Panama Canal expansion sails both ways

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When President Theodore Roosevelt relentlessly advanced the digging of the Panama Canal more than 100 years ago they called him crazy. In the politics of the moment, it seemed like a long slog. Financial and political delays plagued the project. Workers died by the score, if not from malaria than from some other disease or workplace accidents.

We know now that the Panama Canal would become a critical part of global commerce, a means by which goods would circumnavigate the world with breathtaking economic results.

But let’s not forget: it’s a ditch dug through a continent.

Well, this year it’s going to become a much wider ditch through a continent. Panama, which now operates the canal after the United States relinquished control in 1999, is expanding its canal. Wider, deeper locks will mean that much bigger ships will be able to cross easily from the Pacific to the Atlantic.

The Panama Canal expansion is significant because shipping by water is by far the cheapest way to transport heavy materials. Larger ships will make shipping the heaviest goods cheaper still.

You can imagine the economic implications for world trade. We’ve already seen how international trade affects so many aspects of our Minnesota economy. From farming, to mining, to manufacturing and technology, what happens in China, India, Europe or Brazil affects people in Hibbing, Worthington or Minneapolis.

So as we learn about this Panama Canal expansion we often will hear how positive this development will be. For instance, this Star Tribune story about how these larger ships will improve markets for Minnesota’s agricultural goods all over the world. Being able to triple the size of a ship is the difference between moving to a new apartment in a Ford Focus or moving in a delivery van. It literally changes the game.

Minnesota isn’t the only American beneficiary. Jona Ison of the Cincinnati Enquirer wrote last year about how the canal expansion might mean new jobs for Ohio. Manufactured goods could find new markets. Inland river cities could suddenly become international ports serving the heart of the nation. It’s all very exciting.

But read this, from Ison’s Enquirer story:

Trade experts with the Panama Canal Authority say it is probable that liquefied natural gas, coal and grains will be leading export products from Ohio through the expanded Panama Canal. Top imports include steel products for the automotive industry and containerized cargo carrying multiple manufactured goods.

 

I was talking to a mining engineer the other day. He was the first one to tip me off about the Panama Canal expansion and what it might mean for the already struggling U.S. iron and steel industry.

Right now, we’ve been hearing a lot about “illegal” steel dumping from places like China, which is affecting the market for U.S. steel, and thus depressing demand for Minnesota Iron Range taconite pellets. That means that China is selling steel for less than it costs to make. People argue about whether this is actually illegal or just “frowned upon,” but it is nevertheless one of the issues at stake in our regional downturn.

Right now the steel is coming in through the West Coast, perhaps into Louisiana. Because of the cost to ship steel across land, most of the steel is used by manufacturers near the coasts. That certainly affects the American industry, but it leaves part of the country to domestic steelmakers no matter what. Even the cheap foreign steel can’t serve the whole United States.

But what if you could get that cheap steel directly to Detroit? Almost entirely by water? Worse yet, what if that steel didn’t even have to be traded illegally, or at a loss. What if it was still cheaper to get foreign steel even when prices improve?

That wasn’t possible before, but some are suggesting it could be part of the future economic landscape. Iron ore prices are expected to stay low. They can dig it up in Australia and Brazil much more cheaply than they can here. Not because of our labor protections, but because the ore is better.

It’s a good example of how international trade can giveth and taketh away. It’s also a good indicator that we shouldn’t expect a complete recovery of demand for taconite. Partial, yes, but we’re going to permanently shed some taconite jobs in the next ten years. In terms of mining, we must start making specialty ore products at lower costs if the industry is to survive these coming changes.

That’s a monumental challenge. And it’s one in which mining companies will try to take the easiest route first. They’ll ask for production tax breaks, land breaks and to forgo any environmental upgrades. Why wouldn’t they? Who could blame the pencil pushers for trying?

But see, none of that will really strengthen the industry. Only investment and development can provide the stability Iron Rangers want out of their mining economy. Even then, it’s still a commodity. There will still be ups and downs.

This is why I argue that the extraordinarily difficult task of diversifying our economy is actually wedded to the similarly difficult task of modernizing our existing economy. Regardless, change has already happened.

The Panama Canal expansion will be open in May.

 

Comments

  1. My wife and I went through the Canal in 2007 and watched the huge backhoes working then. The next year we were in Galveston Texas taking a tour down the Houston Boat Canal. We watched a huge ship being unloaded of foreign steel pipe, while our domestic pipe plants are closing. The ports prospectus for the next year was to double the steel importing there.

  2. Glenn Karich says:

    A canal is presently being excavated across Nicaragua by a private Chinese investor. Ships will cross lake Nicaragua, which is a huge freshwater inland sea. It may influence global shipping even more than the Panama canal expansion.

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