Expansion of the Panama Canal: Effect of Transportation Cost on Bilateral Trade for USA and East Asian Partner Countries (China, Japan & South Korea)

Abstract

When people heard Panama Canal, they usually think of a major historic engineering in the history of humanity which allows maritime vessels to transit through America from one ocean to another. A little know the influence of this infrastructure in the economic field, more over the Expansion Program which started to operate in June of 2016.The motivation of this study is to analyze the macroeconomic effect of the Expansion and its competitiveness. First the Panama Canal is of extreme importance to 5% of the total world trade and most of them comes from the East Asia-East USA maritime route, to evaluate the macroeconomic changes, the study is focused on this specific maritime route among 4 of the top users of the Panama Canal which are United State of America, China, Japan and South Korea. Second the Expansion is designed to lower Transportation Cost by applying economy in scale for bigger vessels, to carry more for each voyage and therefore reduce the time and fuel consumed.With all this approach, Gravity Model of International Trade was chosen to determine the variables which affect Bilateral Trades among these countries, the variables considered are Economic Size represented as GDP, Market Size represented as Population, Exchange Rate in United States Dollar and lastly the Distance represented as Transportation Cost. The result will not only help these countries to make strategic planning for trading but also help the Panama Canal to promote International Trade.It is important to mention that in the original Gravity Model proposed by Tinbergen in 1962 use Distance as a factor to measure bilateral trade, because the Expansion is to lower Transportation Cost, in this study we are going to calculate Transportation Cost comparing it with alternative routes such as the top competitor Suez Canal, Cape Horn and Cape of Good Hope. The result will help us to get a better insight of the Gravity Model by replacing Distance for Transportation Cost for a more accurate result; also show how competitive is the Expanded Panama Canal in the maritime market for the East Asia-East USA route. By analyzing the changes between sailing time, voyage cost, route alternatives and the possible macroeconomics effects of the expansion by comparing different scenarios focusing on opportunity cost through a pricing model. The model is designed to estimate the possible outcome of each voyage taking into consideration some of the main variables like distance, fuel, Canal dues to evaluate the estimated time comparing it to different scenarios.The result for Bilateral Trade for USA and Partner Countries shows that variables like Economic Size have a positive impact on trade which is as expected for the development of the economy, Transportation Cost is negative because the increase in transportation cost would discourage the trading among countries while the other variables show no level of significance for Trading between these countries. Transportation Cost also show an increase in effectiveness of double the amount compared to the Original Canal, also compared to other alternative routes it only have a slight advantage in term of lower cost comparison, therefore it clearly show the importance for this project to be taken in order to maintain its competitiveness in the East Asia- East USA maritime market.

Keywords: Expanded Panama Canal, Gravity Model, Transportation Cost.