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Everyone Gets a Canal

Fernando Menéndez, principal of Cordoba Group Int'l LLC
July 5, 2013
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The United States and China are about to embark on a significant set of bilateral talks between the world’s largest commercial partners.  The Strategic and Economic Dialogue (S&ED) to be headed by Secretary of State John Kerry and Treasury Secretary Jack Lew and their counterparts from the People’s Republic of China (PRC) Vice Premier Wang Yang and State Councilor Yang Jiechi will discuss bilateral, regional and global issues. 

One area which should be of significant interest is Central America where economic, security and political implications will affect the United States as well as China’s trade routes and, if mishandled, could give rise to serious difficulties in the U.S.-China relationship.  It is questionable, however, if the S&ED talks will focus on this very critical area. 

Two, Three, Many Canals 

At least three proposals for building additional canals will supplement the existing Panama Canal between the Pacific and the Caribbean.  One canal by sea and two on land will be financed and built by Chinese private and state-owned enterprises, if all goes as planned. 

The Panama Canal will also be expanded and updated to transport post Panamax super tankers, as well as inter-coastal high speed railways, oil pipelines, refineries, and state-of-the-art port facilities.  

While three new canals are scheduled in Nicaragua, Honduras and Guatemala, they are by far not the only ones on the drawing board.  Costa Rica, the only country with diplomatic relations with the PRC recently hosted President Xi Jinping, and is contemplating a super highway between the Pacific and the Caribbean.  Colombia, also negotiating with China, envisions the construction of a land canal between Bahía Solano in the Pacific and Acandi in the Caribbean, which will be built to order by China Railroad Engineering Company.  Mexico has also been studying the possibility of a canal through the Tehuantepec isthmus. 

Among the three key projects, Nicaragua’s is the most advanced in development.  The canal will cost some USD $40 billion, a sum equal to five times Nicaragua’s annual GDP.  The canal’s capacity for all size and tonnage of cargo ships will include the most recent series carrying 9,000 TEUs (1 TEU is equal to a 20 foot container).  Some newer generation tankers are expected to exceed 12,000 TEUs. 

The new Nicaragua canal development project calls for a transoceanic railway, highways, oil pipelines, automated ports on either coast, airports, and free trade zones.  The entire project will be under the control of HK Nicaragua Canal Development, a Hong Kong company registered in the Grand Caymans, whose sole owner is businessman Wang Ying. 

It is estimated that the project will generate some 1 million jobs in Nicaragua alone and that it will boost GDP by some 15 percent annually.  This is an incredible projection when one considers Nicaragua’s entire labor force is currently barely 2 million.  

A land-bound canal through Honduras comes in at roughly USD $20 billion.  China Harbour Engineering Company has proposed a hydro-power generated high-speed railways system.  Ten railway lines will run from the Gulf of Fonseca to the Caribbean.  The deal is on the verge of being signed according to President Porfirio “Pepe” Lobo. 

Guatemala’s President Otto Pérez Molina has argued his country’s canal project will best the others.  Feasibility studies for a 390-kilometer project complete with gas and oil pipelines, a high-speed highway and a rail system are almost complete.  Chinese investments of USD $10 billion in the project are tied to an oil pipeline intended to transporting Venezuelan oil. 

One source estimates that a Panamax capacity ship travelling at 13 knots with anywhere between 55 to 80 thousand dead weight tonnage (DWT), will take 35 days and cost USD $1,846 per 20 foot (TEU) container across the Panama Canal.  The Guatemalan canal project is estimated to reduce both time and fees by approximately three days and USD $169 per container. 

China Pays the Bills 

Chinese capital investments will amount to USD $70 billion for the three major canals alone.  Competition between existing and potential efforts, in a small and poor region, raises serious questions about financial viability. 

For the United States, long focused on transit through the strategic Panama Canal, these new ventures are both opportunity and threat.  The opportunities for participation in construction and supply, as well as the advantages of competitive pricing are all positives.  However, the potential for corruption, the passage of illicit contraband and the very real possibility of weapons and human trafficking raise considerable alarm.  

Central America has become the key transit point in the flow of drugs and narcotics from South America through Mexico and the Caribbean into the U.S.  Lacking control of their own territories many of the regimes in the isthmus have been unable to manage the spread and growth of cartels and gangs, the distribution networks and the circulation of hundreds of millions in cash. 

Unfortunately, as the formal economies have expanded in the region, so have informal and black market operations.  The possibility of the canals playing a role in the expansion of illicit exchanges is enormous, and given the inability of local regimes to inspect cargo, for U.S. agencies concerned with the flow of goods and persons this poses the specter of an international game of Three-card Monte.   The Guatemalan canal alone is expected to account for 800 thousand containers from Asia to the US and from Europe to the Far East. Furthermore, it remains unclear whether the economic viability of these projects will pan out as anticipated.   There is a very real possibility of developing over capacity. 

The S&ED will have an innumerable number of topics for China and the United States to discuss.  As China moves into Central and South America, the economic and security concerns of the U.S. must be taken into account if the two nations are to avoid increasing conflicts.  With the canals, the security concerns seem paramount, but so is a porous isthmus recovering from a failed and unsustainable economic model. 

Fernando Menéndez is an economist and principal of Cordoba Group International LLC, a strategic consulting firm providing economic and political analysis to clients.

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