Editorial & Opinion

The Nicaragua Canal: China’s Secret Motive

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I first saw the Panama Canal in action back in 2002. Although it was nearly 90 years old at the time (and now soon to be 100 years old), it was an impressive piece of engineering to behold, even by modern standards.

The Panama Canal is something that would make any red-blooded American proud. It was started by the French — who eventually gave up on it due to engineering difficulties and a high mortality rate for their workers. It took American innovation and engineering prowess to get the job done. Now, a series of locks lifts ships 85 feet above sea level and then lowers them again on the other side — all on some of the least hospitable terrain on the planet.

You absolutely cannot underestimate the importance of the Panama Canal to the modern global economy. The existence of the canal has done more to promote free trade and globalization than all of the international summits in history. It has massively reduced costs and transit times and allowed for much tighter economic integration between the countries of the Americas and between the Americas and the Old World.

The canal currently handles about 5% of all worldwide shipping traffic — and it would be substantially higher if the canal weren’t already running at maximum capacity, pending the opening of a new, wider lane set to open in 2014. The new lane will accommodate significantly larger ships and is expected to double the canal’s current capacity.

Yet recent moves by China add a new wrinkle to this story. Even while the capacity of the Panama Canal is being doubled, a Chinese company is in serious discussions with the Nicaraguan government to build a rival canal.

The cost? $40 billion and 11 years of construction.

Based on economics alone, it’s difficult to understand the Chinese motivation. Panama nets about $1 billion per year in tolls on its canal and has the ability to undercut any potential rival on price. The canal expansion — which, again, will double capacity — cost just $5.2 billion.

Maybe China is betting that world trade will be high enough to justify two Central American canals by the year 2025, but I believe its motivation is less economic and more geopolitical.

The Panama Canal has been under the control of the Republic of Panama since 1999. But under the original treaties negotiated by the Carter Administration — ceding control to Panama — the United States retained a permanent right to defend the canal if its openness and neutrality were ever at risk. The canal might belong to Panama, but the United States still considers it a vital asset necessary for national defense.

Could China have similar motives in Nicaragua? I think so.

In Nicaragua, China has the potential to essentially bribe one of the poorest countries in the Western hemisphere into being a loyal ally. By some estimates, a new canal could double the country’s GDP per capita.

And Nicaragua is not a country known for being friendly to the United States.

Will the canal happen? Maybe, maybe not. We’ll see.

But if it does, it should benefit the world economy by increasing capacity, speeding up transit times, and presumably forcing Panama to lower its tariffs to compete.

What exactly China will get out of it is a little murkier.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”

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