Trade and Investment

What the new Panama Canal tells us about globalization

People wave Panama flags as they wait for the Chinese COSCO container vessel named Andronikos to navigate through the Agua Clara locks during the first ceremonial pass through the newly expanded Panama Canal in Agua Clara, on the outskirts of Colon City, Panama June 26, 2016.

Image: REUTERS/Carlos Jasso

Peter Vanham
Previously, Deputy Head of Media at World Economic Forum. Executive Editor, Fortune
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Tens of thousands of people from all around the world had come to see the miracle happen. A giant Chinese ship carrying an astonishing 9,000 containers approached the locks. And then it happened. Seven years after the works were first started, and 102 years after the opening of the first canal, the new, expanded Panama Canal quite literally opened its doors. The crowd cheered, the ship passed through. The canal was open for business.

The opening of the expanded canal last month wasn’t historic just because it happened a century after the opening of the first. There are plenty of other similarities. As was the case back then, the building of the canal had many difficulties along the way. But both then and now, it opened up a world of new possibilities, including a new era of globalization and trade, just as the world around it seems to be turning its back on this.

These are the four things you need to know about the new and old Panama Canals.

1. They were conceived in an era of globalization

The expansion of the canal was formally proposed 10 years ago, when growth in global trade was at the height of a decades-long boom. The financial crisis hadn’t happened yet, China’s economy was growing at double digit rate, and the existing sea routes for international trade – among them the Panama Canal – couldn’t cope with the increased demand.

That situation seemed an awful lot like the end of the 1800s. In that colonial era, global trade boomed for the first time. Colonial powers such as Great Britain, France and the United States used ships to enable trade throughout their empires. Developers such as the French diplomat Ferdinand de Lesseps first helped built the Suez Canal that connected the Mediterranean Sea to the Red Sea, and then focused on building a canal to connect the Atlantic and the Pacific Oceans: the Panama Canal.

2. They went over budget and over the planned construction time

Group United for the Canal is the name of the consortium that built the new canal. They were awarded the contract in 2009 after making an offer of $3.12 billion – significantly below the $3.48 billion target reference issued by the Panama Canal Authority for the process, and $1 billion below the second lowest offer. The idea was to complete the work in five years, in time for the 100th anniversary of the canal.

But the plan failed. First, it took two years longer than expected to build the canal, and second, it went more than a billion dollars over budget. In the end, the final cost was between $5.25 billion and $5.4 billion, much of which remains disputed. On top of that, questions remain about the quality of the new locks, which at least on one occasion started to crack, and are narrower than what many engineers deem the optimal size.

That situation is very similar to what happened with the building of the first canal, which was also delayed and went over budget. Around 1880, the French first tried to build the Panama canal, as they had done in Suez a few years earlier. But tropical diseases such as malaria and yellow fever, a lack of adequate construction machines and material, and a wrong concept put an end to their efforts after about a decade. By the time they left, an estimated 22,000 people had died. The French ultimately abandoned the project, which had become a financial disaster, and it took another two and a half decades before the project was finally completed by the US in 1914.

3. They allowed for a huge increase in global trade and economic growth in Panama

The new canal is completed at a time when about 90% of all global trade happens by sea, and about 5% of all trade passes through the Panama Canal. The new canal allows for ships of some 50 metres wide and more than 350 metres long to pass through, carrying up to 13,000 containers. As such, it more than doubles the capacity of the old “Panamax” ships, which could carry only about 5,000 containers. That capacity was more than enough in the early 20th century, when the world population stood at less than 2 billion. But it quickly grew outdated, and by the early 21st century, the expansion was deemed of crucial importance.

The new Panama Canal is therefore in theory great news for Panama and the world. With related economic activity, ABC wrote, the canal is responsible for about 40% of Panama's GDP. On average, 35 to 40 ships transit the waterway each day, and the canal is estimated to handle 6% of world maritime commerce. By 2021, Buenos Aires Herald wrote, the Panama Canal Authority is hoping the project will bring in $2.1 billion per year in added revenue, representing 2.8% of GDP. The International Monetary Fund estimates the canal expansion will reduce global maritime shipping costs by $8 billion a year.

4. They opened at times global trade was coming under pressure

The new canal was meant to help address poverty and inequality in Panama, as it will bring new sources of revenue for the government. But the country's $5 billion bet comes at a difficult time for international shipping, NPR reported. Rock-bottom oil prices and China's economic slowdown has sent shipping costs plummeting. Globalization as such is under pressure, and so is global trade. Whereas it used to grow by 5% to 10% a year, the percentage growth in many countries is now down to low single digits. With recent events such as the Brexit vote in the UK, and nationalist reflexes in countries from France to the US, some people even wonder if the era of globalization is over.

That would again resembles the situation in 1914, when globalization and global trade came to an abrupt end because of the First World War. The colonial empires went to war, countries closed their borders, trade plummeted – and it took decades for global trade to recover. Will the situation be different this time?

This article is part of our globalization series. You can read more here.

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