Wednesday, October 9, 2019

Is there room for another ´wet canal´ or for ´dry canals´ in the Americas?

From Pulse by Pablo Rodas-Martini

In November 2013, I gave a conference at St Louis University in Missouri titled: "Is there room for another ´wet canal´ or for ´dry canals´ in Central America?"
At the time I was working as an economist at the Inter-American Development Bank (IADB) in Washington DC.
Occasionally I met the Director at the Bank from Nicaragua, and one of the topics that sometimes we discussed was the Nicaraguan canal.
He even wrote a novel and gave it to me to comment before its publication.
He was one of the main promoters of the alternative canal in his country, a canal that was supposed to be built by Chinese investors; I hold the opposite view, but our disagreement was always amicable while also talking about many other issues in between.

Although he knew my position, he asked my boss, the Manager for Mexico, Central America, and the Dominican Republic, if I could present in an event, he was going to participate in St Louis University, Missouri.
After receiving the authorization of my boss, I prepared a PowerPoint presentation of 19-slides PowerPoint, which I presented in about 30 minutes or so at the workshop.
Since my position was not ambiguous at all on the issue, and against the eternal aspirations of four Central American countries (Nicaragua, Guatemala, Honduras, and El Salvador), I did not use the PowerPoint template of the IADB, and I made clear in the second slide: “This presentation does not represent the official position of the IADB.”
As we said in Spanish “guerra anunciada, no mata soldados” (an announced war does not kill soldiers).

My thesis at that meeting, and which I will repeat and develop here is the following: 1) the Nicaraguan canal will never be built, 2) any dry canal across the isthmus of Tehuantepec, the Central American isthmus, or the Northern tip of Colombia will never take any real business from the Panama Canal, 3) the main competition to the Panama Canal has been and will continue to be the intermodal transport (trains and trucks) from the west coast to the east coast of the US, and 4) the Panama Canal will confront an enormous challenge in a few decades, a challenge that could hit the canal much more than the intermodal transport in North America.
Let´s take one by one each of these points, as I did in my presentation.

First, the Nicaraguan canal will never be built.
Nicaragua lost its chances at the beginning of the XX century when the US Senate voted between the two finalist routes for the construction of the canal: either to buy the rights from the French company that had started and failed in the construction of the Panama Canal, or to start from scratch across Nicaragua (the two routes are shown in Map 1, but the Corp of Engineers of the US analyzed even a few more options).
Nicaragua and Panama had been competing since the Gold Rush times in California in the mid-XIX century: between traversing the entire length of current US for about six months through lands controlled by native Americans, many of the future miners decided to go by boat all across the American continent up to the Strait of Magellan at the tip of the South American continent but, of course, some entrepreneurs realized soon that they could offer to those eager travelers to pass through the Central American isthmus rather than going all the way south and, for that, the two best places were Panama and Nicaragua.
In the beginning, the crossing was possible only by mules in Panama and, in the case of Nicaragua, going upstream the San Juan River by boat up to a point, then by mules, then by boat again through the Nicaraguan Lake, and then again by mules.
The Nicaraguan route was longer, but it was competitive due to the use of boats in two main segments.
However, the construction of the Panama train killed the Nicaraguan route (see Pictures 1a-1b).
The decision by the US Senate was the coup the grace of the Nicaraguan dream; by the way, there is a famous story about how a Frenchman fooled the senators with a stamp of the Momotombo volcano in eruption to convince them that a canal in Nicaragua could be very risky despite the volcano was not close to the planned route of the canal (see Picture 2, which, shows the most famous post stamp in the world).
Once the US built the largest construction the world had ever seen in history (maybe just the Chinese Wall could be comparable, because the canal was an even bigger endeavor than any of the pyramids of Egypt) there was no way to compete against Panama, well, the US since the US administered the canal from 1914 until the year 2000, when it was returned or, better say, it was given to the Panamanians since it had never before belonged to them.
How can you compete with the biggest infrastructure investment in the world?
The Chinese may have billions of dollars to invest across the world, but they will not waste their money building an alternative canal when there is no market for that.
And this takes me to my second point.

