The Panama Canal and trade war between the United States and China

In December 2024, just a month before taking the presidency of the United States, Donald Trump publicly announced that he was going to “take back” the Panama Canal and everyone kind of lost their cool over this announcement. In the media, we can find information about the role of the Panama Canal for the United States, China's growing influence in Panama, and they also mention Trump's military "threat" to retake the canal. Was this really a military threat from the United States? 

Panama canal, an international trade player

The historical ties between the Panama Canal and the United States

Since the 16th century, a couple of years after the arrival of the Spanish to America, countries such as France or the U.S.A were already considering the possibility of connecting the Pacific and the Atlantic Ocean by building a canal that would allow transoceanic navigation. Before the construction of the Canal, Panama was already a natural route for the transit of goods and people. For foreign countries and especially the European powers or the United States, the isthmus, that is, the narrow piece of land that links North and Central America to South America, could become a transoceanic canal that will shorten travel time for ships. At the end of the 19th century, during the 1880s, the French attempted to build such a canal, but it was a total failure. 

At the beginning of the 20th century, Panama existed as a department of Great Colombia. Many Panamanians were demanding independence and the creation of a Panamanian government. However, the Colombian government had no interest in getting rid of Panama, which represented a strategic territory. In the 1900s, the then president of the United States, Theodore Roosevelt, attempted to negotiate with Colombia for the construction of a canal but could not reach an agreement.

Thus the U.S decided to send the military to support the panamanian protesters who finally obtained independence on November 3, 1903. Two weeks later, the Hay-Bunau-Varilla treaty was signed between the governments of Panama and the USA for the construction of the Panama Canal. 

If the Panamanians obtained control of their territory, they did not obtain control of their future canal. This treaty granted the United States completely unlimited use of the Canal. A strip of land that would later be called the “Canal Zone” was given to the United States in perpetuity, in which the laws of the United States would govern. Furthermore, within the framework of that treaty, the only real benefit that Panama received was a modest annuity. The country also benefited from the creation of direct and indirect national jobs. However, it should be highlighted that wages of Panamanians were far below those of North American workers. In the long term, the little control that Panama had over its canal created political tensions between Panama and the United States and social tensions among Panamanians. These tensions came to a peak with the events of January 9, 1964, which resulted in the death of 23 people and the injury of more than 200 people. A few months later, in March 1964, the then president of the United States, Lyndon B. Johnson, recognized the Panamanian claims and decided to undertake an internal process to return the Canal to Panama.

The Torrijos-Carter Treaties: can the United States intervene militarily in the Canal?

10 years later, on September 7, 1977, US President Jimmy Carter and Panamanian President Omar Torrijos signed the Torrijos-Carter Treaties at the headquarters of the Organization of American States (OAS), in Washington. These treaties put an end to the concept of perpetuity and describe the process of liquidation of the Canal Zone and define the date on which Panama would regain control of the Canal, that is, December 31, 1999. They include three treaties: one dealing with the Canal, another with its operation, and another on the neutrality regime of the Canal.

However, these treaties only returned 64% of the Canal Zone lands to Panama and allowed the United States to retain advantages and rights over the Canal. First, the United States benefits from an advantageous economic agreement. The annuity that Panama must pay is extremely limited. Likewise, the development credits that must be granted to Panama by the United States are loans that are granted for the purchase of North American products, reinforcing the economic presence of the United States in the country. 

Likewise, the Treaty concerning the Permanent Neutrality and the Operation of the Panama Canal gives the United States the right to intervene militarily in Panama to guarantee its security and neutrality. It is not that clear what “to guarantee neutrality” really means and implies but what we know is that it is this right that President Donald Trump made reference to and apparently would like to use to take back the Canal, arguing that it is under Chinese control. 

However, if at first the United States gave itself the right to take unilateral action to defend the Panama Canal against any threat against the Canal, in an amendment to the 1978 Treaty, the “DeConcini Condition,” these terms were rejected by Panama. The Central American country sent a letter to the UN to denounce the US for giving itself the right to intervene militarily in Panama based on a unilateral decision, which violated international law and the organization's principles. The US thus had to amend the text.

