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Panama Canal gets a revamp – and so does global trade

It has been almost 100 years since the completion of the Panama Canal, a project that took more than a decade and created one of the world's most important trade routes.

It was hailed as one of the greatest engineering works of all time. But it came at a hefty price: More than 22,000 workers died while chiselling the $336-million course through the yellow fever- and malaria-infested jungles of Panama.

The canal they created revolutionized global trade, shrinking a 22,500-kilometre voyage from New York to San Francisco to 9,600 kilometres.

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Now, work is under way on an ambitious development that will add an extra lane and two sets of locks, a $5.25-billion expansion that will triple cargo capacity through the storied waterway, but also redraw global trade routes once more by deepening Asia's access to markets along the Atlantic ocean.

China, the world's fastest-growing major economy, will be able to use larger and more efficient cargo vessels to transport goods to consumers on America's east coast. It will also be more efficient for China to obtain raw materials from Latin America's northeast, such as Brazil's iron ore and Venezuela's oil – key ingredients in its drive to industrialize – and will afford Chinese exporters greater access to a rising middle class in Brazil.

China's imports surged nearly 40 per cent last year, making it the world's second-largest importer and a key engine of the global economy. But that growth is occurring at a time when soaring energy prices make it crucial for all trading nations to reduce transportation costs.

"China recognizes that if their trade is going to continue to grow with the Atlantic – the east coasts of North America and South America – … they've got to find better ways to get into the Atlantic," said David Hummels, a professor of economics who specializes in global trade at Purdue University in Indiana. Freeing up east-west global trade routes will be a priority in the coming years, he said.

Another winner in the Panama expansion will be Chile, which will be able to more easily move goods such as copper and wine to the eastern U.S., said Mary Brooks, the William A. Black chair of commerce at Dalhousie University who specializes in trade and transport.

Canada is rarely mentioned in the debate over who wins and who loses in the canal's expansion. But Gary LeRoux, executive director of the Association of Canada Port Authorities, says Halifax could see more activity because its deep-water harbour can accommodate larger ships.

More than 7.21 million long tons of cargo originating in Canada travelled through the Panama Canal in fiscal 2010, compared to 5.35 million in the previous year, making Canada the sixth-heaviest user of the canal for outgoing cargo. When cargo destined for the country is added, Canada was the 11th-heaviest user of the canal in 2010.

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Currently, the U.S. is by far the biggest user of the Panama Canal, but China's share is growing rapidly – so much so that the country is investigating other east-west routes.

Last month, Colombian President Juan Manuel Santos said his country is in advanced talks with China to develop a "dry" Panama Canal. One proposal is a $7.6-billion project to build a 791-kilometre railway through Colombia and expand a port that would give China a gateway into Latin America.

That could take years to realize. For now, the Panama canal expansion comes amid choppiness on the world's seas. In 2004, global trade was so robust that many ports were choked with capacity constraints. Activity buckled through the recession before partly climbing back last year. Shipping hasn't yet returned to pre-recession levels, although the rising cost of aviation and trucking fuel may make ocean shipping more viable.

About 90 per cent of goods worldwide are moved by ship. Global demand for seaborne containers is expected to grow by 6 to 8 per cent this year, Denmark's Maersk said in February.

Construction of Panama's expansion, which will enable vessels twice the size to navigate the passage, will likely finish in 2014. The new canal will allow the world's largest ships – called post-Panamax vessels, which are up to 366 metres long and 49 metres wide – to use the passage. (Still, the massive container ships that Danish shipper AP Moller-Maersk AS recently announced it is buying won't fit through the canal even after the expansion.)

The new Panama project has had its setbacks, though far less dramatic than those of a century ago. Late last year, Wikileaks revealed a U.S. diplomatic cable in which the expansion was labelled a "disaster" and a "failure." The cable came after a Spanish firm won a contract over a U.S. bid.

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Landslides and mud have proved challenging. In December, heavy rains caused the waterway's first temporary closing in more than two decades, although the authority says construction remains on schedule.

An expanded canal will have ripple effects for global trade, boosting activity for east coast U.S. ports and reducing it in the west, where unloaded cargo has to continue by rail to the east. Increased trade between Asian markets and east coast ports could dislocate as much as 25 per cent of traffic from west coast ports, Fitch Ratings estimated in a report last month: "Significant traffic leakage is to be expected."

For Panama, however, the expansion bolsters its hope of becoming a Singapore-style trade hub for the region. The expanded canal might become a more attraction option for shipping companies than the Suez Canal, said Lars Jensen, vice-president of Maersk's Pacific line, who predicts a shift toward fewer, but larger ships in the sector.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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