‘Unprecedented challenges’: Drought at the Panama Canal disrupts global trade

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Spencer Feingold, Digital Editor, World Economic Forum

• The climate crisis is increasingly impacting global supply chains and trade routes.
• In recent weeks, cargo ships have been forced to wait days and weeks to cross the Panama Canal because of a drought.
• Authorities say the crisis is posing “unprecedented challenges” and has “no historical precedence.”

A severe drought in Panama is creating long queues and delays at the Panama Canal, causing shipping disruptions and further highlighting the impact the climate crisis is having on global trade.

The Panama Canal Authority (ACP) has limited the number of vessels passing through the canal for several dry months due to water scarcity. Restrictions were also imposed on ships’ depth while in the canal, curbing the amount of cargo they can hold.

In a statement, the ACP said the ongoing drought is posing “unprecedented challenges” and has “no historical precedence.”

The Panama Canal, an artificial waterway that connects the Atlantic and the Pacific Ocean, has been a major thoroughfare for international trade for over 100 years.

Today, the canal connects nearly 2,000 ports in 170 countries, according to the ACP. The top origin and destination countries are the United States, China and Japan. In 2022, over 14,000 transits were completed through the canal by ships carrying more than 291 million long tonnes of cargo.

In recent months, however, traffic through the canal has slowed due to a prolonged drought that has diminished the amount of available water used to fill the canal locks, which require 101,000 cubic meters of water to fill. The water is drawn from the nearby lakes.

As a result, wait times for ships arriving at the canal have increased from a matter of hours to several weeks, according to S&P Global. Several private shipping companies have reportedly implemented surcharges for clients moving goods through the canal.

The Panama Canal drought crisis highlights the increasingly disruptive impact that the climate crisis is having on global supply chains.

The impact of the drought on supply chains

“Climate change is reshaping countries’ economic and trade prospects, and is a major threat to future growth and prosperity,” the World Trade Organization’s (WTO) World Trade Report 2022 notes. “Higher temperatures, rising sea levels and more frequent extreme weather events bring the prospect of productivity losses, production shortages, damaged transport infrastructure, and supply disruptions.”

At the Panama Canal, authorities are preparing for the impacts of the climate crisis. The ACP has implemented water-saving measures since the beginning of the year and employed US Army Corps of Engineers specialists to develop long-term solutions.

Latin America has long had some of the world’s highest levels of water endowment per capita. As the climate crisis worsens, however, experts expect drought and water scarcity issues to intensify. Already, roughly a quarter of people in Latin America and the Caribbean live in water-scarce regions, according to the World Bank.

Efforts are underway around the world to make supply chains more resilient to the impacts of climate change.

For instance, the Global Alliance for Trade Facilitation—a coalition created by the Center for International Private Enterprise, the International Chamber of Commerce and the World Economic Forum—supports global efforts to implement the WTO’s Trade Facilitation Agreement (TFA).

While the TFA doesn’t explicitly address disaster relief, its clauses—particularly those pertaining to transparency, coordinated border management, risk-based strategies, pre-arrival processing and prioritized handling of perishable goods—hold the potential to substantially contribute to climate-related disaster relief when effectively put into practice, experts say.

“Trade facilitation, and the implementation of the TFA, serves as a vital channel for enhancing climate change resilience by streamlining processes, improving transparency and supporting the efficient movement of goods, contributing to better disaster response and recovery,” said Philippe Isler, the Alliance director.

In Madagascar, for instance, the Alliance supported local authorities in drafting new Standard Operating Procedures (SOP) for the clearance and regularisation of relief goods. Shortly after, the new SOPs helped expedite the delivery of vital assistance after Tropical Cyclone Batsirai hit Madagascar in February 2022, according to the Alliance.

Moreover, the Alliance warned in its Annual Report 2022 that “extreme weather events such as floods, droughts and epidemics afflict some of the world’s poorest countries with alarming regularity and climate change models suggest such incidences are only going to become more frequent.”

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