Conversations on Strategy Podcast – Ep 56 – Dr. R. Evan Ellis – The Panama Canal

Transcript

This podcast was recorded on January 28, 2025, and updated on February 11, 2025.

In this episode, Dr. R. Evan Ellis discusses the Panama Canal, including its history and significance to the United States, China’s involvement in the region, and Secretary of State Marco Rubio’s visit to Panama in February 2025.

Keywords: Panama Canal, Secretary of State Marco Rubio, China, trade, President Jimmy Carter

Stephanie Crider (Host)

You’re listening to Conversations on Strategy. The views and opinions expressed in this podcast are those of the guests and are not necessarily those of the Department of the Army, the US Army War College, or any other agency of the US government.

I’m happy to be here today with Dr. Evan Ellis. Ellis is a professor of Latin American studies at the Strategic Studies Institute at the United States Army War College.

First, I just want to welcome you back. I know that we’ve been talking for a while about recording another podcast. Thank you for making time to join me for another Conversations on Strategy.

Dr. Evan Ellis

Stephanie, it’s a pleasure to be part of the program today. Thanks for having me.

Host

So, we’re talking about Panama today. I’d like to really dig in and get a better understanding of things here. What did the original agreement regarding the Panama Canal say?

Ellis

Well, by “original agreement,” of course, we’re talking about the agreement on September 7th, 1977, in which President [Jimmy] Carter agreed with President [Martín ] Torrijos of Panama to, essentially, return the Panama Canal and, in turn, Panama agreed to, essentially, defend and maintain and operate the canal. So, there are really two components of this. One, which is the more commonly known Panama Canal Treaty, which made arrangements for the return, again, at the end of December 31st, 1999, although there were different enclaves that the United States was able to hold on to after that point and that one by one [it] released or turned over to Panama in an organized fashion. Panama then, in turn, agreed to defend the canal and to operate the canal. Indeed, Article 4 of the treaty that talks about its obligations for protection and defense is a very important component of that, and that also served [as] the basis for the military coordination that we have today with Panama, in which we not only work with their border service SENAFRONT but also the air and naval service SENAN, international police, and also conduct one of the largest military exercises, multilateral exercises, that we conduct in the hemisphere, which is the two-part PANAMAX exercise.

But, it’s also important to note that aside from the Panama Canal Treaty itself, there was a second related treaty invoked the same day—the Neutrality Treaty—and that made provisions that the Panama government would operate this in what was referred to as a just and equal or equitable fashion and at what was called a reasonable fashion from the perspective of rates. In other words, the commitment on the Panamanian side was not only to ensure that all nations, the United States, China, et cetera, had access to it but also that the rates that it would charge would not prejudice one country or another—that even though you could have different rates for different classes of ships at different times—but, essentially, every country would have equal right and prioritization. Now, having said that, there are some important exceptions to that. Number one is pointing out that essentially, US military warships get to go to the head of the queue, and there’s also a separate related Treaty of Montería, which actually gives the Colombian government and the Costa Rican government [the] right to have free access or free use of the canal. So, there’s a number of different little-known details but, really, the bottom line is the turnover of the canal but [also] the corresponding responsibility for neutral operation access for all to use it.

Host

How is the canal used today, and how is its use different from America’s original understanding with Panama?

Ellis

That’s a great question. And, really, even when the Panama Canal was given back by the treaty by President Carter with President Torrijos, the canal’s use was already then evolving. But, when the canal was first built, and as it was used, especially during World War II and in the post-war period, it was initially largely about US commercial movements and military movements between the Atlantic and the Pacific. Now, a couple things have happened since then. First of all, global containerized shipping has become much more important. One of the primary uses back in those earlier days was largely about the Pacific and Atlantic [coasts] of the United States. Today, the Panama Canal has become a global shipping hub. Although the primary traffic is that which goes between the East Coast of the United States and Asia, you also find that traffic going between Asia and Europe has a certain role, also, between various other points that involve the use of the canal.

