Although global trade has had a bad couple of years, a look at the Panama Canal would seem to indicate otherwise. At least at first glance.
Following a $5.25 billion construction project aiming boldly to almost triple cargo capacity, the Panama Canal Authority boasted its third highest tonnage in history for the 2016 fiscal year. 330 million tons (PC/UMS, or Panama Canal tons) passed through the canal in the fiscal year, quelling some fears that the third set of locks, rolled out on June 26th, was not entirely safe. The new locks are much bigger, large enough to fit Neopanamax-sized vessels; these vessels have over twice the cargo capacity of the Panamax, the previous largest Panama Canal-passable size class. Overall, the new locks were intended to more than double cargo capacity (1)(2).
While these numbers are exciting, one should exercise caution in celebrating them as a groundbreaking counterpoint to the global trade decline. In fact, they could be much higher. A more than doubling of capacity should create an ultimate tonnage increase that, if not equal to current capacity, would at least be significant. Yet since 2014 transit has only increased around 1%. 2015 actually saw a higher tonnage than 2016; year over year, Panama Canal traffic is actually in decline (3). That said, the new investment has created many jobs and will significantly reduce costs for shipping many more goods in the global trade ecosystem on Neopanamax ships.
The Canal is currently exposed to a host of cyclical risks. The large majority of its traffic moves between the Far East and the Eastern United States. Both of these geographies have experienced declines in demand, which has held back trade along this route (4). Consider that in 2016 trade between the U.S. and China dropped 30%. U.S. imports in general are in decline, and have approached a five year low in 2016 (5)(6).
Independent of whether underlying forces of trade strengthen, the Panama Canal Authority intends to continue investing in new infrastructure over the next year. A request for bids has been made to build The Corazon Container Terminal, which will open space for millions of TEUs of containers for transshipment. Transshipment is a process whereby cargo is dropped at an intermediate destination before continuing on a different vessel (7). The Authority is also making strides toward more environmental friendliness. In 2017 it plans to begin a system of expediting transit for ships with lower emissions (8).
In short, the Panama Canal is in a period of revamping and investment in the face of an extended and potentially very long-lasting global trade decline. In much the same way that the oil economy drives livelihood in Saudi Arabia, the continuation and improvement of traffic increases on the Canal will be decisive for the future of the Panamanian economy. It remains to be seen whether the slowing tide of trade will be a mere roadblock or a chronic pain point.
(1) Buxbaum, Peter. "Panama Canal Records Third Highest Annual Cargo Tonnage | Global Trade Magazine." Global Trade Magazine. N.p., 04 Nov. 2016.
(2) Buxbaum, Peter. "Could Safety Concerns Undermine Economic Advantages of Expanded Panama Canal? | Global Trade Magazine." Global Trade Magazine. N.p., 11 July 2016. Web.
(3) Panama. Panama Canal Authority. Top 15 Countries by Origin and Destination of Cargo. N.p.: n.p., n.d. Web.
(4) "Https://www.pancanal.com/eng/op/routes.html." Canal De Panama. Panama Canal Authority, n.d. Web.
(5) USA. National Census. Trade in Goods With China. N.p.: n.p., n.d. Web.
(6) CNBC. "US Trade Deficit Narrows as Goods Imports Tumble." CNBC.com. CNBC, 06 Jan. 2016. Web.
(7) Buxbaum, Peter. "Panama Canal Issues RFP for Corozal Container Terminal | Global Trade Magazine." Global Trade Magazine. N.p., 14 Oct. 2016. Web.
(8) McKevitt, Jennifer. "Panama Canal to Reward Ships with Low Emissions by 2017." Supply Chain Dive, n.d. Web.
Image: © Vintagepix | Dreamstime.com - Panama Canal New Construction
While comprehensive, all-encompassing trade deals like TPP and TTIP are of particular note in recent years, we ought not to sideline regional agreements of narrower scope which, even proportionally, propose sweeping economic effects. On the first day of this month, the UN Economic and Social Commission for Asia and the Pacific (ESCAP) opened for signature one such agreement: the Framework Agreement on Facilitation of Cross-Border Paperless Trade in Asia and the Pacific (1).
As the name suggests, this agreement will work toward facilitating paperless trade among signing parties, and is the first regional agreement encompassing solely this space. Thus this deal can be seen as an exciting indicator of global trends in trade communications and paperless transacting, and governments’ recognition of these trends.
The agreement defines “cross border paperless trade” as “trade in goods, including their import, export, transit and related services, taking place on the basis of electronic communications” (2). Though this may sound rather broad, the latter clause is of note since most trade in the region today is carried out using physical paper documents.
International trade can require a complex constellation of documents and data, and in many cases the exchange of these materials is carried out with physical paper, costing billions of dollars to the private and public sectors. Lawmakers and businesspeople alike have seized the opportunity to build paperless trade systems, which in many advanced economies have already been hugely successful; Hong Kong, for example, sees estimated annual savings of 1.3 billion USD due to its automated information transaction system (4). That is equivalent to about half a percent of Hong Kong’s GDP.
How much export value is lost in the Asia Pacific economy due to the inefficiency of paper-based trade? ESCAP places the figure at $257 billion annually. The wheels are very much in motion on correcting this inefficiency, and in a sense it is a low-hanging fruit as compared to more controversial areas of trade (such as offshoring of manufacturing). To see this, one can look at the progress of agreements touching on the issue. In 2013, as part of a larger WTO Trade Facilitation Agreement, negotiators concluded that member states would need to work toward paperless trade solutions. This agreement has already been ratified by 94 states since then, although two-thirds of the 164 WTO members need to ratify before it goes into force (3). Several higher-income Asian nations have already implemented paperless trade systems with a “single window” framework, wherein all documents of a cross-border transaction may be submitted to one platform which distributes them to the necessary parties (4).