Map 1 Possible routes for "wet" or "dry" canals across Mesoamerica

Pictures 1a-1b.
The Panama railroad built in the XIX century

Picture 2.
The most influential and famous postal stamp in the world

Second, the expansion of the Panama Canal a few years ago annihilated any future competition by either Mexico, the other Central American countries, or Colombia (Colombia also has a route where a canal could be built).
In addition to the huge initial investment in the canal by the US over a decade: they re-started the construction of the canal in 1904 and finished it in 1914, investing a total of 375 US million dollars which at current prices would be about ten billion dollars, the Panamanians spent more than five billion dollars between 2007 and 2015 to expand the canal.
The expansion of the canal was necessary for two main reasons: world trade has increased almost every year at a higher rate than the world GDP, which means that more ships need to transit the canal, otherwise they would have to anchor for days on either side of the canal waiting for their turn, which would have forced many shipping companies to change towards the intermodal transport in the US; Graph 1 shows an increase in the number of unsuccessful reservation slots before the expansion of the canal, which means that a large percentage was unable to receive a slot and had to transit on a first-come-first-served basis, which translated into more prolonged waiting times (this and the following three graphs are taken from the Master Plan for the expansion of the Canal, a document presented by the Panama Canal Authority in 2004 to convince the people of Panama about the advantages of expanding the Canal).
The other reason is that the yearly increase in trade has increased the size of newbuildings, many of which could not use the canal; the Panamax had to give place to bigger vessels: the now called Neopanamax or New Panamax (even Suezmax have crossed the expanded canal).
Of course, there will always be even bigger vessels that will not be able to transit the expanded canal: Capesize, VLCC, and ULCC, but the Panama Canal has a limit it can expand and those ships are not designed for the Panama Canal.

Graph 1.
Vessels that requested a reservation slot

Below I include some other graphs to illustrate what the expansion means.
Graph 2 shows the volume of cargo through the canal since its construction until 2005 before the expansion started.
Graph 3 shows the increase in the capacity of the expanded canal.
Graph 4 shows how the expansion of the canal almost tripled the capacity per volume in from 4,500 to 12,000 TEUs.
The expansion of the canal was not a minor widening or dredging, but it was an infrastructure work designed to cover the demand of world trade through this route for several decades into the future.
What all this implies for the Nicaraguan canal?
It means that if before they had to compete against a giant, now they must compete against a super-giant, and when you even do not exist, that is an insurmountable feat.
From an economic perspective the construction of an alternative canal is … wishful thinking, nonsense: there will not be demand for another canal at all since the current one could perfectly serve the need of the shipping companies.
As you can imagine, the Nicaraguan canal has not really started despite it was announced with great fanfare about ten years ago.
When you explain to the Nicaraguans these facts and show to them that a new canal has no economic base, they would shift to the geopolitical front: the Chinese would like to invest in the canal to put pressure in the US to compensate the influence that the US has exerted in the Far East since the end of the II World War and, when you argue that if the Chinese would have a geopolitical interest in the Caribbean due to the proximity to the US, the cheapest and best decision would be to build a huge military base either in Nicaragua, Cuba or Venezuela: even the biggest military base in the world would cost one-tenth of a new canal and would have a much greater impact on the geopolitics in the Americas than a new canal.

