Melting Ice Caps: Implications for Asia-North America Linkages and the Panama Canal Joseph Francois, Amanda Leister and Hugo Rojas-Romagosa 2015 MASS, St. John s Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 1 / 31
Motivation Arctic ice caps have been melting as a result of global warming (Kay et al., 2011; Day et al., 2012) and this phenomenon has been well documented (Rodrigues, 2008; Kinnard et al., 2011) Recent satellite observations, furthermore, suggest that the climate model simulations may be underestimating the melting rate (Kattsov et al., 2010; Rampal et al., 2011). In the future the extension of the Arctic ice caps will be reduced and the shipping routes could become ice-free during most or the whole year. As a consequence the Arctic trade routes (NSR and NWR) may be used for high volume commercial traffic Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 2 / 31
Melting projections (The Arctic Institute) Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 3 / 31
Research scope Melting icecaps will have vast environmental and economic impacts Our analysis is limited to the potential economic impact of the Arctic shipping routes, but other economic impacts will emerge: rising sea levels and other expected and unforeseen climate impacts, besides natural resource commercialisation in the Arctic regions We use a what-if approach, which provide an upper-level economic potential of the Arctic routes. Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 4 / 31
Arctic Routes Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 5 / 31
Northern Sea Route (NSR) Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 6 / 31
Outline of our research We build on previous paper analyzing the NSR (Bekkers, Francois and Rojas-Romagosa, 2015) and include the impact of the NWR: links East Asia and North America s East coast Shipping reductions: NSR (around 25%) and NWR (around 10%) USA has major ports in both coasts so we split the country into 5 major regions with different shipping distances We also include results for Canada Estimate shipping distance reductions and trade cost reductions from Arctic routes (using gravity trade model) Use CGE model to analyze the economy-wide effects of both the NSR and NWR Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 7 / 31
North Western Route (NWR) Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 8 / 31
Commercial feasibility of the Arctic routes Already possible to use the Northern Sea Route (NSR) during 4 to 5 months around summer time, but the NWR less used at the moment There are two elements that condition the Arctic routes becoming a fully viable commercial substitute of the SSR and the Panama Canal: 1 The actual ice levels in the Arctic in the future, which is the main barrier to the commercial use of the NSR and the NWR 2 Transport logistic issues associated with the opening of a new commercial shipping route in a region with extreme weather conditions Both he uncertainties are translated into a wide range of estimates: from 10 to 50 years for the NSR to be fully operational all-year round (Verny and Grigentin, 2009; Liu and Kronbak, 2010; Khon et al., 2010; Stephenson et al., 2013). Less studies for NWR, but Stephenson et al. (2013) provide evidence of more difficulties for the NWR wrt NSR. Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama Canal 9 / 31
Melting projections (The Arctic Institute) Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 10 Canal / 31
Assumptions: We use a what-if approach and assume that the Arctic routes will be fully operational all year round by 2030 (but also we use other years) Further, both Arctic routes will be perfect substitutes for the SSR and Panama Canal: All trade that has a shorter distance through the Arctic will use it Different approaches could be used: gradual shifting in the use of routes, using other year than 2030, etc. Here we focus on one-time full-shock approach To sum up: this is the upper limit scenario! Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 11 Canal / 31
Our economic analysis follows a three-step process: 1st Step Estimation of shipping distance reductions using the Arctic routes compared to the current shipping routes 2nd Step Gravity equations to estimate reductions in transport and trade costs 3rd step CGE model linking both these cost reductions to shifts in trade patterns, macroeconomic indicators and emissions Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 12 Canal / 31
Distance reduction estimations: We need to take shipping distances between trading partners into account and thus we cannot use the common distance measures (e.g. CEPII s calculations of distance following the great-circle formula) Our modified distance is calculated as waterway routes (or a combination of land routes for landlocked countries) As water routes we define the shortest water distances between two major ports. For each country we choose between one and three major ports, depending on country size and port importance. With the exception of the USA, Canada and Russia Using these modified distance measures, we then estimate the reduction in distance associated with the Arctic routes Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 13 Canal / 31
Total distance reductions for the USA and Canada Panama Canal is important for North American East Coast to East Asia trade: around 31% to/from Newark, 33% to/from Lousiana and 36% to/from Long Beach, CA. Confirmed by Panama Canal traffic data: around 35% for the route East Coast USA and East Asia. Second route is 9% We take Canadian GDP shares to obtain similar figures (East is around 65% and West 35%) Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 14 Canal / 31
