When the Panama Canal expansion is finally finished next year, the canal will have two new features: the ability to serve ships that can carry up to three times as many containers as it can currently handle, and the ability to serve liquified natural gas carriers, which it currently cannot handle at all. It is not entirely clear what effects this will have on world trade, but Panama’s hope is that, in spite of a recent shipbuilding trend toward vessels so large they will exceed even the acceptable “post-Panamax” canal dimensions, the expansion will still help to make it cheaper for the consumers and commodities of the Atlantic world to access the industrial economies of the Asia-Pacific.
There has indeed already been a great deal of analysis as to how the canal expansion might influence the United States, China, and Japan. While such attention is hardly unwarranted — these three nations alone account for almost half of the global economy — it has nevertheless managed to overlook a number of smaller countries that could be impacted the most by the canal. In this article we will attempt a quick overview of ten of these countries (in no particular order), identifying five which may be among the greatest beneficiaries of the canal expansion, and five which may have the most to fear from it. So, let’s get started:
The Winners:
South Korea, Taiwan, Trinidad, Colombia, and El Salvador
South Korea and Taiwan
Looking at liquified natural gas (LNG) markets may be the key to understanding which economies will benefit most from the expanded canal over the medium-term, since: a) LNG cannot today pass through the canal at all, but will be able to post-expansion; b) natural gas prices in 2015 have often been around 5-10 times higher in East Asia than in North America, and close to twice as high in Japan as in the European Union; and c) the shale boom has unlocked gigantic supplies of natural gas near the Gulf of Mexico around states like Texas and Louisiana, where there are already a large number of LNG import facilities that could be converted into export facilities. The existence of these facilities is significant, as it is considerably cheaper and faster to retrofit an existing plant than it is to build an LNG export terminal from scratch.
The US, to be sure, currently has the greatest number of LNG export projects in the world being planned, with the vast majority of these located along its Gulf coast, not so far away from Panama. Even though only one of these American projects, Louisiana’s Sabine Pass, is expected to be finished prior to 2019, the early 2020’s could see many more come to fruition.
Similarly, in Canada, which is the world’s fourth largest natural gas producer, the only existing LNG facility in the country is also located on the Atlantic coast, in New Brunswick. This too may soon be repurposed for exports. It will be particularly likely to happen if the New Brunswick government decides to give the go-ahead for the development of shale resources in the province, as it has been discussing of late, or if the British Colombian government decides that constructing LNG export facilities alongside its pristine Pacific rainforests is too expensive and environmentally risky, which would leave New Brunswick’s as the only LNG terminal in the country.
A typical assumption has been that Japan will be the primary beneficiary of this situation, since Japan has accounted for around 40% of the world’s LNG imports in recent years, far more than any other country has. There are, however, caveats to this assumption, which are often pointed out. These include the fact that Japan’s LNG imports could quickly fall by a large amount if it decides to bring its nuclear power plants, which were shut off following the Fukushima disaster in 2011, back online; the fact that the Chinese government could drive up Asian LNG prices over the next decade if it tries to switch over its energy sector from coal to natural gas at a breakneck speed; or the fact the US could choose to block its domestic natural gas exports (just as it has already made exporting American oil overseas illegal) in order to help keep gas cheap for its own consumers.
While these caveats are noteworthy, there is an even more important point that is more often overlooked: namely, that Japan imports so much LNG primarily because its economy is so enormous; it is actually not nearly as dependent on LNG imports as it appears, once you adjust for GDP size. A similar thing is true of China, which has also become a significant LNG importer in recent years. Per dollar of GDP, the economies of Japan and China are not very dependent on LNG when compared to their neighbors South Korea and Taiwan. Adjusting for GDP size, South Korea and Taiwan are about 1.8 and 1.4 times more dependent on LNG imports than Japan is, and 15 and 12 times more dependent on LNG imports than China is.
