EP83 Chancay Port in Peru: The New Frontline in the US-China Global Trade Wars: How the Port Could Bypass the Panama Canal—and Challenge U.S. Trade

Summary:

In this episode, we examine the opening of the Chancay Port in Peru, a state-of-the-art shipping terminal built by China as part of its Belt and Road Initiative. The port is designed to enhance trade between South America and Asia, bypassing the Panama Canal and reducing shipping times. While this development promises economic growth and job opportunities for Peru, it also increases China's influence in the region and challenges U.S. trade dominance. We explore the potential economic, geopolitical, and strategic implications of this new port, analyzing its impact on trade routes, global competition, and regional dependencies.

 

Questions to consider as you read/listen:

1. What are the key economic and geopolitical implications of the Chancay Port's construction and operation?

2. How might the Chancay Port impact US trade interests and what are the potential economic and strategic consequences for the US?

3. What are the long-term implications of the Chancay Port for global trade dynamics and the balance of power between the US and China?

 

Long format:

 Chancay Port in Peru: The New Frontline in the US-China Global Trade Wars: How the Port Could Bypass the Panama Canal—and Challenge U.S. Trade

By Justin James McShane 

TL;DR:

Chancay Port in Peru, opened on November 15, 2024, is a state-of-the-art shipping terminal designed to enhance trade between South America and Asia. Built by China’s Cosco Shipping and Peru’s Volcan Mining Company, the port is part of China’s Belt and Road Initiative and can handle 1.5 million TEUs annually. It reduces shipping times to Asia by 10 days, boosting South American export competitiveness and positioning Peru as a major logistics hub.

While Chancay offers economic growth and job opportunities for Peru, it also increases China’s influence in Latin America and challenges U.S. trade dominance. The port’s success could reshape global trade routes, but it also raises concerns about Chinese influence, regional dependencies, and geopolitical shifts. The long-term implications will depend on how stakeholders address these challenges and opportunities.

Introductory:

The opening of Chancay Port in Peru on November 15, 2024, represents a pivotal development in the global shipping industry. Strategically positioned along the Pacific coast, just 60 kilometers north of Lima, this state-of-the-art facility has the potential to redefine trade routes between South America and Asia. As a joint venture between China’s Cosco Shipping and Peru’s Volcan Mining Company, Chancay Port symbolizes more than just infrastructure. It is a critical link in China’s Belt and Road Initiative and a bold statement about the future of global trade.

This paper explores the significance of Chancay Port in three key dimensions. First, we will examine its technical capabilities and design, which allow it to accommodate the world’s largest container ships and rival major global ports in efficiency and scale. Second, we will analyze its economic and geopolitical implications, particularly its role in fostering direct trade routes between South America and Asia, bypassing traditional hubs like the Panama Canal. Finally, we will consider its broader impact on U.S. trade interests, exploring potential shifts in competitive dynamics and strategic responses.

Chancay Port is not just a Peruvian project. Some argue it is a transformative force in the world economy. As trade patterns evolve and geopolitical alliances shift with reshoring and decoupling, understanding the role of this port is essential for assessing the future of international commerce and geopolitics. This paper provides a comprehensive analysis of Chancay Port’s role in shaping this new era of connectivity and competition.

Information:

Chancay Port is a major shipping terminal in Chancay, Peru, that opened on 15 November 2024. Located about 60 kilometers north of Lima, on the edge of Peru's coastal desert, we can find the port.   It is now 17.8 meters deep. It was built by the Chinese company Cosco Shipping in association with the Peruvian company Volcan. It is owned by China Cosco Shipping Ports and Peru Volcan Mining Company. It is operated by Chancay Port Terminals. It can accept up to 1.5 million twenty-foot equivalent unit intermodal containers and 6 million tons of cargo annually. It has an ability to accommodate very large container ships that can carry up to 18,000 TEUs.

It is part of the Belt and Road Initiative, the port is intended to reduce shipping times between China and Peru, and to become a hub for Chinese containerized exports in South America. The port is touted as South America's first green and smart port. 

In comparison Balboa port (Panama) handles around 3.8 million TEU annually, making it one of the busiest in the Americas due to its canal connectivity. Port of Manzanillo, Mexico manages around 2.4 million TEU annually. Port of Los Angeles/Long Beach, USA handles over 16 million TEU, making them the busiest ports in the Western Hemisphere. Yangshan Port, Shanghai, China moves about 49 million TEU per year, making it the world's busiest container port. 

Chancay Port in Peru and Its Importance to China:

Chancay Port benefits from its location in the Pacific Ocean, offering direct access to Asian markets without the need for transshipment points like the Panama Canal. This reduces shipping times significantly, which is critical for perishable goods and just-in-time manufacturing.