Weighted distance reductions for the USA and Canada First approach is to use a weighted shipping distance measure using trade values, as a border (point of entry) distance Later we also divide the US into 5 main regions/ports: Newark (NJ), Charleston (SC), New Orleans (LA), Long Beach (CA) and Seattle (WA). For this we needed to split the US data in GTAP (with BEA state-level sectoral value added data, combined with intra- and international trade data from USITC using the SplitReg program) Similar exercise can be done for Canada, but US results are indicative Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 15 Canal / 31
Transport cost reductions for Canada Table: Canadian distance estimates to main East Asia countries From: Distances to the Canada China Korea Japan Shipping distance to Vancouver 9,491 8,604 8,217 Shipping distance to Halifax using Panama Canal 20,322 19,435 18,923 using Arctic NWR 15,779 14,866 14,064 Distance reductions using NWR 22.4% 23.5% 25.7% Weighted distance 16,551 15,664 15,195 using NWR 13,590 12,686 12,028 Final distance reduction NWR 17.9% 19.0% 20.8% Note: distance reduction with Taiwan 15% and Philippines 13%, also significant Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 16 Canal / 31
Transport cost reductions for USA Table: USA distance estimates to main East Asia countries From: Distances to the USA China Korea Japan Great-circle formula (km) 10,993.7 11,065.7 10,855.6 Shipping distance to California 10,667.6 9,780.2 9,309.6 Using Panama Canal: to Newark (NJ) 19,743.1 18,855.8 18,343.8 to Lousiana 18,779.1 17,891.8 17,379.8 Using Arctic NWR to Newark (NJ) 16,102.8 15,190.2 14,387.5 to Lousiana 17,818.0 16,905.4 16,102.7 Distance reductions using NWR to Newark (NJ) 22.6% 24.1% 27.5% to Lousiana 5.4% 5.8% 7.9% Weighted shipping distance 16,157.8 15,270.4 14,773.3 using NWR 14,712.1 13,808.6 13,125.5 Distance reductions using NWR 8.9% 9.6% 11.2% Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 17 Canal / 31
Transport cost reduction estimates for NSR Table: Different distance values for selected countries From: To: Great-circle formula (km) SSR (km) NSR (km) NSR against SSR (% change) China Netherlands 7,831 19,942 15,436-23% China Belgium 7,971 19,914 15,477-22% China Germany 7,363 20,478 15,942-22% China United Kingdom 8,151 19,723 15,217-23% Japan Netherlands 9,303 20,922 13,718-34% Japan Belgium 9,464 20,894 13,759-34% Japan Germany 8,928 21,458 14,224-34% Japan United Kingdom 9,574 20,703 13,499-35% South Korea Netherlands 8,573 20,405 14,751-28% South Korea Belgium 8,722 20,378 14,792-27% South Korea Germany 8,140 20,941 15,257-27% South Korea United Kingdom 8,875 20,186 14,532-28% Taiwan Netherlands 9,457 18,750 16,150-14% Taiwan Belgium 9,587 18,722 16,190-14% Taiwan Germany 8,959 19,286 16,655-14% Taiwan United Kingdom 9,790 18,531 15,930-14% Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 18 Canal / 31
Distance reduction translated into two different cost reductions: Shipping distance reductions using the Arctic routes are country-specific. The effective distance is reduced by around 35% from Japan to North European countries with NSR and around 10% to the USA and 20% to Canada using the NWR. Average days of transportation are reduced accordingly These reductions translate into lower transportation costs (e.g. less fuel) but also into lower trading costs due to more connectivity (in terms of both time and costs) for East Asia Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 19 Canal / 31
2nd Step: Gravity equations We then use a standard econometric gravity model of trade to map these shipping distance reductions into bilateral trade cost equivalences between sectors and partners. 1 Poisson pseudo-maximum likelihood (PPML) estimator, following Santos Silva and Tenreyro (2006, 2011) 2 The basic estimating equation takes the following form: v jsd = e D js +D jd + i β ji X isd +η jsd (1) 3 Usual set of variables: trade, importer/exporter fixed effects, and pair-wise variables: distance, and socio-economic variables (e.g. language, ex-colony) Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 20 Canal / 31
2nd Step: Gravity equations: cost separation We then separate total costs into two different sets of cost reduction estimates: 1 Transport cost reductions due o fuel savings and overall transport costs (these are country-pair specific): directly related to overall shipping distance reductions 2 Trade cost reductions related to transport time savings and other cost reductions that can effectively create new supply chains in certain industries (these are country-pair-sector specific). This second set of trade costs reductions are implemented as reductions in the GTAP database iceberg trade costs (country and sector specific) Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 21 Canal / 31
Trade cost reduction estimates Table: Trade cost reductions (average, maximum and minimum) between 20 non-services sectors for selected countries. Using US average distance trade cost reductions trade cost reductions From: To: average max min From: To: average max min USA CHN 1.03 3.15 0.08 CHN USA 1.03 3.15 0.08 USA JPN 1.30 3.97 0.11 JPN USA 1.30 3.96 0.11 USA KOR 1.11 3.39 0.09 KOR USA 1.10 3.38 0.09 USA TWN 0.77 2.36 0.06 TWN USA 0.77 2.36 0.06 From DEU CHN 2.71 8.20 0.22 CHN DEU 2.54 7.70 0.21 DEU JPN 4.39 13.11 0.37 JPN DEU 4.37 13.05 0.37 DEU KOR 3.41 10.26 0.28 KOR DEU 3.23 9.74 0.27 DEU TWN 1.60 4.89 0.13 TWN DEU 1.44 4.40 0.12 Notes: Average is the mean trade cost reductions between all 20 sectors Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 22 Canal / 31
