Making the Panama Canal Great Again
The President-elect wants discounts for American energy exporters
So, the President-elect threatened to take back the Panama Canal if the Panamanians didn’t stop treating us unfairly. Then, I got a bunch of interview requests that required me to look into data that I hadn’t thought about in a decade. And I was surprised by what I found.
But I know the reason and I think I know what President Trump will consider a win. We’ll go in turn: (1) The Fake Problem; (2) The Real Problem; (3) The Justification; (4) The Threat; and (5) The Resolution.
The Fake Problem
“It was solely for Panama to manage and not for China or any other country to manage. You see what's going on there. China.”
—President-elect Donald Trump
Chinese control of the Panama Canal is not happening. That is not a thing.
Trump is talking about the way that Chinese companies manage the Panamanian ports where cargoes are transferred from some ships to others. In 2016, a Chinese company called Landbridge took control of Margarita Island, which it turned into Panama’s largest Atlantic port.1 Meanwhile, Hutchison Whampoa runs Panama’s older ports on either end of the Canal under a concession that Panama renewed for 25 years in 2021.
I can see why that looks bad. But it not a threat to American national security. Nor does it pose any sort of economic threat to the United States. And it certainly doesn’t give China a say in management of the canal.
I actually don’t think that President Trump will care about this if he gets a win on what he really wants.
The Real Problem
Against my expectations, since 2009 the Panama Canal has become a key artery for American exports. This is new in the history of the Canal. The Canal now carries about 13% of all American liquid hydrocarbon exports and half of our exports to Asia.2 A full 61% of all our LNG shipments to Asia passed through the Canal, a number which would have been 100% had it not been for long wait-times at the Canal.
Conversely, American exports have become key to Panama’s canal revenues. A rough back-of-the-envelop calculation estimates that American export cargoes generated 40 percent of the Panama Canal’s revenues last year.3 That was not true when I published my book on the Panama Canal (it’s the best book, the greatest book, an absolutely perfect book) back in 2010. It hasn’t been true since before World War 2, when the Panama Canal chiefly transported oil from California to the East Coast. But it is now.
So there are interests that Trump cares about who are annoyed by Panamanian toll hikes.
And toll hikes have been pretty large since the Panamanians took control in 1999:
Under the Americans, the Panama Canal was run (badly) as a public service. Rates covered costs, with no attempt to segment the market.
The Panamanians, conversely, have been experimenting to see how much the market could bear. They reached that point around 2012, but they have been trying to raise rates in specific market segments. One segment in particular is sure to be irritating friends of the President-elect: LNG tankers. The Panama Canal currently charges the average American LNG tanker $532,625 per transit, scheduled to rise to $580,518 at the end of the year.4 Now, that’s not a giant barrier given LNG tanker rental rates and the value of the cargo, but it is enough to annoy the President-elect.
A bigger barrier to American LNG exports are the aforementioned wait times at the Panama Canal, with Chiniere in particular complaining that they aren’t a “priority customer.” In other words, they want American ships to be able to jump the queue.
The Justification
I doubt any serious international lawyer would claim that Panama has an obligation to keep rates low for the United States.
But there is a “but” that you could drive an airborne division right through.
U.S.-Panama relations over the Canal are governed by something called the Neutrality Treaty.5 It’s a very boring (but short) document. Most of it just defines neutrality in different ways. But there is Article 3, Article 4 and Article 6.
Article 3 has a sentence reading, “Tolls and other charges for transit and ancillary services shall be just, reasonable, equitable and consistent with the principles of international law.”
Article 4’s key sentence reads: “The United States of America and the Republic of Panama agree to maintain the regime of neutrality established in this Treaty.”
Article 6 gives U.S. Navy ships the right to bump other traffic out of the way. The actual sentence reads, “Such [American] vessels of war and auxiliary vessels will be entitled to transit the Canal expeditiously.” Nonetheless, U.S. Navy ships have to pay tolls, just as they did before the handover, although back then it was just one part of the U.S. government paying another part of the U.S. government.
The upshot is that when the President-elect said “It was given to Panama and to the people of Panama, but it has provisions, you got to treat us fairly,” he wasn’t entirely filibustering. The Trump Administration could argue that Panama’s tolls are no longer “just” nor “reasonable.” It could also argue that Article 6 means that Navy ships shouldn’t pay tolls.
Does that mean that the Neutrality Treaty gives the United States the right to take back the Canal if the Panamanians refuse to cut us a deal on our energy exports?
