Indian Council of World Affairs

In December 2024, US President Donald Trump made statements regarding seizing control of the Panama Canal and did not rule out the use of military force to do the same. He cited that American ships were being overcharged for transit and that Chinese investments and presence in the Panama Canal posed sufficient threats to the US. In return, President of Panama José Raúl Mulino, stated that the Canal belonged to Panama and the status quo could not be altered. He further added, that the Panama Canal operates without influence from external actors and that the tariff rates are reasonable and are decided in an open audience. 

President Trump’s comments on the Panama Canal speaks of a larger geopolitical context encompassing US security interests, and to diminish China’s role in the Hemisphere. China since 2017 has made significant financial investments in the Panama Canal to gain strategic depth. Hence, the Panama Canal has the potential to turn into a geopolitical flashpoint, given the competition between the US and China. 

This paper examines the importance of the Panama Canal, the imbroglio regarding it and possible outcomes. 

The US and the Geopolitical Importance of the Panama Canal

Understanding President Trump’s statements regarding the Panama Canal

President Trump issued statements that the Panama Canal Authorities were overcharging American ships and that China exerts a significant control over it which is detrimental to American security interests. The President added that it would not be in the best interests of the US to witness the Panama Canal falling into the hands of China and if required the US may repossess the Canal in case Panama cannot maintain neutrality of the Canal. The US president did not rule out the use of military action in such a scenario. 

These statements may have stirred a hornet’s nest in the Americas, but it should be seen as a larger geopolitical thrust to secure US interests in the region. While the Panama Canal[i] may have been built by the US, it was a bone of contention between the US and Panama in the past. Although handing over the canal to Panama dissolved conflict of interests, China's investments, financial and technological proximity with Panama and especially in the context of the canal has always been an issue with the US. This has gained prominence in the recent years as China and the USA compete on global levels. Hence, president Trump's statements regarding the canal highlight the US's dislike for China's deep involvement in its areas which it considers as its own sphere of influence. 

Also, president Trump's statements can be seen in a broader way to compel Latin American countries to choose a side, that is between the US and China. While China is a huge investor and over the years has made close relations with many of the Latin American countries, the USA is still one of the closest economic partners of these countries and not to mention the geographical proximity, and the fact that many people from Latin America reside and work in the USA. In fact, many countries receive a sizeable portion of GDP from remittances from the US. Hence countries like Panama are in a position where they are now being compelled to draw lines and gradually build proximity either with the US or with China. The question is, will countries like Panama be able to skilfully wade through such challenging mazes and assert their geographical and strategic advantage and maintain cordial relations with both or will they develop closeness to one at the expense of trimming relations with the other.

Geopolitical importance of the Panama Canal

The Panama Canal is a vital artery of global trade and supply networks, accounting for 6% of worldwide marine trade. Approximately 40% of US container traffic uses the canal each year, and the US is also the greatest user of the Panama Canal. In 2023, more than 73% of the ships going through the canal were destined for or returning from US ports[ii].  Annually US$ 270[iii] billion worth of trade occurs through the Panama Canal, which comprises mainly of Petroleum products[iv], LPG, Container Cargo, Grains, Chemicals and Petroleum Chemicals, Metals and Machinery[v].

This significant proportion emphasizes the canal's vital role in lowering transit times[vi] between the Pacific and Atlantic Oceans, increasing trade efficiency and competitiveness. This dependence demonstrates why any disturbance or control could have deep effects on the global economy and particularly on the US which relies a lot on it. Although there are alternative land routes that traverse the Americas connecting the two great oceans, nothing comes closer to the Panama Canal and hence, its strategic and geopolitical value remains at the pinnacle.

It is therefore easy to understand why there is a significant possibility for countries such as the US and China to deepen their strategic roots in and around the Panama Canal. This would enable them the opportunity to oversee maritime trade, control the supply of essential goods and allow easy transport of military hardware and troops.

Panama- in a Zugzwang

Reaction from Panama

President Trump’s statements were not received well in Panama and its President José Raúl Mulino issued a statement in which he expressed the non-negotiable sovereignty of Panama over the Canal and its adjacent areas. He emphasised on the permanent neutrality of the Canal thus, ensuring its availability for all the countries and denied that any country controls the Canal. There were protests in the country opposing the statement of President Trump organised by independent groups and also spearheaded by SUNTRACS[vii] which is the largest Trade Union. These events have led to some tensions in bilateral relations between the US and Panama.

The primacy of the Panama Canal for the Republica

The Panama Canal is the most important infrastructure for the country, and earnings through freight charges contributes 7.7 percent to Panama’s annual GDP which roughly is US$2.5 billion to US$3 billion annually[viii]. The canal provides around 3 percent of the total employment in the country. It is estimated that the Panama Canal will contribute to an increase of 3.45 percent to the GDP by 2030, while contributing an increase of 5.78 percent to exports and 2.12 percent to employment by 2030[ix]. Apart from the economic reasons, the Canal is also a very important part of the country’s identity and heritage and gives it a geopolitically important position in the Americas. Any loss of control over the Panama Canal will reduce the geopolitical importance of Panama, deal a blow to its sovereignty and lead to severe financial strain. 

