At the beginning of the 20th century, an expanding United States wanted a way to expedite naval passage between the Pacific and Atlantic Oceans. And in 1904, Panama granted the United States the right to build and operate a canal and control five miles of land on either side of the water. But ownership of the region had been a thorny issue for decades as Panamanians were locked out of the prosperity the canal created right in their own front yard, and in 1977 President Carter signed a treaty with Panamanian Chief of Government Omar Torrijos to return the canal area to Panama.
Since then, Panama has invested nearly $6 billion to improve the infrastructure and increase the shipping capacity to expand the canal’s use worldwide.
The Panama Canal was not an issue in the 2024 election, but in December, President Trump began claiming that the United States, the shipping lane’s biggest user, was “being severely overcharged and not treated fairly” and threatened to “take [the canal] back or something very powerful is going to happen.”
Ricardo Hausmann, the Rafik Hariri Professor of the Practice of International Political Economy and director of the at Harvard Kennedy School, is the author of on the economics of Panama. In a recent interview, he addressed the significance of the region to Panamanians, why Trump might be so interested in rescinding the treaty, and how the recent news of an American company buying a controlling stake in the company operating the ports on either end of the canal might change the conversation.
Q: What does the canal mean to Panama? And how has Panama performed as a steward of the canal?
After the Carter-Torrijos agreement—a treaty that required approval by a two-thirds majority in the U.S. Senate—the Panamanians put together a group of thought leaders to determine what they should do with the canal and the zone around it.
They made three major investments. First, they created some special zones on the canal. One is called Panama Pacifico which is an industrial zone. Another one is called the City of Knowledge, a platform that focuses on boosting the innovative and competitive capacities of its members, to attract R&D and research.
Secondly, they developed some ports to enhance the canal as a logistics hub. They also developed a pipeline to cross the isthmus for oil tankers that cannot cross the canal. And, finally, they decided to increase the size of the canal in a project called the "third set of locks" to allow the ships that are three times heavier than before. That project ended up costing between $5 and $6 billion that Panama borrowed on its own books and is repaying.
Additionally, with global warming there’s been a significant reduction in rainfall in parts of the year which requires them to divert rivers and pump water to run the canal. Although they made major investments to improve the efficiency with which water is used in the canal, as the Panama Canal is not at sea level, they are planning to invest an extra $1.5 billion to bring water into the canal. They have been very responsibly managing the canal and making it more valuable for the world.
“It’s not that U.S. is being unfairly treated, it’s that the U.S. is not being preferentially treated. I would argue that’s what Trump doesn’t like.”
Q: What about President Trump’s claims about unfair treatment and overcharging?
He finds the accord unfair and wants to reverse it. But a treaty is a treaty, right? That’s why you have to have a two-thirds majority approval in the Senate. One of the conditions of the treaty is creating neutrality in the Panama Canal. The United States has to pay the same as anybody else even though it built the canal.
Panama charges a market price that equates demand for crossing the canal with the current expanded supply. The price did go up during the last climate change-induced drought experienced by the canal. The alternative to market pricing would be for Panama to decide who goes through and who does not, but that would violate the principle of neutrality.
So, it’s not that the United States is being unfairly treated, it’s that it is not being preferentially treated. I would argue that’s what Trump doesn’t like.
Q: Are there concerns about Chinese domination in the region?
Since sovereignty was returned to Panama, the canal has been operated by Panama, not the Chinese. When construction and management for the two new ports was announced, the bids were won by a Hong Kong company, C.K. Hutchinson. Nobody at the time thought of them as a Chinese company.
I hope the recent announcement that U.S. investment giant Blackrock will replace Hutchinson and own the company operating the ports will put that issue to rest.
The facts are that Panama has managed the canal incredibly well. They have expanded the canal. They are heavily investing to assure the adaptation of the canal to climate change, and they are increasing the services provided around the canal, making it a more valuable logistic point for the world. They have treated the United States fairly and equally. The revenues generated by the canal are important for Panama, representing about 4% of their GDP. They represent less than 1/10,000 of the U.S. GDP. It sounds un-American to expropriate the assets of other countries, just because we can.
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Photograph by Rnulfo Franco/AFP/Getty Images