Latin America’s Moment

As the first ship goes through the expanded Panama Canal, the Development Channel sat down with Geraldine Knatz, former director of the Port of Los Angeles and now a professor of policy and engineering at the University of Southern California’s Price School of Public Policy. Dr. Knatz talked about changes in the shipping industry, trends affecting U.S. ports, and what the canal expansion will mean for trade globally.   1)  What will the Panama Canal expansion mean for the shipping industry and for global trade? The biggest change with an expanded Panama Canal is that it will allow larger ocean carriers to pass through. Pre-expansion, the canal was limited to containerships that could handle about 5,000 TEUs (one TEU is equivalent to a twenty-foot long container). The expanded canal will allow ships of up to 12,000 TEUs to transit. Shipping companies will be able to unlock economies of scale by sailing these bigger ships, and the cost of moving goods from Asia to the East Coast of the United States will drop. In addition to industries that rely on containers and big ships to move their goods, other types of commodities can benefit from more capacity through the canal, such as grain exports and liquid and natural gas (LNG) exports. The Panama Canal expansion will also create more routing options for ocean carriers bringing containerized goods to North America. Currently there are three main routes for goods moving from Asia to the United States. From China and northeast Asia, most goods come across the Pacific to a West Coast port where they are offloaded, transferred to rail, and then carried to the Midwest—roughly an eighteen-day trip. Or, cargo can move via the all-water route from Asia, go through the Panama Canal, and enter the United States through an East Coast port like Savannah or Charleston, which can take as long as twenty-six days. The second all-water route is from Asia through the Suez Canal—a twenty-eight day trip to the East Coast, with cargo often ending up in the Port of New York. In the past, goods from Southeast Asia and India took this route, but as ships got bigger and fuel prices dropped, some north Asian cargoes also started transiting to the U.S. East Coast through the Suez. One of the first things that will happen when the expanded canal opens is North Asian cargoes moving in larger ships through the Suez will switch back to the Panama Canal for cargo coming from north Asia. And the West Coast will try to prevent losing market share to the East Coast. 2) How has the shipping industry changed in recent years and what are other trends to watch going forward? To fully understand how the canal expansion will affect shipping and trade we have to first look at what has happened to the ocean carrier industry. Two major trends have affected it—the increased size of vessels and the consolidation of the ocean carriers. After losing money for years because of overcapacity and industry one-upmanship, ocean carrier companies started transitioning to bigger and bigger ships to achieve economies of scale (and these bigger ships are what the expanded Panama Canal is counting on for business). Then, because big ships only make money when they sail at full capacity, the competing ocean carrier companies formed alliances to share space on ships. Some ocean carriers have also merged. So a port that may have once courted twenty ocean carrier lines may now only have four big customers. Just recently, there was an announcement of a new alliance forming: the Ocean Alliance. If approved by the Federal Maritime Commission, the European Union (EU), and China, the Ocean Alliance will control 35 percent of the Asia-to-Europe market, and nearly 40 percent of trans-Pacific trade. For the ports, consolidation has had a big effect on business. The ports of Los Angeles and Long Beach have thirteen container terminals that serve numerous lines. As the alliances pool their cargo on larger ships, they will seek to call at the larger and most efficient terminals. That means when a container port loses a customer, they lose big. This industry consolidation has weakened the ports’ bargaining power and hurt their individual market share. It also makes it difficult for ports to finance major terminal improvements. In the past a port would typically enter into a thirty-year lease with an ocean carrier company to ‘lock in’ its cargo. And once ports had a thirty-year commitment, they had the flexibility to go out and finance improvements. Now the alliances seek short-term arrangements, maybe three years, and ports are in constant negotiations to keep the business. Meanwhile, the alliances are constantly seeking terminals with high productivity and threatening to go to the port next door. We can see the effects of the changes in the industry and the decreasing leverage that ports have by examining what has happened at the ports of Seattle and Tacoma. Both had lost market share in recent years, and rather than continuing to spend billions going after the same business and using predatory pricing practices to shift cargo back and forth—which did nothing to boost the regional economy or create jobs—they merged their cargo operations, and created a new entity. Tacoma and Seattle realized the market power of their customers was stronger than their own and they took strategic steps to try and deal with that. The hope is that their new collaboration, called the Northwest Seaport Alliance, will have better leverage in negotiating with the alliances. It will be interesting to watch what actions other ports take to address their decreasing leverage. 