 Graph 2. The volume of cargo transported through the Canal

Graph 3.
Increase in capacity with the third set of locks

Graph 4.
Comparison between Panamax and Post-Panamax vessels

Third, the dry canals will not be more than toys compared to the Panama Canal.
As I said before, dry canals could be built across Mexico, Colombia, or any of the other five Central American countries.
Mexico tried in the past through the isthmus of Tehuantepec (the shortest distance they have between the two oceans) and failed.
Mexican engineers even designed crazy ideas such as the pulling of ships through land! (see Pictures 3a-3b-3c).
Guatemala, Honduras, El Salvador, and also Nicaragua have dreamed since their independence in 1821 with creating dry canals that can serve as an alternative way to Panama (first to the Panamanian train and later to the canal).
Almost with each new president in one of those three countries, the idea is revived, and after some months it dies, just to be revived with the next president.
A dry canal will never work there for three reasons: A) Across those countries the terrain is not flat between the two continents (that is why the Panama Canal has locks, contrary to the Suez Canal that was built at the sea level).
The topography elevates significantly between the two oceans in all places, which difficult the transport of cargo by either trucks and or trains.
You would need thousands of trucks to carry the equivalent of one boxship, or you would need an extremely very powerful train to go up the hill with dozens of containers or wagons.
Since the terrain tends to be high to the sea level, the speed and costs for land transportation would be enormous compared to transport the same volume of cargo through the Panama Canal.
B) Any dry canal would confront a logistical problem impossible to solve: a ship would deposit its cargo in one port and, assuming that the cargo could be transported to the other ocean, will there be a ship of the same size… empty and ready to take the cargo?
Of course not.
That is not the way the logistics in the world works.
That was exactly the problem that the people that wanted to become miner during the Gold Rush in California were confronting in the mid-XIX century when they were arriving from the East of the US to either Nicaragua or Panama to travel to California: they had to wait weeks or even months in Panama City or San Juan del Sur in Nicaragua to be able to board a ship that could take them to California.
The proponents of the dry canals think only in terms of roads or railways, never in terms of logistics.
When you tell this to them, they will say that in that case most of the trade could end in the same Central American countries, well, then you are not talking at all about a dry canal which by definition would imply that you upload the cargo in the other ocean, but you are referring only to a better road to the one that currently exists (or to build from scratch a railway) to carry goods from the small ports in the Caribbean towards the main cities of those countries: Guatemala city, Tegucigalpa, or San Salvador.
C) But there is even a third reason why any dry canal will not work: Panama already has two dry canals, and they are shorter, flatter, and faster than any dry canal that Mexico, Colombia, or any of the other Central American countries could ever build.
Panama still has the train (it was rebuilt in a different route after the construction of the canal), which transport cargo from one ocean to the other (it also has a passenger that provides a majestic view in a classical train, and it also has a highway that connects both oceans in barely one hour or so since its length is only about 80 km (see Pictures 4 and 5).
Any road or railway through any of the other countries would take at least three times that time.
Do the Panamanians make such a fuss about their two dry canals?
Not at all.
They do not call them dry canals: for them, they are only accessories to real and only one canal: the wet, the watery one (see also the map below which shows the canal, the railway, and the highway).
If you realized, I have no mention Costa Rica at all; they have never talked about dry canals: they know that there are highlands between the two oceans.
Costa Ricans tend to focus on what matters for human development and economic growth, and, as a consequence, their development is much superior to the rest of Central America (by the way, I must say that I am neither Panamanian nor Costa Rican).

Picture 3a-3b-3c.
The proposal to transport ships through the isthmus of Tehuantepec in Mexico (see the sequence)

Picture 4.
The highway between Colon and Panama City.

Picture 5.
The commercial train between Colon and Panama City

Fourth, the real competitor of the Panama Canal is the intermodal transport between the west and the east coasts of the US.
Graph 5 shows how big is the intermodal transport in the US and how the Panama Canal has gradually increased its share.
The figures for 2004 (before the expansion of the canal started) was 61% by intermodal transport, 38% by the Panama Canal, and 1% by the Suez Canal (see Map 2); yes, it is true that a small percentage of the trade from the Far East (or most probably from Bangladesh and the east coast of India) to the east coast of the US takes place through the Suez Canal.
Hence, the real competition for the Panama Canal are the ports in the west coast of the US, in particular, the Port of Long Beach, Port of Los Angeles, and Port of Richmond in California, the Port of Oregon in Oregon, and the Port of Seattle and Port of Longview in Washington.
The modernization of those ports and the improvement in the transportation by trucks and trains towards the center or the east of the US is the real competition of the Panama Canal.
In this case we are not referring to a dry canal because the cargo is not loaded again into another ship in the Atlantic: the final destinations are cities or locations in the US.
And there is another competitor for the Panama Canal: not significant, but one that could grow if the Panama Canal does not keep a continuous improvement: the Port of Ensenada in Baja California, Mexico, a port that almost touches the border of the US (just 125 km from San Diego in the US) and that in logistical terms could be another critical entrance point for the intermodal transport to the east coast of the US (mainly towards the southern states) since Mexico has in place the North American Free Trade Agreement (NAFTA) with the US and Canada, a trade agreement that has been renegotiated under the name of the US-Mexico-Canada Agreement (USMCA) and whose approval is still pending by the US Congress.
The west coast of the US has the disadvantage of a long land transportation of the cargo towards the East but the faster and fossil fuel trains and the electric and autonomous trucks of the future will be keeping their costs and, in addition, has two significant advantages compared to the Panama Canal: huge vessels such as the VLCC or the ULCC can berth in the Pacific ports, and in trade economies of scale reduces costs significantly, and those ships are much bigger than the New Panamax; the other reason is that shipping companies do not need to pay a costly fee as they have to do with the Panama Canal, all that they need is to unload the cargo in one of the ports, a smaller payment than transiting the Canal, and a cost that ships would have to pay anyhow in a port in the east coast if they were choosing the alternative way.