First text submitted: “If the Canal is closed, or if its operation is interfered with, each country will have, independently, the right to take the measures that each considers necessary, including the use of military force in the Republic of Panama.” (translation from Spanish)

Amended text: “In compliance with its adherence to the principle of non-intervention, any action taken by the United States in the exercise of its rights to ensure that the Panama Canal remains open, neutral, safe and accessible, may be only for the purpose of ensuring that the Canal remains open, neutral, safe and accessible, and will not be intended, nor will it be construed as the right to intervene in the internal affairs of the Republic of Panama or interfere with its political independence or territorial sovereignty.” (translation from Spanish)

So in this new amendment, the United States affirms that the right to intervene in the Canal should not be interpreted as “a right of intervention of the United States in the internal affairs of Panama.” Any action taken by the United States in exercising its rights to ensure the neutrality and security of the Panama Canal should only be construed as action to ensure that the Canal remains in the condition stipulated by the treaties.

To conclude, the United States does have the right to intervene militarily, however, in order to intervene the US would have to demonstrate that the neutrality of the Canal is threatened.  In our case, the US would have to prove that China has control over the Canal and this decision cannot be made unilaterally according to the law.

The role of the Panama Canal in international trade (regional and global trade)

The construction of the Panama Canal changed the patterns of international trade. The use of the Canal made it possible to open new maritime routes between countries and regions that traditionally did not have commercial relationships due to their remoteness. It also made it possible to shorten transportation times, facilitating and increasing trade flows in the world. For example, the distance between New York and San Francisco (USA) through the Panama Canal is 5,262 nautical miles whereas the route through the Strait of Magellan is 2 times longer (more or less 13 nautical miles). Today, the Canal represents the main maritime connection between the Atlantic and Pacific Oceans. 

The Canal allowed many countries and regions to be more competitive and develop their economy. It has been one of the main sources of economic growth especially for developed countries, such as the United States. 

Here are the main commercial routes with traffic in the Panama Canal according to data from the Panamanian authority:

• East Coast of the USA and Asia (Far East)

• East Coast of the USA and West Coast of South America

• Coast to Coast of South America

• Europe and West Coast of South America

• East Coast of the USA and West Coast of Central America

In total, 170 countries in the world use the Panama Canal. The Canal serves as a connection to 180 different routes and 1920 ports are connected to it. According to the 2024 annual report of the Panama Canal Authority, about 3% of global maritime trade transits through the Canal. 

Regarding the importance of the Canal for Latin American trade, in 2009 an average of 4.8% of its maritime exports to the world crossed the Canal. This percentage was higher for west coast countries, for example, for Chile, Ecuador and Peru, they reached 32%, 31.2% and 26.8% respectively[1]. Regarding the total imports, 18% of Latin American imports passed through the Panama Canal in 2007. A revaluation of these figures would be interesting and necessary but we can assume that these figures increased over time as international trade kept developing.

In 2024, the activity of the Canal directly contributed a total of US $2,475 million to the State. Direct and indirect contributions to the Panamanian economy reached US $3,604 million. The Canal contributed to 2.9% of Panama's GDP in 2024 [2]. In 2023, the Panama Canal represents the route through which 57.5% of the total cargo transported by container ships from Asia to the east coast of the United States transits [3].

According to data from the Panama Canal Authority, the majority of cargo movements coming from the Pacific go to the East Coast of the United States and the majority of cargo movements coming from the Atlantic go to Asia. The main ships that pass through the Canal are container ships, bulk carriers and chemical tankers.

The Panama Canal at the heart of the commercial and geostrategic war between the United States and China

China-Panama: a recent friendship

For a couple of years, China has undertaken a process of diplomatic rapprochement and development of economic and commercial relations with Panama. It is important to understand that China's rapprochement with Panama is part of its influence strategy on Latin America that it implemented at the beginning of the 21st century. 

