Could the US really take back the Panama Canal? It’s complicated.

US President Donald Trump sent shockwaves across Latin America earlier this month when he used his inaugural address to target Panama with a very explicit threat to grab back the world’s most famous canal. The rhetoric hasn’t died down since, which has many wondering if the administration could actually follow through with an annexation of the important waterway. It’s a complex geopolitical puzzle at the intersection of history, trade, superpower rivalries, migration, and two traditionally allied countries.

“We have been treated very badly…the spirit of our treaty has been totally violated,” Trump alleged in the January speech, referencing the 1999 handover of the Panama Canal that was constructed by the US in the early 20th century at a cost of $15 billion in today’s dollars. “We’re taking it back.” 

The canal handles about $270 billion worth of cargo annually, and US customers account for nearly 75% of the goods that flow through it. While China is the second largest user, many other countries in Latin America—including Chile, Mexico, Peru, Ecuador, Colombia and Guatemala—also depend on it to move their goods. 

At the heart of Trump’s claims is a belief that China has been gaining too much influence in the surrounding Canal Zone that could undermine US interests, including its guaranteed access to the crucial shipping lane that connects the Atlantic and Pacific Oceans. 

The claims

Panama in 2017 cut diplomatic ties with Taiwan in a move that was widely seen as an overture to Beijing, and concerns about China’s expanding influence over the Panama Canal have persisted since. It’s been part of a broader rise of the Asian country in the region—along with its multibillion-dollar “Belt and Road” infrastructure initiative that spans the globe—and it shows how China has used trade incentives to expand its influence. According to the Global Taiwan Institute, for example, the country either signed or began negotiations for trade deals with Panama, Nicaragua, El Salvador and Honduras after they dropped diplomatic recognition of Taiwan for Beijing.

General Laura Richardson, former Commander of the United States Southern Command, testified before the House Armed Services Committee in 2023 that China was making significant investments in Latin America to strengthen its military and political influence; she called the Panama Canal—which sees 6% of global trade pass through it each year amid 14,000 transits—a “global strategic chokepoint.”

“In any potential global conflict, the PRC could leverage strategic regional ports to restrict US naval and commercial ship access,” Richardson said. “This is a strategic risk that we can’t accept or ignore.” The Center for Strategic International Studies noted the growing presence in the area back in 2021, when it detailed billions of dollars of Chinese investments that include the Balboa and Cristobal ports operated by Hong Kong-based CK Hutchison Holdings. 

“The Panama Canal is no doubt an important gateway for China’s bid for broader presence and a logistical hub for Chinese goods entering the region,” the think tank wrote, specifically warning that Hutchison could be “vulnerable to influence from fellow China-based companies in coming years.” It said a pending decision at the time that ultimately renewed a 25-year contract for one of the ports would shape geopolitical considerations for years to come and be a point of tension. 

Trump, in a Tuesday post to his Truth Social account, renewed his criticism of the engagement with China and accused the Central American country of trying to cover it up by removing signs written in Chinese. “Panama is not going to get away with this,” he wrote.

Panama responds

Panama President José Raúl Mulino, who describes himself as a center-right politician, is at the helm of what’s usually been a staunch American ally in the region. He quickly defended the country’s sovereignty, though, and said that “every square meter of the Panama Canal and its adjacent area belong to Panama, and will continue to be.” After complaining to the United Nations, he’s even taken his defensive posturing all the way to the Vatican this week, where he met with Pope Francis.

Panamanian authorities have followed up by launching an audit of Hutchison, which does suggest they are carefully moving to address some of the US concerns. Orlando Pérez—a professor at the University of North Texas at Dallas who’s written extensively about politics in Panama—said there’s probably lots of room for negotiation and deal-making, especially as the country has a political culture known to be transactional.

