The Nicaragua Canal Proposal

CASE NUMBER: 405
CASE MNEMONIC: NICCANAL
CASE NAME: The Nicaragua Canal Proposal

(1) THE ISSUE

Interest in a short route from the Pacific to the Atlantic began with explorers of Central America in the 16th century. For the last ten years, the possibility of a canal through Nicaragua has been heavily debated. As time draws nearer to the December 31, 1999 deadline when the US hands control of the canal over to Panama, the Nicaraguan route is again being considered. Currently, several alternatives are being considered to Panama. It is believed that the Panamanians cannot efficiently handle the service of the canal. Further, international trade is on the rise and the waiting period for canal entry is growing. At this time when East-West container ship traffic is growing at a rate of from 5% to 8% a year, the Panama Canal has neared its capacity, sometimes backing up for days or weeks during maintenance. (Murphy, 1996) Additional problems exist such as the increasing number of large tanker ships that cannot enter Panama's narrow waters. Price hikes are also quite possible. As a result of these issues, several countries have been investigating plans for a competing canal, in addition to revising the Panama Canal. Of these countries, which are Colombia, Mexico, Honduras and Nicaragua, Nicaragua seems to be the most achievable. Nicaragua is considering two different ideas. One is for building a new canal and another is to build a rail system. A feasibility study is currently underway by the Canal Interoceanico de Nicaragua (NIIC) on the railway and should be completed by October.

(2) DESCRIPTION

The question on whether an additional canal is necessary is extremely important to international trade. The outcome of this case will definitely have a global impact. The US is the main user of the Panama Canal. Latin American countries rely on it as well as Japan and other Asian countries. The time and cost of transportation has detrimental effects on prices throughout the world.

Throughout history, Nicaragua has been noted as suitable for construction of an interoceanic canal. This Central American nation was first considered for a canal in the late 19th century. It offered cheaper transportation than Panama, a healthier climate and even abundant provisions. Reports dated from 1852 and 1876, demonstrate beyond any doubt the superiority of the Nicaragua route. During the 1800's, Nicaragua's relations with the US revolved around the prospects of construction of a canal through Nicaragua. In 1884 an agreement was concluded, expanding previous arrangements in the area. The US was to construct a canal that would be owned jointly with Nicaragua. Nicaragua ratified this treaty, but the US did not. President Chester A. Arthur withdrew it from Senate consideration in 1885. (Millette, 1991) Relations with Nicaragua began to go sour under the rule of Zelaya because of the US decision to construct a canal through Panama. The loss of the canal route had far reaching consequences for both internal Nicaraguan developments and for relations with the US. Panama won out because of political reasons among others. An intensive pro- Panama lobbying unit had existed. An additional factor that swayed this early US decision was that a volcano was on the suggested canal path. After Mt Pelee, a volcano on the island of St. Martinique, had erupted killing 30,000 people, Momotombo began to rumble to Nicaragua. The Nicaraguan government had just put out a stamp that identified Nicaragua as the land of volcanoes. This was used by the Panamanian lobbyists to persuade the vote toward Panama in fear of an eruption. The stamps were distributed by Senators just three days before the vote. One stamp showed Momotombo erupting behind a wharf with a railroad in the foreground. Panama was then chosen as the site of a US built canal.

Over the years, the Panama Canal has been successful. It has gained revenue and helped the country's economic status. International trade has been facilitated by not having to travel around South America. The canal's traffic has grown steadily and a boom in trade between Asia and South America and Africa is expected to sustain demand for the canal. The numbers are growing every year and soon the capacity will exceed the limit. This among other factors has increased the consideration for a new route.

