Today's Opinions, Tomorrow's Reality
By David G. Young
Washington, DC, October 15, 2013 --
A Chinese company plans a new pan-American canal in just six years. Don't hold your breath.
The land on Nicaragua's Mosquito coast is flat. In the 80 odd miles of steamy jungle from the Caribbean to Lake Nicaragua near the Pacific, the elevation goes up only 107 feet. Viewed from the side, the human eye would be incapable of even perceiving a slope.
This flatness stands in stark contrast to the colorful graphs on the website of Wang Jing's HKND Group, the company boasting of plans to build a new canal across Nicaragua. One graph show that global shipping volume is growing. Another that ship size is increasing. Yet another that container ship fleet capacity has exploded.1
Indeed, there is some truth to these numbers. As such, the government of Panama is currently building a $5.25 billion expansion of the Panama Canal, building two new sets of locks that will fit enormous "post-Panamax" container ships, although not the very largest ones in existence.2 The expansion will help alleviate the multi-day backups that often exist to go through the existing canal. This expansion was brought to a vote seven years ago, during the heyday of the rise of Chinese manufacturing. China went from exporting goods worth a piddly $63 billion in 1990 to $1,899 billion in 2011.3 And a big chunk of these exports went through the Panama Canal on the way to the America's East Coast.
While a big Panama Canal expansion might be justifiable, a much bigger new canal in Nicaragua is a completely different story. The $40 billion project -- over seven times the cost of the Panama Canal expansion -- has little chance of being completed by the 2019 planning date claimed by Wang.3 This crazy ambitious schedule would have construction starting next year (when precious little planning has been done so far) and have a much larger project be completed faster than both the original Panama Canal was built and faster than the current Panama Canal expansion. Even if the project manages to get off the ground, a more realistic completion date would be well into the 2020s. By that time how different will the world look?
If you believe Wang's graphs, it will look much like today, with all current trends extrapolated into the future. Gigantic ships, bigger than those today, will take an ever increasing amount of manufactured goods from China to America's East Coast through the cheapest path possible: a new canal through the flat jungles of eastern Nicaragua.
The problem, of course, is that no trend lasts forever. Since the financial crisis, China's growth rate has slowed markedly and manufacturing has continued moving to lower cost countries. Many of these countries are also in East Asia, but there are others in South Asia from which shipping to America's East coast would go nowhere near Central America. Long-term, it is likely that bulk manufacturing will shift to India, Africa, or even less developed parts of Latin America where wage pressures are still low.
Additionally, there are plenty of other shifting trends that could work against the need for a second canal. Americans' attitudes about disposable consumer goods could change. A less throw-away society would ship fewer Chinese products through Central America. More physical things could be replaced by virtual things. Instead of shipping magazines and books, publications now "ship" content though the internet. Even more concrete items, to a limited extent, may be created closer to home using additive manufacturing technologies, popularized by the rise of 3D printers. While none of these changes are likely to happen immediately, subtle shifts like this are hard to product over the course of a decade or more. The economic future of any Nicaraguan canal is therefore as murky as the rivers running though its jungles.
That Nicaragua has nevertheless jumped into bed with Wang is no major surprise. The land has been chasing the dream of a canal for 200 years. The country is poor, has few prospects, and thus little to lose. It is run by a crackpot ex-Marxist, whose one party state loves to poke America in the eye. At a recent speech at the UN, Nicaragua's foreign minister spoke out against British colonialism in the Falkland Islands and in favor of independence for Puerto Rico before talking about their partnership with China to build a canal.5 What better way to stick it to America than to let its nominally-communist commercial rival build a canal to compete with the American-built icon in Panama?
Americans should pay this no mind, if for no other reason that the Nicaraguan canal plan is likely to end up somewhere between a non-starter and a big failure.
Export economies like China's cause mounds of cash to pile up, often leading their owners do pretty stupid things. Think back to 1989, when it was Japan rather than China challenging America's economic supremacy. That year, Japanese conglomerate Mitsubishi bought a controlling interest in New York's Rockefeller Center for $1.4 billion.6 Americans were shocked to learn that Japan was buying up an American icon. Real estate values in New York were skyrocketing. Much like today's trends on container shipping, late 1980s trends on New York real estate looked like they would continue forever. But that didn't happen. The bubble in the real estate market popped a few months later, sending rents paid by Rockefeller Center's tenants tumbling. By 1995, Mitsubishi let the Rockefeller Center fall into bankruptcy rather than continue to throw good money after bad.7
If a sophisticated, multinational giant like Mitsubishi can fail to recognize such a mistake, there should be little question that Wang can do the same. By all accounts, the telecom executive is a bit of a lightweight who has no experience in any large infrastructure projects let alone canal building. Nor does he have them money to build the project himself -- he would have to finance it with money from people who will ask much harder questions than those raised above. What's more, there is no evidence that Wang has spent a significant amount of money on the project, and that lack of money is telling.
A decade from now, when the Nicaraguan canal is projected to be up and running for four years, there's no telling what the economics of container shipping will look like. The future of the Mosquito Coast, by contrast, is far easier to predict. Those steamy jungles will look just as flat, and just as canal-free as they to today.
1. HKND Group, Trends in Global Shipping Trade Demand A New Canal, as posted October 15, 2013
2. Canal de Panama, Expansion Report, October 2012
3. Congressional Research Service, China's Economic Conditions, June 26, 2012
4. Christian Science Monitor, Nicaragua's Canal Controversy Builds, August 7, 2013
5. Nicaragua Dispatch, Santos Delivers Nicaragua’s Speech to UN, October 1, 2013
6. Fortune, Behind the Fall of Rockefeller Center, July 10, 1995