“Panamanians are naturally inclined to seek compromise,” he wrote. “Control of the Canal, however, is existential to national identity. Pushing this point is a recipe for stoking nationalism and undermining relations with a partner that is inclined to be pro-US and reach deals.” That said, it’s still Panama that will probably have to tread much more carefully as it faces the ire of Trump’s bully pulpit and unabashed “America First” priorities that have seemingly embraced expansionism and a revived form of “Manifest Destiny.”

Panama may have some leverage when it comes to illegal migration, which the Trump administration has made a centerpiece of its emerging foreign policy. The country controls much of the remote Darién Gap land bridge that connects Central and South America through a treacherous and mountainous tropical rainforest, and a record 520,000 migrants—many from Venezuela—traversed it in 2023 to head north on foot. Anyone making the trip has to pass through Panama, and the US will need its cooperation to halt the flow of people. 

The fine print

While President Trump has attracted significant attention with his rhetoric, whether or not his administration could find legal justification to back up what many assume to be just negotiating tactics is, well, complicated. At the center of the transfer that gave control of the canal to Panama are two treaties that were signed in 1977; it’s in the so-called “Neutrality Treaty” where Trump may best find a legal opening for a possible US intervention. There, in a Joint Statement of Understanding that was signed by former President Jimmy Carter and former Panamanian President Omar Torrijos Herrera, it is stated that either country has the right to defend against any perceived threats to neutrality.

“Each of the two countries shall, in accordance with their respective constitutional processes, defend the Canal against any threat to the regime of neutrality, and consequently shall have the right to act against any aggression or threat directed against the Canal or against the peaceful transit of vessels through the Canal.“

It’s not carte blanche, however, and an important clarification immediately follows:

“This does not mean, nor shall it be interpreted as, a right of intervention of the United States in the internal affairs of Panama. Any United States action will be directed at insuring that the Canal will remain open, secure, and accessible, and it shall never be directed against the territorial integrity or political independence of Panama.“

That may seem to give Panama some cover, but there’s more, and perhaps the biggest political justification for a possible military intervention is a paragraph that was added to a proclamation letter signed by President Carter on September 24, 1979. 

“The agreement ‘to maintain the regime of neutrality established in this Treaty’ in Article IV of the Treaty means that either of the two Parties to the Treaty may, in accordance with its constitutional processes, take unilateral action to defend the Panama Canal against any threat, as determined by the Party taking such action.“

That’s some broad language, and it’s not hard to imagine how Trump could use it to hammer away to get what he wants. At the end of the day, the Treaty is probably more ambiguous than Panama would like to admit, even though the US is explicitly prohibited from actions that could threaten the country’s political independence. There may be just enough wiggle room to back up the most forceful threats, and the fact that Panama has no comparable military power doesn’t help its case either. It’s not a symmetric relationship, to say the least. Panama’s economy is also dollarized, which makes it especially vulnerable to any kinds of economic measures Trump and his administration could deploy.

Lessons (to be) learned

Amid the speculation and intrigue, a recent clash with Colombian President Gustavo Petro—who earlier this month reversed course on deportation flights just hours after Trump threatened tariffs—holds a key lesson: the new Trump administration is not afraid to go big to get what it wants, and when push comes to shove, Panama, like Mexico, won’t have much of a real choice if forced to pick between the US or China. Many Latin American countries may have seen ties with China as a way to hedge against economic and political risk connected to over-dependence on the US, but in doing so, they may have poked an American hornet’s nest. The real question now is whether the Trump administration really wants a return of full physical control of the Canal, or just a deal that would scale back Chinese influence.

There’s a broader lesson for the US in all of this, too. Had the superpower invested more in the region earlier, China would have never had the space to grow its presence in the first place. There’s a tacit acknowledgement about this in a recent bill moving in the Senate that calls for significant investment in Panama to modernize canal infrastructure and provide alternatives to Chinese-funded projects.

At the end of the day, the US may be better served by dangling carrots than by threatening sticks, but that requires long-term thinking that frequently seems missing from the shorter-term political cycle.