Francisco A. Laguna & Wojciech Kornacki
The Panama Canal will soon have a bigger, wider and newer competitor in Central America: the Grand Interoceanic Canal. Nicaragua has joined forces with Hong Kong-based HKND Group to build a canal connecting the Atlantic and Pacific Oceans. The project is estimated to cost at least $50 billion over the next five years, and create 50,000 construction jobs. Today, we start a series of articles to analyze the economic history behind building waterways, the economic impact on Nicaragua and the region, their expected profitability and potential side effects.
Why do we need artificial waterways connecting oceans or seas?
As trade and commerce develops between nations on different continents, merchants continue to look for faster and cheaper ways of delivering goods and services. Since traveling over water is significantly cheaper than traveling by air or land, they often look to waterways. According to the Suez Canal Authority, Egypt was the first country that engaged in building man-made canals across its land to connect the Mediterranean Sea and the Red Sea in 1874 B.C. They were not only used by merchants, but also by the Egyptian military.
With time, such waterways gain not only economic but also strategic importance. In 1869, the Suez Canal officially opened for business under the control of European powers. It dramatically improved international commerce by removing approximately 6,000 miles of extra travel. In 1956, Egypt nationalized the Suez Canal, which led to an international conflict involving several European powers and Israel. Today, Egypt controls the Suez Canal, and it is opened to everyone.
Today, the Suez Canal supports 8 % of global seaborne trade. In fact, it is so important to Egypt and the rest of the world, that even during the recent political turmoil in Egypt, it continued to operate as usual. In addition, the Suez Canal is highly profitable. Reuters reports that in August 2014 alone, the canal made $508 million in revenues for Egypt. Guardian reports that in 2010, Egypt made over $4 billion in revenues from the canal.
Why does Nicaragua need an interoceanic canal?
Nicaragua is the second poorest country in the region, right after Haiti. Approximately 40% of its population lives below national poverty lines. National institutions have also been affected by the continuing political instability over the last several decades. However, recently Nicaragua has been making progress, and its GDP growth has reached 4.6%. Thus, it can be expected that Nicaragua would immensely benefit from the canal. In 2013, its GDP amounted to $11.26 billion. Assuming the Interoceanic Canal would be as profitable as the Suez Canal, its GDP would increase by $4 billion within the first few years after completion. One indicator is to watch what major shipping companies are doing.
For example, Maersk, one of the biggest container shipping company, has moved its operations from Panama Canal because it is too narrow for its ships. Most likely this and many other shipping companies will be very interested in the Grand Interoceanic Canal. In the next article, we will explore the economic impact on the canal on Nicaragua and its neighbors.
TransLegal assists clients in with trade issues throughout the region. Call us with your questions.