The Impact the Grand Interoceanic Canal Could Have on Your Wallet

Francisco A. Laguna & Wojciech Kornacki

This third and final article of our series on the Grand Interoceanic Canal examines the financial impact on the canal may have on consumers.

Many experts predict that the new interoceanic canal will significantly reduce the time and costs of shipping goods between Asia and Europe, Asia and the U.S. East coast, and Asia and Brazil, all of which should result in lower prices to consumers. However, lower prices come with numerous environmental and construction challenges which may be difficult to overcome.

The Benefits:

Maersk triple E class ships are the largest ships ever built by cargo volume. This class of ships is longer than the maximum length of the American aircraft carrier Enterprise and not every sea port is equipped to handle them.  They are designed to carry 2,500 containers.  These ships are too big for the Panama Canal, but once completed, the Interoceanic Canal in Nicaragua should be able to handle them.  Courtesy of http:// http://en.wikipedia.org

Maersk triple E class ships are the largest ships ever built by cargo volume. This class of ships is longer than the maximum length of the American aircraft carrier Enterprise and not every sea port is equipped to handle them. They are designed to carry 2,500 containers. These ships are too big for the Panama Canal, but once completed, the Interoceanic Canal in Nicaragua should be able to handle them. Courtesy of http:// http://en.wikipedia.org

Lower Prices: Prices for some products may drop once the interoceanic canal is operational in Nicaragua. Recall that the Panama Canal cannot accommodate many of today’s super transport ships. Thus, with specific regard to the United States, currently, many goods coming from Asia are shipped to the West Coast of the US, and then have to be transported by train or truck to eastern locations, all of which creates additional expenses. The Interoceanic Canal will accommodate super tankers, allowing for the direct shipment of goods and commodities without the need for the middleman on the West Coast of the US.

More Choices: Shippers are also stating that another benefit of the Interoceanic Canal is that it will create choices for international shipping companies. Currently, the only two choices are either the Suez Canal or the Panama Canal. However, the Panama Canal cannot handle the largest triple E cargo ships, even after $5 Billion in improvements. In addition, shipments through the Panama Canal are sometimes delayed by 20 to 30 hours, simply due to volume. Currently ships from Asia using the Panama Canal arrive in New York within 26 days, which is 2 days quicker than through Suez Canal. Once the Interoceanic Canal in Nicaragua is operational, the shipping companies will have another option for shipping goods.

Less Time: The Interoceanic Canal is expected to eliminate approximately 500 miles of travel to get through the Panama Canal. Since shipping is a very competitive industry, shipping companies constantly look for ways of improving their profitability, and the shortened distance should improve the shippers’ bottom line.

The Risks:

 

The Interoceanic Canal is expected to increase the trade between Asia and the U.S. East Coast, Europe and Brazil.  Currently many goods from China are transported through the United States or Canada.  By having an interoceanic canal capable of handling the biggest cargo ships in the world, this may no longer be necessary.  Courtesy of http:// http://en.wikipedia.org

The Interoceanic Canal is expected to increase the trade between Asia and the U.S. East Coast, Europe and Brazil. Currently many goods from China are transported through the United States or Canada. By having an interoceanic canal capable of handling the biggest cargo ships in the world, this may no longer be necessary. Courtesy of http:// http://en.wikipedia.org

Actual Costs: While consumer prices for some goods may experience a decline, it is important to keep in mind that the parties financing the project are expecting to make a profit. The project is estimated to cost over $45 Billion, and that Hong Kong-based developer, HKND Group, will have a 50-year lease. While prices may drop, shipping goods and commodities through Nicaragua will not be free. The President of Nicaragua, Daniel Ortega, hopes that this project will make his country rich or at least end extreme poverty.

Environmental Costs: The environmental impact could result in significant financial hardships for Nicaragua and the region. Critics argue that the Interoceanic Canal and all the mega triple E cargo ships traveling through Nicaragua, and through Lake Nicaragua (Lake Cocibolca), the largest fresh water reserve in Central America, could have very serious environmental consequences. In addition, the project will also cut through 4 nature reserves. According to Nicaraguan officials, the project also involves building seaports, free trade zones, bridges and an airport, among others – all resulting in additional environmental issues. Some proponents point out that some of the proceeds from the canal could be used to protect the Nicaraguan environment, but no definitive approach has been adopted.

International Issues: Nicaragua’s neighbor, Costa Rica, has expressed concern over The Interoceanic Canal. Costa Rican officials are concerned with how little information about the actual project has been made public, and with the fact that there has been no environmental assessment.

Major environmental, financing and construction challenges have to be resolved before the interoceanic canal is declared a success. Once built, it is likely to have positive economic impacts around the world, and it will result in greater flow of commerce from Asia to the East Coast of the United States, Brazil and Europe. The success of this project will not only be measured by the flow of commerce, but it will also depend in part on how it deals with its challenges. TransLegal will continue to monitor as the project progresses.

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The Grand Interoceanic Canal and the Economic Future of Nicaragua

Francisco A. Laguna & Wojciech Kornacki

 Today, we continue our discussion of the Grand Interoceanic Canal being built through Nicaragua by examining key facts about the project and its expected economic impact on Nicaragua.