A similar situation is true of the other bulk commodities that East Asia might import from the Atlantic world via an expanded Panama Canal. South Korea imports approximately 1.9 and 1.1 times more food than China and Japan do, adjusting for GDP size, and Taiwan 2 and 1.2 times more. South Korea imports approximately 3 and 2.5 times more coal than China and Japan do, adjusting for GDP size, and Taiwan 4 and 3.3 times more. South Korea imports approximately 1.7 and 1.25 times more crude oil than China and Japan do, adjusting for GDP size, while Taiwan imports 2 and 1.4 times more.
South Korea and Taiwan both import about 1.8 times more iron ore than Japan does, adjusted for GDP size (though they still only import about 60 percent of what China does). South Korea’s imports of liquid petroleum gasses (ethane, butane, etc.), which the canal expansion is supposed to have a significant influence upon, is around 11.8 and 1.1 times greater than China’s and Japan’s are, adjusted for GDP size, while Taiwan’s are 4.4 times greater than China’s (though only 40 percent the size of Japan’s). Finally, South Korea exports roughly 8 and 8.1 times the value of goods to the United States that China and Japan do, adjusting for GDP size, while Taiwan exports 21.7 and 21.8 times more to the United States than China and Japan do.
None of this means that South Korea and Taiwan are risk-free investments. They are not. Ceteris paribus, though, they are likely to be two of the greatest beneficiaries of the new canal.
Trinidad
While countries like South Korea hope that the United States and Canada will translate their immense gas production into an LNG export boom, it is far from certain that they will do so. The US may simply consume the gas instead, or send it via overland pipeline to Mexico, or to Europe as LNG in order to help countries like Poland and Lithuania wean themselves off of Russian gas.
If North American gas is not made available to East Asian markets, that leaves Trinidad as the sole LNG player in the Americas capable of serving the East. Today Trinidad is the world’s sixth largest LNG exporter, and its 23rd largest natural gas producer in general. Trinidad exports 3.5 more LNG than Peru, which is currently the only other LNG exporter in the Americas. It produces more gas in general than any Latin American country outside of Mexico or Bolivia, both of which it trails only slightly. This is a considerable amount of gas production for a country as small as Trinidad, which has a population of just 1.4 million (including its sister island, Tobago, which is home to just 62,000 people).
Though Trinidad’s economy will probably suffer in the near-term or medium-term as a result of the recent sharp fall in energy prices worldwide, its position as the only significant LNG exporter on the Atlantic side of the canal means that Trinidad has the most to look forward to from the canal’s new ability to handle natural gas carriers for the first time. Trinidad is also the world’s largest exporter of ammonia and second-largest exporter of methanol, which also often find their way to East Asian markets. Finally, another reason for Trinidad to look forward to the canal expansion is the island’s location only 14 km off the coast of Venezuela, an oil-oriented economy that could also benefit long-term from the expanded canal by being able to more easily access the Pacific. While Venezuela is not yet an LNG exporter, it has the world’s eighth largest “proved reserves” of natural gas, according to the CIA World Factbook, so it could potentially become one in the future.
Colombia
Like Trinidad, Colombia’s economy could be in a difficult position as a result of the recent fall in commodity prices. That said, Colombia could be one of the major beneficiaries of the canal as well, all other things being held equal. Colombia’s borders are only 250 km or so from the canal zone, much closer than any other South American country. Panama was in fact a part of Colombia until the US helped detach it in 1903, a decade before the completion of the original canal. While Colombia does have long-term ambitions to build an efficient intermodal overland trade route that could serve as a rival to the canal, these dreams are still far from being realized, so the canal expansion will not interfere with the country’s nearer-term aims. To the contrary, the canal will help Colombia’s isolated Pacific coast west of the Andes Mountains interact with its more developed Atlantic and interior regions, which could allow the country to achieve a greater internal economy of scale, helping it to throw its weight around as the most populous country in South America apart from Portuguese-speaking Brazil.