A number of different alternatives are being reviewed:

Honduras: The New Orleans-based consulting firm, Trans- World Traders, is proposing a rail system in Honduras. They are proposing a continuous loop rail system between Trujillo on the Caribbean Sea side and Amapala on the Pacific side's Gulf of Fonseca. Trains would be electrically powered or powered by natural gas. One drawback would be the reliance of development bank financing. They claim that the environmental damage would be limited because the route is deforested, and the port sites are ideal. (Murphy 1996) In September 1996, the Honduran government announced it was studying the feasibility of the project between Puerto Castilla on the Atlantic and Puerto San Lorenzo on the Pacific. The costs were estimated to be $300 million less than the Nicaragua project. (Hernandez, 1996)

Mexico: Mexico's outdated rail system of 255 miles between the two coasts is due for privatization and several foreign investors are interested. However, feasibility studies are not planned for the near future.

Colombia: Only Colombia is talking about building a Panama-style waterway. President Samper has called for the construction of a canal across the northwest part of the country. There are 25 possible routes the canal could take from the Gulf of Uraba on the Caribbean coast to somewhere over the Serranna de los Altos mountains on the Pacific. However, cutting through these forests would be expensive and would destroy one of the world's most important rainforests. (Reuter Business Report, 1996)

The United States: The US currently has a rail system that is being increasingly used to deliver containers from the Pacific to the Atlantic.

Panama: Panama also hopes to expand the canal in order to allow for increased traffic and larger ships. The Panama Canal Commission has plans to invest $3 billion from 1997-2005 in capital improvements. One target of the improvements is to widen the Gaillard Cut to allow two-way traffic. This is the narrowest point in the 52-mile canal. (Murphy, 1996) Panama has had a railroad that unites both oceans in four hours less than the proposed Nicaragua route. This trans-isthmus train has three ports for container handling. It has been turned over to a Hong Kong company, which plans to refurbish it. (Hernandez, 1996)

Nicaragua:

The proposal for Nicaragua has two alternatives. Building a waterway has been considered. A substantial portion would utilize the San Juan River and the huge inland Lake Nicaragua and require only 12 miles of new canal. This would mean a drastic change in shipping. The routes between East Coast and West Coast ports would be shortened by 525 miles-a full day or more in sailing time. This scheme would be able to accommodate the new larger tankers. Ships up to 250,000 tons would be able to pass through, compared to the 65,000 to 70,000 in Panama. (San Diego Times, 1989) The Managua government's canal plan would utilize a route that has been under consideration since the early 1500s which was talked about by the Spanish conquistadors. Yet before lakes and rivers are dredged, several studies are being conducted on the environmental impacts. The largest barrier to this is the cost. Feasibility studies are underway at present, however many question if this investment is worth the extreme high cost.

An alternative proposal, which has been the most popular, is for a "dry canal" in Nicaragua that would join the Pacific and the Atlantic through a 234 mile rail system. This would only ship containers and would not help the problem of large tankers or cruise ships. Many shippers currently use the rail system in the US, however there is a long delay for coast to coast transport. Furthermore, the Nicaraguan route would entice customers by charging half of the price as the US route. This system would take cargo trains transporting 40-foot containers at over 150 kilometers per hour a maximum of four hours to cross the isthmus. (Fonseca, 1996) This dry canal would be faster than the Suez canal between Asia and Northern Europe. The selected route, which runs from Pie de Gigante on the Pacific coast to Monkey Point on the Atlantic, was chosen because it avoids urban centers and natural reserves, although the route would cross some virgin rain forest. The question of the exact routing will be determined after the study of environmental impact is complete. The project promises to create 20,000 construction jobs and another 40,000 once the "landbridge" is operating. (Coone, 1995) This is highly desired in a country where six out of 10 people are unemployed because numerous jobs would be created.

The rail system would cost considerably less than the proposed waterway. However, even if Nicaragua's landbridge could capture all of Panama's $64 million in container traffic,it would not cover half of the annual finance charges on the investment nor operating costs. The project would cost $1.3 billion, with the feasibility study costing $20 million. The Panama Canal earns up to $400 million in total toll revenues per year and it is not considered to face congestion for another 10 to 20 years. (Coone, 1995) The viability of such a project remains in question. However, the Nicaragua route would cost only half as much as the US.

