Panama Canal Expansion Impacts: Myths and Misconceptions

The ongoing Panama Canal expansion, scheduled for completion in 2014, is one of the largest and perhaps most visible construction projects in the world, a development that will affect global trade for decades to come. Effects will be seen in international shipping fleets and services, global trade patterns, international port development, North American intermodal transportation patterns, and development of global supply chains.

The expansion program includes widening and deepening access channels and raising the level of Gatun Lake, which will help enable the passage of deeper draft vessels. Most importantly, Canal capacity will be increased by the addition of a new third set of locks parallel to and larger than the current locks. These new locks will allow the passage of much larger ships of all types. For the container market segment, larger vessels will be able to carry about 13,000 twenty-foot equivalent units (TEUs), or 2.6 times more than current Panamax vessels that handle a maximum of about 5,000 TEUs.

In the years leading up to the Great Recession, shipping through the Panama Canal was approaching capacity and portions of international trade could have become severely constrained by growing delays and increasing costs. When the expansion is completed, capacity of the Panama Canal will double as measured by total cargo volume, although in some cases the number of transits could actually decline as a single transit by a post- Panamax ship replaces multiple transits by smaller ships.

Great Expectations and Great Frenzy

Expectations of major impacts to shipping are being driven by Canal expansion, as well as by the rapid growth in average ship size, with the newest large container ship class reaching 18,000 TEUs—nearly four times the current Panamax size. While these new large ships are too big to transit the expanded Panama Canal—they are designed for use on the large Asia-Europe trade lane—other large ships with capacities of 8,000 to 13,000 TEUs able to transit the expanded Panama Canal are being built and delivered. In addition, as the very largest ships enter the world fleet and are deployed on the Asia-Europe trade lane, their availability will tend to push smaller classes of ships into use in other trade lanes such as transpacific trade between Asia and the US West Coast.

With the growth in the number of new large ships, the total capacity of the global container fleet is significantly outpacing total demand. This development will tend to worsen the cyclical profitability problems of international carriers.

Given the breadth of impacts just outlined, expectations have grown that massive growth in trade volumes from Asia to the US East and Gulf coasts would occur due to increases in total trade volumes and significant shifts away from US West Coast gateways that currently handle most Asia-US trade, to US Gulf and East Coast ports.

There are wildly divergent views, however, about the extent of shifts in coastal trade. Compare, for example, two recent assessments of the anticipated impact of the Canal expansion, quoted in Box 1.

Expectations have led to a frenzy of efforts to capture new growth opportunities or to defend current market positions. On the East Coast these efforts range from the plan to raise the deck of the Bayonne Bridge in New York Harbor to eliminate the height restriction limiting use of larger ships, to calls for deepening harbors and channel depths in Charleston, Savannah, and Miami. On the West Coast, perceived threats have sparked a “Beat the Canal” campaign, with port and related infrastructure improvements ranging from replacing the Gerald Desmond Bridge in Long Beach to large port and rail capital improvement projects.

Perceived impacts and responses extend beyond ports and coastal interests. Significant shifts in trade patterns and supply chains could also affect inland transportation systems and economic development in many regions of the US as well as in Canada and Mexico. Class I and smaller railroads have made and are planning multibillion dollar investments to increase system capacity, reconfigure their networks and improve connectivity with ports. While these developments are not all directly related to Panama Canal expansion, they will tend to reinforce potential cost reduction benefits that could result from the project.

On the East Coast, the development of Norfolk Southern’s Heartland Corridor will improve capacity and connections from the Port of Norfolk, Virginia to the Ohio River Valley and Chicago. CSX’s National Gateway program will also improve connections from Atlantic Coast ports to the Midwest through the development of a hub and spoke system centered in Northwest Ohio. On balance, how much the CSX development will improve East Coast competitiveness is unclear since it will also improve rail connections for freight from the West Coast.

Factors Affecting Volumes and Coastal Shifts

Looking at fundamental factors that affect trade volumes and patterns can shed some light on the likely reality of Panama Canal expansion impacts and perhaps dispel some myths and misconceptions that surround this development.

Relevant Trade Routes

The first important factor is that the principal trade that may be influenced by Panama Canal expansion is containerized US imports from Northeast Asia, most notably from China, but also including Hong Kong, Japan, Taiwan, and South Korea. This trade comprises a large share of the Panama Canal’s business and is the principal trade route where larger container ships are likely to be deployed. Containerized exports to Northeast Asia are less relevant since trade is heavily imbalanced and increased export volumes would tend to replace empty containers being returned to Northeast Asia. While this would improve carrier profitability it would not fundamentally affect the design of carrier services unless export volumes grew to more closely rival imports. A smaller but still relevant trade lane is the West Coast of South America to the US East Coast, which will continue to use smaller ships and transshipment in Panamanian and Caribbean ports.