Moreover, because Colombia’s vast supplies of coal (it is estimated to be the 10th largest coal producer in the world), coffee (it is the 3rd largest producer in the world), nickel (9th largest), bananas (10th), oil (19th), and other goods are much easier to export via Atlantic rather than Pacific ports — as a result of the navigability of the country-spanning Magdalena River, as well as the rail infrastructure that traverses the the valley through which the Magdalena runs — the expanded canal will help Colombian commodities to reach East Asia’s, California’s, and Chile’s import markets.
Colombia is also politically well-positioned to benefit from the canal, since it entered into a bilateral free trade agreement with the United States in 2012 (it is one of only a dozen or so countries to have a bilateral free trade agreement with the US), with Canada in 2011 (it is one of only three South American countries to have one with Canada), with the European Union in 2013, and with Chile, Mexico, and Peru, which along with Colombia make up the “Pacific Alliance”, in 2014. Colombia is also one of just three countries in South America – and the only one with a coast on the Atlantic – that may become a founding member of the TransPacific Partnership (TTP) free trade zone, if that zone comes into existence soon, as many hope it will.
Finally, Colombia has medium-sized natural gas reserves: the 47th largest in the world, according to the CIA Factbook. While Colombia currently does not export any LNG, and will not become a significant LNG exporter in the near future either, it has been involved in pioneering a the technology of “floating liquefaction terminals” that convert natural gas into liquified natural gas so that it can be exported via ship. According to the International Gas Union’s 2014 World LNG Report, Colombia’s floating liqufaction terminal project is set to begin commercial operations in mid-2015, at which point Colombia will become the only Latin American LNG exporter apart from Peru (since Trinidad speaks English). This terminal is one of just four floating liquifaction projects in the world that is in the process of being built or planned. The other three will not be completed until at least 2018. According to the report, floating liquifaction terminals might eventually become an important part of the natural gas liquifaction industry as a whole.
El Salvador
Today, from an economic perspective, El Salvador is a very isolated country. It cannot easily access the vast markets of North America, South America, or Europe, because, unlike other Central American states, it does not have a coast on the Atlantic Ocean. The overland routes to the Atlantic that are available to it – via the rugged territories of Honduras or Guatemela – are under-developed, politically unreliable, and sometimes dangerous. El Salvador also cannot access the markets of East Asia too easily, not only because of the vastness of the Pacific Ocean, but also because the Salvadoran economy competes directly with Asian manufacturers in the export of manufactured goods to Western consumer markets — unlike most other Latin American countries, which are resource-oriented economies and therefore tend to have a more synergistic relationship with East Asian manufacturers.
In fact, in spite of its Pacific Ocean frontage, El Salvador cannot even easily reach Pacific South American markets, since those markets are for the most part located between 3500 and 6000 km south of El Salvador, in the Peruvian megacity of Lima or in the country of Chile. Indeed, Chile is so far from El Salvador that El Salvador’s capital city, San Salvador, is actually a bit closer to Canada’s Innuit territory of Nunavut than it is to Santiago, the capital city of Chile.
Finally, El Salvador has some trouble accessing Californian markets, because Central America is not actually located due south of North America as one might assume, but rather is located southeast of North America, which means that El Salvador, in spite of being a Pacific country, is actually around 2.3 times further away from Los Angeles than it is from Miami via airplane, and 1.2 times further away from Los Angeles than from Miami via ship. Similarly, El Salvador is basically as far from Canada’s Pacific city of Vancouver as Vancouver is from Japan.
If the expanded Panama Canal allows El Salvador – which is, after all, not far from Panama – to more easily interact with the rest of Latin America, the United States, and Europe, it could be a huge boon for the country’s economy. Indeed, even Europe is 1-2 times closer to El Salvador than East Asia is, and Mediterranean Europe also shares cultural and linguistic ties with El Salvador, as does the enormous Spanish-speaking population of the United States. There is, in fact, a gigantic Salvadoran diaspora within the United States, almost two million strong in 2014 in spite of the fact that El Salvador’s overall population is currently just 6.3 million. Most of this diaspora lives within the Atlantic basin, in states like Florida, New York, Texas, and Virginia, as well as in Washington D.C.
