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

2. 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

3. 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 rate
China’s economy slowing down, shifting from exports to domestic market

4. 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