3) Who will be the winners and losers in the Panama Canal expansion? The biggest winner may be the Panama Canal Authority (ACP), which makes the largest share of its revenue money from container traffic. As long as traffic goes up, the ACP will be poised for growth. The ocean carrier companies are also well positioned. After the expanded canal opens, they will shift even more to bigger ships and improve their economies of scale. For the ports the question will be: where will the big ships stop? A lot of East Coast ports are vying for that business. Since the canal expansion was approved in 2002, there has been a perception that it will benefit all ports—large or small—and many have made improvements to get ready. But big ships make money at sea and not at port, where they want to spend as little time as possible. On the West Coast, large vessels call at two, maybe three ports. The carriers will adopt the same pattern on the East Coast once the expanded canal opens. Inevitably, some East Coast ports are going to lose vessel calls. The economy of scale driving ocean carriers will make that happen. 4) After the Panama Canal expansion, what will a U.S. port need to do to win business? Ports use the term “big ship ready,” which means they can handle the large ocean carriers. That usually requires having at least a fifty-foot navigation channel. Channel-depth is not the only factor that makes a port “big ship ready” however. There are other major investments needed to upgrade port facilities and infrastructure. For example: in addition to deepening the channel, wider ships need new cranes to reach and offload cargo. These longer-reach cranes are heavier than the old ones, so the port then has to upgrade the wharf—another major expense. And once the port facilities are in shape, the containers need to get from a port to their final U.S. destinations, which requires a good rail system. Given shipping companies take all of these factors into consideration when deciding where to drop their goods, ports should also consider the regional infrastructure when deciding how to invest. 5) What U.S. policies are being implemented so that U.S. ports and the broader public can capitalize on the Panama Canal expansion? When the canal expansion construction started, it was a wakeup call for U.S. ports to get ready. It was also a wake-up call to the federal government on policy changes necessary to expand and invest in U.S. ports. One example of government action is the Obama administration’s “We Can’t Wait” initiative that prioritized the dredging of new channels, expedited the modernization of five ports, and allocated investment to upgrade transportation. Another is new funding from the Department of Transportation (DOT), particularly the Transportation Investment Generating Economic Recovery (TIGER) grant program, which allowed ports to apply directly to the DOT for funding. The Federal Maritime Commission—which for many years was an organization that only a port’s attorney might deal with—has also stepped up to be more active, especially in dealing with port congestion. Finally, the latest surface transportation legislation, the Fixing America’s Surface Transportation (FAST) Act, created a dedicated fund for freight infrastructure. It also created a program for monitoring port performance by the Bureau of Transportation Statistics that will report to Congress annually. However, there is still a need to re-examine the way the U.S. government decides which ports to invest in—and in particular, which channels to dredge. Now the process is managed by the Army Corps of Engineers, which runs economic models to look at the “federal interest,” or the maximum benefit for spending federal money that results in reduced transportation costs. But the shipping companies now wield the power. They are less concerned with where the U.S government spent money dredging a port, and more with lowering their own costs. At the same time, ports have a have a hard time securing financing because they are not able to lock in business and customers for long terms. For both lenders and the U.S. government, investing in ports is getting riskier. Ultimately, the U.S. government should decide which ports to invest in according to the long-term commitments from multinational ocean shippers the port is able to secure. Using this criteria, instead of focusing on helping ocean carriers save on each container they move, would ensure the investments pay off.  

Michel Temer’s first month as interim president has not been the stuff of dreams. Even though important elements of urgently needed economic reforms have advanced, impeachment politics continue to cast a long shadow, corruption investigations continue to percolate, and Temer’s legitimacy remains under constant assault. As impeachment continues to move forward in the Senate, Dilma Rousseff and her supporters have pulled out all the stops. Actors at Cannes and other cultural events have protested the alleged coup, demonstrators have hit the streets alongside former President Lula, and perhaps looking for a wedge that might drive moderates to her side, Rousseff has suggested that if reinstated, she would call for new elections. Public support for impeachment has fallen slightly, although most Brazilians say they would rather not see Rousseff return and chances are still better than not that she will be convicted by the Senate in August. But Rousseff’s supporters know that their own long-term political fortunes depend on questioning the legitimacy of impeachment, and fence-sitting senators seem to be using the uncertainty surrounding support for impeachment to extract a pound of flesh from the interim president. Temer has built a defensive cabinet, following the time-tested recipe of appointing ministers who faithfully represent the majority legislative coalition. They are complemented by a parallel kitchen cabinet of technocrats in the Finance Ministry, the National Development Bank (BNDES), Banco do Brasil, Treasury, and state-owned enterprises. The bifurcated cabinet may help to ensure Temer’s survival, but