A third plan has been suggested, using a low-draft canal. This would use the same route as the proposed deep canal but would cost 200-300 million to build and would be designed to accommodate small vessels. It could be expanded gradually as demand grows. (Tyrell, 1995)

None of the Nicaragua proposals are new. Although recently the government has become more serious and has taken bids from interested parties. Eight multinational consortiums have expressed interest and are exploring costs. The latest scheme to be presented comes from an international consortium led by Wimpey, a UK construction firm, Siemans of Germany and the Interoceanic Canal Consortium of Nicaragua (CINNSA) which includes China Merchant Holdings, a Hong Kong shipping company, the port authorities of Tianjin and Qingdao in China, Parsons Brincker of International Engineers of New York, Europe Combined Terminals of the Netherlands, Spain's state-run RENFE rail company, as well as Japanese shipping interests. This group proposes to build a new high-speed railway.

There are also many political factors to be considered. It is believed that this canal would be a political instrument to improve relations with the US, and to settle political problems in Central America. The Sandanistas are also keen on this idea because they hold some land on the proposed route. Another view is that the canal is apolitical. (Reuters, 1989) In addition to bringing international investors, it will affect the transport of goods throughout the world.

The financially strapped country of Nicaragua is again hoping to fulfill their dream of a canal. However, a number of downfalls are foreseen. The first is that it does not have the labor force necessary to carry out all of the work. They estimate that at least 200,000-300,000 workers would have to be brought in, just as in Panama. Second, Nicaragua would have to undergo a radical transition to be adequately equipped for the new canal. Third, ecologists are already protesting that natural resources would be harmed. Many await the results of the feasibility study due out in October to determine if Nicaragua's dream could become a reality.

(3) RELATED CASES

Key words

• SIC=Transport
• Forum=Nicaragua
• Environmental Problem=Habitat Loss

(4) DIANNE LINDER, May 2, 1997

(5) DISCOURSE AND STATUS: Agreement and Allegation

This case will be basically a negotiated agreement between the Nicaraguan government and companies. There is no doubt that there is a consensus that a Nicaraguan canal would be useful for expanding global trade yet the cost is questionable. Alternate solutions to the problem do exist such as expanding the Panama canal, or building a new one in Mexico, Honduras or Colombia and they all are also being considered. Rail transport via the US is also currently available.

(6)FORUM AND SCOPE: Nicaragua and Unilateral

It has been proposed that the canal be internationally controlled by a key campaigner for Nicaraguan independence, Cesar Augosto Sandino.

(7) DECISION BREATH: 1

(8) LEGAL STANDING: Law

The legal standing affects the Nicaraguan government and the business entities involved. There would be a national agreement between the groups.

(9) GEOGRAPHY

a) Domain: North America

b) Site: Southern North America

c) Impact: Nicaragua

(10) SUB-NATIONAL FACTORS: No

The case affects Nicaragua on a whole the communities which lie on the proposed route of the canal or railway may take legal measures.

(11) TYPE OF HABITAT: Tropical

(12) TYPE OF MEASURE: NA

(13) DIRECT VS INDIRECT IMPACTS: Direct

The decision to build a canal through Nicaragua would directly affect trade passing through that region. There would be several indirect impacts on trade in Nicaragua. For example, there may possibly be increased imports. Supplies or equipment specifically for the canal would also surge. There would also be indirect effects on the environment. It can also be considered a regional project because the ports of El Salvador and Honduras are within easy trucking distance.

(14) RELATION TO MEASURE OF IMPACT

(a)Directly Related to Product: Yes, Transport
(b)Indirectly Related to Product: No
(c)Not Related to Product: No (d)Related to Process: Yes, Habitat

(15) TRADE PRODUCT IDENTIFICATION: Transport

(16) ECONOMIC DATA

The forecast on trade and current figures on the Panama canal shed light on the feasibility of a Nicaraguan canal's success.

