The Panama Canal plays a critical role in the facilitation of global supply chains. In 2019 alone, the Panama Canal registered 13,785 transits, or approximately 6 percent of global trade. More than 60 percent of goods transiting the canal originate or are destined for U.S. markets, making free and fair access to the waterway of vital interest to U.S. national security. With the breakdown of global supply chains during COVID-19 and the potential nearshoring of manufacturing away from China, the Panama Canal will likely play an even larger role in shipping goods to and from the United States moving forward.
Unfortunately, the need for foreign investment has provided China with strategic openings to increase its presence in Central America and especially in Panama and around the canal, and thus increasing its influence over international trade and supply chains.
China’s expansive footprint around the waterway directly threatens Panama’s independent control of this critical infrastructure system. It also enhances risks for industrial espionage as Chinese contractors find opportunities to surveil cargo transfers and develop close relationships with both private and public sector decision makers. Chinese and malign actors can also take advantage of contracts to use Panama’s banking and shell company infrastructure for nefarious activities.
Continued Chinese investment in canal adjacent infrastructure represents an extraordinary threat to U.S. national security. The incoming Biden Administration needs to take action to reduce the amount of Panamanian dependence on China.
Since the U.S. government began to transfer control over the canal to the government of Panama in 1977 under President Jimmy Carter, the waterway has been the driving force behind Panama’s rapid development and growing prosperity. In 2019, the Canal’s activity accounted for approximately 12 percent of Panama’s economy. Despite concerns from the international community that Panama would lack the capacity to administer the canal effectively, the canal has been even more profitable under Panama than it was under U.S. control.
Despite a precipitous drop in international trade due to COVID-19, traffic through the waterway remained high in 2020, registering nearly 500 more transits than initially projected for the first half of the fiscal year.
Given its central role in Panama’s economy, the country has sought out investments to expand the waterway, thereby increasing revenues from shipping traffic. In 2016, a group of European firms led by the Spanish company Sacyr completed a $5.5 billion expansion of the canal. Despite the fact that the project ran considerably over budget, vessels transiting the canal’s expansion now account for 51 percent of canal revenues.
Further plans have been made to integrate the canal into the broader Central American economy through rail, road, metro, power and other infrastructure projects. Such an endeavor could help transform the entire region’s economy, provide critical jobs, and attract foreign investment to one of the region’s greatest success stories.
A 2018 report by a CSIS Senior Associate, Evan Ellis, illuminates that the Chinese Communist Party has been one of the greatest contributors to canal-related infrastructure projects. A Chinese consortium that includes the China Communications Construction Company and the China Harbor Engineering Company was awarded a $1.4 billion contract for the fourth bridge over the canal in January of this year, despite allegations that the firm had proposed a deficient design. On the Pacific side of the canal, Belgian company Jan de Nul and Chinese firm CHEC were awarded contracts for a Cruceros de Amador cruise ship terminal in 2017 at the cost of $165 million. On the Atlantic side of the canal, the Chinese firm Shanghai Gorgeous won a $900 million dollar contract for a natural gas powered electricity plant. Despite ongoing roadblocks with the company’s certification process, the Chinese New United International Maritime Services was also selected to certify the vessels and crews of Panama-flagged ships.
Of greatest concern is the role of Hutchison Ports PPC, a subsidiary of CK Hutchison Holdings headquartered in Hong Kong, in the administration of the ports of Balboa and Cristobal, which control traffic on the Pacific and Atlantic side of the canal, respectively. As China consolidates its control over Hong Kong, the company’s central role in transiting the canal should be of increasing alarm to U.S. national security experts.
Undoubtedly, these investments have strengthened Panama’s relationship with China and undermined U.S. leadership in our own backyard.
In June 2017, then-president Carlos Varela cut diplomatic ties with Taiwan in order to formalize the Panama-China relationship and further increase BRI investments. In 2018, the Chinese government bid on waterfront property with the intent build an embassy on the Amador peninsula on the mouth of the canal; pressure from U.S. diplomats, including Secretary of State Mike Pompeo, led then-President Juan Carlos Varela to withdraw consent. Since Panama announced its break with Taiwan, the Chinese and Panamanians have signed 45 bilateral agreements. On June 12, 2019, both countries launched negotiations for a China-Panama free trade agreement, which would further facilitate Chinese investment, industry and commerce in the country.
On Sept. 7, 2020, the Panama Canal Authority launched a tender for a new water management system project, designed to “guarantee an adequate water supply for both canal operations and local consumption for the next 50 years.” The authority plans to shortlist candidates by the end of this year.
Future infrastructure projects will surely be announced over the course of President Biden’s term. Hutchison PPC’s 25-year contract for the Port of Cristobal is set to expire on Jan. 16, 2022. When these opportunities arise, is of vital national security interest that President-elect Biden make sure that American companies and firms from allied nations, such as Spain and Belgium, are at the table when such announcements are made.
To do so, the new U.S. administration must provide positive incentives through USTDA, the US EXIM Bank, the Development Finance Corporation and USAID to support transparent and competent bids from U.S. or European firms. By building upon the 2018 Memorandum of Understanding with Panama on energy and infrastructure, President-elect Biden can restrict China’s growing footprint in Central America and reduce the potential threat that it poses to U.S. companies operating in the region.
In the startling absence of U.S. domiciled banks in Panama, President-elect Biden must also encourage U.S. finance and investment leaders to set up shop in Panama City.
To reduce the potential threats, President-elect Biden needs to restrict China’s expanding footprint in Central America by growing U.S. investments in Panama. Biden campaigned with a promise to restore U.S. leadership in and stem migration flows from Central America with private-public partners designed to mitigate poverty, create jobs, and improve regional security outcomes. China’s growing footprint in Panama directly undermines such goals. When considering what “restored and reimagined partnerships” will look like in the region, President-elect Biden must ensure that the U.S.-Panamanian relationship is at the center of his strategy.
This will also mean appointing an ambassador with the necessary expertise to spearhead the U.S.-Panamanian bilateral relationship. Since Ambassador Feely’s resignation in January 2018, the U.S. has been without an ambassador in Panama City. President Donald Trump nominated a replacement, but that nominee has not been voted on by the Senate. It will be critical that whoever Biden nominates for the role understands China, has worked in finance, and is familiar with logistics and shipping enterprises.
The potential for a renewed U.S.-Panamanian relationship has never been greater. President Laurentino Cortizo Cohen, whose term will not expire until 2024, graduated from Valley Forge Military College in Pennsylvania in 1972 and received an MBA and doctorate in business from University of Texas at Austin. President Cortizo has committed to strengthening the U.S. bilateral relationship and has taken a firmer stance on Chinese investment practices. If President-elect Biden makes Panama a priority, President Cortizo’s pro-American views could reverse the startling trends in the Panama-China relationship and secure U.S. interests in one of the region’s most important partners. It is an opportunity that the U.S. simply cannot afford to lose.
NOTE: This post has been updated from the original version to correct the cost of the Cruceros de Amador cruise ship terminal.
Daniel F. Runde is a senior vice president and William A. Schreyer chair in Global Analysis at the Center for Strategic and International Studies. He previously worked for the U.S. Agency for International Development, the World Bank Group, and in investment banking, with experience in Africa, Asia, Europe, Latin America, and the Middle East.