But also, the composition and volume of shipping has increased. First of all, from the time of the signing of the treaty, there has been a dramatic increase in the number of transits. In 2024, there were a total of about 11,240 transits—according to the Panama Canal Authority—a total of 210 million long tons. But also, there have been [an] increase in use by the Panama Canal by larger ships—so, what is now called the Post-Panamax category. And so, you’re looking at 14,500 TEU [twenty-foot equivalent unit] ships in terms of bulk carriers and others, [including] some of the very big LNG [liquified natural gas] carriers that take US LNG from East Coast terminals to Asia to customers that really need that US LNG like Japan and others. And so, those uses are different from what was initially contemplated.

Also, beyond just serving as a transit point, Panama itself, through the port of Colón and through logistics staging areas like Panama Pacífico, has become an important logistics hub for companies that want to warehouse and distribute their products from the Panama Canal.

Now, finally, [it is] important to note that while there was that initial importance of the military access, especially by the US military to the canal, and while, if there were ever a war in the Pacific, it would be important for the US to get certain smaller or mid-size ships from the Atlantic to the Pacific or, frankly, certain sustainment items or deployment items—especially heavier cargo—through the canal, at the end of the day, certain categories of ships (for example, carriers) do not transit the canal. And also, the deployment concept is arguably somewhat less reliant on the canal than it used to be—although in military terms it is still substantially important, especially as we look at the possibility of a conflict in the Indo-Pacific.

Host

Tell me a little bit more about how the Panama Canal contributes to international trade and economies.

Ellis

First, it’s useful to understand that as international shipping has become increasingly globalized, especially containerized shipping, that you have a series of international logistics you’d refer to as hubs or choke points. Of course, one is the Straits of Malacca, just outside of China. One, of course, being the Suez Canal and, of course, Panama, then, being the third of those major three. But, as I noted before, the function of Panama is not just as a logistics choke point but also as a transit hub for the transfer and on loading and offloading of cargo for, again, the warehousing of certain types of cargo for distribution throughout the region. And, beyond its role as a logistics center, [it also has] a role as an international financial center. And oftentimes, the commerce that you find moving through the canal and warehoused there, there’s actually a tie to some of those financial operations of Panama as an international banking center.

Again, in terms of overall volume, you can point out that only about 5 percent of all international shipping actually moves through the canal. And yet, at the same time, if you look from a US standpoint, again, about two-thirds of everything that goes through the canal actually either starts at, or ends at, a US port. And so, especially for that traffic going from the East Coast of the United States, and secondarily the East Coast of South America—countries such as Brazil—connecting to Asia, it is substantially important, and any disruption to the canal—as we saw during the period of drought where it had to restrict throughput just last year—any type of restriction has a really adverse impact on those flows [in] which the East Coast of the United States and others rely.

Host

How did China enter the picture? I’ve heard comments in the news about China and the Panama Canal.

Ellis

It’s a great question, and it really occurred in stages. First of all, understanding that as China increasingly engaged as the manufacturing factory floor of the world, especially in the 1990s and expanding in the 2000s with its entry in 2001 in the World Trade Organization, the role of Chinese products needing to access US East Coast and Latin American East Coast destinations were increasingly important. During that period, you had Chinese shipping companies (such as China Shipping and COSCO, which eventually merged) becoming increasingly important as users of the canal behind the United States and in conjunction with other partners such as the Japanese and the Chileans. But, in the context of the turnover of the Panama Canal—again, December 31st, 1999—to Panamanian authorities, so the Panama Canal Authority, the question was as they moved towards that period, well, who would operate ports on the Atlantic and Pacific? Who would get those concessions? And so, there was a deal that was somewhat criticized for a lack of transparency at the time in which Hong Kong–based Hutchison Whampoa [Limited] was given one of what was eventually three ports on the Cristóbal side and one of two on the Balboa side. As Hutchison proceeded through, and in conjunction with, COSCO as a user of the canal, it built a relationship with the Panama Canal Authority, and China increasingly got involved in Panama.

