PANAMA CANAL COMPANY BOARD OF DIRECTORS Report of Panel on PROPOSED CHANGES IN RATES OF TOLLS for the Panama Canal AN ADDENDUM Concerning Effect on U. S. Economy of Proposed Increase in Tolls October 20, 1976 September 13, 1976 Gift of the Panama Canal Museum «i?3- ? -/^ 3 PANAMA CANAL COMPANY Board of Directors Report of Panel on Proposed Changes in Rates of Tolls for the Panama Canal AN ADDENDUM CONCERNING EFFECT ON U.S. ECONOMY OF PROPOSED INCREASE IN TOLLS At the hearing on the proposed tolls increase, AIMS suggested that the fact that U.S. carriers represent only eight percent of the traffic does not mean that the benefit of maintaining lower tolls primarily benefits foreign maritime interests because "the real burden of toll rate increases is ultimately borne in very substantial measure by the American exporter and importer whose goods represent about two thirds of your /Tanama Canal/' traffic" and because much of the cargo through the canal is carried on container vessels, "over 50% of which transiting the Canal do fly the United States flag. " _!/ The facts in regard to U.S. flag participation in containership traffic as shown by the table attached to the Panel Report in Appendix G (p. 29 3g) may be summarized as follows: Table 1 Containership Traffic through the Panama Canal by Flag of Vessel (FY 1976) Transits ■; 347 ^ of Total 30 Tolls /a of Total U.S. Flag $ 5,371,480 25 Other 819 70 16,339,525 75 Total container 1,169 100 $ 21,711,005 100 The relationship of U.S. flag containership traffic to all traffic through the canal is shown by comparison of the figures shown above to total Panama Canal traffic in fiscal year 197 6. !_/ AIMS, Tr. , p. 7 (Panel Report, Appendix B, p. 63b) Digitized by the Internet Arcliive in 2011 witli funding from University of Florida, George A. Smathers Libraries with support from LYRASIS and the Sloan Foundation http://www.archive.org/details/reportofpanelonpOOpana Table 2 Relation of Container Traffic to Total Traffic FY 1976 Transits Tolls All traffic 12,157 $134,212,000 U.S. container traffic 347 $ 5,371,480 U.S. container traffic as percent of total 2.85% 4.0% The initial impact of operation of the canal at rates of tolls less than necessary to recover costs clearly favors the foreign flag operators. Data in regard to operating costs of containerships operated through the Panama Canal by Sea Land Service, Inc. , summarized at pages 23-25 of the panel report show that voyage operating costs of the SAN PEDRO (18,421 registered gross tons) were about $285,277, including Panama Canal tolls of $16,947, representing about 6% of the voyage operating costs of the vessel (excluding capital costs). The proposed increase in rates of tolls v/ill increase tolls paid by the SAN PEDRO by $3,296 to $20,243, after which tolls will represent 7% of the ship's total voyage operating costs of $288,57 3, adjusted to reflect the proposed tolls increase but not to show other cost increases such as fuel and crew costs. The allocation of the economic effects of an increase in tolls as between the economies of the United States and foreign countries is a more complicated problem. The AIMS statement suggests that the allocation should be on a basis of two thirds to the United States and one third to foreign countries because combined American exports and imports represent about two thirds of Panama Canal traffic. However, studies of the economics of international trade show that increases in transportation and other costs, including canal tolls may be (1) included in the price paid by the buyer; (2) absorbed by the seller; (3) divided between the buyer and the seller; or (4) avoided by alternative ar- rangements, eliminating the payment of the increased costs altogether or sub- stituting other, presumably lesser, costs. Determination of which of these arrangements will be adopted as a result of an increase in tolls requires exami- nation of the markets in each of the commodities that move through the canal and analysis of the economics involved in the trade in such commodities. Such examination and analysis have been made for the Company in a series of studies of the economic effect of Panama Canal tolls increases on the international trade of the various regions involved in the movement of cargo through the canal. 