China really began to take an interest in Latin American countries in the 2000s. It first started developing bilateral commercial/economic relations with the countries. China signed free trade agreements with Chile in 2005, with Peru in 2009 and Costa Rica in 2010. In 2018, the Asian country signed cooperation agreements with Venezuela. In 2019, China and Mexico signed an agreement for the Reciprocal Promotion and Protection of Investments. The signing of these treaties represents the first stage in the development of Chinese influence in the region through trade and mercantilism. 

In the 2010s, China began to develop a “soft power” strategy to consolidate China's presence in the region. In 2013, the People's Republic of China and Mexico signed a comprehensive strategic partnership agreement. This agreement involves a cultural, technological and diplomatic collaboration between the two countries. January 8, 2015 marks the launch of the China-CELAC (Community of Latin American and Caribbean States) Forum, which aims to align development strategies of both parties, strengthen strategic coordination, promote cultural exchanges and strengthen mutual political trust. China multiplied cultural cooperation projects of this type in the region. 

China joined the Inter-American Development Bank (IDB) in 2009. The IDB represents the largest regional development bank and the main source of multilateral financing for regional integration and the economic, social and institutional development of the countries of Latin America and the Caribbean. In July 2014, at the China-Latin America and the Caribbean Leaders' Meeting, President Xi Jinping delivered a keynote speech titled “Strive to build a community of shared destiny characterized by moving forward together,” in which he highlighted the creation of a comprehensive cooperative partnership between China and Latin America/the Caribbean. 

Since Xi JinPing came to power in China, the “new silk routes” are at the heart of Chinese foreign and trade policy. The Silk Road was a network of ancient trade routes that was established during the Han Dynasty of China in 130 BC, which connected the different regions of ancient times through trade until 1453 AD. In September 2013, Xi JinPing announced the Belt and Road Initiative (BRI) an ambitious business and geopolitical plan, which consists of the injection of financial resources and the construction of infrastructure such as roads, bridges, railways and ports in strategic territories to consolidate the global presence of China and its companies around the world. 

If at first Latin America was not fully included in the BRI project, in 2016 the Chinese government published a document which formulates the idea of ​​using Latin America as an extension of these new routes. From there, countries like Peru or Panama were integrated into the Chinese project. Within the framework of the Belt and Road Initiative, China has signed cooperation documents with 21 Latin American countries. 

Among other things, China wants to dominate a large part of strategic ports in the world, including in Latin America, to control a large part of international trade. The country invests largely in the public sector and also strategic sectors of Latin American countries. China took advantage of the United States' withdrawal from the region after September 11 to become the main player in Latin America granting significant bilateral and multilateral to companies from the private and public sector. For instance, the Chinese company COSCO Ports built the mega port of Chancay (Peru) to compete with other large Latin American ports and control a large part of South America's regional trade. 

As for the People's Republic of China-Panama relations, they began in June 2017 when Panama recognized the existence of a single China, breaking its diplomatic relations with the Republic of China (Taiwan). China, through the BRI, seeks to use Panama and the Canal as a gateway to the Latin American market. It is important to note that Panama was the first country to join the Chinese Belt and Road Initiative project. 

Only between 2017 and 2018, the country signed 47 agreements with the People's Republic of China. The agreements involve bilateral cooperation in the areas of diplomacy, trade, economy, infrastructure, tourism, development, among other things. 

On December 11, 2017, the two countries signed a Memorandum of Understanding on Cooperation within the Framework of the Silk Road Economic Belt and the Century Silk Road Maritime Initiative that aims to strengthen bilateral cooperation through strong economic and trade relations. This agreement is one of the largest Chinese projects in terms of foreign policy.

On December 17, 2017, Panama and China signed the Maritime Cooperation Agreement, which includes state control of their ports and maritime traffic, the promotion of maritime transport between both parties and mutual support before international organizations, among other things. The topics included in the cooperation agreements with Panama coincide with the global goal of the People's Republic of China to develop its hegemony in Latin America.