Now, it’s also useful to remind the listeners that this was not the first time that ethnic Chinese had been in Panama. Indeed, ethnic Chinese had been brought over to Panama in the mid-nineteenth century to work on the railroads and eventually other projects. But, when we look at the expanding role of China, of course, one of the big moments was in the run-up to the change in recognition. About two years before recognition, there’s a question of allowing yet another Chinese port operator to establish a presence on the Colón side. This was a somewhat shady consortium called [the] China Land Bridge that was coming in to build a new operation, which was going to be called the Panama Colón Container Port. Again, there were a lot of issues involving the way in which the deal was signed and the supporting construction of infrastructure—like an LNG-fired power plant.

But, in the context of some of those preliminary agreements, the real takeoff occurred in 2017, when the government of Juan Carlos Varela, who had previously served in a government position working in China and who recognized the power commercially of China for Panama, decided to switch relations from Taiwan to the PRC [People’s Republic of China]. This allowed a dramatic jump in the Chinese commercial role and in engagement in a variety of different areas. Initially, there were 19 nontransparent MOUs [memorandums of understanding] signed between the new PRC government and the Varela government in Panama. And, at the time, it seemed like Chinese activity was just rapidly exploding everywhere. You had the use of a company locally known as China Construction Americas that built a vast, shiny new convention center near Panama City. You had talk of a $4 billion China-built bullet train. You had the Panama Canal container port that I mentioned before. You had a new power plant that was going to be built and the power transmission line (under questionable conditions) to support the new Chinese operations. You had a cruise ship terminal, which was being built up by the Chinese on the Pacific side of the canal [and] which was kind of curious because it was an area where you didn’t have, really, a lot of market things that new cruise ships would actually want to see. And then, you had some symbolically worrisome things such as, for example, the Varela government was going to allow the Chinese to put its new embassy on a hill over what’s known as the Amador Peninsula. Symbolically, that meant that as ships approached the canal from the Pacific, basically looking at the entrance of the canal, the first thing that they would see at the entrance of the canal was a big red Chinese flag on the hill there, over the Amador Peninsula.

If you added that to the role of China in purchasing copper from a major new Canadian-run copper mine that was starting up by a company by the name of First Quantum [Minerals Ltd.] and then negotiation by China of a free-trade agreement that also accelerated Chinese companies coming into both Colón and other places like Panama Pacific, you had the Chinese digital technology telecom company Huawei [Telecom Limited] expanding a big distro center on that side. And so, there was a moment in which it seemed that the Chinese presence was taking off.

To kind of bring this to a where we’re at today, it’s of use to note that because of the sense that Panama had gotten itself on the bad side of the relations with the United States under the rule of the Varela government, Panama had an election in which voters chose a change. The new government of [Laurentino] “Nito” Courtizo basically gave a new look to a number of Chinese projects. And so, the Panama Colón container port collapsed. The bullet train project went away. The fourth power line was reconsidered. Work on the free-trade agreement was stopped. Although one of the things that did happen is under questionable terms. That lease, which comes to be an important part of the story later—Hutchison’s 25-year operating lease to operate on both sides of the Panama Canal was renewed under questionable conditions. And then, of course, COVID hit about the same time, which slowed the projects down a lot.

And so, again, what you really had was an explosion that largely occurred under the Varela administration, which slowed down but did not stop completely under the Cortizo administration. And now, today, with the current government of José Raúl Mulino, you have the relationship continuing to evolve through smart cities, safe cities, projects, and possibly the regeneration of the FTA [free-trade agreement].

That’s kind of how we got where we are today in terms of a relatively massive Chinese presence. [There is] a lot of people-to-people contexts that go with that presence, and thus concern over what that all means in terms of China’s position of influence with respect to the Chinese government both in peacetime and if there ever [is] a military conflict in the Indo-Pacific.

Host

What does all of this mean for America, then?