2/ The determination of the question of who pays the increased tolls charges is also a necessary part of analysis of the effect of the increased toll rates on the Gross National Product (GNP) and Balance of Payments of the United States. 3/ Based on detailed analysis of the market conditions affecting trade in the 21 major commodities moving through the canal, the economic studies found that over a ten-year period, the effect of a 50% increase in Panama Canal rates of tolls over the rates in effect prior to July 8, 1974, would be divided between the U.S. and foreign sources in the proportions shown in the following table: 4/ Table 3 Increased Toll Payments Resulting from 50% Increase (Dollars in Thousands) Total Increase U.S. Sources 1st year $ 48,657 $ 12,993 5th year 53,967 15,133 10th year 62,781 19,962 A different method of economic analysis in another study by other econo- mists estimated that the share of increased tolls payments paid by U.S. buyers and sellers would be approximately 34% of the total increase. 5/ U.S. % of Foreign Foreign % Total Sources $ 35,664 of Total 26.7 73.3 28.0 38,834 72.0 31.8 42,819 68.2 2/ Brandes & Houston, International Research Associates , Palo Alto, Calif. (IRA), Panama Canal Toll Rate Increases: Effect on the U.S. Economy , pp. 3-17, 18; Brandes & Samuel (IRA), Panama Canal Tolls Increases: Effect on Canada and the Caribbean Region , pp. 19, 42; Effect on Central America, Mexico, and Panama, p. 18; Effect on Europe , p. 21; Effect on the Far East , p. 30; Effect on Ocea nia, p. 20; Effect on South America , p. 20. 3/ Brandes & Flouston (IRA), Panama Canal Toll Rate Increases, Effect on the U.S. Economy, p. 2-4. See Also, Howell & Solomon (IRA), The Economic Value of the Panama Canal, p. 14. 4/ IRA, Effect on the U.S. Economy, p. 2-1. See also series of reports cited in footnote 2, above. 5/ Howell & Solomon (IRA), Economic Value of the Panama Canal, p. 32. The studies also estimated that division of the ultimate payment of the increased tolls as between U.S. and foreign sources shown in Table 3, above, would result in increases in the real GNP of the United States by $35 million at the end of the first year of the increase, rising to $42. million at the end of the tenth year. Improvement in U.S. balance of payments resulting from the increase was estimated in about the same amounts. 6/ Although the studies briefly summarized above were made before the 1974 increase in Panama Canal tolls, the cumulative effect of the 1974 increase, the recent change in measurement rules, and the current proposal amount to just under 50%, 7/ and the estimates of division of the amount of the increase as between U.S. and foreign sources is still valid. Updated projections of Panama Canal traffic made earlier this year analyze the same basic group of commodities involved in cargo movement through the Panama Canal and pro- vide a new estimate of sensitivity of tolls increases of 25%, 50%, and 75% over the rates and under the measurement rules now in effect. 8/ The 197 6 report estimates that a 25% increase in rates of tolls in 197 6 would result in increased tolls payments in the amount of $36,628,000 in 1979, the third year of the increase. The earlier analysis of division of increased tolls payments as between U.S. and foreign sources estimated that the U.S. share of the increased tolls payment would rise from 26.7% to 31.8% over a ten-year period following the increase, a difference of 5. 