Because of its Central American location and its membership within Central American and North American free trade zones and political groupings, El Salvador might also benefit by becoming a transshipment point for international trade in the future, as ports all throughout the Central American and Carribbean region are now trying to do in anticipation of the increased shipping traffic the new canal may bring. El Salvador’s Gulf of Fonseca, which it shares with Honduras and Nicaragua, is one of only two significant natural harbors on the Pacific coast of Central America.
The only other countries in a similar position to El Salvador are Ecuador and Peru — both of which are also near the canal (though Peru, and especially its main city Lima, is much further from the canal than El Salvador is) and both of which also do not have a coast on the Atlantic Ocean. Crucially, however, Ecuador and Peru are both major commodity exporters, whereas El Salvador is a net commodity importer. Ecuador, for example, is hugely dependent upon exporting crude oil to Asia and California. Such exports do not need to go through the canal, and indeed the revenue Ecuador receives from them could perhaps even fall if the canal eventually helps to bring about a convergence between the West Texas Intermediate price of oil and global oil prices in general.
A similar thing is true of Peru, which exports commodities like oil and copper to East Asia. In anticipation of the canal expansion, for example, Panama has been investing in the construction of a large copper mine along its Atlantic coast, which could compete with Peru’s position in Asian markets. Peru is also the 13th largest LNG exporter in the world, so if the canal helps to bring down the currently-high prices of LNG in East Asia (and in Chile), Peru could be hurt as well.
So, while Peru and Ecuador might still wind up among the leading beneficiaries of the canal because of the positions they occupy, they are unlikely to benefit from its completion nearly as much as El Salvador could.
In part 2 of this article, we will take a look at five of the potential "losers" of the Canal expansion project: Australia, Malaysia, Mexico, Yemen, and Mozambique. None of these countries will actually be hurt by the canal: they may be losers only in the relative sense rather than in absolute terms.
Here is a snapshot of why these countries will be on this list:
Australia is on the list because it has been expected to account for an enormous share of the newly built Asian-oriented LNG export facilities over the next five years or so, so if the canal helps to bring down the price of LNG in Asia, Australia could get hit. Also, the only major competition to Australia in Asia's iron ore market is Brazil, so if the canal helps more Brazilian iron ore get to Asia, it could also be bad.
Malaysia is on the list because its a big LNG exporter to Asia, and because its position on the Strait of Malacca could maybe become a bit less valuable if the Panama route becomes a more widely used alternative for global trade.
Yemen is the world's 13th or so largest LNG exporter, and LNG exports as a share of GDP is probably a lot higher in Yemen than in any other country apart from a few small exceptions like Trinidad. And it is also located along a major global trade route, the Bab-el Mandeb (the gate to the Red Sea and Suez Canal), which could perhaps become a bit less valuable because of the Panama Canal.
Mexico could get hit if the canal makes it easier for Asian exports of manufactured goods to access US consumer markets. Also, Mexico has been planning to import lots of US natural gas, both via pipeline and via LNG (it already has an LNG import facility on its Atlantic coast), so if the canal makes it easier to ship some of that US gas to Asia instead, then the price of gas imports in Mexico could become higher than it otherwise would be.
Finally, Mozambique has been hoping to turn its recent giant gas discoveries into a big economic boom, but, given the difficulty of the offshore projects (both from a technical standpoint and because this is Mozambique), lower LNG prices could put a halt to the projects altogether. Plus, Mozambique's capital city, Maputo, which is located on the coast immediately next to the South African border, is basically along the major global trade route that circumvents the cape of Africa, so the Panama Canal route could be a rival to it. And finally, if coal from North or South America becomes more accessible to Asia as a result of the canal expansion, it could hurt South Africa's coal-exporting economy, which could in turn hurt neighbouring Mozambique.
Comments
Log in or sign up to join the conversation.