Containerized cargo growth rates via the Panama canal are expected to slow moderately during 1996-1998. West Coast to South American trade will continue to drive most of the growth, while the Canal is projected to continue losing market share on the East Coast United States-Far East container trade to the US intermodal service. (Panama Canal Commission 'homepage') An increase in tolls in the Panama Canal would impact trade significantly. About 13% of US international seaborne trade moves through the Panama Canal. The most important region in Canal traffic is the Gulf area. Cargo to and from this area totalled nearly 83 million tons. Cargo moving to and from Atlantic ports is over 25 million tons. (Panama Canal Commission)

Elasticity studies of Canal demand indicate that the bulk trades, excluding grain, are sensitive to rate hikes. The liner trade is less sensitive to price and more sensitive to time constraints.

The affects of the toll increases being considered is not expected to have a significant impact on US trade in the short to medium term. However, in the longer term, the West Coast and intermodal routing will benefit from the containership trade diversion.

Oceangoing transits are forecast to increase to 13,870 or 38 daily in fiscal year 1997 and to 13,900 or 38.1 daily in fiscal year 1998.

Source: The Panama Canal Commission

(17) DEGREE OF COMPETITIVE IMPACT: Medium

(18) INDUSTRY SECTOR: Transport

(19) EXPORTER AND IMPORTER: Nicaragua and Many

(20) ENVIRONMENTAL PROBLEM TYPE: Habitat Loss

The route has been devised away from any cities, to minimize the destruction of resources. There would be deforestation and the route would pass near volcanic and seismic activity. The San Juan river is part of the international system of protected areas, which would be completely destroyed in the process of the canal's construction. Also, the waters of the Pacific, the Atlantic and Lake Nicaragua may be mixed by the new waterway, with serious consequences for the various ecosystems involved. Also, there would be minimal species loss yet pollution may increase which would affect land, sea and air. Additionally, the system of dams, which lifts and lowers ships, wastes an enormous amount of water. The recent uncontrolled tree-felling around the waterway has disrupted its water catchment area, which affects the canal's water levels. (Ardito, 1990)

(21) SPECIES INFORMATION: NONE

(22) RESOURCE IMPACT: Medium

(23) URGENCY OF PROBLEM: Low

The problem will grow quite large within the next decade.

(24) SUBSTITUTES: Alternative routes

Honduras and Mexico are competing with the rail system idea.

Colombia would like to build a deep water canal.

The US currently provides Atlantic-Pacific rail access.

Panama could expand the canal and renovate it.

(25) CULTURE: No

(26) TRANS-BOUNDARY ISSUES: No

(27) HUMAN RIGHTS: No

(28) RELEVANT LITERATURE

Ardito, Fabrizio "Cutting Through a Continent," Geographical Magazine, August 1990, p32-35.

Clayton, Lawrence "The Nicaragua Canal in the Nineteenth Century: Prelude to American Empire in the Caribbean," Journal of Latin American Studies, V 19, 1987, p323-352.

Coone, Tim "Nicaragua: Second Crossing" Business Latin America, April 10, 1995, p. 7

Encarta-Microsoft, "Panama Canal", 1993

Folkman, David, The Nicaraguan Route, University of Utah Press: Salt Lake City, Utah, 1972.

Fonseca, Roberto "Nicaragua: Age-Old Dream of a Coast-To -Coast Route Within Reach," Inter Press Service English News Wire, August 29, 1996.

Hernandez, Silvio, "Panama-Economy:Dry Canals Vie with Waterway" Interpress Service English News Wire, Sept 11, 1996

Millett, Ricard, "Nicaragua: Conservative Rule and Era of Jose Santos Zelaya, 1857-1909" Countries of the World, Jan 1, 1991.

Murphy, Barbara, "Alternatives Considered to Historic Panama Canal" Los Angeles Times, Sept 3, 1996

Panama Canal Commision web site

Reuter Business Report, "Brief look at competing canal proposals" August 21, 1996

_______________________, "New Canal to cost $10-15 billion," Feb 14, 1989

Tyrell Jr., R., "Isthmian Chinese Whispers" Economist May 20, 1995, p. 58.

Wilkinson, Tracy "An Uneasy Passage in Panama" Los Angeles Times, June 6 1994, pA-1.