The implementation of the BRI project in Panama involved an increase in Chinese investments in the country. While the United States was Panama's largest trading partner in 2024, China is right behind. According to data from the Panamanian government, in 2022, China occupied the #1 position, in 2022, as a destination for Panamanian exports and also as the main country of origin of imports to Panama.

As part of the agreements signed between China and Panama, both committed to encouraging companies and other organizations to carry out cooperative actions and projects through direct investments, creation of joint ventures, construction projects, supply of equipment and technology transfers, among other things. 

Here is a list of the Chinese companies established in Panama at the end of 2022 : (source: Panamanian Ministry of Commerce and Industries, INTELCOM)

Importance of the Panama Canal for US trade

As mentioned in the first part, Panama and the United States are linked by history through the involvement of the United States in the country's independence process and the Canal construction. The Panama Canal is “vital” for the United States at a strategic level. The construction of the Panama Canal was done mainly for strategic military goals as it constituted a strategic defense point for the American continent where the North could be defended as well as the South, as well as the Caribbean and the Pacific. It should be noted that for a long time, exercising control over Latin America was a key point of US foreign policy explaining why the United States were so predominant in the region. 

However, after the return of the Canal to Panama and the withdrawal of US troops in the country, relations between both countries have been mostly economic and commercial.

In 2006, a Canal expansion project was launched with the participation of the United States. The expansion of the Canal was beneficial for the US for several reasons: 

• Possibility for larger container ships to cross the Canal

• New opportunities for North American investors

• Increase in US exports

• Increase in US imports from Asia 

• Facilitation of internal US trade flows (facilitation of traffic between the East and West Coasts, the US depends on maritime transport for its internal trade since its railway network is very poorly developed).

• Possibility for larger US Navy ships to cross the Canal and move from one ocean to the other

• Better political stability in Panama due to greater economic growth.

According to the 2024 report of the Panama Canal Authority, in 2024, 74.7% of the cargo of the Panama Canal has as its origin or destination the United States. The Canal is essential for its internal trade as well as for its foreign trade. 

Does China really control the Panama Canal?

It is clear that the United States did not like the establishment of diplomatic and later commercial and strategic relations between Panama and the People's Republic of China. President Donald Trump complained several times about China's influence over the Panama Canal and declared that the Chinese control it. What Trump’s arguments are valid?

China is the largest supplier to the Colon Free Zone (FTZ). The Colon Free Zone, as its name indicates, is a free trade zone located at the entrance to the Panama Canal on the Atlantic side. Several large and prestigious multinational companies are located in this area of the Canal. The ZLC represents the most important free trade zone on the entire continent and the second most important in the world, with an annual volume of imports and exports reaching US$16.16 billion [4]. In the first half of 2017, the Colon Free Zone imported US $1,344 million of Chinese products. In recent years, several large Chinese companies sought to establish themselves in the FTZ. Furthermore, in 2017, China launched the construction of the largest container port in the CFZ on Margaret Island with an investment of US$1.1 billion [5]. Until early March 2025, China (Hong Kong) had control of the two entry ports of the Panama Canal. 

However, it should be noted that the Panama Canal is managed by an independent authority, appointed by the government, the Panama Canal Authority (ACP). It was created in 1997 and aims “make the channel an efficient and profitable company, a pillar of human and socioeconomic development of the country”[6].

Besides, The United States remained the main destination for Panamanian exports in 2024, with a total of 184.5 million dollars [7] (19.1% of Panamanian exports), consolidating its position as Panama's main trading partner. Likewise, according to data available on the Panama Canal website, in 2024, 74.7% [8] of the Panama Canal's cargo originates or ends in the United States (mainly ports on the East Coast and the Gulf of Mexico), while only 21.4% of the cargo came from or went to China.  

As you can see in the table below, the main country of origin and destination of cargo is the United States, far ahead of China. 

