East Coast vs. West Coast: The Impact of the Panama Canal’s Expansion on the Routing of Asian Imports into the United States Camil Martinez – University of Maryland Adams Steven – University of Massachusetts Martin Dresner – University of Maryland ATTSS 2014 City University of Hong Kong November 17-18

Introduction The Panama Canal is a 77 km link between the Atlantic and Pacific Oceans. Officially opened in 1914, it was controlled by the U.S. until transferred to Panama in 1999. Managed by the Panama Canal Authority.

Canal Limitations Ships must navigate a series of locks while transiting the canal. Locks restrict size of vessels to 33 meters wide and 296 meters wide with a draft of 12.6 meters. A Panamax container ship, the largest that can transit the canal. can hold about 5,000 TEUs.

Panama Canal Expansion Given the limitations on ship size and the wait time for passage that can be several days, a decision was made by the Panama Canal Authority to expand the canal. The expansion project, started in 2007 and was originally slated to be completed in 2014 (now scheduled for completion in 2016). It will allow for passage of 13,000 TEU container vessels.

Research Questions How will the Panama Canal expansion affect sea trade from Asia to North America? In particular, how will the expansion affect the percent of Asian trade that goes by sea to the East Coast of North America?

Relevance of Expansion Currently, the two major U.S. West Coast ports, Los Angeles and Long Beach, are quite congested. Headlines/Links from the Journal of Commerce during the period October 16-21, 2014: Port woes threaten toy importers with unhappy holidays Container ships backed up for days off LA-LB [Updated] Harbor Trucking Association warns LA-LB, Oakland of legal action Port of LA chief: ILWU deal needed to fix congestion Long Beach extends free time for containers LA-Long Beach congestion pushing up outbound spot truck rates Truckers, shippers protest demurrage at clogged US ports

Relevance of Expansion In addition, there are serious railroad capacity issues in the U.S. that have been worsened over the past few years as more resources have been devoted to the transport of shale oil. Therefore, an expansion of the Panama Canal that enhances the transit route from Asia to the U.S. East Coast would be welcomed by many shippers.

Port Choice Literature Several studies have been conducted on port choice. Common factors that have been found to influence port choice include: port location, inland distance, costs/fees, efficiency, services provided, port infrastructure and connectivity. Port choice may also be influenced by the decision maker; i.e., the shipper or freight forwarder, and their preferences.

Methods of Analysis Two common methods have been used to gather data in the port choice literature. Survey shippers and freight forwarders to determine their perceptions as to the most important factors determining port choice. Use a revealed preference approach; i.e., determine the factors that influence port choice on a post hoc basis using archival data. In addition, some studies separate out those factors that are under port control (e.g., efficiency, services, etc.) from those factors that are beyond management’s control (e.g., location).

Coast Choice In many of the models on U.S. port choice, the coast is determined a priori by the researcher based on the origin/ destination of the shipment; i.e., shipments from N.E. Asia are assumed to be destined to the West Coast while shipments from Europe are assumed destined to the East Coast. From a distance point of view, this is reasonable, however in some cases the assumption may be inaccurate. WES T EAST

Asia – East Coast Traffic Levine, et al. developed an origin- destination table for U.S. imports. Using data from 2004, they found that 17% of Chinese cargo entered the U.S. at the Port of New York. It is evident that East Coast Ports are already a reasonable destination for at least some Asian shipments. How will this change once the Panama Canal expansion is completed? Levine, B., Nozick, L., Jones, D., 2009. Estimating an origin-destination table for US imports of waterborne containerized freight. Transportation Research Part E 45, 611-626.

Impact of Panama Canal Expansion Two previous studies on the impact of the Panama Canal expansion on container flow into U.S. ports. Use mathematical programming model to show that the expansion of the Panama Canal will divert some traffic to East Coast ports through the Canal, although the impact on port selection will be smaller than other logistical improvements, such as a through route to the U.S. from Prince Rupert, BC. Fan, L., Wilson, W. and Tolliver, D., “Logistics Rivalries and port competition for container flows to US markets: Impacts of changes in Canada’s logistics system and expansion of the Panama Canal,” Maritime Economics & Logistics, Vol. 11(4), 2009, pp. 327-357. Fan, L. Wilson, W. and Tolliver, D., “Optimized network flows for containerized imports to the United States,” Transportation Research E, Vol. 46, 2010, pp. 745-749.

Our Research Project Focus on imports destined to the Pittsburgh metropolitan area. Chose Pittsburgh because it is a city viable from both East and West Coast ports. Approximately 39% of the shipments in our dataset transited to Pittsburgh through an East Coast port. Pittsburgh, PA.

Data Main source of data for our study was the Port Import Export Reporting Service (PIERS) database. PIERS contains individual shipment information, including port of origin, port of entry, commodity type, cargo value, cargo weight, number of TEUs and country of origin. Started with the population of 28,945 shipments into the Pittsburgh area during 2009 from Asia. After eliminating zero weight shipments, records with obvious errors and shipments that did not originate from East Asia (China, Hong Kong SAR, Korea and Japan), S.E. Asia or Australia and the Pacific, we were left with 15,233 shipments. All shipments in our dataset entered the U.S. through nine major container ports: East/Gulf Coast – Baltimore, Charleston, Houston, New York/New Jersey, Norfolk and Philadelphia West Coast – Los Angeles/Long Beach, Seattle and Tacoma.