Increasing Trade Volumes

There is a myth that Panama Canal expansion will increase trade volumes, encompassing the notions that the capacity-restricted Canal has held back growth in container trade volumes, and that deployment of much larger ships will obviously mean more containers filling those larger ships. Fundamentally, the potential for increasing total import volumes depends on whether lowered transportation costs could lower prices of imported goods enough to induce more US consumption, much as lower prices offered during holiday sales result in increased sales.

The basic question here is what price reductions could occur, and  secondarily what might be the consumption response (price elasticity). Using order-of-magnitude numbers, if the average value of goods transported in a TEU is about $100,000 and the transportation cost reduction passed on to consumers is $200 per TEU, this would result in a 0.2 percent price reduction for the goods consumed. If this percentage price reduction is in the right ballpark, the effect on volumes will be close to zero.

But what about all those larger ships and the resulting increases in volumes? The answer is quite simple. Given a fixed level of volume, there will be fewer ships carrying the cargo and fewer and more concentrated port calls. These impacts may, in fact, be the principal result of Panama Canal expansion. There is one market area where increased trade volumes could result from Canal expansion and that is US exports of bulk products, especially grain. Transportation cost reductions from use of larger ships could make US grain exports more competitive in world markets and increase volumes of grain moving down the Mississippi River out of Gulf ports to Asia via the Panama Canal.

An additional factor to consider in Northeast Asia-US container volumes is whether growth rates will return to the double digit increases experienced in the years immediately preceding the Great Recession. Based on at least three fundamentals, those historic growth rates are unlikely to return.

First, there is little growth potential left from further containerization of bulk goods. Second, in many large product categories such as apparel, footwear, furniture, toys, and consumer electronics, most consumption is already based almost entirely on imports, leaving little room for additional growth in container import volumes in the future. Third, container import volumes were boosted by shifts in sourcing to China and other Asian countries rather than from Canada and Mexico. This trend may have also reached its limit. In summary, if the major factors that drove container volume growth have run their course, then container growth will slow as a result. It is also possible that product sourcing trends may be reversing, lowering growth in container shipping rather than sustaining it. Specifically, the return of manufacturing either to the US or to neighbors Mexico and Canada would dampen container trade volume growth.

The overall conclusion is that US container trade will have volume growth rates that are closer to GDP growth rates rather than the multiple-of-GDP growth seen in previous years.

Factors that Will Influence Coastal Shifts

There are five principal factors that will determine possible coastal shifts: market segments and drivers; supply chain network development; remaining potential for shifts; port readiness and inland infrastructure; and transportation cost reductions and competition.

Container Market Segments: Products and Geography

The US import market is large, diverse, and highly differentiated in terms of geographic regions and products being imported. Geographic factors and product values are both critical in determining the potential for future shifts in coastal shipment patterns from Northeast Asia.

Concerning geography, no matter what the product, goods destined for US Western and Central regions as far east as Chicago, Memphis, and Dallas from Northeast Asia will always tend to be moved through West Coast ports because the alternative routes are more costly and take longer.

Higher-value products will tend to be shipped through West Coast ports no matter what their destination in the Eastern United States. For such products the value of time associated with longer transit times and the resulting inventory carrying costs tends to outweigh lower transportation costs available from “all water” shipping services.

The principal conclusion here is that only limited product volumes are up for grabs by East Coast ports, inland ports, and railroads, and this naturally restricts potential coastal shifts.

Supply Chain Networks

The second major factor to consider in assessing potential coastal shifts is the influence of supply chain network structures. While the marginal costs of transporting goods have an impact on how supply chains are designed and how goods are shipped to distribution nodes, there are overriding factors that may be far more important. These include flexibility in distributing goods, overall time to market, network redundancy for minimizing risks of disruption, and the strategic location of distribution networks close to end markets.

The development of supply chain networks may be the single biggest factor in determining how the flow of goods shifts over time. The historic growth of the Inland Empire shipping hub located east of the Los Angeles metropolitan area has solidified the position of the Ports of Los Angeles and Long Beach as the principal trade gateway into the Unites States. The development of distribution center clusters near Atlanta has likewise been correlated with growth at the Port of Savannah.

Two important points arise out of this understanding. First, marginal changes in transportation costs that could result from Panama Canal expansion may be just a small part of the overall supply chain network cost equation. Second, large complex supply chain networks cannot be easily altered based on transitory fluctuations in transportation costs. Put another way, shifts in shipping patterns may best be explained by how supply chains evolve over time rather than by simple and limited changes in one component of transportation costs.



Remaining Potential for Shifts

A third factor in assessing potential coastal shifts is how much such shifts have already occurred, and what the remaining potential may be. Box 2 shows Gulf and East Coast shares of Northeast Asia-US container cargo based on 2011 product value, displaying cargo transported via all routes including the Panama and Suez Canals.

