Trading Up

In pursuance of the goals set by the Mexican Development Plan from 2016, which aims to substantially improve Mexico’s transport infrastructure capability and lower costs in carrying out Mexican economic activities, the Governor of the state of Oaxaca, Alejandro Murat Hinojosa, announced at the end of 2017 an ambitious plan for the creation of a transoceanic corridor on the Tehuantepec Isthmus.

Thanks to its strategic location, representing the shortest distance between the Gulf of Mexico and the Pacific Ocean, this route has been used since 1907. It was originally supposed to host the canal connecting the Atlantic to the Pacific. Mexico and the US signed in 1859 the McLeane-Ocampo treaty, which granted the US the right to explore the isthmus, but Mexico’s fears regarding its sovereignty and the opportunities arising from neighboring countries undermined the agreement. Thus, the canal was built in Panama. The creation of the Panama Canal meant the existing railway line, which was built in the early 1900s, lost its profitability, and the region was left on the sidelines for a century.

Now, with the increasing competition in transoceanic traffic, the Tehuantepec Isthmus reemerges as a strategic route. The centurial rail route between the ports of Coatzacoalcos, located on the Gulf of Mexico, and Salina Cruz, on the Pacific, is still operational and operated by Ferrosur Company, and it is an efficient logistical corridor essential to meeting increased traffic demands.

The region has been designated by the central government as one of Mexico’s Special Economic Zones (SEZs), a measure intended to promote local economic development. The area will receive a MXN3-billion investment, which will be applied to the construction of the interoceanic corridor and to other projects aimed to promote prosperity in the region, such as the modernization of oil refineries, creation of an agro-industrial park, and investments in renewable energies. The project is a dry canal and consists of a logistical corridor with rail infrastructure for freight trains and highway sections.

According to Oaxaca’s governor, the corridor will significantly reduce the travel time on the route, which now amounts to four hours, and expedite trade flows. According to the state-owned petroleum company Petróleos Mexicanos (Pemex), Chinese products will be able to arrive in the southern US one week earlier via the Mexican connection compared to the Panama Canal. Two sides of the same isthmus, routes departing from the US’ east coast and the Gulf of Mexico will be largely facilitated. The geographic configuration presents few engineering challenges, as the terrain is mostly flat, making it an exciting endeavor for the operators that decide to take part in the bidding process, which should take place in 2018.

Pemex announced as early as 2014 its interest in investing in the corridor and has already started to build oil infrastructure in the region. It ultimately aims to export oil to the Far East, exploring the current price difference between North America and the Pacific.

If successful, this corridor would come at a critical moment for the Mexican economy. In 2017, US President Donald Trump called for a revision of the existing free trade agreement between Mexico, the US, and Canada, widely known as NAFTA, accounting for 80% of Mexican exports. The dry canal would be a valuable tool to facilitate Mexican expansion to new markets and to mitigate adverse outcomes of this possible American shift. However, the project is still in its initial phase, and it is not the only plan for a transoceanic transport endeavor in the region, with countries such as Guatemala and Nicaragua also making similar moves. Creating a path connecting the Mexican Gulf to the Pacific seems as pressing now, if not more, as it was in 1849. If Mexico wants to capture its share of this transoceanic economic activity, the country should push forward at full throttle to build upon the century-old corridor and activate its economic potential.