it also helps to explain the ambiguous results of the last month: progress on fiscal reforms, such as more realistic fiscal targets and the DRU law (which reallocates tax revenues in favor of the federal government), but also important setbacks, such as a tone deaf congressional push for higher civil service wages. Most damaging, of course, is that Temer’s allies, especially within the PMDB party, are a constant embarrassment: wiretapped conversations between a defendant in the Lava Jato case and party heavyweights Renan Calheiros, José Sarney, and Romero Jucá, suggested an effort to undermine anticorruption efforts and confirmed many Brazilians’ worst suspicions about the Temer coalition. Recognizing his own tenuous support and the likely political confusion of coming months, Temer appears to be governing largely symbolically, announcing a number of high-impact measures that require little legislative support, such as reducing the number of ministries, creating a new concessions program, rebuilding regulatory agencies, and reviewing the rules on Petrobras’ participation in the pre-salt oilfields. The most important major legislative initiative announced by the government is social security reform, but debate over the specifics of the proposal is unlikely before municipal elections in October, given that Temer cannot afford a divisive battle while Congress is still fighting the impeachment battle or distracted by electoral politics. The best news in the short term is that the Temer administration is reportedly planning to back a series of accountability reforms proposed by the Ministério Público prosecutorial service, presumably to help it to recover some modicum of credibility in the anticorruption effort. Multiple corruption investigations continue to destabilize the political world. A plea bargain by former OAS executive Leo Pinheiro included allegations of campaign finance violations by Marina Silva, one of the few prominent politicians as yet untainted by the Lava Jato case. Rumors of a plea bargain by construction magnate Marcelo Odebrecht and the investigation of former President Lula’s involvement in the Petrobras scandal have Brasília abuzz. The Zelotes investigation of tax evasion seems to have moved into a new phase with the indictment of the president of one of Brazil’s largest private banks, Bradesco. The possible removal of Eduardo Cunha from the Chamber of Deputies presidency continues to generate sparks in Congress, and there is (as yet unfounded) speculation that Cunha might try to save his skin through a plea bargain of his own. Meanwhile, the impeachment trial will move into higher relief beginning next week, as the defense presents its case and President Rousseff is scheduled to testify. In sum, the coming weeks and months are likely to remain full of drama and tension, with a distracted political class focused less on governance than survival. In the background, almost as an afterthought, will be efforts to address the multiple economic challenges the country faces: heavily burdened state companies, the threatening fiscal deficit, and the critical situation of Brazil’s state governments.

This is a guest blog post by Ivan Rebolledo, managing partner of TerraNova Strategic Partners. Sunday’s election pitted the two versions of the Peruvian right against each other: the populist, Keiko Fujimori of the Fuerza Popular party, and the liberal, Pedro Pablo Kuczynksi (PPK) of the Peruanos por el Kambio party, with the latter’s win confirmed Thursday afternoon. In 2011, Ollanta Humala eventually won the second round, over Fujimori, with votes from the liberal right and center. PPK did it with votes primarily from the left, including important support from Veronika Mendoza and her Frente Amplio party. Since then, Fujimori has attempted to clean up her party’s image by removing the more controversial leaders and selecting better congressional candidates. Her 40 percent win in the first round showed this strategy’s success, as she garnered support from all socioeconomic classes. However, during the second round campaign, Fujimori campaign insiders were secretly taped and allegedly linked to drug trafficking, reminding the electorate of similar scenarios during her father’s presidency. She failed to quickly distance herself from the intrigue, which in the end thwarted her campaign. Though PPK was trailing due to his lackluster second-round campaign performance, close affinity to the United States including one-time U.S. citizenship, and years in the international banking sector, Fujimori’s problems became his successes, swaying the popular vote in his favor. This is the first time that the liberal right has won a democratic election in Peru. And it is the first time a candidate wins without espousing leftist rhetoric to then govern from the right. Clearly PPK is a free-market reformer (Peru sovereign bonds rallied yesterday after his confirmed victory). No one should be surprised when he implements liberal economic policies, as so many were with Humala’s turn to the right. The left knows this and still they voted for him. PPK’s tremendous gains between the first and second round create real weaknesses for his administration. He won just 21 percent of first-round votes, the other 30 percent “borrowed” from those opposing Fujimori. He also comes in with just eighteen representatives, or 14 percent of Congress. Few leaders have such meager parliamentary support. Now PPK’s biggest dilemma will be how to consolidate political power, which will probably mean working with Fujimori and her party. His top priorities should be crime and security; dealing with immense government corruption; accelerating economic growth by shrinking the informal sector; diversifying the economy away from extractive to manufacturing industries; and fortifying Peru’s role regionally and globally.