Data Point Example An example observation would be the following: 8 containers of wood products weighing 154 metric tonnes and valued at US $158,000 originating in Shanghai and destined to Pittsburgh through the Port of Baltimore. PIERS data, however, does not contain ocean and inland transit times and does not include freight charges. These variables are required to estimate our “Coast Choice” model.

Transit Distance and Times Relied on third parties for transit distances: AtoBviaC provided most likely sea transit distances in nautical miles from port of origin to port of destination. Sea transit times were computed based on an average speed of 14 knots. Inland transit times from the nine ports to Pittsburgh were provided by a shipping company. An additional 36 hours of transit time was added to shipments through the Panama Canal as per transit information on the Canal’s website.

Freight Charges Freight charges were estimated following Steven and Corsi (2012) using aggregate 2009 quarterly data from the U.S. Census Bureau. The Census Bureau provides the total value of cargo, total weight, and total freight charges from a country of origin to a U.S. entry port. Steven, A. B., Corsi, T. M., 2012. Choosing a port: An analysis of containerized imports into the US. Transportation Research Part E 48, 881-895.

Freight Charges Estimation Using an aggregate log-log model, we estimated freight charges from an origin country to a U.S. port using the following variables: Ocean distance Freight value Freight weight Crane moves per hour at U.S. port Import TEUs – Export TEUs Average size of vessel at port Number of container vessel calls at port Port throughput in TEUs After obtaining the coefficients from our aggregate log-log model, we used PIERS and port data to estimate the ocean freight cost of each shipment in our dataset.

Coast Choice Model WES EAST T Goal of our paper is to determine how the expansion of the Panama Canal will affect the distribution of Asian freight traffic through the East and West Coasts of the U.S. to Pittsburgh. As a first step, we used existing data to determine how various factors influence “coast choice”. WES T EAST Pittsburgh, PA.

Coast Choice Model Estimated a logit model with the dependent variable equal to 1 if the shipment traveled through an East Coast port and 0 if the shipment traveled through a West Coast port. Explanatory Variables: Shipment Value (US$/tonne) Freight Charges Ratio (Estimated East Coast Freight Charges/Estimated West Coast Charges) Transit Time Ratio (Estimated East Coast Transit Time from Asia to Pittsburgh /Estimated West Coast Transit Time from Asia to Pittsburgh) Originating Regions in Asia (Dummy variables for Australia and the Pacific and for East Asia. SE Asia is the base case.) Commodity Dummies (Series of dummies to differentiate between commodities in shipment)

Descriptive Statistics Variable Mean Coast (East Coast = 1) 0.39 Freight Value (US$ / Tonne) 9,533 Estimated Freight Cost (US$) 7,685 Estimated Transit Time (Days) 28 Freight Cost Ratio (East Coast/West Coast) 0.50 Transit Time Ratio (East Coast/West Coast) 1.37

Coast Choice Results Variable Model 1 Model 2 Model 3 Model 4 Model 5 Intercept 1.80*** 14.70*** 0.78*** 12.11*** 11.99*** Value/ Tonne -5.96E-05*** -6.62E-05*** -4.50E-05*** -3.75E-05*** -3.87E-05*** Freight Ratio -0.72*** -0.02 -0.51** -0.22 Transit Time Ratio -1.01*** -13.48*** -2.18*** -11.97*** -11.95*** Australia & Pacific 1.71*** 0.95*** 0.91*** East Asia 4.80*** 3.75*** Commodity Dummies Included NO YES

Impact of Reduced Panama Canal Expansion The expansion of the Panama Canal is likely to affect shipping in a number of ways: Freight will move to larger vessels (Post Panamax) making transit through the Canal more attractive due to cost economies. However, increased freight transit charges by the Canal could (partly) offset the lower shipping costs. Shipping times through the Canal should decrease as bottlenecks are reduced or eliminated.

Impact of Lower Transit Times In our estimation of Coast Choice, we allowed 36 hours for passage through the Panama Canal. How will Coast Choice change if transit through the Canal is expedited?

Probability of Choosing East Coast Port As transit time through the Canal decreases, the probability of choosing an East Coast alternative increases. Current Ratio (East Coast Transit Time / West Coast Transit Time

Significant increases in East Coast traffic due to lower Canal transit times (based on results from Model 5).

Conclusions Based on Panama Canal transit time savings alone, the expansion of the Canal should direct a significantly higher percentage of the traffic to the East Coast ports and thus help to relieve the congestion a the U.S. West Coast ports. However, the increased East Coast traffic will depend on a number of factors, including freight charges by the Canal, cost savings from the use of larger vessels, congestion at ports and limitations in East Coast port capacities.

mdresner@rhsmith.umd.edu