Source: Panama Canal Authority, “Annual report 2024”, 2025

Taking into account the data and all the benefits that the Torrijos-Carter Treaty and the expansion of the Canal gave to the United States and after analyzing China's presence in the Panama Canal, stating that China “controls” the Canal seems a bit exaggerated not to say false.

Conclusion

To conclude, for all the reasons stated throughout this article, the United States needs to preserve good relations with Panama since the Canal represents a “vital interest” for US trade and Navy. Since the US and China are in the middle of a trade war that President Donald Trump started in 2017, the United States wants to ensure that they remain Panama's first trading partner and that they keep their interests protected in the Canal. 

Trump's speech is a reflection of his economic policy, based on protectionism, and demonstrates that the trade war that President Donald Trump launched is not yet over. The figures and data show that the United States continues to be Panama's main trading partner and also the main foreign country that uses the Canal. The Canal is managed by an independent Authority whose director is appointed by the government. China, through a Hong Kong company, had control over two major ports of the Panama Canal, not the entire Canal.  

If Trump thought he could apply the DeConcini Condition of the Permanent Neutrality Treaty of the Torrijos-Carter Treaties to intervene militarily to retake the Canal, well it is not that simple. Panama's agreement is required to send troops to its territory and it is also necessary to demonstrate that there is a real threat to the Canal to apply the Treaty. The presence of Chinese companies does not constitute a threat to the neutrality or proper functioning of the Canal. If the Republican president wanted to send troops to the Canal it is unlikely that it would come under legal scrutiny, since the Canal is still operating and even seeing record traffic. It would not be legal under the 1978 DeConcini Condition amendment. 

It is therefore necessary to relativize President Trump's speech. In reality, his speech represented

an economic threat for Panama which also depends on the United States for its economy and is interested in maintaining good relations with Washington. 

However, In the end, the US president's threats led the president of Panama, José Raul Mulino to withdraw from the Chinese Belt and Road Initiative on February 7, 2025. Likewise, in March 2025, the largest investment company in the world, BlackRock, (an American company) bought the management of the Cristobal and Balboa ports located at the Atlantic and Pacific entrance of the Panama Canal from the Hong Kong company CK Hutchison. With this, this American company will control 3 of the largest ports of the Panama Canal. Two big wins for Trump!

Bibliography - The Panama Canal and trade war between the United States and China.pdf

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[1] Rodolfo Sabonge and Ricardo J Sánchez, ECLAC, “The Panama Canal in the Economy of Latin America and the Caribbean”.

[2] “Annual Reports,” Panama Canal Authority, Accessed March 3 2025, https://pancanal.com/informes-anuales/.

[3] Roberto Rodriguez, “Panama Canal Transit Report,” Panama Canal Authority, August 29, 2023, https://pancanal.com/informe-de-transitos-por-el-canal-de-panama/.

[4] “Global Affairs and Strategic Studies. School of Law,” Global Affairs and Strategic Studies, accessed March 7, 2025, https://www.unav.edu/web/global-affairs/detalle/-/blogs/china-aumenta-su-presencia-en-el-entorno-del-canal-de-panama.

[5] “Panama Colon Container Port Project Groundbreaking,” Panama Colon Container Port, accessed March 7, 2025, http://www.pccp.com.pa/pccp/index.php/sala-de-prensa/116-primera-piedra-del-proyecto-panama-colon-container-port.

[6] “Frequently Asked Questions,” Panama Canal Authority, accessed March 7, 2025, https://pancanal.com/preguntas-frecuentes/.

[7] “Panama Approaches $1 Billion in Exports by Closing 2024,” MICI, accessed March 7, 2025, https://mici.gob.pa/2025/02/04/panama-se-acerca-a-los-mil-millones-de-dolares-en-exportaciones-al-cerrar-2024/.

[8] “Each ton of cargo has an origin and an associated destination for each country. The percentage share per country is calculated from the perspective of cargo origin and destination.”, https://pancanal.com/estadisticas/.