Papers in the "JIIA Strategic Commentary Series" are prepared mainly by JIIA research fellows to provide commentary and policy-oriented analyses on significant international affairs issues in a readily comprehensible and timely manner.
Introduction
Since taking office in January 2025, US President Donald Trump has sparked controversy by revealing territorial ambitions toward not only Greenland and Canada but also the Panama Canal. As a key maritime transport hub, the Panama Canal is a strategic chokepoint that could have a major impact on the Free and Open International Order based on the rule of law. This article reviews the relevant historical background, identifies points to watch in the future, and considers the role expected of Japan.
The economic importance of the Panama Canal
Ranking alongside the Suez Canal and the Strait of Malacca as one of the world's key maritime chokepoints, the Panama Canal reduces transport between the Pacific and Atlantic Oceans by 5,000 kilometers in distance, 8-10 days in travel time, and 20% in cost vis-à-vis the route rounding Cape Horn at the southernmost tip of South America. Approximately 14,000 ships pass through the Panama Canal annually, accounting for 5% of global trade volume. The largest user of the canal is the United States (approximately 70% of total traffic), followed by China and Japan1.
Additionally, Panama boasts multiple port facilities, two economic zones (one of which is the second largest in the world after Hong Kong), a hub airport connecting various regions of the Americas, and a financial system (with the US dollar as the circulating currency and relatively lenient financial regulations), making it a crucial hub for the flow of people, goods, and capital in Latin America and the Caribbean.
(Library of Congress, US) https://www.loc.gov/resource/g3290m.gct00217/?sp=4
The Panama Canal as a strategic security asset for the United States
The United States' strong interest in and involvement with the Panama Canal did not begin with the Trump administration. As far back as the mid-19th century Gold Rush, the United States built a railroad across the Isthmus of Panama in 1855 to transport large numbers of people to the western United States. By the late 19th century, Alfred Thayer Mahan, a US naval strategist known for his work "The Influence of Sea Power upon History, 1660-1783" highlighted the importance of a canal across the Isthmus of Panama, sparking growing interest in the United States in building a canal connecting the two oceans2.
In 1903, the United States supported the independence movement in the Panama region, leading to the separation of Panama from Colombia and the establishment of the Republic of Panama. The US and Panama signed a treaty granting the former the right to build a canal and manage the canal and adjacent areas in the future. Construction began in 1904, and the canal was completed and opened in 1914. While operating the canal thereafter, the United States established numerous US military bases in adjacent regions and placed the headquarters of the US Southern Command (SOUTHCOM), responsible for Latin America and the Caribbean, in Panama (it has since been relocated to Miami), making Panama a key hub for US security in the Western Hemisphere. However, the United States' overwhelming presence fueled Panamanian nationalism, leading to growing demands for the return of the canal. After a series of twists and turns, the Panama Canal Treaty was signed in 1977 during the Jimmy Carter administration, and the canal and adjacent areas were returned to Panama at the end of 1999. Since then, the canal has been managed by the Panama Canal Authority, a Panamanian government agency.
Since then, however, strong security concerns were voiced in the United States about the return of the canal. The US Senate accordingly amended the 1977 treaty to address these concerns (e.g., granting the United States the right to take measures, and even resort to military force, if the operation of the canal were ever interfered, and stipulating that US interests would be considered when revising canal tolls) but about one-third (32 members) of the US Senate voted against the treaty despite these additions. And Carter's successor President Ronald Reagan also advocated revising the treaty. President Trump's claim that the Panama Canal "has foolishly been given to the country of Panama" is not entirely new.
In addition to security needs, the Panama Canal is extremely important for US maritime logistics. Currently, 40% of US container shipments pass through the Panama Canal.
While Panama has close economic ties with the United States, the resentment toward US control of the canal zone has not been completely resolved by the canal's return. It is important to note Panama's ambivalent feelings toward the United States, which has at times adopted a conciliatory policy (symbolized by the return of the canal) and at other times taken a strong-handed approach (invading Panama in 1989 to overthrow an anti-American government)3.
China's penetration into Panama and US concerns
When the Democratic Progressive Party's Tsai Ing-wen administration came to power in Taiwan in 2016, China abandoned its previous "diplomatic truce" and resumed its efforts to undermine Taiwan's diplomatic relations. In early 2017, Panama became the first country thereafter to break diplomatic ties with Taiwan and recognize the People's Republic of China, followed by the Dominican Republic, El Salvador, Nicaragua, and Honduras, setting off a diplomatic domino effect against Taiwan. Unlike Brazil and Argentina, which switched their recognition in the 1970s, Panama fully accepted China's "One China" principle, opening the door for other countries to follow suit (China's position is that Taiwan is an inalienable part of China; the US, Brazil, and others "acknowledge" or "take note of" this position and Japan "fully understands and respects" it, while Panama has declared this as its own position)4.
