Key Decision Point Coming for the Panama Canal
The Panama Canal sits at the nexus of international political and economic concerns. Following the Canal’s expansion in 2016, the waterway annually registers nearly 14,000 transits, a value equal to 6 percent of global trade. The Canal’s global shipping role has only increased amid the disruption of global supply chains during the Covid-19 pandemic and U.S. calls for nearshoring away from China. The United States remains the top user of the Canal—in 2019, 66 percent of the cargo traffic transiting the Canal began or ended its journey at a U.S. port; cargo from or destined to China made up 13 percent of Canal traffic. Still, China is the primary source of products going through the Colón Free Trade Zone and its increasing presence in and around the Canal has made the waterway a flashpoint for U.S.-China competition over spheres of influence. China’s influence in the Panama Canal has only grown since 2017 when then-president Carlos Varela severed diplomatic ties with Taiwan and recognized China, further opening the door to China’s expanded footprint in critical Canal infrastructure and laying the groundwork for alignment with the Belt and Road Initiative (BRI).
Q1: How is the Panama Canal currently governed?
A1: The Panama Canal has been fully owned and administered by the Republic of Panama since the transfer of management from the joint U.S.-Panamanian Panama Canal Commission in 1999. Today, the Panama Canal Authority (ACP) is charged with the administration and maintenance of the waterway’s resources and security as an independent entity of the national government. Governed by the 11 members of its board of directors, the ACP’s members maintain overlapping terms to ensure independence from each presidential administration. Designated by Panama’s president, the chairman of the board holds the rank of minister of state for Canal affairs and under the supervision of the board, the designated Canal administrator heads the ACP, implementing the decisions of the board. Through contract awards, the ACP in turn grants concession agreements to companies for port operations.
While much of the Canal’s original legislation expired upon turnover of the Canal to Panama, one key treaty relevant to U.S. and Chinese influence in the Canal remains active with no expiration date. The Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal, or the Neutrality Treaty, between Panama and the United States guarantees permanent neutrality of the Canal with fair access for all nations and nondiscriminatory tolls. Only Panama may operate the Canal or maintain military installations in Panamanian territory. The United States, however, reserved the right to exert military force in defense of the Panama Canal against any threat to its neutrality. Any interpreted Chinese threat to the Canal’s neutrality could activate the U.S. forces through this treaty, meaning current and future Chinese interventions should be calculated with this potential response in mind.
Q2: What is China’s influence in the Panama Canal?
A2: Chinese companies have been heavily involved in infrastructure-related contracts in and around the Canal in Panama’s logistics, electricity, and construction sectors. These projects fit naturally with China’s BRI vision, onto which Panama was the first Latin American country to sign in 2018. This, along with Panama’s recognition of China, boosted China’s already existent footprint in the Canal, and Chinese companies have since positioned themselves at either end of the Panama Canal through port concession agreements. In 2016, in a $900 million deal, the China-based Landbridge Group acquired control of Margarita Island, Panama’s largest port on the Atlantic side and in the Colón Free Trade Zone, the largest free trade zone in the Western Hemisphere. The deal established the Panama-Colón Container Port (PCCP) as a deep-water port for megaships, and the construction and expansion was carried out by the China Communications Construction Company (CCCC), a company also active in China’s island-building initiatives in the South China Sea, and the China Harbor Engineering Company (CHEC). The location of the port on the Canal has since allowed China to capitalize on Canal expansion. Additionally, in March 2021 the Panamanian government began the process of renewing the lease of Hutchison Ports PPC, a subsidiary of Hong Kong–based CK Hutchison Holdings, which serves as operator for the ports of Balboa and Cristobal, two major hubs of the Canal’s Pacific and Atlantic outlets, respectively.
Furthermore, in 2018, a Chinese consortium led by CHEC and CCCC announced it was awarded a $1.4 billion contract for the Canal’s fourth bridge, which then-president Varela called “the fifth most important project in the history of the country.” More recently, China Construction Americas finished the Amador Convention Center along the Pacific side of the Canal, a project contracted under the Varela government and funded by Chinese loans. China has also invested in energy-related facilities along the Canal. For example, the Chinese group Shanghai Gorgeous invested $900 million to build a natural gas–fired electricity generation facility. As an economic foothold into Latin America, the Panama Canal is no doubt an important gateway for China’s bid for broader presence and a logistical hub for Chinese goods entering the region.
Aside from infrastructure projects, water management efforts are also a key source of entry for Chinese players. A plan announced in September 2020 would establish a water management system to combat against drought, which threatens the operation of the Canal, but also would impact local access to water for the next 50 years. This presents another opportunity for Chinese investors to increase their presence in Panama beyond the Canal.
