Everyday Economics and a wider and deeper Panama Canal will change the invisible lines that show the world's supply chains.

How the New Panama Canal Affects Us

by Elaine Schwartz    •    Jul 24, 2014    •    465 Views

When a desk destined for Ohio leaves China on a super-sized container ship, should it enter the United States in Los Angeles or New York?

The Panama Canal could determine the answer.

Imagine a jagged north south line dividing the US. Located somewhere between the East and West Coast, this invisible line determines where supertankers carrying Asian cargo will dock. All places to the east of the line will receive goods from NY/NJ or maybe Savannah or Charleston. On the west side of the line, maybe Los Angeles or Oakland.

But here is where it gets interesting. When the Panama Canal’s renovation is completed, perhaps during the beginning of 2016, a newer, larger generation of Panamax container ships will be able to use it. As a result, some of the cargo heading for congested West Coast ports like Los Angeles will have a cost-effective alternative. By choosing a new destination, shippers will nudge that jagged north south demarcation line westward. One article I read suggests the line could shift from Memphis to Dallas.

Pictured below in canal locks are the New Panamax and its predecessor, the Panamax. There is a Post Panamax that a deeper, wider Panama Canal will not be large enough to accommodate.

New Panamax ships create economies of scale.

From: MaritimeConnector.com

New Panamaxes will also change the incentives that shape worldwide supply chains. Midwestern corn, sorghum and soybean growers who send their crops down the Mississippi River to Gulf Coast ports will be able to connect with much larger vessels that, for the first time, can reach Asia through the Panama Canal. Meanwhile, South American port cities will be able to send coal and iron ore to Asia more easily. It is even possible that more trade will evolve between the Western US and Eastern Brazil.

Our bottom line: The more I read, the more I concluded that no one is positive about how a wider, deeper Panama Canal will affect international trade. So we really do not know where that desk from China will enter the United States. However, we can be sure that bigger vessels create economies of scale. Representing cheaper shipping costs, these new economies of scale will shift the invisible lines that represent the world’s supply chains.

An excellent movie, Captain Phillips with Tom Hanks is the story of a container ship hijacking. From what I could discover, the ship, the Maersk Alabama, is smaller than a Panamax. The ship is in the trailer for the movie, below. (Please do note that there is some violence.):

 

 

Sources and more...In econlife, we have looked at the individual stories that describe the labor disputes in Panama and port expansion in the United States while other articles herehere and here convey the worldwide impact of the Panama Canal project. Note that today's discussion includes excerpts from past econlife posts. I added the Captain Phillips reference after the post appeared.    

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