Panama’s relations with the US

Regarding international cooperation and diplomacy, Panama has close economic ties with the US and imports around US$ 2.7 billion worth of goods which is around 18 percent of its total imports, and a significant portion of citizens receive remittances[x] from the US. Apart from that the US is the largest investor in Panama and in 2023 invested US$1.9 billion in various projects and bilateral trade in 2023 amounted to US $13 billion[xi].  The US is still the most favoured destination for citizens of Panama to pursue education and seek employment. Apart from such ties, both countries have mutual interests in cooperating on narco-trafficking[xii], migration[xiii] and transnational crime[xiv]. The US is also the largest provider of financial aid to Panama and the previous Biden administration requested US$ 1.2 million in bilateral funding and US$2 million as funding for its security forces. Likewise, through the Global Health Programmes a contribution of US$12.5 million has been made since 2023[xv]. Under the Americas Partnership for Economic Prosperity and the Alliance for Development in Democracy, the US and Panama closely cooperate in enhancing supply chains while the US International Development Finance Corporation seeks to prioritise American investments in infrastructure projects in Panama.

Panama’s relations with China

Similarly, China is an important economic partner to Panama and diplomatic relations were established in 2017. A partner country to the Belt and Road[xvi] Initiative (BRI)[xvii], around 39 percent of exports from Panama are destined for China. China is also the second largest user of the Panama Canal and since it established relations with Panama, it sought cooperation on financial and infrastructural lines.  For instance, the Chinese consortium comprising China Communications Construction Company (CCCC)[xviii] and the China Harbour Engineering Company (CHEC) are proceeding with the creation of a fourth bridge over the Canal. Out of the 5 ports in the vicinity of the Canal, two of them, at Balboa and Cristobal are managed by a Hong-Kong based firm, the Hutchison-Whampoa company and the concession was awarded in 1996[xix]. In a $900 million agreement, the Chinese Landbridge Group gained ownership of the Margarita Islands and the Colón Free Trade Zone's major port. Additionally, China built the Panama-Colón Contained Port.

Hence, its clearly discernible that Panama has strong relations with both countries and seeks to maintain cordial relations without jeopardising its relations with either of them and being a part of their larger geopolitical gambit.

Possible Scenarios

As President Mulino’s term nears a year in May 2025, there are certain infrastructure gaps[xx] that still require addressing such as the upgrading of port infrastructure, the creation of a Panama-David Railway and the creation of a University City as a centre for learning. Regarding road infrastructure, the Ministry of Public Works discussed ideas to improve road connectivity and repairing existing roads. Since operationality of the Panama Canal is subjected to frequent droughts, there is a requirement to address these concerns. Hence, it is expected that Panama will require more foreign investments and partnerships with other countries. At this juncture, Panama has to weigh its relationship with its continental neighbour US and with distant China to fulfil its infrastructural requirements and to maintain the control of the Panama Canal and the effectiveness of its functioning. 

For the US, any attempts to repossess the canal by force would tantamount to violation of Panama’s sovereignty and it is most likely that such an event would not occur. However, keeping in mind President Trump’s foreign policy measures[xxi] the possibility of a heightened shadow conflict between the US and China in terms of securing infrastructure contracts and other economic activities may occur. Panama has submitted a 90-day notice to China as it wishes to withdraw from the BRI and is also in the process of reviewing and possibly cancelling the contract[xxii] awarded to Hutchinson which operates two ports along the Panama Canal. China has termed these two developments as regrettable and accused the US of coercing Panama to take such steps. Such developments may also lead to scuttling the proposed Panama-China Free Trade Agreement that has seen 5 rounds of negotiations since 2018. As a result, China too will compete in securing its interests in the region and hence, there is a strong possibility that the Panama Canal may turn to become a new geopolitical flashpoint. Apart from that, in a bid to extract mileage out of these developments in Panama it may be expected that China may leverage its strategic depth in its own sphere of influence to create a strong bargaining chip vis-à-vis the US. It is also expected that the US will leverage all of its financial and diplomatic influence to ensure a diminished role of China in Panama. In other words, President Trump has taken into cognizance the geopolitical risks and US interests in its vicinity and will take further steps to ensure that its strategic goals are met, by diplomatic means or by coercive gestures.

Conclusion

With assertive foreign policy measures induced by President Trump one may expect that important hemispheric infrastructures like the Panama Canal may gradually turn into a geopolitical flashpoint. The US and China will likely vie for influence in Panama in a bid to outdo each other. For Panama the primacy of the canal is of great importance and as it seeks to upgrade its infrastructure and build new ones, it will seek to pursue a path that serves its interests and the interests of its people the best.

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*Dr. Arnab Chakrabarty, Research Fellow, Indian Council of World Affairs (ICWA)
Disclaimer: The views expressed are personal.

