Does the Kra Canal Threaten Singapore?

A recent essay in The Independent (Singapore) warns that plans to construct a new canal across the Isthmus of Kra are an existential threat to Singapore.

If the Kra Canal truly becomes a reality, ships would certainly consider by-passing the Strait of Malacca and Singapore altogether, making the Singapore’s all-important geographical location redundant. We may truly become a third world country after all.

The idea of bypassing the Strait of Malacca altogether is apparently quite old, as the essay illustrates. By cutting (literally) across southern Thailand, the argument goes, freighters can save time and fuel costs.

Such worries about Singapore’s vulnerability are greatly overblown, for two reasons. First, a Kra Canal isn’t in the same league the Panama Canal or the Suez Canal. And second, geographic location is hardly the source of Singapore’s economic strength.

The first argument is straightforward if rather uninteresting. According to Wikipedia, the Kra Canal could cut 1200 km off of the shipping distance from the Indian Ocean to China or Japan. The Suez Canal shortened journeys by 7000 km, and the Panama Canal by almost 13000 km. Yes, fuel could be saved, but nothing to match what is saved by Panama and Suez. And the question of time or money saved is far from clear. That depends on the efficiency of the operation of the canal, and the costs charged. The essay cited above suggests that the canal tolls could be economical, but I would bet that costs would be higher than budgeted, and it remains free to travel through the Strait of Malacca.

The second argument is the more interesting one. It is plain that Singapore sits right at one of the world’s most valuable shipping lanes. Yet Singapore does not profit anymore from this location itself, because Singapore (unlike sea-based empires such as Srivijaya) does not control the Strait of Malacca, which are subject to free passage under international maritime law.

What Singapore enjoys today, and what sets it apart from its neighbors, is political stability, contract predictability, logistical efficiency, and trade openness. To threaten Singapore, the Kra Canal would need to outperform in Singapore across all of those dimensions. Doing so is far from an easy task—nearly every country in Southeast Asia has experimented to one degree or another with free trade zones, and these have not done much to unseat Singapore’s dominance in logistics and trade. The Port of Singapore is a hub not because ships have to float past Singapore, but because ships choose to load and unload there. Anyone who has stopped by Tanjung Priok in Jakarta, which sits near to the Sunda Strait, can see first hand why geography is not destiny.

Even if the Kra Canal were built, and even if a sophisticated logistics operation could be developed that rivaled the remarkable Port of Singapore, this would not be enough. Logistics are integral to Singapore’s economy, but just as important is Singapore’s position as a hub for finance and investment in the greater region. Again, other regional players have attempted to create financial hubs to rival Singapore (e.g. Labuan in Malaysia), but with limited success. Much like Hong Kong’s historic position with respect to greater China, Singapore’s strategic economic advantage is that it is literally an island of political stability and contract enforceability in a region where such political and economic institutions are rare. Could Thailand and China create such institutions in, say, Hat Yai? Almost certainly not.

The point is that in the contemporary international economy, Singapore’s geographic advantage is no longer solely determined by its position along a vital sea lane. Its geographic advantage today comes from its relative political stability and contract enforceability vis-a-vis the other countries in a region of more than half a billion people. That political stability, in combination with a long history of openness to trade and capital, means that Singapore is the best place for a multinational to set up shop in the region, and the best place for traders to trade in the region. Lower freight costs through southern Thailand would not change that.

Posted in Asia, Economics, Politics
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