By reducing shipping times by about 10 days to Asia, Chancay is poised to become a major hub for exporting South American commodities, particularly to China. This efficiency leads to lower transportation costs, which could make South American products more competitive internationally.

Beyond the port itself, plans include developing an economic zone around Chancay. This zone would facilitate processing, manufacturing, and logistics activities, potentially turning the area into a significant industrial hub. Such development would not only enhance trade but also foster local economic growth by attracting investments.

The port's operations are expected to generate significant revenue and create thousands of jobs directly and indirectly. For Peru, this could mean a substantial increase in GDP contribution from trade and logistics.

By establishing a direct route, China reduces its dependency on potentially congested routes like the Panama Canal, thereby ensuring more stable supply chains.

The Chancay Port underscores China's increasing influence in Latin America, not just economically but potentially in terms of soft power, as infrastructure projects like this foster goodwill and economic ties.

Chancay is envisioned as part of a new maritime silk road that connects Latin America directly with Asia. This corridor not only serves immediate economic needs but also aligns with China's long-term vision of a global trade network where it holds significant sway.

The Maritime Silk Road (MSR) is a development strategy by China to connect the country to trading hubs around the world. It's a key part of China's Belt and Road Initiative (BRI), a larger plan to improve infrastructure and connectivity across Asia, Africa, and Europe. 

The success of Chancay could lead to more infrastructure projects in the region, creating an integrated network that enhances China's strategic presence.

In summary, Chancay Port represents more than just infrastructure; it's a symbol of China's deepening economic ties with Latin America, a strategic move to secure and diversify its supply chains, and an opportunity for Peru to significantly enhance its global trade position. However, its success will depend on managing economic, environmental, and social challenges effectively.

Impact on USA:

The Chancay Port in Peru, while primarily beneficial to China and Peru, could potentially impact the USA in several ways.

The port could divert trade routes traditionally involving the U.S. For instance, goods from South America destined for Asia might bypass U.S. ports, reducing the volume of cargo handled by American ports and consequently affecting port-related industries.

The efficiency and reduced shipping times provided by Chancay could make South American goods more competitive in Asian markets. This shift might hurt U.S. exporters who compete in the same markets, particularly in agriculture and certain commodities where South America has a strong presence.

By facilitating easier access to South American resources, China could strengthen its economic ties with the region, potentially at the expense of U.S. economic influence. This might affect the U.S.'s strategic economic partnerships in Latin America.

The U.S. has historically considered Latin America within its sphere of influence. China's investment in ports like Chancay introduces a new player with significant economic power, potentially shifting regional dynamics and diminishing U.S. dominance.

There's an underlying concern that infrastructure like Chancay could be used for geopolitical leverage. Although primarily commercial, the strategic location of such ports could potentially support military or intelligence operations in the future, although currently, there's no indication of such activities.

The U.S. might feel compelled to increase its infrastructure investments in Latin America or at home to maintain or regain economic leverage, which could divert resources from other domestic or international priorities.

U.S. companies might find themselves in a position where they need to compete more aggressively with Chinese investments in Latin America, possibly leading to a bidding war for influence or projects, which could inflate costs or alter U.S. foreign investment strategies.

The direct route from South America to Asia via Chancay might encourage companies to restructure their supply chains, potentially excluding U.S. ports from certain trade routes. This could lead to logistical challenges or increased costs for U.S. businesses relying on these imports or exports.

If Chancay or similar projects operate under less stringent environmental or labor regulations, this could pressure U.S. companies to lower their standards to remain competitive, potentially impacting the U.S.'s commitment to environmental or labor policies.

However, it's important to note:

The global economy benefits from efficient trade routes, and while Chancay might hurt certain U.S. interests, it also contributes to the broader efficiency of global trade, which indirectly can benefit the U.S. consumer through lower prices and increased product availability.

The impact is not necessarily a zero-sum game where China's gain is directly the U.S.'s loss, but it does introduce new variables into the complex equation of international trade and geopolitics, requiring strategic responses from the U.S. to maintain its competitive edge and influence.

The math and the realities

But let’s also remove some of the Henny Penny. Let’s look at realistic scenarios to discover the overall “damage” this port may bring to US maritime interests. 

Estimating the exact monetary impact of Chancay Port on U.S. trade involves numerous variables and assumptions, making it quite speculative. However, we can outline potential areas where U.S. trade might incur costs or losses:

If we assume a small percentage of South American cargo that would transit through U.S. ports now uses Chancay for direct shipping to Asia, the financial impact could be substantial. For example, if U.S. Pacific ports handle about 20 million TEU annually, and let's conservatively estimate that 1% of this volume might shift due to Chancay Port. 1% of 20 million TEU  = 200,000 TEU. Assuming an average revenue per TEU of about $200 (for handling, storage, and other services), this would mean: 200,000 TEU * $200 = $40 million in potential lost revenue per year.

