Name: Mexico Is Building a $7.5 Billion Megaproject to Divert Shipping From the Panama Canal
Uploaded: 2024-09-23T04:01:00Z
Duration: 8 min 43 s
Description: The Panama Canal isn’t as reliable as it once was and Mexico is racing to build a new corridor connecting the Pacific and Atlantic Oceans that would help fill the gap. WSJ explores whether it will lead to faster or cheaper shipping.

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The Panama Canal isn’t as reliable as it once was and Mexico is racing to build a new corridor connecting the Pacific and Atlantic Oceans that would help fill the gap. WSJ explores whether it will lead to faster or cheaper shipping. Photo Illustration: Annie Zhao / Government of Mexico

https://m.wsj.net/video/20240918/b9342697-6f40-43ee-84a3-945f6ef914e0/2/hls/manifest-hd-wifi.m3u8

The Panama Canal isn’t as reliable as it once was and Mexico is racing to build a new corridor connecting the Pacific and Atlantic Oceans that would help fill the gap. WSJ explores whether it will lead to faster or cheaper shipping.

Mexico Is Building a $7.5 Billion Megaproject to Divert Shipping From the Panama Canal

Narrator: For decades, this 50-mile-long stretch of water through Panama has been a top choice for companies moving billions of dollars of goods around the world, but it's not as reliable as it once was. Say you're in charge of shipping 10,000 containers from Shanghai to New York in the most efficient way possible. Your go-to route the Panama Canal has raised toll prices by nearly eight times and restricted the number and size of ships that can pass through it. That's because water levels are at an all-time low. You could reroute via a Cape Horn down here, which would add nearly 8,000 miles to your journey, costing you time and money. But what if you could cut through this little stretch of land right here? Enter Mexico's $7.5 billion Interoceanic Corridor, stretching 188 miles across the Isthmus of Tehuantepec. This railway aims to ease a major choke hold in what has become a global shipping mess. But it's not clear whether Mexico's alternative is going to be faster or cheaper. This is Mexico's plan to grab a slice of the multi-trillion dollar global shipping industry. Now, this is an actually Mexico's first attempt to take advantage of its strategic location. The Interoceanic Railway originally opened back in 1907 to move goods like Hawaiian sugar from the Pacific to the US East Coast, but it was essentially abandoned for trade. A few years later, after the country's railways began to be used by armed forces in the Mexican Revolution, and a few years after that, the Panama Canal opened offering an alternative and much more attractive route for American businesses. So a lot of people may be wondering what makes it viable now.

There are lots of things that have changed since the beginning of the 20th century.

Narrator: Today, reviving the railway is part of a bigger plan by the Mexican government to spread wealth across the country. You see, the new corridor runs through the southern states of Veracruz and Oaxaca, where around half of people live in poverty. The Interoceanic Railway will carry both passengers and cargo across 10 stops between ports in the Atlantic and Pacific. The hope is that the line will eventually link up to Tren Maya, which will connect to the tourist destination Cancun once it's complete. There are also plans to build 10 new industrial complexes along the route to take advantage of its proximity to the trade corridor, think car part factories or agricultural plants. But all of that takes money and buy-in from the rest of the supply chain.

Mexico needs to convince investors of the attractiveness and economic viability of these kind of projects and reshoring.

Narrator: So far, the project has received about $6 billion in funding from the Mexican government and more than 2 billion in financing from international sources in including the World Bank. Now, supply chains are incredibly complex, but for this video, we're going to simplify the practice down to its building blocks. Time, money, and shipping containers. If you're a shipping company, the more containers you move, means the more money you'll be able to make, which is why the Panama Canal would probably be your first choice because you can move a lot of containers in one trip. Over time, ships have been redesigned to take advantage of every square inch of real estate this canal has to offer. When shipping companies couldn't stack any more containers through this narrow stretch of water, they built even bigger New Panamax ships. And in 2016, Panama actually widened the canal locks by 70 feet. But now, some of those ships can't actually pass through the canal as often as before. You may have to wait more than two weeks out at sea or bid millions of dollars just to get ahead in line. That's because there's been a historic drought in Panama, which is leaving water levels at the nearby Lake Gatun at record lows. That's a problem because the Panama Canal relies on the water from that lake to operate the lock system that moves ships through the canal, and that means shipping companies are losing time and money. That's where Mexico's Interoceanic Corridor could come in. Say you reroute to the port of Salina Cruz on the Pacific, you can then transfer your goods to the railway and pick them back up with a ship on the other end. In theory, sounds great, but in reality, Mexico still has a lot of work to do to get its ports ready for an influx in traffic.

