By Matija Šerić
In 1513, the Spanish maritime explorer, Vasco Núñez de Balbo, crossed the Isthmus of Panama and saw the Pacific Ocean. From that moment on, the Spanish, and then the Dutch, the French, the British and the Americans, would try to dig a canal between the oceans that would greatly shorten the journey from the Atlantic to the Pacific. It took almost four centuries to achieve the goal. The Panama Canal is not only an impressive construction project and a sea canal connecting the Atlantic and Pacific oceans. The point is that the Panama Canal represents a key point that has a far-reaching impact on geopolitics, global trade and the world economy.
From its opening in 1914 to the present day, the Panama Canal has played a key role in shaping dynamics in terms of geopolitics and geoeconomics. The Panama Canal has an inestimable geopolitical significance as it is a key maritime route connecting the Atlantic and Pacific oceans. The canal is a strategic transit location that enables faster and more economical cargo transportation between the industrially developed east coast of North America (especially the USA) and Asia without the need for ships to sail around South America and its southernmost part Cape Horn and Tierra del Fuego (Strait of Magellan). Also, the canal makes it easier for goods from South America to come to Europe.
The idea of an interoceanic canal dates back to the Spanish colonial period. France started work in 1881, but stopped due to lack of investor confidence (engineering problems and high worker death rates). The United States took over the project in 1904. Construction of the canal began immediately after the Spanish-American War. It was a period of sudden foreign policy rise of the USA, which, although it itself overthrew the European imperialists, turned to imperialism.
The Americans took control of Puerto Rico, Cuba and the Caribbean, as well as the Philippines. Thus, the USA gradually became a power, and the Panama Canal would connect the growing American Pacific power with the traditional power in the Atlantic. When diplomatic niceties are discarded, it can be said without reservation that the idea of the Panama Canal is closely related to the idea of the rise of the USA as a world power.
The role of Teddy Roosevelt
The popular and colorful American president Teddy Roosevelt was a great nationalist and imperialist, and it is he who is most responsible for the realization of the Panama Canal. The United States built the Canal between 1904 and 1914. Congress questioned whether the canal was even necessary.
That’s why in 1906, during its construction, Teddy Roosevelt traveled to Panama. It was the first time a sitting US president had ever left US territory. He pulled off a successful PR stunt: He sat in a large earthmoving machine with a panama hat and gave a speech that America could and should do it. When he returned to the US, the Senate supported the project.
Thousands of human lives
It was a miraculous project, until then the largest public construction project in US history. American ingenuity was in building a diversion canal, instead of a sea-level canal. Given the terrain, which was not stable enough, the channel at sea level would be easily flooded and prone to landslides. The channel had to adapt to different levels. It was lower on one side than the other, with hills in between. Systems of locks (devices used to raise and lower ships and other vessels between water levels of different levels) are what made this possible. The engineering, technical and medical challenges were incredible but they were overcome. The canal was 64 km long and literally crossed continents, so the execution was extremely difficult.
The key thing the Americans did was to use railroads to transport land. The French piled it up, which led to a landslide. Also, when it rained, the dirt would turn into puddles, which attracted mosquitoes, which meant that malaria affected the workforce.
The US established medical innovations to control malaria and yellow fever. The construction itself was so significant that at one point one third of the city of Pittsburgh was working on the construction of the canal. Each canal lock, (four in all), had more steel, more concrete and required more work than the Empire State Building. The canal required the use of materials like the six buildings of the famous skyscraper in New York. A total of 27,000 people died building the Panama Canal in two construction periods, first the French one and then the American one. Today, it is unimaginable that so many thousands of workers die in one infrastructure project. On August 15, 1914, the canal was finally opened.
Thanks to the channel, the USA becomes a global power
Thanks to the Panama Canal, the USA for the first time in history was able to have a certain degree of control over the Pacific and Atlantic oceans. This was of crucial importance in both world wars. In the First World War, there was no advanced air force, so the enemy was still fought on the seas.
World power was matched by naval power. The Americans knew that they more than needed the Panama Canal to quickly move ships and navy from east to west. Through the control of the oceans, the Americans could dictate the dynamics of geopolitical relations. Undoubtedly, the Panama Canal was part of a foreign policy strategy to make the United States the most powerful country in the world, which came true during World War II. Also, the economic impact of the channel was huge. It enabled a drastic facilitation of trade between the two oceans. Because of this, Wall Street gave great support to the idea and helped finance the project.