Ellis

That’s a great question, and as you point out, this is something that often times people misunderstand. And so, what I have long argued is that there are both challenges and implications for the United States and the region in peacetime and if we ever have a war in the Indo-Pacific. Now, the issue in peacetime is the broader context of PRC-based companies as they seek to extend their operations in global logistics and in commercial penetration and capture as much of the value added [as] possible as they extend into Central America, into Mexico, as they extend their construction operations. A lot of those companies are based in Panama or have logistics and distribution hubs in Panama. A number have financial operations in Panama. And so, Panama [is] a base where they have a relatively good relationship with the government, have headquarters operations, a warehousing operation, that really facilitates the broader penetration of Chinese commercial (and with it, related human networks in influence) throughout the hemisphere.

At the same time, however, [as the] Department of Defense, and if you look at it from the perspective of US Southern Command (that has responsibility for the area encompassed by Panama and the canal) if we ever found ourselves in a conflict, you have to prepare for what your principal adversary—we have to presume here, that would involve, largely, the People’s Republic of China—might do not just in the in the Indo-Pacific but in other parts of the world to try to impede the US ability to project and sustain power in a fight in the Indo-Pacific. And so, to that end, when you look at a map, you see things that are competent, and often clever adversaries in the People’s Liberation Army might think about [them]. And, one of those things is how, by shutting down the Panama Canal and in [undeniable] ways, you could impede US deployment and sustainment flows in the movement of some forces from the Atlantic to the Pacific in a way that might limit the number of forces or the amount of ammunition to support those forces that could get to support Taiwan in such a fight and, thus, give the PRC an opportunity to push Taiwan to surrender before substantial forces could come.

To that end, one of the things that’s most misunderstood is it’s not the control of those two port operations in Cristóbal and Balboa by Hutchison Port Holdings [Trust] that is critical. It is the broader Chinese presence in the region that creates options for the Chinese. And I’ll use a pithy example: During the Second World War when we were fighting Japan, the empire of Japan actually had a crazy program where they were trying to build a huge submarine with an underwater aircraft deck. And, the idea was to have a submarine that could get close enough to the Panama Canal to launch an aircraft that could then launch one bomb that could theoretically shut down the canal.

If you think about all the things that the Japanese were willing to do during World War II just to get close enough to have one bomb go against the Panama Canal, think about the fact that Chinese companies not only operate on the port on both sides but have commercial operations in those staging areas, again, in Colón in Panama Pacific, the construction of bridges, et cetera. And so, the danger is that the Chinese today, through their commercial presence, have the operational knowledge plus the physical access that one would need to do any type of deniable, mischievous operations that could at least temporarily shut down the canal. Whether that would be to sink a ship into one of the narrow parts like Culebra Cut or sink a ship or detonate explosives in one of the locks themselves or do a cyberattack against the locks or mine part or all of the canal or even put ships at risk as they’re waiting at the entrance or exit to the canal. The number of things that one could do are numerous but, at the end of the day, the key point is that it’s not the PLA physically being in the canal today, but it is the access that they have through their ample commercial presence that creates those opportunities that they could exploit in wartime, in relatively quick but deniable ways.

Host

Let’s say that America decides to reclaim the Panama Canal. What would that potentially look like?

Ellis

That’s a great question, and there are different layers to this, and I would start with the legal issues, military issues, and what I would call negotiations based on the prospect of changing control of the canal. With respect to the legal issues, it really goes back to the question I illustrated before, whether the increase of freight rates Panama Canal authorities engaged in or the types of freight rates that are charged to some of the types of users that use it most, such as those big LNG tankers, and whether the questionable practices of Hutchison Whampoa can be construed to violate Panama’s neutrality commitments. Certainly, lawyers on both sides can argue that issue. There’s the broader question of whether the United States could take military action. We can remember 1989 when we felt that international drug dealer and anti-US populist Manuel Noriega was taking actions that were strategically unacceptable to the United States—to have the canal in control of somebody like Manuel Noriega. You can remember that the US militarily intervened in Panama to remove Manuel Noriega.

It’s interesting that today the long-standing, very close US security cooperation with Panama, with their border service SENAFRONT front, with the air and naval service SENAN, with the national police, it’s almost unthinkable in military operation. It’s as if, you know, Big Brother is going to militarily intervene against Little Brother. But, the issue probably would not be a question of could it be done? Certainly, the prospect of [a] military solution grabs everyone’s attention on both sides. But, at the end of the day, what, and again, in my academic judgment, is likely is the talks about what could be really serve as a basis for the Panamanian government to have a discussion about how their operation of the canal and the role of China there possibly could be adjusted to address some of those US policy concerns. And so, that might not be a renegotiation of the treaty.