In short, the pace of paperless trade is formidable and this agreement will be a big step, although individual implementation for certain less developed states remains to be seen. If properly implemented, paperless trade will bolster the Asia Pacific economy by smoothing out bureaucratic inefficiencies.
(1) "ESCAP Economic and Social Commission for Asia an : First Regional Agreement to Enable Cross-border Electronic Trade in Asia-Pacific Opens for Signature at UN Headquarters." ESCAP Economic and Social Commission for Asia an : First Regional Agreement to Enable Cross-border Electronic Trade in Asia-Pacific Opens for Signature at UN Headquarters. ESCAP, 30 Sept. 2016. Web. 9 Oct. 2016. <http://www.4-traders.com/news/ESCAP-Economic-and-Social-Commission-for-Asia-an-First-regional-agreement-to-enable-cross-border-e--23149895/>.
(2) United Nations. ESCAP. Bangkok, Thailand. Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific. N.p.: n.p., n.d. Print.
(3) "Ratifications List." World Trade Organization – Trade Facilitation Agreement Facility. WTO, n.d. Web. 11 Oct. 2016. <http://www.tfafacility.org/ratifications>.
(4) Ha, Sung Heun, and Sang Won Lim. The Progress of Paperless Trade in Asia and the Pacific: Enabling International Supply Chain Integration. Publication. Asian Development Bank, Oct. 2014. Web. <https://www.adb.org/sites/default/files/publication/152775/reiwp-137.pdf>.
Image: © Tianyi Wang | Dreamstime.com - United Nations Social and Economcis Commission for Asia and Pacific (US ESCAP)
The OPEC production freeze that hit headlines at the end of September was described by Russian President Vladimir Putin as “the right decision for world energy”. OPEC members as well as Russia have long faced the tradeoff between destabilizing oil prices and ensuring their market share, and this agreement was meant to indicate that, at least symbolically, they were prepared to choose the former (many analysts consider the agreed output reduction to be negligible in real terms, but more indicative of a trend toward a price increase) (2). Iran, however, currently stands to be exempt from this trade-off; negotiators reached consensus at the meeting that, given its political and economic context, Iran ought to be able to continue producing oil as its capacity picks up post-sanctions.
This is direly needed; the last five years have been rocky for the Iranian economy to say the least. This can be mostly chalked up to the sanctions regime; billions of dollars in foreign accounts are frozen. American-imposed restrictions limit the ability of Iranian businesspeople to transact in USD. A slate of trade sanctions were long in place, some of which still are, calculated to pressure the Islamic Republic in several arenas, most notably its nuclear program and proxy wars in Syria and Yemen (1)(3). This led to two consecutive years of very negative growth in 2012 and 2013. As negotiations progressed and some sanctions were lifted, growth picked up and the economy grew 4.34% in 2014, alongside reductions in inflation (1).
The 2014 growth explosion is attributable to large-scale re-activation of previously dormant industries (such as reopening of oil fields) as post-sanctions investment poured into the country. Still, Tehran claims that there is still 400,000 barrels per day worth of capacity that remains untapped since the nuclear deal sanctions regime (3). Meanwhile, large OPEC producers, even under the freeze, will be operating at or near capacity. Thus the Iran exemption can be justified as a simple leveling of the playing field.
Like in Saudi Arabia and many other OPEC producers, Iran’s oil reserves are mostly nationalized and therefore the country’s fiscal position is heavily dependent upon the oil economy, with oil making up 45% of GDP and 90% of exports (3). The price freefall caused Iran’s budget deficit to more than double from 2014 to 2015, especially because production was still catching up to capacity (i.e. market share was disproportionately low) all while prices drove down the revenues that could be gained. A World Bank model made before the recent OPEC deal forecasted this deficit to ease in the coming years to 1-2% assuming no production cut (4). These numbers could get even better if, simultaneously, other oil producers were leaving more oil in the ground. Thus Iran stands to gain hugely from this exemption.
OPEC leaders clearly agree that it is in their long-run interest to collaboratively manage oil production in order to put a floor under oil prices and ultimately ease the supply glut. In doing so, they have elected not to throw Iran under the bus. It remains to be seen whether this support continues as further meetings are held.
(1) By the Numbers | The Iran Primer. "Iran's Economy, By the Numbers." United States Institute of Peace. United States Institute of Peace, n.d. Web. 16 Oct. 2016.
(2) Arkhipov, Ilya. "Putin Pushes for Oil Freeze Deal With OPEC, Exemption for Iran." Bloomberg.com.
Bloomberg, 2 Sept. 2016. Web. 16 Oct. 2016.
(3) Gamal, Rania El. "OPEC Agrees Modest Oil Output Curbs in First Deal since 2008." Reuters. Thomson Reuters, 29 Sept. 2016. Web. 16 Oct. 2016.
(4) "Iran Overview." The World Bank. N.p., 1 Oct. 2016. Web. 16 Oct. 2016.
Image: © Alireza Teimoury | Dreamstime.com - Oil Industry worker
Evan is an international student and writer, who has lived and studied in Los Angeles, Hong Kong, and Milan. This background has lent itself to special insight on trade and international economic issues, topics on which he primarily writes at GIT. Recently, Evan has taken particular interest in regional and multilateral trade deals, sanctions, OPEC, and other economic diplomacy topics.