Mexico might have a very good opportunity here to put itself as a key player on this map of international maritime shipping.

Narrator: But it's not clear whether Mexico's railway will actually be faster than the Panama Canal, which is about 50 miles long. While the railway is around 200, it takes about 8 to 10 hours to sail through the Panama Canal, while it could take 6 to 7 on the railway. But when you add in the time it takes to load and unload thousands of shipping containers off a ship onto a train and back onto another ship, it's more like 15 hours to pass through Mexico. But recent waiting times at the Panama Canal have caused delays of up to two weeks as they try to preserve the amount of water that's displaced by heavy ships. So it's not clear exactly who wins out on speed right now. And then there's the question of capacity.

Even within few years from now, after the project has been completed, it's not going to reach even half of the capacity that the Panama Canal allows the shipping companies to transit through the canal.

Narrator: A company involved with the development of Mexico's corridor says it'll handle up to 5% of the global trade passing through the Panama Canal, but it's not just the railway that needs an upgrade. The ports still need to be modernized because they aren't actually capable of handling that many new freight shipments right now. So this corridor isn't exactly a replacement, but it could be a promising plan B.

This can be a very interesting case with a Mexico and Panama are actually going to collaborate in the future on the long term, and perhaps they can share data. They can reroute the vessels when there is chalk point, whether it is in the Panama Canal or in Mexico.

Narrator: The Panama Canal Authority told WSJ. "This route remains the top choice for shippers and that we are always monitoring potential projects that could compete with our route." Now, it's not just Mexico that stands to gain from this trade route. Remember that order from Shanghai to New York. It's one of the most common journeys to pass through the Panama Canal, but the US government and businesses have been trying to loosen ties with China by moving operations closer to home through a tactic called Nearshoring.

So Nearshoring or Backshoring is when businesses relocate their supply chain processes back home or in a near country. Mexico is benefiting from its proximity to the US as a bordering country.

Narrator: Those involved with the project say all those new industrial plants Mexico wants to build could be used to make goods like the semiconductors used in everything from cars to smartphones and computers.

In general, Mexico is ambitious and trying to play a role in the semiconductor nearshoring. So bringing back all the semiconductor chips to be closer to the US and be manufactured and processed in Mexico.

Narrator: Now, all of this represents potentially billions of dollars in trade and toll revenue from Mexico.

This gives a lot of influence to the country. Soft power, basically.

Narrator: The Panama Canal Authority is expecting to bring in $5.6 billion in revenue this fiscal year. Even a slice of that is a lot of money. An Oxford business group report projects the corridor and the surrounding developments could boost Mexico's current GDP by 3 to 5% once it's operational. But not everyone in Mexico is set to benefit equally. Indigenous communities have said dozens of families along the railway are being forcibly relocated, and that the construction poses a threat to the environment.

People should care about this project because it really relates with how supply chains relate to our daily lives. When we place an online order or when we pay for a product that we buy in a shop, it is our money that finances the entire supply chain. Probably also partially finances these infrastructure projects.

Narrator: In late 2023, both freight and passenger service began on the first section of the railway, but there's still more work to be done to upgrade the entire railway and ports. As for whether it will take on Panama.

I don't really look at this project in terms of rivalry between Mexico and Panama. I really think about this project in terms of what we call co-opetition. I think it could be more beneficial for the global supply chain networks to actually use both capacities of these two routes to ensure that there is a seamless flow between the Pacific and the Atlantic Ocean.