Since 1914, the canal has been managed exclusively by the Americans in the interest of their political, commercial and military interests. The Panamanians rightly felt that they had no use for the canal. The canal zone was surrounded by a fence and the local population could not enter there. It was an exclusive American property. The canal was the most valuable piece of land in Panama, and it was not exploited by the hosts but by a foreign power.
In 1950, Congress passed the Thompson Act, which created the Panama Canal Company, which operated under the auspices of the US government. The Governor of the Canal Zone, appointed by the President of the United States, oversaw the day-to-day operations of the zone and used revenues to improve and maintain the canal. In addition, the US military maintained bases in the Canal Zone to protect the strategic location.
During this period, Panamanian nationalists sought more favorable terms than those in the 1903 agreement. The 1936 agreement increased the annuity paid by the US government to the Panamanians, and the 1942 agreement transferred various construction projects to the Panamanian government and promised additional infrastructure development. Additional revisions occurred in the 1950s, including the flying of the Panamanian flag in the Canal Zone as the United States attempted to resolve sovereignty issues.
Despite the compromises, tensions continued to rise. There were many incidents and the biggest was in January 1964 with dead and wounded on both sides. Soldiers killed students because they tried to raise the Panamanian flag on the canal. Panamanian President Roberto Chiari broke off diplomatic relations, and American hardliners in Congress called on President Lyndon Johnson to respond with force. However, Johnson decided to negotiate and sent diplomats Thomas Mann and Cyrus Vance to mediate the dispute, which Johnson blamed on the Communists. Although they blamed the communists, most American politicians could not ignore the hostility that had caused the conflict, and negotiations began on the status of the canal.
1977 Panama Canal Agreement
In August 1977, President Jimmy Carter signed an agreement with Panamanian general and dictator Omar Torrijos, ceding control of the Canal to Panama in 1999. Another part of the agreement guaranteed the rights of American workers in the Canal Zone until their retirement. Third, it gave the US a permanent right to defend channel neutrality.
Most recently, Washington increased the payment for its use of the canal from 2.3 to 40 million dollars a year and promised additional economic and military aid. The transfer agreement has led to major political debates in the US. Reagan strengthened his reputation as a staunch nationalist by opposing the treaties, and the deal cost Carter dearly as American power abroad appeared to be in rapid decline, exacerbated later by crises in Iran and elsewhere. But the transfer of administration was extremely important for relations with Panama and Latin America.
By the time the transfer treaty was ratified in March 1978, American benefits from the canal had all but disappeared. It was not an “act of mercy” by the Americans, nor was Carter overly accommodating to Latin Americans. It was part of the American strategy. By the 1970s, American farmers supplying food to Asia could transport goods by rail to Seattle and ship them by sea to Asia because rail costs were much cheaper after World War II. Militarily, the canal proved to be strategically useless and completely indefensible in the event of a foreign invasion. Truman tried to hand him over to the UN. It was losing money under Johnson. The only reason for political opposition to Carter’s treaties was that he was a symbol of American national pride, especially after the American debacle in Vietnam.
The Panama Canal – an important item of American national pride
In a certain sense, the Panama Canal represented an important item in his own vision of the USA as a force for good in the world in the 20th century. At the time when the USA was emerging as a global power (end of the 19th and beginning of the 20th century), US policymakers were extremely keen to differentiate themselves from the old European powers that they condemned for their colonialism. America wanted to form a vision of itself as a selfless power that, as a more advanced civilization, wants to help the world.
Of course, the truth is often different from the ideal. The USA often, despite the embellished image, imposed its power. But regardless, the Panama Canal remained an important fixture of American national identity in the 20th century, in part because it was seen as an act of a “force for good” “leading the free world” in a sea of European “forces of evil.”
Officially, on December 31, 1999, the Panama Canal became the property of the State of Panama. The political consequences of the transfer of administration to Panama were immediately felt. Within two years, the canal zone was abolished. Tensions were eased not only in Panama but also throughout Latin America, since the canal was a symbol of American colonialism in the region.
Since the transfer of management from the joint US-Panama Canal Commission in 1999, the Panama Canal has been fully owned by the Republic of Panama. Today, the Panama Canal Authority (ACP) is charged with managing and maintaining the waterway’s resources and safety as an independent entity of the national government. The 11 members of ACP’s board of directors maintain terms to ensure independence from any presidential administration. Appointed by the Panamanian President, the Chairman of the ACP Board holds the rank of Minister of State for Canal Affairs. ACP awards concession contracts to companies for port operations.
Successful business of the channel
The Panamanians manage the canal very well – efficiently and cost-effectively. There were very few reported cases of corruption. The channel brings money in an efficient way. The three main ports create thousands of jobs. An entire industry dedicated to transportation services has developed. 60% of all ships in the world sail under the Panamanian flag.
