China, Nicaragua and the Canal: Global Shipping with Chinese Characteristics

A Chinese company and a former Sandinista revolutionary leader (three-time and current Nicaraguan President Daniel Ortega) are teaming up to revive an old idea -- create an alternative to the Panama Canal that will traverse through Nicaragua.
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A Chinese company and a former Sandinista revolutionary leader (three-time and current Nicaraguan President Daniel Ortega) are teaming up to revive an old idea -- create an alternative to the Panama Canal that will traverse through Nicaragua. With this week's approval by the Nicaraguan legislature of construction of a trans-oceanic canal through the country, the draft agreement between the Hong Kong registered company and the government of Nicaragua stands a decent chance of proceeding. Is it a nutty idea?

Not according to the government and project developers, who see it as economically transformational for Nicaragua, the region, and global consumers, who in theory stand to benefit from reduced shipping costs. Never mind that the 155 mile-long waterway will be three times longer than the Panama Canal, will cost $40 billion to construct, will take an estimated 11 years to construct, or that the Panama Canal is just about to finish doubling its own capacity to accommodate larger ships and heavier traffic. None of that appears to matter to the project developers. So, how many years of shipping fees would it take to recoup at $40 billion investment? Answer: a long, long time. That will no doubt matter to prospective investors.

What are the Nicaraguan government and its Chinese partners thinking? That in the decades to come shippers will mostly prefer to transport their cargo on super-sized ships, or that the appeal of the Panama Canal will suddenly wane, after 100 years of use and a doubling of its capacity? That is what would need to happen in order for the project to become commercially viable - if it has a chance of becoming commercially viable at all. Granted that some of today's supertankers and military vessels are too large to pass through even the expanded Panama Canal, but are their numbers, and those of the future, sufficient to support the project? Unlikely. What is likelier to happen -- should the project proceed -- is that both canals would become economically unviable, as they would undoubtedly compete so fiercely for business that usage fees for both would plummet.

In the interim, a number of 'unknowns' present near-term obstacles. For example, which of three proposed routes would the new canal take? Would the final routing and construction plan be acceptable to environmentalists? And will there be any additional legal battles over ownership of the sea lanes traversing portions of the proposed canal?

In 2001, Nicaragua sued the Colombian government at the International Court of Justice over ownership of approximately 50,000 square kilometers of sea. Last year the ICJ awarded all but 7,500 square kilometers to Colombia. Interestingly, Nicaragua needed that particular area in order to proceed with its plans for the canal. There have been allegations by the Colombians ever since that a Chinese judge at the ICJ was instrumental in ensuring that Nicaragua received the allocation (the judge apparently knew the Nicaraguan ambassador to the Court from a previous position and is presumed to have known about the Chinese company's plan to proceed with the Canal idea). Theoretically, the decision could be 'revisited' under ICJ rules, but this seems unlikely.

So, the plot thickens, but the idea of a trans-oceanic canal through Nicaragua has had a 'colorful' history, which seems destined to continue. In 1902, the then Chief of the French Canal Syndicate (which favored construction of a Nicaragua Canal) hired a lobbyist in Washington who planted a story in a New York newspaper that the Momotombo volcano had erupted in Nicaragua and that seismic activity could threaten a future canal there. The subsequent eruption of a volcano in Martinique that killed 30,000 people convinced the majority in Congress to vote in favor of the Panama Canal. In the end, the decision to build the Panama Canal instead won by only 4 votes. The U.S. has opposed any efforts to build a Canal in Nicaragua since then.

The two countries that stand to gain the most from a Nicaragua canal are of course Nicaragua and China, which uses supertankers to transport much of its natural resource purchases, so it is no surprise they have teamed up in the hope of taking the project to the finish line. However, the economics don't make much sense -- except perhaps in the very long term -- and there are plenty of obstacles standing in the way. If the allegations about interference in the judicial process by the Chinese judge at the ICJ are true, it is a reminder of how China does business and is shaping the way global business is done to suit its needs and desires. That certainly sounds reminiscent of 1902, when global shipping had "U.S." characteristics.

*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk advisory firm based in Connecticut, and author of the book "Managing Country Risk".

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