The Panama Canal is in the eye of the storm

Trump’s foreign policy combines theatrics with threats. The theatrics include treating Canada as the 51st state and referring to its prime minister as “Governor Trudeau.” And the threat centers on taking back control of the Panama Canal — a vital waterway connecting the Atlantic and Pacific Oceans, saving ships an additional 8,000 miles around the perilous tip of South America.

The 51-mile-long canal cuts through central Panama, a country straddling the isthmus between Central and South America. Approximately 5% of global trade flows through the canal, and the United States as its biggest customer, accounting for 74% of the cargo, followed by China at 21%.

For Panama, the canal is a goldmine. It generates around $4 billion annually, with $2.5 billion going directly to the government. This waterway serves as the backbone of a nation growing at an extraordinary annual rate of 6.5%, supported also by its financial services, tourism, trade, construction, and transport sectors.

But Trump’s memory is sharp. In the fiscal year ending September 30, 2024, nearly 10,000 ships traversed the isthmus, carrying 423 million tons of food, minerals, and manufactured goods. Over 40% of the consumer goods traded in 2023 between Northeast Asia and the U.S. East Coast passed through its locks.

In response to recent droughts, Panama’s president, José Raúl Mulino, announced a rate hike for this year — a move that provided the perfect trigger for Trump’s fury over what he called “ridiculous” fees levied on both commercial and military vessels. Trump also voiced complaints about China’s growing influence in canal operations, declaring that if Panama ensure “the secure, efficient and reliable operation” of the channel, “then we will demand that the Panama Canal be returned to us, in full, and without question.”

Mulino, in response, argued that Panamanian sovereignty is non-negotiable and that control of the canal has come at the cost of “blood, sweat, and tears.”

The story goes that the United States took over construction of the Panama Canal in 1904 after aiding Panama in gaining independence from Colombia. The canal was inaugurated in 1914, marking one of the greatest logistical revolutions of the 20th century.

Decades of tension between the United States, which administered the canal, and Panama came to a head on January 9, 1964. A massive protest erupted, resulting in 28 deaths during the subsequent repression by authorities. Under growing international pressure, U.S. president Jimmy Carter (1924–2024) and Panamanian leader Omar Torrijos (1929–1981) signed two treaties in 1977 to gradually transfer control of the canal to Panama.

In 1999, after the U.S. helped overthrow military leader Manuel Noriega, Panama officially assumed control of the canal’s operations and infrastructure.

Trump knows the canal’s history and fits it seamlessly into his “America First” campaign. “It’s a matter of tariffs: if he manages to lower transportation costs, he can reduce the prices of goods entering the country, benefitting industries and farmers, and, in doing so, deliver on his electoral promises,” says Emilio Blasco, a researcher in International Relations at the University of Navarra in Spain.

If Trump excels at anything, it’s bending his interests to appear as inevitable realities. “It will not fall into the wrong hands,” he warned — a direct message to China.

The Hong Kong-based company Hutchison Ports PPC, a subsidiary of CK Hutchison Holdings, controls two of the five ports near the Panama Canal. While direct Chinese investment in Panama amounted to a modest 0.8% in 2023 (compared to 3.6% from Spain and 19.6% from the U.S.), Trump’s often unpredictable worldview perceives China’s involvement as a national security threat.

Nicaraguan President Daniel Ortega also wants to build a 276-mile canal connecting the Atlantic with the Pacific Ocean as an alternative to the Panamanian one.

Meanwhile, the Panama Canal has faced a 29% drop in ship traffic over the past fiscal year due to a severe drought. From October 2023 to September 2024, only 9,944 ships traversed the isthmus, a stark decline from 14,080 the previous year. These figures could justify higher tolls — or perhaps the opposite.

“Imposing sanctions or bans on shipping companies using the canal, assuming rates were not reduced, would backfire on the United States,” notes Roberto Scholtes, head of Strategy at Singular Bank. “The country’s port systems, as well as road and rail freight infrastructure, are already under strain, facing shortages of truck drivers and stevedores. The consequence? Redirecting Asian traffic to the East Coast by land would only drive up costs.”

After enduring several years of severe drought (notably in 1997, 2016, and 2023), the Mulino government has announced plans to expand the Panama Canal’s basin to reduce water consumption per ship crossing by 12%. Each year of scarce rainfall results in losses of around $1 billion. However, droughts often alternate with floods, creating a precarious balance.

“The greatest risk facing canal operations is the increasing variability in rainfall,” warns Steven Paton, a professor at the Smithsonian Tropical Research Institute (STRI). He underscores the danger, adding: “The canal area has seen numerous rainfall records over the last two decades, including a higher frequency of unusually dry years and large storms.” One such storm, La Purísima in 2020, was the most intense ever recorded in the region, coming “very close to causing catastrophic damage” and halting operations for an entire day.

Amid these climatic challenges, Panama is pushing to raise tariffs, despite opposition from Trump’s administration. Yet, in the discourse, farmers appear to be an afterthought. They contribute only 3% of Panama’s GDP but account for 30% to 40% of jobs, relying on water for their livelihoods in much the same way they did centuries ago.

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