Panama's decision in 2017 to become the first country in Latin America and the Caribbean to join the Belt and Road Initiative, thereby paving the way for other Latin American countries to join, is likely one of the United States' concerns regarding Panama (22 of 33 Latin American countries have joined the Belt and Road Initiative at present).
Panama and China have significantly strengthened their economic ties since the break in diplomatic relations with Taiwan. While the United States was once Panama's largest trading partner, trade with China reached $6 billion in 2023, surpassing trade with the United States at $5.6 billion. Even more notable are China's infrastructure projects, which are seen as compensation for Panama's break with Taiwan. These include the construction of a cruise ship terminal, a fourth bridge spanning the Panama Canal, a natural gas power plant, an international conference center, a high-speed railway between Panama and Costa Rica, and a new port in the Colón Free Trade Zone (some projects were canceled later when a pro-US government came to power). According to the Taiwanese think tank The Doublethink Lab, Panama is considered the second-most China-influenced country in Latin America, following Chile5.
The United States has been particularly uneasy about China's growing influence in Panama since Panama severed diplomatic relations with Taiwan.
In its annual report to the US Congress, the US Southern Command expressed concern since 2018 that China's expansion of influence through infrastructure projects connected with the chokepoint Panama Canal could create commercial and security vulnerabilities for the United States6. In February 2025, Secretary of State Marco Rubio stated that he had no doubt that China would close the canal if the US-China conflict intensifies and that the Chinese Communist Party's influence and control over the Panama Canal Zone is a threat to the canal and a violation of the Panama Canal Treaty. There are also apprehensions that the Chinese company currently operating the two ports at either end of the Panama Canal (see below) could provide information on ships passing through the canal to the Chinese authorities through its port operations and management, and that this could lead to data manipulation and other measures that might interfere with access to the canal.
Though it is far-fetched to say that current Chinese involvement violates the neutrality treaty, it is necessary to keep in mind the background and circumstances surrounding the US government's high level of concern for the safety of the Panama Canal as the situation develops.
Developments under Trump 2.0
President Trump claimed even before his inauguration that the tolls for US ships passing through the canal are too high and that, if they are not corrected, the US would demand the full return of the canal; his assertion that China is operating the Panama Canal and his suggestion that the US might take the canal back has made the Panama Canal a major issue among the US, Panama, and China. As a matter of fact, the Panama Canal is operated by the Panama Canal Authority, a Panamanian government agency, and the claim that China is operating the Panama Canal is a misrepresentation of the facts.
Currently, the focus of attention regarding China's involvement is not the canal itself but the ports of Balboa and Cristóbal, located on the Pacific and Atlantic ends of the canal. Since 1997, these ports have been operated under a management agreement between the Panamanian government and a subsidiary of CK Hutchison Holdings, a Hong Kong-based company. In 2021, this agreement was extended for an additional 25 years.
Since the start of the second Trump administration, close consultations have been held between the US and Panama. In February 2025, Secretary of State Rubio visited Panama as his first overseas destination. While Panama did not relinquish sovereignty over the canal, it did announce its withdrawal from the Belt and Road Initiative.
The Panamanian government began investigating the legality of the contract allowing CK Hutchison to operate the two ports, and the pressure placed on the company led to a March announcement that a basic agreement had been reached to sell the operating rights to Global Infrastructure Partners, an infrastructure investment company affiliated with the US firm BlackRock and the Swiss investment company Terminal Investment for $22.8 billion (however, as described below, China is attempting to regain its foothold).
To address security issues, US Secretary of Defense Pete Hegseth visited Panama in April and signed a memorandum of understanding on joint training for canal defense and an increased US military presence. He also announced that discussions were underway on preferential and free passage through the canal for US military vessels.
China has reacted strongly to this series of moves by the US and Panama. The Chinese government has denied any involvement in the management of the canal and has strongly protested Panama's withdrawal from the Belt and Road Initiative. Furthermore, the Hong Kong and Macao Affairs Office of the State Council criticized the sale of the two ports' operating rights as treason against the nation, denouncing the action as "tantamount to handing a knife to an opponent," and the State Administration for Market Regulation launched an investigation into the legality of the sale. The signing of the final agreement scheduled for April has been postponed, and its future remains uncertain. The situation has escalated into a direct confrontation between the United States and China over Panama.
The outlook for US-China tensions over Panama
Given the actions of the Trump administration so far, it is difficult to predict the US's next move. Even if the US maintains its stance of curbing China's growing influence in Panama, there are concerns that the US-China rivalry could escalate in Panama or Latin America and the Caribbean, depending on what the US demands from Panama and what measures it takes.
What is certain is that the US will continue to be deeply involved in Panama regardless of the administration in power. As is clear from the historical background mentioned above and Panama's geopolitical position, Panama is a country of vital interest to the US and the security of the Western Hemisphere, and the strategic significance of the Panama Canal as a chokepoint remains unchanged.
