, Oct 7, 2013
Trinidad and Tobago“Ampliación y apertura de nuevas vías interoceánicas abren el apetito del Caribe,” Mundo, Jan 18, 2015
Santos (Brazil)“Santos Brazil invest 324.4 million USD in expansion of Tecon Santos terminal,” Maritime News, Oct 07,2015

“Santos Brasil wins extension, $324 million investment to follow,” Journal of Commerce, Oct 15,2015
Itajai (Brazil)“Brazil undergoes policy shift it hopes will spur port investment,” Journal of Commerce, Sep 24,2015

“New Productivity Record for APM Terminals Itajai,” APM Terminals, May 7, 2015

“APM Terminals onpath to growth,” Apr 2013, Latin America Edition
Quequen (Argentina)“Quequén Port adapting to expanded Panama Canal, expected higher exports,” Antares Shipping, May 5,2014

Prepared by Ana Ahijado, Metodij Hadzi-Vaskov, Andras Komaromi (all WHD), and Diego Cerdeiro (SPR).

As of 2012, post-Panamax vessels accounted for 16 percent of the container ships fleet and 45 percent of the fleet’s capacity. These figures are expected to reach, respectively, 27 percent and 62 percent by 2030. See “U.S. Port and Inland Waterways Modernization: Preparing for Post-Panamax Vessels,” Institute for Water Resources, U.S. Army Corps of Engineers, June 20, 2012.

This back-of-the-envelope calculation assumes that canal traffic on all other routes also grows at the rate of world trade.

Currently 5 percent of world trade is estimated to go through the Canal. Ad-valorem transportation costs are assumed to be of 8 percent (see Hummels, 2007). The estimate assumes an expanded Canal operating at full capacity. Total world trade figures are taken from the WTO’s International Trade Statistics.

Considering the range of transportation cost reductions across various cargo types (15-37 percent), this multiplier could be between 0.6 and 1.5.

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