Graph 5.
Competition in the route between Asia and the US East Coast

Fifth, the Northwest Passage will become -regrettably- the main competitor to the Panama Canal in future decades.
I must say that I say regrettably not because I prefer the Panama Canal, but I used the word because, for me, commercial shipping through the Northwest Passage is a tragedy: the tragedy of climate change.
The Northwest Passage has not one but many possible routes through the Canadian Arctic since the islands form one of the largest archipelagos in the world (Map 3 shows the three main routes).
Some expeditions tried to cross the Passage in the XIX with no success and most ending in tragedy.
The most memorable of all was the failure of the large two-ship expedition commanded by Sir John Franklin, which ended in the dead of the entire crew; it is believed that most by starvation or scurvy.
It was not until 1906 when Roal Amundsen in a small herring boat and with a crew of only six mariners was able to cross the Northwest Passage after a voyage that took them three years: they appeared in the Pacific when most people in Norway had assumed that he and his crew had also died.
They found a Passage almost impenetrable, packed with ice, and mainly thick- multi-year ice.
Amundsen and his crew reached the pages of history for that incredible voyage that they would have not survived without the help of Inuit people.
The tragedy in the long term for Gaia, for plants and animals, and for us, the human race is that all the multi-year ice has disappeared from the Canadian Arctic, basically from most of the Arctic with only a few pockets remaining in other parts of the Arctic.
The ice created every winter lasts until the spring since it is thin and melts during the summer; at the beginning of the autumn, the Canadian Arctic is just water.
While Amundsen´s crossing took three years, currently, an ordinary ship (no need of an icebreaker ship moving in front) may take just a few days to cross from the Atlantic to the Pacific or vice-versa.
The Arctic is warming at a rate almost twice the global average.
The warming of the Arctic is creating an enormous vicious circle because it is attracting large investments in mining and fossil fuel exploration, which at a due time will increase global warming even more.
Entire ecosystems will die, and our economic “victory” will be short because after some more decades a hotter earth will take revenge not against us, but Greta Thunberg´s generation, and that explains her immense rage: there is an incredible inter-generational injustice, we, the adults, take most of the benefits, while today´s teenagers and children will pay most of the costs.

Map 3.
Main routes to cross the Northwest Passage

Similar to mining and oil and gas companies, the shipping industry has also put its eyes on the Northwest Passage, not yet as much as with the Northeastern Sea Route across the Scandinavian and Russian Arctic, but its eyes are already on the Northwest Passage.
Some shipping companies must already be figuring which of the three or two main options through the Canadian archipelago could be the best for container ships, dry-bulk ships, and tankers.
Canada would love to ban the commercial traffic through its islands because the risks of an environmental disaster is enormous: an oil spill could take years to clean o could never be cleaned due to the remoteness and the non-hospitability of the region, besides, the economic cost of monitoring such a long route would be enormous for the Canadian budget: we are not talking about crossing the Panama, Kiel, Gota, or Suez canals (80 km, 98 km, 190 km, and 193 km, respectively) or even the Strait of Malacca (800 km); the Northwest Passage, depending of which could it be the best navigable route, could range from 1,450 to 2,400 km.
With dozens of vessels crossing the Passage, initially during summer and autumn, but in some decades maybe also during late spring and even early winter, the risks of maritime disasters similar or even much bigger to Exxon Valdez is a real threat.
And let´s make it clear: the tanker Exxon Valdez ran aground at less than 61o, but the commercial ships will be crossing the Canadian Arctic much farther north: between 70o and 75o, which explains why the challenge to clean any oil spill would be almost impossible.
Finally, experienced pilots take control of the ships when they transit the Panama or Suez canals; the crossing of the Northwest Passage would require a similar mastery due to the myriad of islands that the ships will face, but will Canada have enough expert pilots to do that?
Will the shipping companies pay for that service if Canada is not able to regulate the transit?
And this takes me to my last point.