Panama, while refusing to cede sovereignty over the canal, is currently adopting a policy of "endurance" toward US demands, declaring its withdrawal from the Belt and Road Initiative, moving to exclude Chinese company from the two ports, strengthening security cooperation with the United States, and taking measures against illegal immigration. However, if Panama cannot secure some form of benefit (such as increased US investment) in exchange for reducing its ties with China, it will likely have no choice but to seek partners outside the United States in the medium to long term.
China has harshly criticized the Trump administration's policy toward Panama and, in unison with other Latin America and the Caribbean countries, has declared that it respects Panama's sovereignty over the Panama Canal. It has also emphasized the achievements of the Belt and Road Initiative, appealing to public opinion in Panama, Latin America and the Caribbean as a whole, and the Global South and striving to send a message that it stands with them. Although China has been forced to take a step back for the time being due to Panama's withdrawal from the Belt and Road Initiative and impediments to its port operations, Trump's current hardline stance toward Panama could concerningly become a tailwind for China's diplomatic strategy toward Latin America in the long term.
Japan's role
The current turmoil surrounding the Panama Canal is a microcosm of the US-China rivalry, but Japan cannot afford to remain indifferent. Japan is an important stakeholder in Panama and the Panama Canal, and the stability of Panama and its canal is of great significance to Japan's economic security. Ninety-nine percent of Japan's trade is supported by maritime transport, and Japan is the world's third-largest user of the Panama Canal, a key chokepoint for maritime transport. In particular, the Panama Canal is a major export route for automobiles and electrical products to the US East Coast. Japan, together with the US and Panama, established the Commission for the Study of Alternatives to the Panama Canal to formulate a plan for expanding the canal, and participated in the expansion project with a JBIC loan of $800 million, thereby tripling the canal's annual traffic capacity.
During then Foreign Minister Yoko Kamikawa's visit to Panama in February 2024, cooperation between Japan and Panama was confirmed as necessary to maintain and develop a "free and open ocean supported by a maritime order based on the rule of law." Japan's "Diplomatic Initiative toward Latin America and the Caribbean" was launched in Panama, a partner country of the Free and Open Indo-Pacific (FOIP) and the Free and Open International Order (FOIO).
As a proponent of FOIP/FOIO, Japan should coordinate with other countries that share similar concerns to ensure that Panama remains a partner in the Free and Open International Order and is not drawn into China's excessive sphere of influence, with sustainable cooperation and engagement that differs from that of China. In the economic sphere, cooperation could be advanced through the establishment of frameworks for trade and investment such as Economic Partnership Agreements (EPAs). For countries such as Panama that hold significance for maritime security, it may be worth considering expanding the scope of Official Security Assistance (OSA) beyond DAC aid recipient countries after they graduate from the DAC list (Panama's GNI is $17,870 as of 2023, with graduation expected soon). Furthermore, dialogue with Panama on Indo-Pacific situation and the international order should be intensified, especially given that Panama serves as a non-permanent member of the UN Security Council for the sixth time during the 2025-2026 term.
(Date completed) May 12, 2025
1 In 2023, drought caused a lowering of the water level of Gatun Lake, located at the center of the canal, resulting in restrictions on the number of vessels passing through, limits on cargo volume, and a sharp increase in tolls, reportedly causing over $2 billion in losses to global logistics. This incident once again highlighted the importance of the Panama Canal as well as its vulnerabilities.
2 During the Spanish-American War of 1898, the US Navy dispatched the battleship Oregon, which was stationed in the Pacific, to the Atlantic, but its route via the southernmost tip of South America caused it to arrive too late to take part in the sea battle with Spain. This incident is said to have reaffirmed the necessity of constructing a canal through the Panama Isthmus.
3 Panama refused to cooperate with the US military during World War II, and in 1964, when anti-American riots were suppressed by US forces, the country temporarily severed diplomatic relations with the United States. Several administrations have openly adopted an anti-American stance. The 1964 anti-American riots and the 1989 US invasion are still commemorated in Panama on Martyrs' Day and the National Day of Mourning.
The author frequently visited Panama in the 1980s to attend meetings of the Commission for the Study of Alternatives to the Panama Canal and witnessed the stark contrast between the affluent, American-style areas around the canal and the impoverished regions under Panamanian sovereignty.
4 There are also allegations that President Juan Carlos Varela received $143 million in bribes from China.
5 Doublethink Lab. "China Index," last updated October 2024, https://china-index.io/country.
6 "Increasing Chinese presence creates vulnerabilities and a potential ability to exploit global chokepoints - such as the Panama Canal, sea lines of communication, space, and supply chains - in future conflicts." (Statement of Admiral Alvin Holsey, Commander, United States Southern Command, before the 119th Congress, Senate Armed Services Committee, February 13, 2025)