There certainly are things that could be done, [including] potentially the inclusion of the United States under the Treaty of Montería to get it out of paying freight rates for some of its container ships—if that would not be regarded as prejudicial. There is the possibility that, based on the very questionable circumstances in which Hutchison’s Port Holdings [Trust] operations at Cristóbal and Balboa were renewed back in 2021—that what’ literally going on now, which is a detailed audit of Hutchison—could lead the Panamanian government fully within their treaty to [decide] the previous government’s extension of the licenses was fraudulent and null and void, and, thus, possibly to take those operating concessions away from Hutchison and perhaps give them to a more reliable, perhaps US-based operator such as Manzanillo International Terminals, which is there in Colón today.

And so, I think at the end of the day, there are probably ways in which, within the context of the treaty and short of military intervention, adjustments can be made or discussed that would address US concerns about both China and the freight rates again, you know, within the legal confines of existing treaty. And so, I think that's probably part of what Secretary [Marco] Rubio’s conversations and those of others with the Panamanian government of José Raúl Molino are probably all about today.

Host

Secretary Rubio has completed his trip to Panama and the region. What were the key results of and agreements from that visit and what are the implications for China's position in Panama and US-Panama relations going forward?

Ellis

By all accounts, Secretary Rubio's visit with President Molino was very positive, very cordial, and some of the initial results that came out were, first of all, an offer by President Molino following that trip to pull Panama out of the Belt and Road agreement that its previous president, Juan Carlos Varela, had committed to with China. Now, that is largely symbolic. There is no legal obligation that being part of that treaty puts on Panama to do anything for China, nor does it oblige China to give any type of priority to Panama in terms of its investments, although the investments have been substantial by the PRC. However, the act was an important symbolic gesture of goodwill with respect to the presidency of Molino. And in addition to that, perhaps the more significant offer that was made was [an] independent action by the Molino government to do an audit on the contract that gave Hutchison the authorization to operate the ports in Cristóbal and Balboa on both sides of the canal and the renewal of that contract by Panama Ports in 2021. Now, that renewal was seen as somewhat suspicious by a number of people in that the terms were extremely generous to Hutchison. And, also, there was relatively limited transparency with respect to the criteria with which the negotiations of renewal took place. And so, without violating Panama's commitments under the ND 97 Treaty [the treaty between the United States and Panama that transferred control of the Panama Canal to Panama by the year 2000] or the other commitments that legally it has to administer the canal in [an] equitable fashion, it might create the grounds to find sufficient corruption or wrongdoing in the renewal of Hutchison's license that could be taken away from Hutchison, rebid, and possibly given to another Western company, which would, at least symbolically, allow President Trump and the Trump administration to show a victory and decrease, at least to some degree, China's presence in the region. Although there are a number of other vulnerabilities that would still continue to be there with respect to Costco's regular operation in the canal zone, with respect to the operation of the Chinese companies with construction projects, as well as logistics facilities in Panama Pacifico [a community in Panama] and Colón and other places. However, it seems to be at least a goodwill gesture showing that the Molino government wants to work with [the] Trump administration to try to resolve some of these issues. And perhaps, going forward, also, the commitment that's been shown to work together and to study ways in which some of the US concerns over China's presence can be mitigated. So, it seemed like a good start for the relationship to go forward to address some of those very real concerns that the US and the Trump administration has.

Host

In our pre-podcast conversation, you talked about Colombia a little bit. Can you speak to that?

