The recent inflations in most countries starting from 2021 were largely related to the disruptions in the global supply chain led by the outbreak of the COVID-19 pandemic in 2020. The Ukraine-Russia war that began in early 2022 with the conflicts in the Middle East triggered by the Israel-Hamas war after October 2023 which have led to the tension in the Red Sea and the Suez Canal have worsened the supply chain crisis. The attention from the public and proposed solutions have predominantly centered on addressing supply chain issues stemming from human factors. However, there has been a notable oversight regarding the uncertainty in transportation largely attributed to global climate change, eventually leading significant impact on global trade. According to data from the European Centre for Medium-Range Weather Forecasts (ECMWF), the global average temperature reached 14.98 degrees Celsius in 2023, marking an increase of 0.17 degrees from 2016 and setting a new historical record.

The combination of rising ocean temperatures and severely dry conditions has caused impacts on the operations of a vital waterway connecting the two oceans. The Panama Canal, the most vital transportation artery in the Western Hemisphere, concurrently has been grappling with its most severe drought in history. Given that maritime transportation is a cornerstone of international trade, the adverse effects on the Panama Canal have reverberated throughout the global economy. This crisis prompts reflection on a long-overlooked inconvenient truth: the potential linkage between the long-term deforestation of the Amazon rainforest and the unprecedented dry spell experienced in the region in 2023. This raises pertinent questions about the role of human activities in triggering climate change within the Amazon basin. The Panama Canal, a remarkable engineering infrastructure of the early 20th century, now is facing a complicity in this ecological catastrophe.

The ramifications of the canal-related issues underscore the relationship between environmental factors and global trade dynamics and the need for remedial strategies. As maritime transport has served as the backbone of global trade, the Panama Canal is positioned at a pivotal juncture. Over the years 2022 and 2023, the canal has facilitated an annual cargo throughput of 290 million long tons, highlighting its unparalleled significance. Shipping routes by cargo tonnage reveal a predominant flow from Asia to the East Coast of the United States, constituting over 50% in 2022 and slightly decreasing to 45% in 2023. Among countries, the U.S., Chinese, Japanese, Chilean, and Korean vessels rank as the largest five users of the canal, with a significant portion of the transit volume originating from or destined for the U.S. market.

The data show the declining water levels and the impact on transportation, forcing the Panama Canal Authority (ACP) to initiate measures in 2023, including the increases of tolls and restrictions on vessel size and number. Daily traffic has been reduced from 36 to 30 ships, and load limits are now determined by draft size. These adjustments primarily impact the transportation of energy products, containers, and grain shipments from the United States, resulting in escalated transportation costs, particularly for U.S. energy exports. These challenges are closely tied to the extraordinary El Niño season, characterized by trade winds blowing from the subtropical high-pressure zone towards the equator. Since 2023, this phenomenon has ushered in dry conditions in the Pacific region, with projections indicating its persistence until mid-2024.

The operation of the Panama Canal relies heavily on water, primarily from rainfall. The canal is composed of interconnected freshwater lakes and artificial channels, allowing vessels to pass through a series of locks at different water levels. Among these water sources, Lake Gatun, situated on the northwest side near the Atlantic Ocean, holds paramount importance. Monitoring changes in its water level offers valuable insights into the severity of droughts. Figure 1 illustrates the seasonal variations in Lake Gatun's water levels from January 2017 onwards. Historically, water levels rise steadily from July, reaching their peak in December or early the following year. However, during the dry season of 2023, the water level experienced a significant drop and failed to recover to normal levels after October, marking multi-month records for the lowest levels in seven years. Between June and November 2023, the water level in Lake Gatun declined to around 80 feet, much lower than the historical average of approximately 88 feet by the end of the November rainy season. As of March 2024, the average water level remained about 4 - 5 feet below the previous seven-year average. According to predictions (indicated by the red dashed line from April to early June 2024), it is anticipated to close to or fall below the historical low of 2023 in April 2024. This ongoing trend demonstrates the severity of the impact of prolonged droughts on the operational capacity of the Panama Canal.

Figure 1.  Comparison of Water Levels of Gatun Lake (Feet)

Data Source: Panama Canal Authority

The decline in Panama Canal throughput corresponds directly to low water levels. The freight volume data may grant more insight into the business world regarding the impact of low water levels on global shipping. As the dry season looms, the Panama Canal Authority (PCA) anticipates these water levels to persist at least until mid-April 2024 (as of the latest forecast in February 2024). The water level is projected to be below 80 feet, with a maximum draft of 44 feet. Consequently, the PCA needs to impose stricter restrictions on the number of transiting vessels and their maximum load drafts. Container ships, typically requiring a draft depth of 50 feet, have been limited to 44 feet since last summer to ensure operational smoothness at lower water levels and reduce the usage of water from Gatun Lake. Table 1 shows, compared to the fiscal year 2022 (October 2021 to September 2022), both the number of transiting vessels and the overall tonnage of goods transported through the canal have declined in each month. Specifically, in 2023, the volume of goods passing through the Panama Canal experienced a decline of 10% compared to 2022 for each month. The impact of low water levels on maritime trade through the Panama Canal is signficant.