There is a growing residential sector in the former canal zone, and a large part around the canal is untouched rainforest, which is becoming a center for ecotourism. Now cruise ships are arriving in Panama City. All this is thanks to the channel. Annual traffic increased from about 1,000 vessels in 1914 to 14,702 vessels in 2008. By 2012, more than 815,000 vessels had passed through the canal. During 2017, ships took an average of 11.38 hours to pass between the two ends of the canal. The American Society of Civil Engineers has listed the Panama Canal as one of the seven in the modern world. In 2007, work began on the expansion of the canal, which was completed in June 2016, which enabled the passage of ships of larger capacity (up to 120,000 dwt, length up to 427 m, width up to 55 m and draft up to 18 m – New Panamax ship class).
After the expansion of the canal in 2016, the waterway sees around 14,000 ships annually, which is equivalent to 6% of world trade. The global maritime role of the canal has further increased amid disruptions to global supply chains during the Covid-19 pandemic and the US-China trade war. The canal is threatened by low water levels during droughts due to climate change.
The United States remains the largest user of the channel. In 2019, 66% of cargo transiting the canal began or ended its journey in a US port; cargo bound for China accounted for 13% of turnover. Still, China is the primary source of products passing through the Colón Free Trade Zone, and its growing presence in and around the canal has made the waterway a focus of US-China competition.
China’s influence in the Panama Canal has only grown since 2017 when then Panamanian President Carlos Varela severed diplomatic ties with Taiwan and recognized the PRC, further opening the door to China’s influence. Chinese companies were heavily involved in contracts related to infrastructure in and around the canal in the logistics, power and construction sectors. These projects fit naturally into China’s New Silk Road initiative. Panama was the first Latin American country to join in 2018. All these events have reinforced the already existing Chinese influence, and Chinese companies have since positioned themselves on each edge of the Panama Canal through port concession agreements.
In 2016, in a $900 million deal, China-based Landbridge Group acquired control of Margarita Island, Panama’s largest port on the Atlantic side and the Colón Free Trade Zone, the largest free trade zone in the Western Hemisphere. The agreement established the Panama-Colón Container Port (PCCP) as a port for megaships, and the construction and expansion was carried out by the China Communications Construction Company (CCCC). Thus, the Chinese were able to take advantage of the expansion of the canal in 2016.
In addition, 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 the operator of the ports of Balboa and Cristobal, two the main hubs of the Panama Canal on the Pacific and Atlantic sides. In addition to infrastructure projects, water management efforts are also a key source of entry for Chinese companies. The plan, announced in September 2020, would establish a water management system to combat drought, which threatens the canal, but would also affect local access to water for the next half century. This represents another opportunity for Chinese investors to increase their presence in Panama independent of the channel.
While much of the US canal law expired after the canal was handed over to Panama, one key treaty remains active – the Treaty of Permanent Neutrality and Operation of the Panama Canal between Panama and the US guarantees permanent neutrality of the canal with fair access for all. Only Panama can operate the canal or maintain military installations on Panamanian territory.
The United States has reserved the right to use military force to defend the canal against any threat. Any Chinese threat to channel neutrality could trigger US forces through this treaty, meaning that current and future Chinese interventions should be thought through with a potential US response in mind. With the expansion of Chinese influence in Panama, the canal will continue to be a point of tension in US-China relations. China does not operate the canal, it only controls the two ports at either end, which means it does not affect the goods that pass through the canal. However, the increasing control of Chinese companies over transshipment operations for the United States and other countries is a matter of contention.
During the current summer of 2023, droughts and the resulting low water levels in the Panama Canal and the surrounding lakes that irrigate it have led to congestion. The drought-stricken Panama Canal will maintain restrictions on ship passage for a year, an ACP measure that has already brought maritime traffic to a standstill as ships queue to enter the waterway linking the Pacific and Atlantic oceans.
Each ship moving through the canal needs 200 million liters of fresh water to pass through the locks, and the water comes from two artificial lakes that are fed by rainfall in the surrounding basins. This is normally not a problem because Panama is one of the rainiest countries in the world, but this year turned out to be extremely dry. The consequences will be felt by consumers on store shelves because some goods such as bananas, coffee, sugar, meat will not be available, and oil and LNG will also be delayed, which could further increase prices. However, the problem will be solved. Container ships are given priority of passage.
Due to its key role in global trade and security, the Panama Canal remains an important element in the geopolitical context of world trade, but also in the relations between USA and China.