Ellis

Absolutely. As the listeners will likely be more than familiar with, on the 26th of January, you had [an] explosive diplomatic event. Both under the Biden administration and continuing under the Trump administration, Colombians who were in the United States without proper authorization were being deported, initially through State Department-chartered deportation flights. But then, President Trump authorized the use of military aircraft to supplement those capabilities. Initially, there was pushback by the government of Mexico, Claudia Sheinbaum, over these military flights. But, the real difference was what Gustavo Petro, the president of Colombia, did. The Colombian government had already agreed to the military flight in question to repatriate Colombians to their own country. There’s international legal precedent that a country is responsible or obligated to accept the migrants from their country that are expelled from a country where they do not have legally authorized status. The issue was that when that US military plane had left the ground, left California en route, at that time, probably in order to score political points, President Petro suddenly expressed a concern over the use of military aircraft and, again, in mid-flight when it was already in air, said that he was not going to allow that aircraft to land in Colombia.

And so, there was really two different levels. Number one is that the principle of Colombia’s obligation to accept its own nationals being repatriated, that is fundamental to the entire thrust of President Trump’s national security strategy on immigration in general in dealing with Mexicans and dealing with Venezuelans and dealing with all of the other actors in the region. And so, one just can’t allow that precedent. In addition to that, [is] the question of how one would respond, understanding that the world was watching and needing to send a clear message that the US would push back and push back hard. And so, what happened very quickly— and it was interesting that the administration really had a pre-planned set of very significant actions—most significantly, they announced a 25 percent immediate tariff on Colombian exports to the United States. Again, about one-third of Colombia’s exports actually go to the United States, so that’s significant. It was going to go up to 50 percent in the course of a week if the issue was not addressed. And perhaps more subtly, but actually more importantly, there was going to be extra prioritization given to the inspection in customs of Colombian cargo. Now, why is that important? It’s important because although most of Colombia's exports to the United States are oil and minerals and other items of that nature and, of course, coffee, one of Colombia's significant [industries] is the export of flowers. And, as some may know well, the first two weeks of February correspond to something very important in the United States, that being Valentine’s Day. And so, in other words, not only the tariffs but those inspections of cargo given flowers, which literally are perishable (and in heated containers) in a course of hours, that would have decimated at the high point of Colombia’s flower export season—its major export product.

That was consequential. There was also the announcement of suspension of visa processing. And so, again, many, many Colombians have legal relationships, come to the United States under all the proper documentation, but you have to apply for the visa. People have aunts and uncles and grandmothers. And so, suddenly, because of what Petro had done, reneging on this previous commitment, Colombians found themselves with their visa applications cancelled, as well as an announcement that those Colombians working for the Colombian government in the United States would also have their visas pulled. So, it was a very hard pushback very quickly, and I think [it] sent the message that President Trump was disposed to push back very hard on those countries that did not behave [consistently] with their international obligations and their previous commitments. And so, again, the outcome in which basically Gustavo Petro backed down, I think, you know, had implications not only for the US-Colombia relationship, but also, as Secretary Rubio is coming to Panama and elsewhere in Central America, and as President Trump engages the region in general, that the US was adopting this policy in which it was going to push back hard against those that challenged US equities as Petro had done.

Host

Thanks, Evan. Do you have any concluding thoughts you’d like to share?

Ellis

Just to really reinforce the fact that, obviously, President Trump has taken policy in a very new direction. At the end of the day, what we see with the Panama Canal, both commercially and strategically, and with a migration issue that we’ve also talked about today, is, I think, a reminder that although oftentimes we focus on other parts of the world, there really is no other region in the world in which US prosperity and US security is, as closely and immediately connected as Panama. And so, what is happening now, having a Secretary of State with Latin American expertise, having a National Security Council Director, Mike Waltz, also with extensive Latin American background, having key presidential appointments such as Mauricio Claver-Carone, basically an ambassador with [a] portfolio, with those type of Latin America contacts, [is that] we’re getting what has been historically unprecedented attention to this region. And, although that is shaking up a lot of trees, I think it also is a welcome reflection of the importance that Latin America has always had for the United States that merits greater thinking and resources from the United States, and that’s the direction we seem to be moving in today.

Host

It’s always a pleasure to work with you, Evan. Thank you so much for your time today.

Ellis

Pleasure is mine. Thank you, Stephanie.

 Host

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