Well, let’s look at the words of Jimmy Carter’s National Security Advisor, Zbigniew Brzezinski, as published on page 136 of his own memoirs:
I gave a briefing in early September to a group of political leaders in the East Room. I noted in my journal that “at the end of the meeting which was attended by Senator [Robert] Byrd, I was asked the question ‘But what if after the year 2000 the Panamanian government simply and suddenly announced that it is closing down the canal for repairs?’ Without a moment’s hesitation I replied, ‘In that case, according to the provisions of the Neutrality Treaty, we will move in and close down the Panamanian government for repairs.’ This brought the house down and I think assured a great deal of additional support for our efforts on behalf of the Panama Canal Treaty.”
Jimmy Carter’s national security advisor told a U.S. Senator that the treaty gave the United States the right to overthrow the Panamanian government if it interfered with the Canal.
Obviously, rate hikes are not at all the same thing as shutting down the Canal, but the Trump Administration won’t have to justify any actions in an international court of law. It just needs to point to the Neutrality Treaty. Then it can threaten the Panamanians.
The Threat
The United States wouldn’t have to invade.
Panama is uniquely vulnerable to American sanctions because it uses the U.S. dollar. In other words, it relies on dollar flows from the U.S. to maintain liquidity. Cut that flow and commerce dries up. Balboa notes have only been issued once, in a bizarre episode in the early 1940s, and they were all cancelled.
In 1988, Manuel “Cara de Piña” Noriega, Panama’s then-dictator, found out how bad this could be. It’s rather difficult to pin down the deeper cause of his conflict with the United States, since the fellow had been messing with drugs and money since the 1970s. Suffice it to say that by the late 1980s, Noriega had turned from “our bastard” to “liability” in the eyes of the Reagan and Bush administrations.
The proximate cause, however, was Cara de Piña’s anger-management problem. He decapitated Hugo Spadafora, one of his political opponents. When the nominal President of Panama, Nicolás Barletta, made the mistake of thinking that he, you know, ran the country, and decided to investigate the head-chopping, Noriega locked him in his office and threatened his family. At 3am, President Barletta appeared on national television and offered his resignation, which the National Assemby accepted in a late-night emergency session. Eric Delvalle, the education minister, then became President. A little while later, Delvalle decided to pass on to Cara de Piña an American offer to let him peacefully resign with all his ill-gotten gains.
In response, Pineapple-face ejected Delvalle from the presidency. Delvalle got word that he was going to be arrested the next day, and managed to make it to an American military base. Delvalle’s ambassador-at-large hired an American lawyer, William Rogers, and then ...
... Rogers’ firm filed suits to freeze Panamanian assets in the United States, beginning with the banks. On March 3, the courts froze the U.S. accounts of the Banco Nacional de Panama (BNP). The freeze deliberately cut off the BNP’s liquidity — it could no longer access any of the deposit accounts it held in American banks. Nor could it clear checks through American institutions. The BNP had to close its doors. In Rogers’ words:
“It was a conscious plan to tighten the financial noose around the neck of the Noriega regime. The consequences were seen with precision: Starve the banking system of cash, force the banks to close, and thus cause —not to put too fine a point on it — considerable financial, economic distress in Panama. The economy doesn’t function now.”
Since the BNP was also the Panamanian clearinghouse for domestic checks, the subsequent payday, March 14, became a bit problematic. How could Panamanian firms make payroll? Over 145,000 people, twenty percent of Panama’s labor force, had no access to the $30 million in wages they were owed. A general strike quickly ensued, beginning with the dock workers. By the end of March, Panama’s economy was in disarray, with GDP down about a fifth, and the country defaulted on its foreign debts.
Now, that wasn’t enough to dislodge Noriega. The United States had to invade to accomplish that.
But it certainly is a threat that no Panamanian government could take lightly.
Of course, using this tool would be a disaster for the United States, not least in prompting another wave of migrants towards the southern border. But it is on the table and I suspect it will prompt the Panamanians to give in to at least some of Trump’s demands.
The Resolution
Panama is not going to “give back” the Canal. Unlike Greenland, which I can imagine transferring sovereignty to Washington at a price the U.S. might be willing to pay, it’s extremely hard to imagine Panama selling the Canal to the United States for any reasonable price.6
Now, legally, Panama can’t cut American ships a deal. Article 2 of the Neutrality Treaty says, “There will be no discrimination against any nation, or its citizens or subjects, concerning the conditions or charges of transit.”
But there are always workarounds. The U.S. and Panama could renegotiate the treaty. Many countries have since signed on to the Protocol attached to the treaty, but at the end of the day the authorization is a bilateral treaty between the U.S. and Panama. If they pull out, it’s kaput.
