EN Ireland
Macroeconomic & Geopolitical

A Man, A Plan, A Canal – A Trade War

22 July 2019 - 3 min read

Trade flows, like water, ultimately find their path.

PANAMA CITY – If you are looking to measure today’s global trade turmoil, there are worse places than the 51-mile stretch of canal that connects the Atlantic and the Pacific for roughly 6% of the world’s trade. (If you are a tourist passing through, moreover, there are few nearby beaches to compete for your time.)

It’s easy to turn this tiny linchpin into a broader metaphor for the trade war, but you have to be careful. This isthmus-country of 4 million people is neither a collateral victim of the current trade wars nor a future pawn in the global struggle between the two largest economies. At least, not yet.

It is, however, an important measuring stick of where we might be headed. For an astonishing picture of what’s actually going on right now, click here. Then consider three recent developments.

First, the current set of tariffs has had a noticeable impact.  Overall volumes are up 2% this year but would have been higher still, the canal’s director just announced. China-bound cargo is down as Beijing cut its imports of American food and fuel, relying on purchases from Brazil and Qatar instead. Japan has now moved into second place behind the U.S. as the canal’s largest user.

Second, for all the talk of Chinese money lavished through its Belt and Road Initiative, including key ports in Greece, Sri Lanka and Djibouti, almost no official lending has found its way to Panama so far. Of the $130 billion in official Chinese loans to Latin America, the bulk have landed in Venezuela and Brazil. Chinese contractors at work on large infrastructure projects seem to be paid mostly with Panamanian government money. Talk of a Chinese loan to build a new railway is, so far, still just talk.

“Panama remains a crucial place to monitor the future patterns of global trade.”

Third, the canal is no longer the strategic chokepoint it once was.  The Suez Canal offers reasonable alternative routes between Asia and the United States without locks, while trans-continental trains and trucks are now another viable alternative.

But that doesn’t mean the future of the canal’s traffic or the country’s politics do not bear close watching. Where physical and tariff barriers arise, commerce always finds a way through.

The canal itself is a triumph of political perseverance, technological progress and no small amount of luck. It was initially the 16th century dream of Spanish King Charles I to expand trade with his American colonies. In 1880, French entrepreneur Ferdinand de Lesseps, who had built the Suez Canal, spent eight painful years trying to replicate his feat in Panama before running out of money.  

In 1903, Theodore Roosevelt bought out the French and drove an American effort that nudged Panamanian independence from Colombia, defeated deathly mosquito-borne diseases and introduced exciting advances in engineering. There were political motives to keep Europe out of the Western Hemisphere, strategic motives to bolster the U.S. naval presence everywhere and commercial motives to expand trade. (It also became the world’s best-known palindrome: A Man, a Plan, a Canal, Panama.)

Its epic story is one of intrigue, greed and tragedy with some 20,000 deaths during the French attempt alone. There were dozens of times when the whole attempt might have been abandoned. Without an improvised Panamanian uprising, the canal would have been built in Nicaragua instead, with vastly different consequences around its 1980s civil war or today’s Central American refugees.

But like all water seeking a path to lower ground, there were unrelenting political, military and economic forces that made it inevitable as soon as the technological and medical obstacles could be addressed.

In the same way, any obstacles to trade today, through tariff or sanction, are rarely more than temporary. If China can’t buy American soybeans, it will buy Brazilian. If America’s electronics assemblies grow too expensive in China, they will move to Vietnam.    

Indeed, even as it competes with new cargo routes, Panama needs to keep up with the expanding size of ships themselves. Having taken control of the canal in 1999, the government recently opened a second set of locks to accommodate the so-called neo-Panamax vessels that are nearly four football fields long.  

This political and technological dynamism are part of the reason that Panama remains such a crucial place to monitor the future patterns of global trade. Over 60% of canal traffic is either coming from or destined for the United States, so there is little doubt about where Panama’s current interests lie.  

But the Panamanian government has started hedging its bets. In 2017, it renounced its recognition of Taiwan in order to establish relations with China, which then was still the canal’s second-largest customer.  Last December, Xi Jinping made the first state visit by a Chinese leader. Meanwhile, the Bank of China offers airport travelers a warm welcome on behalf of “a world canal, a global bank.”

If U.S. and Chinese tariffs persist, Panama’s flows will continue to shift, because commerce almost always finds a way around political and physical barriers and this trade war was not part of the man’s or the canal’s original plan.

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Read More Less

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.



We use cookies on our website to provide you with the best experience. By proceeding to our site you agree to our Cookies Notice and our site Terms and Conditions.