The U.S. exported about $143 billion in agricultural products in 2022. If South American products become more competitive in Asia due to reduced shipping costs, a 1% loss in market share could translate to: $1.43 billion in lost export value. This number could be higher if the competition affects more sensitive markets or if the percentage loss is greater.

U.S. companies might need to lower prices or pay for faster shipping options to remain competitive, which could increase their costs. If we estimate this at an additional 0.5% of the value of goods shipped to Asia and for simplicity, let's say U.S. exports to Asia are worth around $300 billion (this figure varies year by year), then 0.5% of $300 billion = $1.5 billion in additional costs.

The U.S. might respond with investments in infrastructure or subsidies to support its ports or exporters. If the U.S. decides to invest an extra $1 billion annually in port enhancements or trade incentives as a reaction to Chancay, this would be an additional cost.

Long-term economic influence is harder to quantify but could involve billions over time in terms of lost opportunities for U.S. companies in South America if China's influence grows substantially.

Total Hypothetical Cost: 

- Port Revenue Loss: $40 million per year

- Market Share Loss: $1.43 billion per year

- Additional Export Costs: $1.5 billion per year

- Strategic Investment: $1 billion per year

Adding these up, we might look at an annual cost or loss to U.S. trade in the range of approximately $3.97 billion. However:

This is an extremely rough estimate with many assumptions. The actual percentage of cargo diversion might be different. Market share might not decrease linearly. Costs could be offset by efficiencies or new trade agreements. The strategic investment could vary widely.

Moreover, while this represents potential costs or losses, the actual impact could be mitigated by U.S. trade policies, new trade deals, or innovations in logistics and trade that adapt to the new dynamics created by Chancay Port. Additionally, the U.S. might find new ways to leverage this situation for its benefit or adapt its trade strategy to focus on different markets or goods.

In terms of the grand scheme of U.S. shipping, the potential loss of income due to the operations of Chancay Port, while significant for specific sectors or ports, might not be considered a massive deal in the context of the entire U.S. economy or even just the shipping industry at large. 

Conclusion:

The opening of Chancay Port marks a potential critical turning point in the global maritime industry, potentially creating new opportunities while challenging existing trade dynamics. By establishing a direct link between South America and Asia, this cutting-edge facility reduces shipping times, lowers transportation costs, and enhances the competitiveness of South American exports in global markets. For Peru, the port signifies a leap forward in economic development, job creation, and trade facilitation, potentially transforming the region into a major industrial and logistics hub.

However, the implications of Chancay Port extend far beyond its immediate economic benefits. It is a cornerstone of China’s Belt and Road Initiative, exemplifying the country’s growing influence in Latin America and its strategic efforts to secure global trade routes. This development has introduced a new layer of complexity to U.S. economic and geopolitical interests, challenging American dominance in the region and reshaping traditional trade routes.

While Chancay Port presents significant opportunities for efficiency and connectivity, it also raises critical questions about Chinese influence, regional equity, and long-term economic dependencies. As global trade continues to evolve, the port serves as a reminder that infrastructure investments are not merely commercial endeavors—they are instruments of power, influence, and transformation.

Ultimately, the success of Chancay Port will depend on the ability of stakeholders to navigate these opportunities and challenges responsibly. Whether it becomes a beacon of prosperity or a flashpoint for geopolitical tension will shape not only the future of trade in the Americas but also the broader dynamics of global commerce in the decades to come.

Sources:

https://moderndiplomacy.eu/2024/11/16/the-opening-up-of-the-chancay-port-in-peru-and-its-role-in-the-chinese-maritime-silk-road/

https://www.aiddata.org/blog/chancay-port-opens-as-chinas-gateway-to-south-america

https://www.washingtonpost.com/world/2024/11/14/china-peru-port-latin-america/

https://apnews.com/article/china-peru-port-poverty-latin-america-1e06904f76cca1d7aaf19bca8bd24d93

https://www.nbcnews.com/news/amp/rcna180289

https://www.reuters.com/world/americas/perus-chinese-built-mega-port-begin-moving-two-container-ships-week-november-2024-10-18/

https://www.barrons.com/amp/news/peru-s-chancay-china-s-megaport-of-entry-to-south-america-5671f310

https://maritime-executive.com/editorials/port-of-chancay-creates-new-competition-in-latin-america