The Panama Canal: Hostage to the US-China Trade War?

In November 1906, Theodore Roosevelt became the first sitting U.S. president to make a diplomatic visit outside the continental United States, sailing to Panama to view the construction of the Panama Canal. In September 1977, President Jimmy Carter signed a treaty that would ultimately give Panama full control and operation over the canal in 2000.  And in December 2025, U.S. President-elect Donald Trump threatened to retake the canal from Panama. The chances of this happening are slim, of course. But like most political rhetoric, his comments denote larger goals and aspirations – in this case, Trump’s domestic agenda, which likely includes a trade war with China. The U.S.-Panama relationship is merely a hostage to that agenda.

Control over the Panama Canal gave Washington a valuable source of revenue and immense geopolitical influence. Since the 1500s, explorers and entrepreneurs had dreamed of a path that would drastically cut the time and resources required to cross from one ocean to the other: Sea transit between the U.S. east and west coasts was a weekslong, 13,000-mile journey. Alfred Thayer Mahan, the naval and geopolitical writer, knew that U.S. control of the Central American isthmus, and the possibility of a trans-isthmus canal, would be pivotal for the projection of U.S. military and commercial power. Presidents Ulysses S. Grant and Theodore Roosevelt, both former military officers, were keenly aware of the isthmus’s strategic value. Grant commissioned a series of expedition surveys to identify possible locations and assess construction feasibility. Roosevelt later oversaw the creation of the U.S. Great White Fleet and canal construction.

The relationship between the U.S. and Panama is more nuanced. When conflict levels are low, the countries’ geopolitical interests align nicely. Washington ultimately wants the secure passage of goods and, relatedly, the prevention of any military not native to the Western Hemisphere from gaining influence in Panama. For its part, Panama needs to control the territory within its modern borders, and it needs the revenue generated from the canal’s strategic position inside them.

In times of conflict, however, they don’t always see eye to eye. The U.S. gained a foothold in Panama only because it was fighting for independence from Colombia. Gran Colombia had already broken down into what we now call Venezuela, Ecuador and Colombia, so Panama thought the time was right for its own secession. Colombia had the far superior military, but to send its soldiers to Panama by land was to send them through the Darien Gap, a wildly impassable area where they shared a border. Colombia was thus forced to transport its soldiers by sea to retake Panama. Seeing the opportunity this presented, the U.S. deployed its own military to deny them passage. Panama was able to separate from Colombia, and the U.S. was able to establish itself as its security guarantor, giving it a leg to assume control of the Panama Canal’s construction if the opportunity arose – which it did when the French company working on it filed for bankruptcy.

The U.S. and Panama enjoyed a mostly harmonious relationship thereafter until the final years of the Cold War. Panama sided with the U.S. in that conflict, working alongside Washington to fight the Sandinistas and secure Western influence in Central America. But ties began to fray under the rule of authoritarian ruler Manuel Noriega, whose administration was marred by political instability and repeated coup attempts (likely with U.S. backing). Washington sent its military to remove him from power, and though it hurt the bilateral relationship (the Panamanian military was dismantled), subsequent administrations repaired the damage, and the treaty signed by Carter remained intact.

The anticipated U.S.-China trade war will test U.S.-Panamanian relations once again. Trump’s comments on social media about the canal all but mention China by name, saying the canal cannot fall into “the wrong hands.” He also criticized what he described as ridiculously high transit fees. This may prove even more difficult to “fix.” The U.S. is by far the largest user and beneficiary of canal traffic. It remains the primary means of shipping goods between the U.S. East Coast and Asian markets, including China. Putting tariffs on goods from China will increase the cost of goods for U.S. consumers. One way to try to offset some of those costs would be reducing other input costs, such as transportation fees.

Fees for transiting the canal follow a complex system with many variables. Transit rates are set by the Panama Canal Authority, which operates closely, though independently, with the government. Every ship that passes through the canal faces a series of mandatory and variable charges. Mandatory charges include things like the tugboat and pilot fees needed for navigating the canal’s many locks. By law, highly experienced and trained Panamanian pilots must command and control all vessels passing through the canal (the vessel’s pilot relinquishes all control to the Panamanian pilot upon arrival at the canal). The variable fees relate to things like a vessel’s length, weight and scheduling. The fees are equally applied to ships regardless of country of origin or destination. (This reflects the “neutrality” concept enshrined in the treaty.)

There are other, strategic reasons Washington would want to avoid antagonizing Panama. Panama serves as a major transit country for migrants leaving South America for the United States. Washington and Panama City have increased coordination on this front, with the U.S. even paying for select deportations of migrants out of Panama to their countries of origin. Panama has also used its control of the canal to indirectly support U.S. sanctions against Iran and Russia by withdrawing flags from vessels linked to sanctioned companies and entities. Elsewhere, Panama’s efforts to develop more reservoirs and build a dry canal to help mitigate the impact droughts have had on canal traffic will ultimately benefit the U.S. But most important, Panama remains the most attractive partner for the U.S.; similar ideas floated for Mexico, Nicaragua and Colombia all lacks the benefits of the canal in Panama, which has the obvious benefit of already being built.

The conflict the U.S.-China trade war will generate will likely force Washington and Panama City to re-examine their relationship. The U.S. has plenty of leverage, including the world’s largest and most advanced military, but Washington is unlikely to be willing to absorb the political and economic costs and international backlash that would come from moving against Panama too aggressively. There’s room in the relationship for adjustment, but cooperation is still in both countries’ best interests.