Panama Canal Deadlock Could Cost U.S. Billions

News that negotiations have broken down over a payments dispute in the massive $5.2 billion project to expand the Panama Canal is devastating news for U.S. exporters and only adds to the "disarray" narrative on U.S. trade policy.

The cash-strapped Spanish-led consortium that is building a new lane says it is stopping work due to the Panamanian refusal to pay an additional $1.6 billion in cost overruns. The Panamanians say it is a breach of contract. The consortium is threatening "years" of arbitration; the Panamanians say they will not yield to blackmail.

The only thing certain is that further delays in the project’s completion, which has already been pushed back from this year — the 100th anniversary of the canal’s completion — to as late as 2015 and beyond will continue to cost the U.S. economy billions of dollars, at a time when seaborne trade is essential to the United States’ economic resurgence.

What is also unconscionable is that today’s debacle was foretold in 2009, when Panama awarded a $3.12 billion contract to the consortium led by a nearly bankrupt Spanish company, stunning observers. According to a representative of the U.S. conglomerate Bechtel, one of the rejected bidders, the winning bid wasn’t even enough to pour the concrete for the massive project.

A year later, Panama’s vice president confirmed the worst. According to a WikiLeaked State Department cable, he told U.S. officials, "The canal expansion project is a disaster," and "You don’t mess around with something as important as the canal. When one of the bidders makes a bid that is a billion dollars below the next competitor, then something is seriously wrong."

Indeed, the stakes are huge. The new lane under construction will accommodate so-called post-Panamax ships, vessels too large to traverse the original canal. These behemoths are able to carry almost three times the cargo that ships can currently carry through the canal, dramatically improving commerce with Asia and other locales. Every industry associated with overseas trade up and down the line has been furiously preparing for the new opportunities resulting from the expanded canal.

Shipbuilders have been taking large orders for post-Panamax ships; U.S. ports along the Gulf Coast and Eastern Seaboard have been investing hundreds of millions of dollars to upgrade their facilities; and energy companies have been investing millions more in natural gas exploration and terminals in preparation to export liquid natural gas to Asia. In New York and New Jersey, for example, authorities are spending $1.3 billion to raise the Bayonne Bridge by nearly 60 feet to allow enough clearance for the big ships. In short, big, big money is in play.

It is for this reason that U.S. Vice President Joe Biden made it a point last November to tour the canal project, where he told Panamanian President Ricardo Martinelli, "Modernizing the canal, Mr. President, is an investment in your future, but it is also a consequential investment in the future of the United States of America."

Panama’s stewardship of the canal since the United States turned over control in 2000 has been nothing short of exemplary, but the decision to shun Bechtel and another strong European consortium that put in higher bids has backfired badly. And there are many questions. For example, did the fact that the winning consortium included a Panamanian company with family ties to a former canal administrator play a role in accepting the lowball bid? Secondly, what role did politics play in the selection process? Was the fact that Bechtel is a U.S. company adversely affect its chances, given the long and, to many Panamanians, controversial association of the canal with the United States?

Given the history and stakes involved in the project — in terms of the costs to global trade and the U.S. economy — these are not impertinent questions. Barack Obama’s administration ought to press for answers. Because each day the canal expansion is delayed means added losses for the United States, including the loss of export markets to increase production, investment, and jobs, and losses for U.S. ports and others needing to recoup infrastructure upgrade costs. The Obama administration certainly is not looking for another headache abroad, but, regardless, another one is here.