China is failing to control the Panama Canal

Consider this a polemic

Is China trying to take control of the Panama Canal?

If they are, they’re doing a terrible job of it, despite the stupidity of Panamanian politicians in failing to read changing American attitudes.

Let’s start with the Chinese presence, such as it is.

Chinese firms did not build the Panama Canal expansion and Chinese entities have zero, zip, nada, bupkis, not, no influence in running the Canal (photo from 2013)

China and Panama

It started in 1999, the year the United States handed off full control of the Canal. The Panamanian government gave Hutchison-Whampoa a 25-year concession to manage ports on either side of the Canal. These ports are basically where cargoes from one ship are transferred to another; they are not part of standard Canal operations.

In 2016, the Chinese Landbridge Group bought Margarita Island, outside Colón, and began negotiating for a concession to build a brand new container port. A year later, in 2017—with President Trump in office—the Panamanian government suddenly broke off official relations with Taiwan and recognized the People’s Republic. Panama promptly joined the Belt and Road Initiative (BRI) and started negotiating a free trade agreement. This corresponded with the Chinese Landbridge group’s decision to buy Margarita Island, outside Colón, to build a new container port. Construction started that same year.

Chinese interests also bought an 18% share in the owner of Panama’s largest copper mine, signed an memorandum of understanding (MOU) to construct a new set of electricity lines, the construction of a rail line from Panama City to David, US$16 million in aid, the construction of a large convention center, the Martano natural gas plant, the Amador Cruise Terminal, and a fourth bridge over the Canal.¹

China even planned to construct a grandiose new embassy right by the Pacific entrance to the Panama Canal.

China fails in Panama

Let’s start with Hutchinson’s port operations. They do give China access to useful intelligence, without a doubt, although I can’t help but think that any halfway decent state intelligence agency should be able to track Panama Canal container traffic for quite a lot less effort. I suppose that they give China some influence, although I have not seen any credible explanations of how that it supposed to operate.

The Landbridge contract was scarier. Official U.S. intelligence sources stated, “Such a location poses a credible threat to U.S. access to the Panama Canal, not only due to the hypothetical placement of weapons systems on a dual-use facility, but also via more simple means such as basic channel blockage from deliberately placed obstacles in the event of a conflict.”

But then nothing happened. Construction stopped in 2020, leading the same U.S. sources to write, “the current assessment of the Panama Colon Container Port is one of no hosting capabilities, with no observed capability for naval, mobile, or containerized threats.” In 2022, Notarc Management Group took over the project. Landbridge is now engaging in an increasingly desperate series of lawsuits against Notarc in American courts to recover some of its investments.

Panama rejected the idea of building the embassy by the Canal entrance. It cancelled the electricity lines project. The train to David went nowhere fast. The Martano power plant was never built. The copper mine hit political opposition and turned into a giant fiasco. Plans for an even bigger Chinese roll-on roll-off container port got stalled, amusing because Hutchinson Whampoa sued to stop it. Got that? The Chinese company running some ports of no strategic import sued to stop a Chinese construction project that might have yielded a potential dual-use facility.

And let’s point out that it is a New Jersey company that runs most intermodal commerce, in conjunction with a Singaporean firm that runs another one of Panama’s ports and Kansas City Southern which runs the Panama Railroad.

Nothing to see here, yet

Of course the PRC government wants to expand its interests in Panama. And of course Chinese companies sitting on a gigantic pool of capital would like to make money (or gain prestige²) in what has been one of the world’s fastest growing economies:

So there are two reasons why you would expect to see major Chinese investment!

And yet, most of the potential dual-use projects (like Margarita Island) or ones that could have paid political dividends for the PRC (like the David train or the Martano power plant) died on the vine. You’re basically left with the Hutchinson port concession and the project to build a fourth bridge over the Canal.

Panamanians, like most Latin Americans, never expected Sino-American relations to descend into Cold War 2. Their governments, therefore, accepted loans and investments from capital-rich Chinese entities without thinking how that might annoy the United States. The Latin American Risk Report has a good overview of how this attitude may now blow up in their faces, as the Trump administration demands that they take a stronger line against Chinese interests. This dynamic is now hitting Panama hard, regardless of Chinese motivations.

Panama has three advantages, however, as I see it. The first is that Panama really has resisted and rejected a lot of Chinese investment! It can throw the bums out at little cost. Even should the government be hit with a billion-dollar judgment after breaking the Hutchinson contract (English translation of the contract here), a country with $35 billion in public debt can afford the cost. The second is that Panama can offer Donald Trump some triumphs. It can renegotiate the Neutrality Treaty. It can step up efforts to stop migration across the Darien gap.³

Third, the United States is genuinely popular in Panama, and was so during the first Trump administration as well:

Source: Latinobarómetro

This is, shall we say, not true for China:

Source: Latinobarómetro

I actually don’t think that China has aggressive designs in the Western Hemisphere. That is not to say that the PRC doesn’t want to expand its influence. It is to say that the Chinese government is treading lightly, simply because aggressive actions won’t pass a cost-benefit analysis.⁴ My biggest piece of evidence for this? The Nicaragua Canal did not get built. The Obama administration wasn’t going to oppose China over it, and the concession offered China immense advantages.⁵ Yet the Chinese government did nothing to take up the Nicaraguan government’s extraordinarily generous offer.

In short, China hasn’t made any serious strategic investments in Panama, isn’t well liked at all, hasn’t invested all that much, and what is there can be thrown out.

1. You can find a nice linkable list of the agreements in an LSE working paper by Luis Carlos Herrera, Markelda Montenegro, and Virginia Torres, called “Implications of the agreements between China and Panama,” Working paper 04/2021.

2. Private enterprises are often motivated by prestige, even if they have to satisfy a minimum hurdle rate. SpaceX and Blue Origin would be recent example of such firms, although to be fair the former has also proved phenomenally successful in conventional terms. More generally, there is a long academic literature on non-pecuniary motivations for corporate empire building.

3. It is weird to use the word “unfortunate” for this, but it is unfortunate that Panama settled its tax evasion case against the Trump Organization in New York district court back in 2021. Otherwise Panama could offer more direct inducements.

4. At least not right now. If the correlation of forces shifts, then that could change.

5. The link goes to my old blog in 2013, which contains two paragraphs about the Nicaragua Canal concession to HKND, a Chinese company, both of which I need to drag out of suspended animation:

So far, we have that the Nicaraguan government gives HKND full property rights over the Canal for 100 years, including title to all property, plus a form of extraterritorial privilege in the free trade zones. Plus full tax exemptions and recourse to international law to make sure that nothing but nothing changes between now and 2113 ... actually, a bit longer, since that 100-year clock starts ticking when the Nicaragua Canal starts operation, estimated by proponents as eleven years after construction starts.

So call it 2124, when the robotic ships will be carrying ... what? Raw materials for 3-D printers now that the war between Russia and Nunavut has shut down the Northwest Passage? I kid, but the point is that there is something fundamentally ridiculous about a 100-year concession.