NS4540 Winter Term 2017 Panama Canal Expansion Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Overview Robert Looney, The Panama Canal Expansion is a Risky Bet that Panama Didn’t Have to Make, World Politics Review, October 27, 2016 Expansion cost $5.25 billion Opened in late June 2016 Enables Panama to accommodate larger ships but not all ships U.S. grain exports from Gulf now more competitive in Asian markets Canal will lower transportation costs for U.S. supply chains and distribution centers. Government set up a stabilizing fund for Canal revenues to smooth out Canal receipts Government hopes Canal can now extend economic boom

Expansion Risks Canal expansion not without significant risks Direct competition from other forms of transport Will it face serious competition from a Nicaraguan canal? Honduras and Guatemala planning a joint rail network linking Atlantic and Pacific ports Expansion of Suez Canal enables it to accommodate largest ships – will it expand traffic from East coast to Asia West coast Ports cutting costs, improving rail service Shifting production and trade patterns Near-shoring of firms from Asia to Mexico, the Caribbean and Central America will divert some traffic from the Canal Cancelling to TPP will result in lost trade with Asia that might have used the Canal World trade now growing about one half pre 2008-09 rate China’s economy slowing down, shifting from exports to domestic market

Assessment Always possible risks will not materialize or as bad as projected However if these uncertainties had been present in 2007 before canal expansion began, good chance the project would have been canceled Government would have focused on other areas of comparative advantage financial center – cleaning up banking sector Services -improving governance – avoiding Panama Papers scandal