In the first and second quarters of 2020, China strayed from traditional infrastructure and business investments to focus on supporting Panama’s fight against the Covid-19 pandemic. Between February and June 2020 alone, Panama received almost $2 million of aid in the form of healthcare-related supplies from China. This interest in Panama’s healthcare resources likely stemmed from the way that the onset of the pandemic in March 2020 brought multiple infrastructure projects, including the Canal’s fourth bridge, to a halt. Some work restarted in late 2020, but progress generally remains delayed.
Q3: What happens on January 16, 2022?
A3: A major concession agreement grantee is Hutchison Ports PPC. Its 25-year contract for the Port of Cristobal is set to expire on January 16, 2022, and Hutchison submitted a request for an extension in March 2021; the Panamanian government now faces the critical decision of whether to continue the extendable concession contract or pursue an open bidding process. In 1997, when Hutchison first won the contract, a report from the Senate Foreign Relations Committee concluded that Hutchison’s development of the Canal ports was not a direct national security threat. However, following clampdowns by China on Hong Kong’s autonomy in 2020, having two major ports managed by a Hong Kong–based holding is a greater security concern today than it was two decades ago.
The continuity of Hutchison Ports PPC’s contract will strengthen Chinese presence in the Canal. In recent years, Chinese investors have expanded their participation in Hutchison Ports PPC. Additionally, due to the growth in Canal activities of Chinese state-owned enterprise China Overseas Shipping (COSCO) as well as China-allied investment groups and construction companies, Hutchinson Ports PPC could be vulnerable to influence from fellow China-based companies in coming years.
The expiration of the Port of Cristobal contract represents a valuable opportunity for the United States and interested ally parties to encourage a competitive bidding process with transparent bids on the contract from U.S. and allied firms. Panama’s critical decision regarding the renewal of Hutchison Port’s contract could shape the Canal’s geopolitical players for years to come.
Q4: What are the implications for the United States?
A4: China’s BRI expansion into port-related facilities has stirred alarm for the United States over ambitions seen as endangering the neutrality of the Canal. Of those goods transiting the Canal, over 60 percent originate in or end up in U.S. markets, intrinsically tying free and fair Canal access to U.S. national security and economic interests in the country. Accordingly, the Canal is a major commercial asset, acting as gateway between the Atlantic and Pacific Oceans and a provider of lower shipping costs for U.S. and global trade.
With the expansion of Chinese influence in the waterway, the Canal will likely continue to be a point of tension in U.S.-China relations. China does not operate the Canal, it only manages the two ports on either end, meaning it does not interact or influence all goods transiting the Canal. However, the increase of Chinese companies’ control over transshipment cargo operations bound for the United States and other countries is a point of contention.
China’s expanded reach in the Panama Canal has slowed recently, mostly due to U.S. pushback and the Covid-19 pandemic. For example, the Panama Ministry of Public Works' plans for the announced fourth bridge over the Canal was scaled back in 2020. In 2018, U.S. and domestic pressure ended China’s plans to construct a large embassy at the mouth of the Canal. In fact, numerous initiated projects have been canceled, postponed, or scaled back during the current administration of President Laurentino Cortizo. This scaling back of Chinese projects by the Cortizo administration indicates that there not only exists a desire to maintain open relations with the United States, as embodied by Panamanians’ access to “Global Entry international trusted traveler” status for entering the United States, but also an opportunity for the United States to take the lead in the geopolitical competition surrounding the Panama Canal.
Q5:How can the U.S. government integrate the Panama Canal into a broader Central America strategy?
A5: The Panama Canal remains a central piece of the U.S.-Panama bilateral relationship. While the United States’ strategy toward Central America remains focused on the Northern Triangle, it also provides support to other Central American nations, including Panama, to address economic, security, and governance challenges. Through this policy framework, the Panama Canal can be tied into a broader Central America strategy, due to its deep ties to Panamanian economic prosperity as well as security and rule of law elements. A strategy that seeks to increase U.S. investment and broad-based economic and infrastructure engagement in the Canal fits into the broader U.S. goal of utilizing economic and political influence for countering Chinese influence in the region.
Given that large fractions of Chinese economic profits, and thus business relations, are driven by a select few families, the United States will need to craft a unique approach to reinforcing its own presence in Panama and particularly around the Canal. Using the Biden administration’s strategy toward Central America as a framework, investment in the Panama Canal can fall under efforts to enhance security and strengthen regional transparency to bolster strong governance and the rule of law. The United States can work with the ACP to counter corruption in public contract awards related to Canal infrastructure projects, strengthening the Canal’s operational transparency. Here too, the United States can engage on security issues, supporting inspections training and anti-trafficking operations in the Canal to combat ongoing drug trafficking and smuggling. The integration of the Panama Canal into a broader Central America strategy will require increased U.S. engagement with Panama itself, with the added benefit of rivaling China not only in the Canal but in the broader region.
Daniel F. Runde is senior vice president, director of the Project on Prosperity and Development, and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Amy Doring is an intern with the CSIS Americas Program.
The authors would like to thank Majaella Ruden, an intern with the CSIS Future of Venezuela Initiative, for her contributions.
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