By Vaibhav Tandon

Panama is a small country that plays a big role in global commerce. The country's most iconic attraction is the Panama Canal, the engineering marvel that has become a flash point for global trade tensions.

The Canal is a highly strategic 51-mile waterway that connects the Atlantic and Pacific Oceans.  It enables ships to avoid the lengthy and hazardous route around Cape Horn, thereby dramatically cutting down shipping times. 

The waterway accounts for almost 6% of global maritime trade, servicing 144 maritime routes used by more than 150 nations.  Around 14,000 ships pass through the canal each year, carrying over 500 million tons of food, minerals and factory-made products.  About $270 billion in cargo is handled annually.

The United States is the largest user of the Panama Canal.  About three-quarters of traffic passing through the isthmus either departed from or is heading to U.S. ports.  Trade between Asia and the U.S. east coast accounts for 42% of the Canal’s total traffic.

China and Hong Kong’s influence in global maritime supply chains has been growing, as companies from those countries hold significant stakes in key shipping infrastructure like the Panama Canal.  A Hong-Kong-based corporation controls two of the four major ports surrounding the waterway; this is perceived by the new U.S. Administration as a potential threat to American interests. Pressure has been applied to reduce this perceived security risk.

As a result, a Hong Kong-based company recently struck an agreement to sell shares of its facilities to a consortium led by a major American firm for close to $23 billion.  But the deal has drawn the ire of Chinese authorities.

High transit tariffs have also become a focal point for the Trump administration.  It has alleged that canal fees violate the Permanent Neutrality Treaty, which requires transit fees to be “just, reasonable, equitable and consistent with international law.” 

Operators of the port note that two years of record drought led to a major reduction in water levels in the Gatun Lake, the reservoir that supplies the canal.  This forced the authorities to implement restrictions on ship traffic, leading to record-high transit fees, longer transit times and disruptions to global trade.  In late 2023, only 22 ships crossed the canal each day instead of the usual 36.

Beijing had extended its national security laws to Hong Kong in 2020.  This is also a concern for the U.S. Under the laws, mainland authorities can seek information from Hong Kong companies for monitoring shipping and the strategic positions of naval vessels.

A conflict over control of the Panama Canal would be disastrous to international supply chains.  A triumph of engineering is at risk of becoming a tragic symbol of global trade frictions.