Box 2 clearly shows that East Coast/Gulf shares for lowervalue products are consistently greater than shares for higher-value products, with shares of low-value products exceeding 42 percent in 2011 compared to higher-valued products having East Coast percentages at half that share, at about 22 percent.

In addition, Box 2 shows that over the past eight years, shifts toward the Gulf and East Coast have occurred across all product value groups, with shares increasing by about one-third (from an average of 24 percent in 2003 to 32 percent in 2011).

It is not possible to project from the simple historic data whether the shares shown will continue to trend upwards or whether they will flatten out. However, it is important to note that these shifts have already occurred, and that if these trends continue through 2015 the potential for further shifts will necessarily be limited.

Port Readiness and Transshipment

While the expanded Panama Canal will allow passage of container ships up to about 13,000 TEU capacity, ships of that size will not be able to call on some US East Coast and most Gulf Coast ports. This is due to limited depths at many ports or, in the case of the Port of New York and New Jersey, due to the current height limitation of the Bayonne Bridge, which restricts access to four out of five of the Port’s major container terminals.

It is expected that the US North Atlantic ports of New York and New Jersey, Baltimore, and Norfolk have, or will all have within the next few years, channel depths of 50 feet, and that the Bayonne Bridge deck will be raised as quickly as fast-track permitting and construction will allow. It is therefore anticipated that ports in this coastal region will generally be able to serve much larger ships not long after the Panama Canal expansion is completed.

Looking at current container ship service patterns it is clear that most liner companies prefer to schedule calls at multiple ports along the US Atlantic Coast, almost always calling at one or more North Atlantic ports and one or more South Atlantic ports. However, maintaining this preference while deploying larger ships will become difficult since the largest South Atlantic ports, Savannah and Charleston, are not on the same timetable for handling large ships as North Atlantic ports. Savannah has grown to become the second largest container port on the US East Coast; even so, a final report recommending dredging of the Savannah Harbor and River to 47 feet was only just released in April 2012 by the Army Corps of Engineers.

The nearby Port of Charleston is closer to the Atlantic Ocean and has 45 feet of channel depth, but further deepening has not yet been recommended by the Army Corps. In addition, the Port of Miami is also moving towards a 50-foot depth, but there are questions as to whether it will be able to serve as a gateway port for Northeast Asia imports to Atlanta and the US Southeast due to rail connectivity problems, added overland costs traveling up the Florida peninsula, and capacity concerns.

In short, South Atlantic ports are lagging behind North Atlantic ports in the ability to handle much larger ships, and the critical question is how liner companies will react to these differences. There are three basic options:

    1. Deploy the largest ships possible along the Atlantic Coast, that is, maintain current calling patterns, and utilize the “least common denominator” ship size to maintain services to South Atlantic ports.

    2. Develop differentiated services using the largest possible ships on dedicated express services to North Atlantic ports, and use smaller ships for South Atlantic port services.

    3. Develop services using transshipment at Panamanian or Caribbean ports. This would allow use of the largest ships possible on the longest leg of transpacific services while serving some US ports with feeder services using smaller ships out of the Caribbean/Panamanian transshipment hubs. The drawback is that transshipment always involves extra moves, both dropping off and picking up each container involved. These extra moves translate to extra time and costs which may or may not be offset by better utilization of larger more expensive vessels.

Of course these options are not mutually exclusive, nor are all liner companies likely to follow the same strategies. Even within single companies or alliances these options could be mixed and matched.

Cost Reductions and Ultimate Benefits

A fifth major factor that will affect possible coastal shifts is transportation cost savings actually realized by consumers and beneficial cargo owners (BCOs). As noted earlier, the impacts of total cost reductions will likely have a near zero impact on consumption volumes, but cost differences could nonetheless have some impact on how goods are transported.

All else being equal, including transit times and reliability, if a transportation option costs less, it begs the question of why consumers or cargo owners would not prefer the less expensive option. This question then becomes, how much money are we talking about?

Again taking an order-of-magnitude approach, a transportation cost reduction on the order of $400 per TEU might be possible using the largest possible container ships—about 13,000 TEUs— versus current Panamax vessels. For $400 per TEU many BCOs and consumers would likely prefer changed transportation routing even with minor increases in delivery times. However, the full $400 per TEU cost reduction is not likely to be passed on to the consumer or cargo owner. Given that liner companies have risked billions of dollars on new large ships (and expanding aggregate capacity that may not have very positive returns) they will likely want to retain some of the cost savings they have directly provided. In addition, the Panama Canal Authority, having taken on the risk of expanding the Panama Canal, will not only need to repay the debts it has incurred, but will also want to achieve an additional return on the value of the asset it has developed. Other participants in the transportation network, some of whom have also made significant investments, will also desire to retain some of the transportation cost reductions that they have helped enable.

