Canal Wars ??
According to Lonely Planet, February is the best month to visit Panama, but not for U.S. Secretary of State Marco Rubio. On February 2, calm blue skies clad Panama City, but a palpable tension filled the air when Rubio arrived.
This marked the first time a U.S. Secretary of State made his initial visit to Latin America in over 100 years. Panamanians, adorned in their national flag, took to the streets to protest Rubio’s visit. They burned banners with photographs of U.S. President Donald Trump and the Secretary of State and shouted slogans urging Rubio to return. The message from Panamanians was clear: PANAMA WAS NOT FOR SALE.?
So, why was a country that’s been a US ally for the last two decades — one of the very few from the Latin American region — suddenly protesting against the US administration??
At the center of this issue is the Panama Canal, an engineering marvel connecting two mighty oceans: the Atlantic and the Pacific. This 51-mile waterway is essential to both global commerce and the United States. It handles 5% of global sea-borne trade, and nearly 40% of U.S. maritime traffic passes through it each year.
In fact, to fully understand the current issue, we need to go back nearly 100 years to the construction of the Canal. So hop on, let’s travel back in time.?
Story of the canal?
The idea of building a canal in Panama has been discussed for many centuries. Interestingly, one of the earliest proposals dates back to the 16th century, when Roman Emperor Charles V surveyed the route to allow ships to sail seamlessly between Spain and Peru.
However, the actual construction happened only 200 years later, in 1881, when the French diplomat Ferdinand de Lesseps – who had previously spearheaded the construction of the Suez Canal – gathered a syndicate of investors to fund the project and sought permission from the Colombian government. Panama was part of Colombia at the time.?
However, the project ended up being a colossal failure. The engineering challenges associated with the canal's construction drained the funds. Ferdinand de Lesseps applied the same techniques he used to construct the Suez Canal, which was exactly the problem; the desert-like conditions of the Suez are different from Panama’s mountainous terrain.?
Furthermore, the dense tropical forest, the exhausting conditions, and the constant presence of fatal diseases like yellow fever and malaria rampaged the human workforce.??
According to the book The Path Between the Seas by American historian David McCullough, the death toll between 1881 and 1889 reached a staggering 22,000. Finally, on May 15, 1889, after nearly spending US$287,000,000 (roughly $9.73?billion today) and after thousands of lives were lost to disease and accidents, the French efforts to build the canal were dropped.?
However, another country, expanding its presence globally, saw an opportunity in Panama to get stronger both politically and economically. Enter the United States of America.?
American takeover?
The butterfly effect states that small and insignificant events can have large and unpredictable consequences on a global scale. But what happened at the 1901 World Fair in Buffalo, New York, was no trivial event.?
The fair, named the Pan-American Exposition, attracted nearly 80,000 visitors, and American President William McKinley was one of them. Just six months into his second term, the United States president was shot dead in the exposition. McKinley was no ordinary president. He had just gotten the nation out of the economic depression and helped the US win the Spanish-American war.???
The leaderless nation turned to Vice President Theodore Roosevelt to take charge, and he assumed the presidency in 1901 to become the youngest US president.?
But how is this relevant to the Panama story??
When he became president, the United States had an overseas empire for the first time. After the Spanish War, Spain ceded the Philippines and Puerto Rico to the United States. Similarly, Cuba was a protectorate of the US, and Hawaii was just annexed.?The idea of further expanding this empire became his sole motive.
He wanted to increase the influence of the United States on a global stage and make America a superpower. To make this possible, he followed his famous maxim, “Speak softly and carry a big stick.” Soon, Colombia became the receiver of the “stick treatment” thanks to the French engineer Philippe-Jean Bunau-Varilla, who was part of the failed French efforts to build the canal.?
He knew the U.S. was on its way to global dominance. He presented the idea of building a canal and gaining control of one of the most important choke points would make America a force to be reckoned with. He then convinced Theodore Roosevelt that backing a Panamanian revolt was the fastest way to achieve this.
On November 2, 1903, US warships were stationed on Panama's shores, and on November 3, Panama declared independence from Colombia. The Colombian government raised troops to regain control of Panama.?
Surprisingly, the mighty American naval ships greeted the Colombian troops dispatched to Panama. The troops were good enough to fight and suppress the Panamanian uprising, but they were no match for the US warships.
Days later, the newly formed Panama signed the?Hay-Bunau-Varilla Treaty, handing control of the canal zone to the U.S. for a 99-year lease at an annual payment starting at $250,000.
Engineering miracle?
After taking control of the canal project in 1904, the U.S. turned a disastrous French failure into one of the greatest engineering triumphs of its time.?