The project is several times greater than the annual gross domestic product of Nicaragua. The Nicaraguan government estimates that it will create double-digit growth once completed in 2019.

The Project

Lake Nicaragua is expected to bear the main ecological brunt of the canal.   The lake which serves as the main source of water for Nicaragua, is already under threat by poorly treated waste water, global warming, agrochemicals, and spread of algae, among others.  Some have expressed concerns about the environmental impact study that has been rushed through the Nicaraguan legislature within 24 hours.  Courtesy of http:// http://en.wikipedia.org

Lake Nicaragua is expected to bear the main ecological brunt of the canal. The lake which serves as the main source of water for Nicaragua, is already under threat by poorly treated waste water, global warming, agrochemicals, and spread of algae, among others. Some have expressed concerns about the environmental impact study that has been rushed through the Nicaraguan legislature within 24 hours. Courtesy of http:// http://en.wikipedia.org

The Idea: The idea behind the project is over 100 years old. In early 1900s, the United States was considering building an interoceanic canal in Nicaragua. However, in the end, the United States opted for Panama because of the concerns over the volcanic activity in the area of the proposed canal in Nicaragua. Currently, the canal is expected to be twice the depth and three times the length of the Panama Canal. We did not uncover any information of how the concerns over volcanic activity and potential earthquakes have been resolved presently. In addition, TransLegal represented a client in the early 2000s interested in raising funds for a canal through Guatemala.

The Costs: The project is estimated to cost approximately $50 billion over the next 5 years, but financing is unclear. The HKND Group plans on 6 sub-projects which will include 2 ports, an international airport, roads, a power station, a cement factory, a steel factory and several other facilities. In addition, a major railroad line will be connected to this project. Other costs may include massive population resettlement and unknown environmental costs.

The Country: This cost of this project is several times bigger than the annual gross domestic product of Nicaragua, which the World Bank estimates at $11.2 Billion (2013). While Nicaragua has been making steady economic progress in the recent years, past decades included political and para-military violence. Currently, Nicaragua is one of the poorest countries in the region. Nicaragua is unable to finance the project by itself.

The Builder: According to its own website, the HKND Group is a privately-held international infrastructure development firm headquartered in Hong Kong, PRC, with its offices around the world. Its Chief Executive Officer, Wang Jing, has over 20 years of successful experience in management and investment. However, concerns have been expressed that the company has no experience in canal building as well as the transparency of the project. Major partners of the HKND Group include the China Railway Construction Corporation, an Australian mining company MEC Mining, and Chinese construction equipment company XCMG.

Lake Nicaragua: Lake Nicaragua, also known as Lake Cocibolca, is a major source of water for Nicaraguans. A 2013 World Bank study indicates that the lake is already threatened by eutrophication, agrochemicals and poorly treated waste water, among others. Eutrophication essentially means the spread of algae blooms which deteriorates water quality. Thus, establishing an interoceanic trade route through the lake may cause additional concerns, and the displacement of tens of thousands of people.

The Potential Economic Benefits for Nicaragua

In early 1900s, the United States considered building the interoceanic canal in Nicaragua, but it was later decided that Panama was the best place for it.  Over one hundred years later, major concerns still exist over the project, including economic feasibility, environmental impact, earthquakes, and funding, among others.  Courtesy of http:// http://en.wikipedia.org

In early 1900s, the United States considered building the interoceanic canal in Nicaragua, but it was later decided that Panama was the best place for it. Over one hundred years later, major concerns still exist over the project, including economic feasibility, environmental impact, earthquakes, and funding, among others. Courtesy of http:// http://en.wikipedia.org

Annual Growth: The Nicaraguan government estimates that its GDP will increase by 11 annually as a result of the canal, which would dramatically improve its economic outlook. This would in turn help the Nicaraguan economy grow, create more and permanent jobs and increase revenue. If successful, this project could contribute to making Nicaragua one of the richest countries in the region. The cost of such success remains to be seen.

250,000 Future Jobs: Francisco Telemaco Talavera, president of the National Council of Universities and project spokesman, strongly believes in the benefits of this canal. The project and its sub-projects are expected to generate 50,000 jobs in the construction industry and another 200,000 permanent jobs once completed. These are significant numbers for a country that has experienced an unemployment rate of ~ 10 percent between 2010 and 2014. The potential of incorporating 250,000 individuals into the market economy would be tremendously beneficial to Nicaragua, a nation of 6 million.

Source of Revenue: The Suez Canal and the Panama Canal are major sources of revenue for Egypt and Panama respectively. With its enormous size and depth, the Grand Interoceanic Canal is expected to be able to handle the biggest ships in the world. Currently, the Panama Canal is too narrow to accommodate such big ships. Thus, if successful, the canal may prove highly profitable to Nicaragua. However, before the people of Nicaragua start benefitting from it, the Nicaraguan government, the HKND Group and its partners will have to overcome major financing, design, environmental and social obstacles.

In the next and last article of this series of articles examining the Grand Interoceanic Canal, we will examine how this project is expected to impact Panama with its own interoceanic canal, other countries in the region, and international seaborne shipping companies.

TransLegal assists clients in with trade issues throughout the region. Call us with your questions.