3rd step: CGE model We integrate our trade cost reduction estimates into a standard global CGE model, which: Is a modification of the standard GTAP model, with imperfect competition and two different labour market closures We use the GTAP-9 database with base year 2011. Model focuses on a 2030 benchmark global economy projection (i.e. productivity growth rates and population growth) We simulate that both the NSR and NWR are commercially feasible Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 23 Canal / 31
The direct consequence of opening-up the Arctic routes is that international shipping (volume by distance) is reduced by around 0.25%, and global trade volumes increase by 0.6%. However, bilateral trade flows vary much for some specific bilateral flows, so much trade diversion going on: mainly within and between EU and USA/Canada Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 24 Canal / 31
Trade changes in Northeast Asia Table: Northeast Asia, changes in trade values for goods and services for with EU and USA, percentage changes China Japan South Korea exports imports exports imports exports imports Total trade: only NSR EU 7.35% 10.37% 11.38% 13.21% 8.78% 10.05% USA -0.44% 0.55% -0.32% -0.18% -0.13% 0.17% Canada -0.43% 0.48% -0.24% -0.03% -0.16% 0.21% Total trade: both Arctic routes (NSR and NWR) EU 7.11% 10.69% 11.18% 13.15% 8.83% 10.06% USA 3.19% 7.23% 2.72% 3.64% 2.62% 4.13% Canada 8.83% 16.79% 6.70% 32.28% 6.44% 8.02% Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 25 Canal / 31
Trade diversion patterns Netherlands Greece United Kingdom France Total to US to NE Asia to EU27 Italy Spain Total to US to NE Asia to EU27 Germany Portugal - 5.0% 0.0% 5.0% 10.0% 15.0% 20.0% - 5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Romania USA Total to US Hungary Total to US Canada to NE Asia to EU27 Czech Republic to NE Asia to EU27 Japan Poland China - 10.0% 0.0% 10.0% 20.0% 30.0% 40.0% - 10.0% - 5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 26 Canal / 31
Income changes Figure: Both Arctic routes (left) and only NSR (right) 1.25 1.00 GDP Real Income 1.25 1.00 GDP Real Income 0.75 0.75 0.50 0.50 0.25 0.25 0.00 0.00-0.25-0.25 DEU GBR NLD FRA ESP ITA CHN JPN KOR USA Canada DEU GBR NLD FRA ESP ITA CHN JPN KOR USA Canada Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 27 Canal / 31
GDP (and welfare) changes Figure: Total export values and GDP percentage changes 1.2 1 % change in real na,onal income 0.8 0.6 0.4 0.2 0-1 - 0.5 0 0.5 1 1.5 2 2.5 3 3.5 4-0.2-0.4-0.6-0.8 % change in goods exports Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 28 Canal / 31
Summary of results Distance and transport costs are reduced in average around 10% from the USA to Northeast Asia, but around 20% between the Northeast US coast and Asia For the Canadian East cost the distance and transport cost reduction is higher at around 25% and the average distance from Canada to Northeast Asia is around 20% This is translated into an increase in bilateral trade flows between North America and Northeast Asia: around 5% (for US) and 15% (for Canada) There is production reallocation within the US and less US trade with the EU and other regions. Same is expected to happen in Canada Northeast Asia and Canada have the largest GDP and income increases from the Arctic routes, while there are mixed results for Europe and a slight gain for the US. Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 29 Canal / 31
CGE results on environment and emissions Reminder: Icecap melting will bring stark environmental changes that will have also a significant economic impact Regarding C02 emissions related to shipping: at first it is expected that the shorter shipping distances associated with the NSR and NWR will reduce fuel costs and emissions from the water transport sector. However, the increase in trade volumes also means that when the shipping distance is reduced, the shipping services are increased due to the jump in trade between Northern Europe and Northeastern Asia. Therefore, both effects almost offset each other, but there is a small increase in global emissions of 30.7 million MT CO2 or 0.05% of baseline emissions projections Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 30 Canal / 31
Policy implications Currently around 8% of world trade goes through the Suez Canal and our estimations reduce this share to 2.5%, around 10.000 ships use the Northeast Asia-Northwestern Europe route Traffic through the Panama Canal will also decrease (around one third serves the East US-Asia route): 4000 ships use the Panama Canal to service the North American East coast to Asia route Canada holds the key to the NWR, but without further icecap melting it seems less commercially viable than the NSR Political interest on the Arctic will be heightened. China, in particular, has already shown political interest in the Arctic (free-trade agreement with Iceland in April 2013 and most recently, China, Japan and South Korea gained observer status on the Arctic Council) Shipping in the arctic, approximately 14,000 crossings annually (both NSR and NWR), implies a new vector of pressure on the arctic climate. Francois, Leister & Rojas-Romagosa (2015) Melting Ice Caps: Implications for Asia-North America Linkages MASS, and St. the John s Panama 31 Canal / 31