Sixth, Canada will never be able to ban the transit through the Northwest Passage.
Canada will never be able to ban the transit, and just with great efforts may be able to impose rules for navigating through those waters.
The regulations on NOx, SOx, or ballast water, to mention only three, are minor endeavors compared to the challenge to regulate the crossing of the Passage.
But the topic takes us to another dimension: the diplomatic world.
Canada has tried for decades that the US and the rest of the world accept that the waters of the Canadian Arctic are internal waters of Canada and that consequently Canada has its sovereignty and can impose any regulation it may want for the transit of ships, and may even close it for the transit of commercial vessels.
However, the US, the European countries, and almost any maritime country in the world refuse to accept that those are internal waters and since they connect the two oceans claim that the Canadian Arctic is an international strait where any vessel has the right of transit passage.
If the latter is accepted, Canada could never close the crossing to foreign vessels, and maybe only with great difficulty could impose some regulations.
The dispute has many ramifications; two of the most relevant are that the US wants to have free transit from the east coast to Alaska, and the waters are of critical geopolitical importance (Soviet and later Russian submarines have navigated the waters).
In brief, if Canada will not get the support of the US, other countries will never accept it either: Russia, China, and Japan, among the largest players.
Hence, ships from weakly monitored countries, such as the flags of convenience, will also be able to cross the Northwest Passage; I am referring to countries such as Liberia, Marshal Islands, Bahamas, Malta, Cyprus, Antigua, Bermuda, St Vincent, Cayman Islands, and same Panama.
It has been shown once and again that ships of flags of convenience are worse than ships from other countries for categories as the following: working conditions, basic rights, pay scale, insufficient compensation, improper work schedule, and future prospects, all conditions related to working conditions for the crews.
Do the same apply regarding the age and quality of the vessels?
Either from flags of convenience or from other countries, having at the beginning dozens and years later hundreds of ships crossing the Northwest Passage would be equivalent to a time bomb.
And let´s be frank about Canada too: Canadian companies are also eager to exploit the minerals and fossil fuels of the Arctic, which means an oil spill could also take place because of increased shipping activity by the same Canadians.

But why would shipping companies like to travel through the Northwest Passage rather than through the Panama Canal?
Two fundamental reasons: the distance from Japan, South Korea, and the north of China is much shorter than a trip that forces ships to travel southeast from Asia to Panama since Panama is at a much lower latitude than ports in those places.
Besides, as airlines know very well: to fly through the Arctic is much shorter than to do it at lower latitudes, and it is not just because of the advantages of flying tailwind with the jet stream from Asia to America.
That is the quid for the Panama Canal: if dozens and later hundreds of ships decide to cross the Northwest passage, the demand for the Canal will drop.
The transit through the canal will remain, of course, because for ships from the south of China, the Philippines, Vietnam, Malaysia, Indonesia or Singapore, the Canal will still make economic sense, and even more if the ports of call for some ships are in the south-east of the US such as Texas, Louisiana, Florida, Georgia, or the Carolinas, and even more for the any ship departing from even southern countries such as Australia and New Zealand towards any place in the east coast of the US (by the way ships from these two last countries will always prefer the Canal and never the Strait of Magellan between South America and Antarctica because as you could imagine by simple geometry: the hypotenuse of a triangle will always be shorter than the sum of the opposite and adjacent sides).
But what if the Northwest passage takes from Panama half or at least one-third of its traffic?
The increase in traffic through the Arctic will affect Panama and Suez canals, in the former case because of the Northwest Passage, and the latter because of the Northern Sea Route.

In summary, returning to my original thesis: 1) the Nicaraguan canal will never be built, 2) any dry canal across the isthmus of Tehuantepec, the Central American isthmus, or the Northern tip of Colombia will never take any real business from the Panama Canal, 3) the main competition to the Panama Canal has been and will continue to be the intermodal transport (trains and trucks) from the west coast to the east coast of the US, and 4) the Panama Canal will confront an enormous challenge in a few decades, a challenge that could really hit the canal even more than the intermodal transport in North America: the Northwest Passage.

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