Table 1, Panama Canal Monthly Transportation Data

A.    Number of Transits

B.   PC/UMS Net Tonnage

C.   Long Ton

Data Source: Panama Canal Authority  

Note: The PC/UMS Net Ton, the Panama Canal Universal Measurement System Net Tonnage, is a specialized measurement unit designated for Panama Canal operations. It is derived from a mathematical formula designed to evaluate a vessel's total volume. Each PC/UMS net ton corresponds to 100 cubic feet (2.83 cubic meters) of capacity. Long tons are employed for quantifying bulk commodities. Each long ton is equivalent to 2,240 pounds or 1,016.047 kilograms.

As the extensive destruction of the Amazon rainforest has posed to broader threat to human civilization, the severe drought in Central America, stemming from ecological destruction, leads to the current global transportation crisis. Tropical forests, such as the "Earth's air conditioning system," the Amazon, play a vital role in regulating both regional and global climates. Since the Amazon rainforest is the largest on the planet, it has nurtured its intricate rainfall cycle and serves as a crucial carbon sink. By absorbing carbon from the atmosphere and storing it underground, the Amazon Forest mitigates the accumulation of carbon dioxide, thereby curbing global warming. The soil power of rainforests is low, leading to poor agricultural value unless extensive chemical fertilizers. Moreover, deforestation disrupts the delicate balance of the rainforest ecosystem, hindering its ability to sustain itself. The repercussions of Amazon deforestation are manifold. Not only does it damage the forest's ability to generate rainfall, leading to diminished forest cover and long droughts, but it also exacerbates carbon emissions, further causing climate change. The far-reaching consequences extend beyond the immediate vicinity of the rainforest. Thus, regions thousands of miles away may experience altered rainfall patterns, resulting in potentially catastrophic impacts on ecosystems and human societies across the American continent and beyond.

A recent study sheds light on the dire situation facing the Amazon rainforest. In the paper "Critical Transitions in the Amazon Forest System" published in highly regarded Nature (626; Published in February 2024), Professor Bernardo M. Flores and his coauthors highlight that due to the combined impacts of climate change, deforestation, and severe droughts that surpass the natural resilience, as much as half of the Amazon rainforest could transform into grasslands or weakened ecosystems within the coming decades. Given the critical role as a habitat for one-tenth of the terrestrial species in the world, such a transformation would lead to severe water shortages and potentially trigger the collapse of the entire forest ecosystem. Unfortunately, the southeastern region of the Amazon basin is facing irreparable damage from widespread deforestation and wildfires, resulting in certain areas emitting more carbon dioxide than they absorb. The potential collapse of the Amazon rainforest ecosystem carries profound global implications, with the replacement of carbon-storing trees by non-forest vegetation threatening to release a substantial amount of carbon dioxide and other harmful substances. This could disrupt global rainfall patterns and temperatures, precipitating a new ecological catastrophe.

Some proposed solutions can pose other environmental and socio-economic challenges. For instance, one of the measures is pumping seawater into the Panama Canal or diverting rivers to replenish it. However, Lake Gatun is a vital freshwater source for Central American countries. Mexico's completion of the railway project in late 2023, the Interoceanic Corridor of the Isthmus of Tehuantepec, offers a new connection between the Pacific and Atlantic oceans, with future benefits worth observing. Nicaragua, a neighbor to Panama, is currently partnering with Chinese investors to develop a new canal. Its economic benefits are questionable due to the projected length of the canal, 278 kilometers long, which is 3.5 times that of the Panama Canal.

The passing of Lake Nicaragua, Central America's largest lake, can cause a significant ecological impact. The complicated and fragile ecosystem in this region serves as the major obstacle to completing the Pan-American Highway, which spans from north to south. The complexity of this ecosystem makes both infrastructure development and maintenance inherently difficult. Thus, achieving a delicate balance between economic progress and environmental preservation is essential. Identifying the optimal solution, whether it involves enhancing the ecological environment or maintaining the current operational mode of the Panama Canal, is critical. In addition, the completion of the Mexican railway project in late 2023, the Interoceanic Corridor of the Isthmus of Tehuantepec that connects the ports of Salina Cruz and Coatzacoalcos, offers a new alternative transporting route between the Pacific and Atlantic.

The future operation of the Panama Canal can become increasingly uncertain due to the heightened frequency, intensity, and prolonged durations of El Niño and La Niña, exacerbated by global climate change and deforestation. These factors have escalated the risks and costs associated with transportation and global trade dynamics. In 2023, the Amazon region experienced its most severe drought on record, attributed to a combination of climate change, extensive deforestation, and the La Niña phenomenon in the Pacific Ocean. This has led to a decline in agricultural production and an economic downturn in Central and South America, fueling social unrest, crimes, and a surge in undocumented migration to the United States. The detrimental cycle has threatened regional peace and stability.

Decisive actions to alleviate climate change seem the only long-term solution to these challenges, particularly the rampant deforestation occurring in the Amazon rainforest. Only through concerted efforts to mitigate environmental damages and combat climate change can we hope to secure the sustainable viability of the Panama Canal and foster stability in the regions.

Paul Chiou: Professor of Finance at Northeastern University in Boston, MA, U.S.