The first challenge wasn’t digging; it was survival. Tropical diseases had decimated French workers, so Dr. William Gorgas, the chief sanitation officer, led a massive public health campaign to combat malaria and yellow fever. Swamps were drained, mosquito-breeding grounds were eliminated, fumigation became routine, and sanitation standards were overhauled. These efforts saved thousands of lives and made the canal’s construction possible.
The U.S. also reimagined the canal’s design. Abandoning the failed sea-level approach, engineers opted for a lock-based system that allowed ships to be lifted and lowered. This required the construction of Gatun Dam, the largest dam in the world at the time, and Gatun Lake, the largest human-made lake, which would provide the water needed to operate the locks. Enormous gates and valves controlled the flow, enabling ships to pass through.
Over 75,000 workers labored for a decade, enduring extreme heat, landslides, and dangerous working conditions. By the time the project was completed in 1914, the U.S. had spent nearly $375 million (approximately $15.2 billion today), making it the most expensive construction project in American history at the time. On August 15, 1914, the SS Ancon became the first official ship to transit the canal, marking the beginning of a new era in global trade.?
Return of canal?
Despite the canal's economic benefits, resentment toward U.S. control simmered among Panamanians almost from the beginning. That is because the Hay–Bunau-Varilla Treaty of 1903 was signed without a single Panamanian representative.?
To add to this, the Canal Zone functioned as a U.S.-run enclave, complete with American schools, segregated neighborhoods, and military bases. Panamanians were largely excluded from decision-making and high-level jobs.?
By the 1970s, anti-American sentiment in Panama had reached a boiling point. Meanwhile, the Cold War was in full swing, and the Soviet Union was expanding its influence across Latin America.?
The revolution was in the air — governments were overthrown, insurgencies gained momentum, and red flags rose across countries. The US feared that if tensions over the canal weren’t addressed, Panama could become the next battleground in the fight between capitalism and communism.
To prevent this from happening, then US President Jimmy Carter and Panamanian leader General Omar Torrijos signed two treaties called the Torrijos–Carter Treaties on September 7, 1977.?
The first treaty (the Panama Canal Treaty) nullified the 1903 agreement, officially recognizing Panama’s sovereignty over the canal. The U.S. would continue operating it until December 31, 1999, and then would transfer all the rights to Panama. The second treaty (the Neutrality Treaty) guaranteed that even after the transfer, the canal would remain open to ships from all nations. At the same time, the U.S. retained the right to intervene if its security was ever threatened.
In the 25 years since the U.S. handed over control of the Panama Canal, there had been little debate over Panama’s commitment to the neutrality agreement, until now. The controversy erupted when President Donald Trump accused Panama of breaking the pact and unfairly overcharging U.S. vessels.
The accusations
In his inaugural address on January 20, 2025, President Donald Trump referred to the 1999 handover of the Panama Canal as a “foolish gift that should have never been made.” He claimed the U.S. had been “treated very badly” since relinquishing control and accused Panama of breaking its promises under the neutrality agreement.
Trump further alleged that "the purpose of our deal and the spirit of our treaty have been totally violated," pointing to unfair treatment of American vessels, including excessive tolls on U.S. Navy ships. He also pointed out China’s growing influence in Panama, declaring, “China is operating the Panama Canal. And we didn’t give it to China. We gave it to Panama, and we’re taking it back.”
In short, President Trump leveled two key accusations: first, that U.S. vessels are being unfairly overcharged, and second, that China’s growing influence over the Panama Canal is threatening its neutrality and U.S. interests.
Let’s now take a look at both the accusations.?
President Trump's first accusation centers on the claim that Panama is overcharging U.S. vessels transiting the Panama Canal. To assess this, it's essential to examine the canal's toll structure and its application.
The Panama Canal Authority (ACP) enforces a structured toll system that applies uniformly to all vessels, regardless of nationality. Tolls are determined based on vessel type, size, and cargo capacity, ensuring a standardized and transparent pricing model. For instance, container ships are charged based on their Twenty-foot Equivalent Units (TEUs), while passenger ships pay per tonnage and berth capacity.?
A Panamax container vessel carrying around 4,500 TEUs typically pays over $400,000 per transit, while a large Neopanamax cruise ship, depending on its size and passenger load, can incur tolls exceeding $400,000. The ACP states that these rates apply equally to all nations, with no preferential treatment or discounts based on nationality.
But have rates increased recently? The answer is yes, and it applies to all countries, not just the United States. According to canal operators, prolonged droughts, investments in upgrades, and increasing demand are among the reasons for the price rise.