Short of that, Panama could jigger rates to favor tanker vessels, which would have the effect of favoring the United States. But I will be surprised if President Trump doesn’t ask for a renegotiation. At the very least it will ask Panama to violate the Neutrality Treaty and then dare other countries (and private entities) to try suing over it.
Getting rid of the Chinese concessions, as pointless as that may be, would be tougher because it would cost Panama a lot of money. Hutchison Whampoa’s contract is projected to bring in $800 million for Panama, as it pays the government $12 per container. Terminating it would open Panama up to international arbitration and a mass of litigation. Landbridge’s contract would be at least as difficult to break, considering as it paid $1 billion for it. Of course, Chinese attempts to get compensation would ultimately wind up in American courts, presenting a supreme irony.
I don’t think the Chinese concessions will be going anywhere. But they don’t matter.
Summation
The U.S. has a reason to be annoyed with Panama’s increase in rates. Normally, however, this annoyance would be too small to risk upsetting hemispheric unity. After all, Panama has the right to set whatever rates that it wants to set.
But the Trump Administration doesn’t care about that.
So the obvious solution is a renegotiation of the Neutrality Treaty followed by preferential treatment for ships on American export routes.
Welcome back to the 19th century!
The Panamanians subsequently tossed out Landbridge, which is no longer involved in the project.
One way this blog tries to add value is by linking to original sources and explaining calculations. The data used to calculate this share derive from the Energy Information Administration’s (EIA) reports on exports to East Asia and the west coast of South America from the Gulf Coast (PADD 3). I cross-checked it against the amount of southbound tanker traffic going through the Panama Canal and a short EIA report on American hydrocarbon exports through the Panama Canal from February 21, 2024.
One way this blog tries to add value is by linking to original sources and explaining calculations. Panama Canal statistics have become significantly harder to get in the last few years, but transit numbers for the last two years are available here. Routes from the East Coast of the United States to Asia carried 51.7m long tons of cargo in 2024 to date, out of 199.7m total. An additional 33.4m went from the United States to the west coast of Central and South America. That comes to 48% of all cargo. The Panama Canal uses a relatively complicated system for charging tolls, but it generally tracks quite closely with cargo volume, so the rough estimate is unlikely to be off by much.
Some U.S. exports, however, are actually re-exports headed elsewhere. We do have some data on that, from Lin Jones, Christine Kobza, Finian Lowery, and Caroline Peters of the U.S. International Trade Commission. They published their work, titled “The Rising Role of Re-exporting Hubs in Global Value Chains,” in the April 2020 edition of the Journal of International Commerce and Economics. (Detail to avoid link rot.) We need to account for that.
We have already excluded re-exports to Canada through the Canal. Re-exports to Mexico are extraordinarily unlikely to go through the Canal, so we won’t worry about them. Exports to Europe from the West Coast might be re-exports, so let’s throw them out entirely.
Re-exports to Asia and the west coast of South America might pass through the Panama Canal, so we’ll assume that re-exports make up the same share of exports through the Canal as they do of all exports to Asia and South America. (This is unlikely for two reasons: Asian re-exports probably don’t go through East Coast parts, since they mostly come from Canada and Mexico, and re-exports are concentrated in manufactures which take up proportionately less tonnage per dollar than commodity exports.) Using 2024 trade values and the 2020 figure for regional re-export shares, that means we should discount trade by 7.5% to those regions. Let’s make that 10%, because why not?
The result is a back-of-the-envelop overall share of Canal traffic generated by U.S. export routes of 40%. Unfortunately, annual Canal statistics have become harder to get, so I can’t pinpoint exactly when this became the case. All I can say is that it wasn’t true in 2009, when the statistics on my hard drive stop.
I’m showing all work on this one! Rates from Norton Lilly. Volume of LNG sent through the Canal from Oxford Energy Associates. The United States sent 147 outbound LNG tankers through the canal last year. I calculated the average size of each shipment by dividing the total amount by 147. I then converted the units using the rate formula.
The “Panama Canal Treaty” governed relations during the handover and expired in 1999.
I’m talking about selling the Canal as a business enterprise, not taking back the entire Canal Zone. Maybe an offer that put $100,000 directly into the pockets of every man, woman, and child in Panama? That would come to a shade under 450 billion dollars, which would imply a price-earnings ratio of 141. That’s almost three times Nvidia. Maybe Panamanians would take that deal, I don’t know, but it would be a very bad one for the buyer.