The net result is that some portion of aggregate cost reductions realized will be retained by transportation providers. The magnitude of probable retained savings is difficult to predict, but an assumption of 50 percent is not unreasonable. Based on this assumption, the net cost reductions that would be passed on to consumers and BCOs could approximate $200 per TEU. This is still a savings that could influence shipping route preferences.

Relative Cost Reductions

One additional factor to consider is that transportation cost reductions will occur on the West Coast as well as on East Coast routes. Deployment of larger ships is likely on the transpacific route from Asia to the West Coast, especially if growth in Asia-Europe trade does not absorb excess large-ship capacity. In addition, most West Coast ports do not have channel depth or other restrictions faced by US East and Gulf Coast ports and could actually serve ships larger than those able to transit the expanded Panama Canal. Reduced West Coast costs will therefore minimize the relative value of the cost reductions expected on the East Coast. Projecting these relative cost reductions is difficult, but final differences could be on the order of $100 or less per TEU.

Considering that these ballpark cost reductions are based on maximum savings (using a 13,000 TEU vessel to the East Coast) and that these maximum savings are not likely to develop quickly, cost savings could be too small to drive significant shifts between coasts for a number of years after the Panama Canal expansion is completed.

Competitive Dynamics

A final consideration for looking at the potential for coastal shifts is the misconception that the Panama Canal is very competitive with North American West Coast ports and the rail intermodal system. After all, West Coast interests did develop the “Beat the Canal” campaign. However, this competition may be more imagined than real, for three reasons.

First, the Panama Canal and West Coast interests have widely different objectives. In particular, West Coast railroads may be more interested in maximizing the return on their significant capital investments than simply competing for market share. While the Panama Canal Authority can be expected to seek the highest possible financial return from its multi-billion dollar investment, its broader interests are in maximizing the economic benefits to Panama, including boosting Panama as a logistics center and as a transshipment hub. Although it is uncertain how these differing objectives may translate into competitive strategies, the expectation that they will compete head-to-head for market share based on pricing may be incorrect.

Second, as discussed previously, for many regions of the US and for particular product groups, the Panama Canal and the West Coast ports, working with the North American intermodal system, are not competitive at all. Trade between Northeast Asia and the US Western, Mountain, and West Central regions, for example, will remain natural markets for the West Coast given the advantages in transportation costs and transit times for reaching these markets.

Finally, West Coast transportation interests have vastly more control over how they can segment markets and price services than the Panama Canal. A prime example is that ocean carriers and their railroad partners can differentiate services and pricing on a point-to-point basis while the Panama Canal has no similar market levers to manage. The Panama Canal’s primary tool for interacting with the market is tolls that apply relatively simply to all containers independent of contents, origins or destinations, or timing of service.

None of these conclusions is meant to suggest that competition is not alive and well. West Coast ports, terminal operators, liner companies, and railroads are all highly competitive with each other. That is where the principal competition exists, not between the Panama Canal and West Coast ports and railroads.

Where Competition Might Occur

As argued in this article, anticipated coastal shifts may be minimal and competition affecting such shifts may also be illusory. But if competition does occur, where will its impacts most likely be seen? From a geographic perspective, competition between routes can be anticipated to play out in limited US inland regions.

In the Midwest, competition will most likely be centered in the Ohio River Valley with the principal competition to West Coast routes, including US and Canadian ports and North American Class I railroads, being offered through North Atlantic ports and the improved Eastern rail connections previously discussed.

In the Southeast, centered in Atlanta, competition will likely be between South Atlantic ports and Southern California ports, along with the Class I railroads that offer intermodal services to distribution centers in Atlanta and Memphis.

Houston is another potentially competitive region, where “all water” services through the Panama Canal have been introduced in recent years and where growth could result from post- Panamax vessels being deployed on those services.

Summary and Conclusions

Big ships are coming to US ports. Some impacts on ports and related infrastructure are relatively certain and include direct local effects from handling larger ships as well as secondary impacts such as more concentrated service call patterns (fewer vessels with bigger loads).

In addition, anticipated shifts in coastal trade resulting from the Panama Canal expansion are highly over-estimated and could be minimal.

Finally, there are still many uncertainties about global and US developments that will determine the extent and timing of Panama Canal expansion impacts. These include South Atlantic port development and liner companies’ transshipment strategies, as well as other factors such as global economic growth, trade policies, and the growing over-supply in carrier fleets relative to demand.



  1. Solid lines each represent about 20 percent of total containerized tons. Products are categorized based on value per kilogram in 2011 at the four-digit Harmonized System commodity code level. The dashed line represents a subset of the $8.00 and over segment.


Image Header Source: Geoff Stearns (Creative Commons)