Mexico and Brazil Amid the Panama Canal Crisis: The Answer to a New Era in Global Trade?

Mexico and Brazil, the primary industrial infrastructure centers in Latin America, hold the potential to offer logistical routes that complement but do not replace the Panama Canal in the wake of its ongoing crisis, sparking optimism for the future of Latin American trade.

However, to become viable alternatives, these nations must urgently strengthen their transportation networks and transition from economies focused on commodity exports to ones emphasizing added value, enhancing their competitiveness in global trade.

According to José Ignacio Martínez, an expert in international economics, the Panama Canal faces a structural crisis due to underinvestment and climate change. Photo: SiiLA.

By: SiiLA News

11/08/2024

Strangled by a historic drought, years of underinvestment, and shifts in global supply chains, the Panama Canal is now facing an unprecedented crisis. Cargo ships wait days or even weeks to secure a transit slot, only to encounter wait times that have doubled the typical 10-hour crossing, all while transportation costs rise due to delays and fees.

In this uncertain environment for a vital artery of global trade, Latin America sees an opportunity to reconfigure its logistics infrastructure. Mexico and Brazil are leading the race to develop alternative routes that could transform the region’s industrial landscape.

“The Panama Canal crisis stems from a combination of factors that have eroded its responsiveness,” says José Ignacio Martínez Cortés, coordinator at the UNAM’s Laboratory of Analysis in Trade, Economics, and Business (LACEN). “Every decade, the canal needs strategic investments to adapt to increasing ship sizes and traffic growth,” he adds, “but the lack of funds and climate change have compromised its operability.”

In the past year, droughts have sharply reduced freshwater reserves that power the Panama Canal locks, forcing authorities to limit the number of ships crossing daily. This operational limitation comes just as recent conflicts in Ukraine, the Suez Canal, and the Red Sea have diverted even more cargo toward an already congested route. With these pressures accumulating, the canal has become a bottleneck for trade between the Americas, Asia, and other key markets, slowing the flow of goods and increasing logistics costs.

Facing this crisis, Latin America is exploring complementary solutions to ease the burden on the Panama Canal, though none can fully replace it.

Mexico, for example, has accelerated the development of the Interoceanic Corridor of the Isthmus of Tehuantepec, a land route between the Pacific and Atlantic oceans. This corridor would allow offloading containers in Salina Cruz, Oaxaca, transporting them by train to Coatzacoalcos, Veracruz, and shipping them to the United States or other international destinations. While viable for North American trade, this option is less competitive for routes between Europe and Asia, where direct transit through Panama remains more cost-effective and efficient. “Regarding transit time, the Isthmus can compete with the canal, but additional transshipment costs limit its competitiveness. However, with the right investment, the Isthmus could help relieve part of Panama’s current burden,” Martínez Cortés explains.

Brazil, meanwhile, is promoting the Central Bi-Oceanic Railway Corridor, connecting its Atlantic ports with Pacific coasts in Chile and Peru, passing through Bolivia. This route opens opportunities for regional trade, particularly in sectors like automotive and pharmaceuticals that depend on fast ground and air transport. However, direct transit through the Panama Canal remains the most cost-effective option for trade with North America.

“Thus, while the Isthmus of Tehuantepec and the Bi-Oceanic Corridor may reduce pressure on Panama, neither replaces the canal’s value for intercontinental trade. The canal’s unique operation allows ships to cross directly from the Atlantic to the Pacific, whereas alternative routes require unloading containers at a port, transporting them by train or road, and reloading at another port on the opposite coast,” concludes the international economics expert.

Industrial Crisis and Opportunity

The industrial infrastructure of Mexico and Brazil is essential for global trade.

The Panama Canal crisis highlights the vulnerability of traditional trade routes and the urgent need for solid infrastructure in Latin America. The canal, which handles 6% of global maritime trade, connects vital routes linking the United States with Asia, South and Central America; Europe with South America; and Asia with Central America, facilitating the movement of goods between hemispheres.

Given their trade patterns, Mexico and Brazil are well-positioned to offer strategic transport and logistics alternatives to complement Panama Canal routes, according to World Bank data and government sources. Most of Mexico’s exports (84%) go to the United States, while 39% of its imports come from the U.S. and 35% from Asia, reinforcing its role as a vital link in trade between the Americas and Asia. Brazil, meanwhile, directs 48% of its exports to Asia, 18% to Europe, and 30% to the Americas (17% south and 13% north), while its imports mainly come from Asia (41%), North America (23%), and Europe (21%). These trade patterns establish Brazil as a natural connection point between continents, enhancing its role in global merchandise flows.

Additionally, Mexico and Brazil have solidified their positions as Latin America’s most developed centers of industrial infrastructure. Over the past decade, both countries have seen significant growth in their industrial real estate markets, driven by demand for logistics centers and state-of-the-art warehouses. According to SiiLA data, as of Q3 2024, Mexico has over 96 million square meters of Class A and B industrial space, largely dedicated to manufacturing (55%), consumer goods (16%), and transport and logistics (9%). In Brazil, the inventory surpasses 26.8 million square meters of Class A+, A, and B space, mainly serving consumer goods (34%), transport and logistics (30%), and manufacturing (15%).

Their role as hubs for alternative logistics routes, while not substitutes for the Panama Canal, will be increasingly crucial if the crisis persists. Countries most affected include South America’s commodity-exporting economies—like Chile, Brazil, and Argentina, which face lower logistics costs thanks to direct ocean access—and Asia’s manufacturing economies that rely on the canal to reach the U.S. East Coast, making them particularly vulnerable to delays and added costs.

However, José Ignacio Martínez Cortés warns that this situation will not incentivize mass nearshoring to Mexico or other Latin American regions, as companies are looking to diversify their supply chains rather than completely relocate them.

“For example, many Asian companies are only moving some production lines without closing their operations in Asia,” he explains. This cautious approach indicates that Mexico and Brazil are well-positioned as strategic alternatives without entirely replacing these companies’ local operations in the short and medium term.

Furthermore, the economist notes that strengthening their infrastructure and improving their tax incentives are essential for Mexico and Brazil to capitalize fully on this opportunity.

“Transportation and logistics companies are evaluating alternative routes to mitigate the impact on their supply chains. One viable option is international cargo transit through Latin American ports, which allows maritime, land, and air transport to bypass the canal’s congestion. However, although the geographical conditions and tax benefits of countries like Mexico and Brazil offer clear advantages for international trade, a robust investment in logistics infrastructure is crucial to solidifying them as viable long-term logistical alternatives.”

According to Martínez Cortés, Latin America faces a structural challenge: evolving from a commodity-focused economy to one that promotes added value, as already in Asia. In this context, Mexico and Brazil could capitalize on these advantages and further establish themselves as key nodes in global logistics routes, mitigating the effects of a crisis that may endure for a long time.

Would you like to stay up-to-date with the most relevant information on the industrial real estate market in Latin America? Explore SiiLA REsource or write to us at contacto@siila.com.mx.

Latam

Mexico

National

Industrial

Market Analytics

Spotlight

ABOUT SiiLA

Founded in 2015, SiiLA is the industry leading REsource for comprehensive commercial real estate market insights, news and events across Latin America. The SiiLA suite of innovative products drive greater accuracy, efficiency, and strategic advantages for top players in the commercial real estate industry.