President Obrador of Mexico hopes to create a viable Panama Canal alternative through Mexico by improving the infrastructure of the Interoceanic Corridor between Oaxaca and Veracruz. The works are ongoing and include:
Modernizing the ports of Coatzacoalcos, Veracruz and Salina Cruz,
Creation of 10 industrial parks (costing $1 billion each and on 200-400 hectares),
Upgrading the Isthmus of Tehuantepec Railway to handle high-speed,
Expand the Minatitlan and Ixtepec airports,
Installation of gas pipelines and fiber optic connections, and
Doubling of the highway size from two to four lanes.
Why doesn’t Mexico just build a canal through the country to remove the necessity to unload the cargo, take it by rail or road to the other ocean, then reload onto another vessel? The distance of 300 miles of land between the oceans is six times the distance of the Panama Canal which is 45 miles long. The Suez Canal is longer at 120 miles, but it was dug out through flat desert, whereas the corridor goes through mountains, jungles, as well as many tribes, communities and municipalities all with different customs and interests in developing the region.
Note: To cross the Isthmus of Tehuantepec the ships would need to be raised ten times what is shown.
History of the Interoceanic Corridor
The Spanish first established the corridor in the early-1800s in order for it to ship products to and from the Philippines and Mexico, both Spanish colonies at the time. The products in transit would be taken overland and then reloaded onto a ship waiting on the other side.
Railway lines were laid in 1907 by a British entrepreneur, Lord Cowdry, and the railway ran profitably until America opened its Panama Canal in 1914. Before this, James Buchanan Eads, an American millionaire engineer, intended to build a railroad connecting the Gulf of Mexico and Pacific Ocean and had the government’s support to carry on with the works. When he died in 1887, the idea faded away.
The Americans first intended to build a canal through this section of Mexico, and even got so far as signing a treaty to that effect with Mexico called the McLane-Ocampo Treaty. The Panama Canal was ultimately chosen because America would have sovereignty over the development, and it was quicker and cheaper to bring it to fruition. Sadly for the Americans, Jimmy Carter gave away ownership of the Panama Canal to Panama. Later, Barack Obama severed the few remaining American interests. Nothing was gained in return, and thus this ranks up there in terms of the most foolish and selfish blunders in modern American history. China now largely controls the Panama Canal, and had a 50 year concession to build a similar canal through Nicaragua, a project that is now defunct and on hold.
The Interoceanic Corridor offers some advantages over the Panama Canal:
Mexico’s outsized participation in America’s nearshoring revolution,
The Panama Canal is struggling to handle all of its LNG and other shipments,
Transit times might be quicker and cheaper for Chinese vessels to reach America’s east coast, and
China’s canal project in Nicaragua is defunct and appears to be indefinitely on hold.
The obstacles facing the project are large, but not insurmountable.
(1) Local Politics. Some indigenous populations oppose any form of development in the region, and these groups are often funded by outside organizations who, for their own purposes, don’t wish for the south of Mexico to develop or for the Interoceanic Corridor to become a viable transit option. Some non-profits will use controversies created to raise donor funding, enriching themselves, and taking the opportunity to enter Mexico as white knights charging to the rescue. The region is considered the poorest in Mexico, lacking in basic infrastructure, which makes it more susceptible to these outside and well-funded influences.
(2) Logistics Hubs and Investment Required. China services its largest client primarily through sailing products directly to southern California, and from there using rail and road networks to supply the more populated east coast. This journey is often cheaper and faster than sailing to the east coast through the Panama or Suez Canals. The Interoceanic Corridor ought to be the most efficient option of the three given its shorter total distance, and quicker transit times. For the development project to succeed, nearly $50 billion of investment is required over the next few decades, from the public and private sectors.
(3) Panama Canal is established. The project is paid off and therefore could theoretically lower transit prices per vessel to well below what Mexico requires just to service the debt on the project. It’s not a simple task to uproot shipping lines and the Panama Canal won’t just roll over.
Impact on Commercial Real Estate in Mexico
The south of Mexico joining the cause of developing the country will have a number of positive impacts on the Mexican economy, as well as on how effectively the federal government operates. These economic and political improvements could be considered positive for commercial real estate investments in Mexico. Below are discussed several important considerations.
(1) Cure for Left-Wing Politics in Mexico. The south of Mexico is committed to the ideology of redistribution and class warfare. The current President derives the base of his support from this region, and the aforementioned ideology animates all that he does. It’s understandable that the south would have such views given the levels of poverty in the region and lack of development. Creating jobs, and involving the south in the nearshoring boom, will open the door for Mexico to have a more unified government in the future which is pro-market and with policies aimed at growing, not dividing, the pie.
(2) South has Water. Lack of water in the arid north deters certain types of water-intensive manufacturing such as producing semiconductors. Emerging Real Estate has previously written about the semiconductor manufacturing opportunity for Mexico.
(3) South has Oil and Gas. 80% of known reserves of oil are in the region. The nearby Dos Bocas refinery is being built to process that oil for use in Mexico, with the rest being available for sale on the global energy market. The south also possesses 57% of the country’s known gas reserves.
(4) Tax breaks and Public Investment. The government is offering tax breaks through “Free Trade Zones”, and the Inter-American Development Bank has prioritized $2.5 billion to fund companies locating operations in the Interoceanic Corridor. The tax breaks currently on the table for qualified investors include no taxation on income for three years, followed by a discount in taxation of 50% the following three years. Depreciation is allowed to be accelerated during the first six years. Business conducted in the Corridor will be exempt from VAT taxation, and new firms can reclaim VAT paid on purchases outside of the region for four years.
(5) Undeveloped Region. The entire region is rich in minerals and natural beauty. There are millions of people, inhabiting villages and cities, which will be directly impacted financially by the growth of industry in the region. Real estate investors can benefit from currently lower land prices, accommodating local municipalities (for the right projects), and consistently growing spending power in the hands of the region’s inhabitants.
(6) Early Investors in Strategic Infrastructure. The advantages gravitate towards early investors in the case of strategic projects, assuming of course that they ultimately succeed. There are opportunities now for American investors, miners, and manufacturers to enter Mexico on favorable terms. The opportunity doesn’t favor mega private equity firms with short time horizons. These opportunities are more suited for American corporations and developers with a longer term view generating wealth and value in Mexico.