1%, or about 0.5% a year. On that basis, the U.S. share of the increased tolls payments in the third year after the effective date of the increase would be 28.2%. Applying that percentage to the projected amount of increased tolls payments as a re- sult of a 25% increase (the current proposal is for a 19.5% increase), it is estimated that of the $36,628,000 increased payment resulting from a 25% increase, $10, 329,096 would be paid by U. S. sources and $26,298,000 would be paid from foreign sources. This result is substantially confirmed by a commodity by commodity analysis using data from the 197 6 and earlier studies, and adjusting the total U.S. portion of the increased payment for the difference between an increase of 19.5% as proposed and 25% used in the 197 6 studies. (See Table 4, following page 5 of this Addendum) 6/ Brandes & Houston (IRA), Panama Canal Toll Rate Increases: Effect on the U.S. Economy , pp. 2-4 to 2-6 7/ See Environmental Assessment of Proposal to Increase Tolls, April 1976, p. 3, attached as Annex II to the Panel Report (Sept. 13, 1976) 8/ Projections of Panama Canal Commodity Flows, Transits, and Toll s Through " FY 1979, Economics Research Associates, 1976. A summary of the report is included in the Proposal at p. 59, attached ot the Panel Report, as Annex I, Some commodities included in the General Cargo category in the earlier studies are separately analyzed in the 197 6 report. The average tolls per cargo ton or other unit of cargo moving through the canal and the relationship of tolls charges to the cost of the cargo places the economic effect of the proposed increase in a different perspective. Table 5 is based on an estimate of Panama Canal tolls per unit of cargo that tends to be on the high side because the average tolls per ton of cargo is computed by dividing the tolls revenues by tons of cargo. Because tolls are based on the capacity of the ship, not the amount of cargo carried, the tolls per cargo ton will increase when space utilization is low. A more accurate picture of the effect of the proposed tolls increase per cargo unit is provided by Table 6, based on toll charges for full loads of commodities susceptible of bulk handling, so that the distortion resulting from partial vessel space utilization is avoided. 9/ See Projections of Panama Canal Commodity Flows, Transits, and Tolls Through FY 1969 (ERA), p. 11-11 to 11-15. Table 4 Summary of Estimated Effects of Toll Increases on U.S. Economy FY 1979 i/ (Thousands of D ollars) Tolls at Tolls v/ith Amount Portion of Increase Paid Oct. 7 5 2 5% of by U.S. b uyers/sellers 2y Commodity Description Rates Increase J ncrease (D ollars) (% of Total) Wheat $ 3,051 $ 3,733 $ 682 $ - — Coarse grains 9,889 11,974 2,085 - - Bananas 6,780 3,245 3,879 8,188 3,914 4,802 1,408 669 923 264 29 18.7 Sugar 4. 3 Soybeans Lumber 4,638 5,795 1,157 659 56.9 Wood pulp, paper & paper products. . 3,253 4,079 826 29 3.5 Phosphates 3,419 4,188 769 30 3.9 Fertilizers, potash & fishmeal 3,793 4,549 856 108 12.6 Iron ore 1,921 2,548 2,402 3,185 481 637 202 198 42.0 Miscellaneous ores.. 31,0 1,623 827 2,030 1,033 407 206 152 _ Alumina & bauxite. . . 73„7 Miscellaneous metals.. 2,023 2,528 505 134 26.5 Coal 14,763 18,453 3,690 1 .781 48.2 11,362 14,208 2,846 704 24.7 Petroleum products. . . 8,249 10,311 2,062 594 28.8 3,362 4,202 840 289 34.4 Sulfur 626 782 156 - - minerals 1,278 1,568 290 15 5.1 Iron & steel manufacture r 9,072 11,339 2,267 1 ,273 56.1 Autos & trucks 12,889 16,111 3,222 907 28.1 Refrigerated food. . . . 3,729 4,560 831 233 28.0 Feed & ether food. . . 3,710 4,555 845 230 27.2 Machinery & equipm.ent 1,835 2,294 459 70 15.2 Misc. cargo & containers 29,342 3,074 36,104 3.821 $190,808 ■ $ icrease proposed 6,752 747 36,628 2 $10 ,373 75 ,349 35.0 General cargo 10.0 Total $154,180 28.2 Less difference between 19.5% ii and 25% used in table • • 2 ,276 Cost of 19.5% tolls increase paid by U.S. $ 8 ,073 J/ Assumes toll increase occurs in FY 197 7 2/ Based on information in Panama Canal To 11 Rate Increase : Effect on U.S. Economy, International Research Associates m c +-) =3 en (1) Di w tn 0) CD -i-H +j ■4-) 01 Tl cc: o .-H S ■ — 1 n h H o . — 1 U ra n -v ^^ 0) -l-J o o 0) fO . — 1 H CD m cyj c M-l (0 o CL, w c 4-> -rH m n O +-> o -(-4 t-i G c; D c 1 — 1 n U) 4-1 u m -< 13 3 u :^ 0) ■(-> (0 o -a 4-' 6 -iH ■M U w i — 1 H 0) n a: 4-" ro (ll S-i :3 C) T1 c 1 — 1 4-J cn C) o 4-1 O ■!-> •r-t C ;3 LO ^5 c p 4-1 L 0) 0) 4-» V-. 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