The Panama Canal is one of the most important maritime routes for international trade. However, due to its own engineering and the continued drought in the area, it is facing different challenges that can economically affect companies and civil society.
What is an international channel
In international trade, the distance between countries, the infrastructure network and the possibility of achieving those economies of scale that make countries more or less competitive in terms of exports and imports play a fundamental role. Therefore, international channels are used in maritime trade.
International canals such as the Suez or Panama canals are artificial waterways that connect two maritime spaces, shortening distances. They are “choke points” (or bottlenecks) that are configured as areas with high strategic value for international actors.
Importance of the Panama Canal
The Panama Canal is one of the most important maritime routes in the world, associated with the 6% of world trade. It is administered by an autonomous entity of the government of Panama; and connects through its 80 km strip to 1920 ports in 170 different countries through 180 maritime routes. Which translates into reduction of times and distances, and therefore, of economic costs.
The main user of the Panama Canal is the United States, which represents almost 67% of the total cargo transported through the interoceanic waterway; and the main routes are: 1) between the east coast of the USA and Asia, 2) the east coast of the USA and the west coast of South America, 3) the east coast of the USA and the west coast of Central America, 4) Europe and the west coast of South America and 5) between Asia and the east coast of Central America.
Therefore, if it did not exist, the countries on the west coast of South America, for example, that export to Europe and the coast of the United States and Canada would face the so-called “tyranny of distance”, being much less competitive internationally; which would have a direct impact on their national economies. And, of course, in globalization itself.
How this channel works
The great disadvantage of the Panama Canal, which connects the Atlantic and Pacific oceans, compared to others such as the Suez Canal, which has already put the global supply chain in “check” in 2021, is that it operates with fresh water and depends on rainwater; and, therefore, the evolution of so-called climate change.
This canal uses a system of locks to raise ships several meters above sea level so that they can pass through Gatun Lake, which links the Atlantic and Pacific oceans. This artificial lake is fed by the Chagres River, whose water comes from local rainfall in the province of Panama. So, as long as it rains, there is no problem. However, when there is continued drought, as is the case, this lake suffers; Added to this is that due to its own operation it loses water with the transit of each ship.
Therefore, if for one of the 12.000 ships that this canal needs around 200 million liters annually, it is evident that: If water levels drop in areas like Gatun Lake, traffic has to be paralyzed, at least partially.. And this is where we find ourselves.
What is happening in the Panama Canal
As of today, the Panama Canal authority has limited the depth of the container ships that can navigate, as well as reduced the number of ships that can pass through, causing a wait of approximately 21 days for them to continue their route. There are more than 120 ships waiting for transit, and those that pass do so with less cargo, which has a direct impact on the billing of the Canal itself as the rates charged are related to the cargo carried by the ship.
The economic consequence of all this is clear. Pressure increases on the supply chain. User companies are “forced” to look for alternative routes, which directly increases their costs, which then affect the prices of the products, which will be substantially higher. That is to say, prices increase due to the idiosyncrasy of international trade, coinciding with the last quarter of the year, and the Christmas holidays, which may be compromised.
Consequences of the drought in the Panama Canal
All of this is a “breeding ground” that can cause a economic crisis from the point of view of demand. This is made worse, of course, in the Panama case, by providing this channel almost a 7% to its GDP. We cannot forget that we have not yet recovered from the blow that was experienced with the COVID pandemic, nor with the conflict in Ukraine, or the collapse of the Suez Canal, in addition to the deceleration of the economic cycle and inflation.
We are also in a high season for commerce, which as a result of the partial blockage of the Panama Canal may see its stock affected, all of this coming together with the return of vacations and Christmas shopping.
However, like everything in International Relations, we must wait to see the real consequences; starting from the premise of the global trade resilience that, not even a pandemic like COVID has affected it enough to have an impact on globalization. The question here could be, will Nicaragua and China take advantage of this situation to make the canal project that they began in 2012 a reality?
LL.M in International Business Law and Law from ISDE and graduated in Law and International Relations from Loyola University. CEO and business internationalization consultant at Reáculoateypunto.