In fact, the ACP cites prolonged drought conditions as a primary cause. The drought has reduced water levels in Lake Gatun, which fills the lock and carries vessels between. This led to a reduction in daily transits in the Panama Canal.?
During the 2023 drought, the canal, which usually accommodates about 36 vessels per day, had to reduce its daily transits to 22 and 24 vessels. Before the crisis, the canal handled around 1,200 transits per month. During the peak of the drought, this number dropped by almost half, with some vessels waiting up to 21 days to cross.
To manage these challenges, the ACP implemented measures such as a Freshwater Surcharge and adjustments to the reservation system, including an auction mechanism for transit slots. This auction system has seen companies bid substantial amounts to secure timely passage; for instance, in late 2023, a shipping company paid nearly $4 million to expedite its crossing.?
So, did fewer vessels contribute to decreased revenue? No, interestingly, revenue increased. In fiscal year 2020, the ACP recorded revenues of approximately $3.35 billion. By FY 2024, revenues had increased to nearly $4.99 billion, representing a growth of about 49% over this period. According to the ACP, revenue increased despite a 21% decrease in deep-draft transits in 2024.?
Chinese influence?
This leads us to the next key accusation: Is the Chinese government influencing the Panama Canal's operations??
Echoing President Trump's concerns, Senator Ted Cruz, in his opening statement before the Senate Commerce Committee hearing titled “Fees and Foreign Influence: Examining the Panama Canal and Its Impact on U.S. Trade and National Security,” voiced concerns over China’s growing influence in the region.
“Chinese companies are building a bridge across the canal – at a slow pace so as to take nearly a decade – and control container ports at either end. The partially completed bridge gives China the ability to block the canal without warning, and the ports give China ready observation posts to time that action.?This situation poses acute risks to U.S. national security.” he said in his statement.?
A Hong Kong-based company has also been managing two vital ports — the entry and exit points of the canal. Hutchison Ports PPC has managed the port of Cristobal on the canal’s Atlantic side and Balboa on the Pacific side since 1997 through a concession from the Panama government. In fact, the agreement was automatically renewed in 2021.?
It is no secret that Hong Kong is a special administrative region of China. Although it has autonomy, it is still officially under China's control.? It is also worth noting that, in 2017 Panama became the first Latin American country to have signed China’s Belt and Road Initiative.?
But here’s the twist: Panama recently announced its exit from the Belt and Road Initiative. Furthermore, the Panama government has ordered an audit process to check on the extension given to the Hong Kong company.?
So, what changed? Why is the Panama government moving away from China??
Closer ties ?
The Panama Canal is the biggest contributor to the Panama national treasury each year. In 2024, according to the Annual ACP report, the direct contribution of Panama Canal revenue to the national treasury was $2.471 billion. Additionally, its contribution to the national economy stood at $3.598 billion, and the canal contributes 2.9% of the country's total GDP.?
In short, the Panama Canal is a significant revenue contributor to the country, and any battle — physical or strategic — with the United States will adversely affect its transit and business. Furthermore, 70% of all shipments that pass through the canal either start or end in the United States.?
Similarly, the canal is of great importance for the United States. The Panama Canal is a vital trade route between the US and Asia. According to ACP data, U.S. East Coast ports exported 125.6 million tons of cargo via the Panama Canal, with 64% destined for Asia, and imported 61.1 million tons of cargo, with 68 percent originating from Asia.?
It is a vital trade route that exports US agricultural products like soybeans, corn, and wheat. Approximately 600 million bushels of U.S. soybeans and 450 million bushels of corn transit through the canal. Similarly, significant US energy imports and consumer products travel through the canal.?
These numbers show how important the canal is for the U.S. economy, making it easier and cheaper to move key exports and imports. Any disruption in the canal can increase the travel time for vessels more than three weeks.?
Final words?
China is now unhappy with Panama’s withdrawal, and lashed out at both countries and called it US “coercion.”???
With Panama announcing its exit from BRI and reconsidering the role of Chinese private companies in the operations of the canal, it is a welcome move for the United States. This signals that Panama considers its ties with the United States. Finally, This shift not only strengthens U.S.-Panama ties but also serves as a strategic win for the U.S., considering the canal's pivotal role in international trade and its significance to American economic and security interests.
For the Trump administration, securing Panama as a key ally once again, at a time when control over global trade routes is more contested than ever, is a significant achievement. However, the bigger question remains: Will this shift lead to long-term stability, or will it be the start of a new geopolitical showdown in the Americas?
This newsletter was written by Shyam Gowtham
Thank you for reading. We’ll see you at the next edition!