Endnotes 

[i] The Panama Canal and US interests are intricately linked. In 1903 the US supported Panama’s independence from Colombia and extended diplomatic recognition. Thereafter the US and Panama signed the Hay-Bunau-Varilla Treaty that allowed Washington to build the Panama Canal and obtain a ten-mile zone in the vicinity of the canal for an initial payment of US$10 million and $250,000 annually. However, Panama Canal zone that was owned by the US became a contentious issue of sovereignty and in 1964 led to riots which left a deep division between the US and Panama.

[ii] EIA. (2024). U.S. energy flows through Panama Canal rose slightly in January. Accessed 24^th January 2025. https://www.eia.gov/todayinenergy/detail.php?id=61443.

[iii] Upstox. (2025). Bridging continents: The Panama Canal and its global impact. Accessed 11^th January 2025. https://upstox.com/news/upstox-originals/investing/bridging-continents-the-panama-canal-and-its-global-impact/article-142568/

[iv] For the US, LPG, ethane and Petroleum products make up around 63% of the total goods traded through the Panama Canal. Hence, operationality of the Canal is vital for energy security of the US. For a brief comparison, in January 2024 Ethane and LPG trade through the Panama Canal amounted to 1.2 million barrels daily, whereas it was only 530 thousand barrels and 300 thousand barrels though the Suez Canal and the Cape of Good Hope in the same period and duration. Just this example highlights, the importance of the Panama Canal for the US.

[v] Diana Roy. (2025). Who controls the Panama Canal? Council on Foreign Relations. Accessed 22^nd January 2025. https://www.cfr.org/article/who-controls-panama-canal.

[vi] For comparison a standard container ship will need 27 days to traverse from the Western Coast of the US to the Eastern Coast circumventing the southern tip of Latin America (taking into consideration nominal weather, absence of storms and without the requirement to refuel) while it will need only 11 days to traverse through the Panama Canal.

[vii]  El Sindicato Único Nacional de Trabajadores de la Industria de la Construcción y Similares or National Union of Workers and Similar Industries.

[viii] The Panama Canal contributes to 15.9% to the country’s total exports and 23.6% of annual income.

[ix]  Invest IDB. (2025). The Economic Contribution of the Panama Canal and its Sensitivity to Internal and External Shocks. Accessed 17^th January 2025. https://idbinvest.org/en/publications/economic-contribution-panama-canal-and-its-sensitivity-internal-and-external-shocks.

[x] On an average remittance received from the US amounts to US$ 530 million annually.

[xi] S&P Global.  (2024). Improved Panama Canal flows support US LPG over LNG. Accessed 13^th January 2025.  https://www.spglobal.com/commodity-insights/en/news-research/latest-news/crude-oil/022224-improved-panama-canal-flows-support-us-lpg-over-lng.

[xii] Congressional Research Service. (17^th December 2024). Panama: Country Overview and U.S. Relations. CRS. Accessed 23^rd January 2025. https://crsreports.congress.gov/product/pdf/IF/IF10430.

[xiii] The US and Panama in 2024 signed a Memorandum of Understanding on Assistance and Cooperation in Migration Matters which provides financial assistance to Panama.

[xiv] David Shepardson & Marianna Parraga. (2025). Senators raise concern about Chinese influence on Panama Canal operations. Reuters. Accessed 13^th January 2025. https://www.reuters.com/world/senators-raise-concern-about-chinese-influence-panama-canal-operations-2025-01-29/.

[xv] Lori Ann La Rocco. (2023). US trade dominates Panama Canal traffic. New restrictions due to severe drought are threatening the future of the shipping route. Accessed 15^th January 2025. https://www.cnbc.com/2023/06/24/us-trade-dominates-panama-canal-traffic-a-drought-is-threatening-it.html.

[xvi] Panama has recently submitted a notice to withdraw from the BRI.

[xvii] The Guardian.  (2025). Trump says China is ‘operating’ the Panama Canal- here are the facts. Accessed 17^th January 2025. https://www.theguardian.com/world/2025/jan/23/donald-trump-panama-canal-operation-china-claims-explainer.

[xviii] Sabrina Nicholls. (2024). Panama: China’s Strategic Hub. Dialogo Americas. Accessed 12^th January 2025. https://dialogo-americas.com/articles/panama-chinas-strategic-hub/.

[xix] These ports are now operated under a new nomenclature, Panama Ports Company which is a part of Hutchinson Ports and is a subsidiary of Hong-Kong based CK Hutchison Holdings. The contract to operate the port was extended by another 25 years in 2021.

[xx] International Trade Administration. (2025). Panama New Government’s Projects. ITA. Accessed 17^th January 2025. https://www.trade.gov/market-intelligence/panama-new-governments-projects.

[xxi] The US Senate Committee on Commerce, Science, & Transportation had a bipartisan hearing on 28^th January 2025 on examining the Panama Canal and its impact on US trade and national security and expressed concerns regarding China’s activities in and around the Panama Canal.

[xxii] The contract to manage two ports at Balboa and Cristobal was originally awarded in 1997, which was then renewed in 2021 and may be again renewed in 2047. Additionally, Panama is also in the processing an audit of the company which operates the ports.