Is Panama violating a half-century-old US neutrality treaty by allowing Chinese firms near the canal?

Nevin Al Sukari - Sana'a - PANAMA CITY, Feb 1 — Some U.S. lawmakers and officials are touting a nearly half-century-old treaty between the United States and Panama to justify the Trump administration’s threat to reclaim the Panama Canal — provided it can show the strategic waterway’s operation is under threat.

Others, however, say hurdles would loom for any bid to use the 1977 Panama Canal Neutrality Treaty, which took effect in 1999 and guarantees that the canal would remain neutral and open to all ships from all countries, as a pretext for the U.S. to seize it.

The 82-km waterway’s construction was completed by the U.S. in 1914, and since its return to the Central American nation in 1999, it has been controlled by the Panama Canal Authority, an autonomous agency overseen by the Panamanian government.

President Donald Trump vowed to take back the world’s second largest interoceanic waterway during his Jan. 20 inauguration speech, falsely claiming that China is operating it. He has complained about the canal’s tolls, as well as the presence of Chinese and Hong Kong-based firms in Panama.

In a Senate hearing on Tuesday, Federal Maritime Commission (FMC) Chairman Louis Sola said the agency that oversees U.S. ocean transportation and its merchant marine would “consider broad reviews of Panama’s maritime sector,” and could impose fines and restrictions on Panamanian-flag vessels entering U.S. ports.

More than 8,000 ships worldwide are flagged and registered by Panama.

Ahead of this weekend’s visit of U.S. Secretary of State Marco Rubio, Panama’s President Jose Mulino on Thursday said he could not “negotiate and much less open a process of negotiation on the canal.”

“The canal belongs to Panama,” he added.

A general view shows cargo container ships transiting through Agua Clara Locks at the Panama Canal, on the outskirts of Panama City, Panama, April 11, 2024. — Reuters pic

Is China’s presence a threat?

Besides stipulating that the canal “shall remain secure and open to peaceful transit by the vessels of all nations,” the treaty also gives the U.S. the right to use its military to defend the canal, some U.S. officials and politicians say.

In this week’s hearing, U.S. Senator Ted Cruz said a new bridge over the canal being built by Chinese contractors, which he said could shut down transit, and the operation of ports on both ends of the waterway by China, constitute “acute” security risks.

“Panama may well be in violation of this treaty,” the Texas Republican said after listening to U.S. officials and experts.

The US$1.3 billion (RM5.7 billion) bridge, being built by a consortium between state-controlled firms China Communications Construction Company and China Harbour Engineering Company, is expected to be completed by 2026 after delays and contract amendments.

Hong Kong-based CK Hutchison Holdings has operated the ports of Balboa and Cristobal for more than two decades. The publicly listed company is not financially tied to the Chinese government, though Hong Kong firms are subject to state oversight.

“The presence of the Chinese government, Chinese companies, and especially Chinese state companies, but not limited to them, does raise serious issues and concerns for the neutrality of the treaty,” George Mason University law professor Eugene Kontorovich, a research fellow at the conservative Heritage Foundation, said at the hearing.

The automatic renewal of CK Hutchison’s concession at the ports in 2021 sparked criticism in both the U.S. and Panama because of favourable financial terms for the firm. But no concerns were raised about security at the time.

“Hutchison Port Holdings operates hundreds of ports around the world, including in the U.S... If these ports threaten U.S. security, why don’t they terminate Hutchison’s contracts in their country?” Julio Yao, one of Panama’s advisors when it signed the neutrality treaty, wrote in a recent op-ed published in a local newspaper.

“The U.S. cannot force Panama to review or terminate contracts with Chinese companies.”

Yao, a specialist in international relations, said arguments for an intervention are based on amendments in 1978 by the U.S. Senate to guarantee the U.S. defence of the canal against any threats. Panama should not recognise those amendments, he told Reuters.

The eight-paragraph treaty and its annexes do not include a provision over the resolution of disputes or an expiration date.

An effigy depicting U.S. President Donald Trump, the U.S. flag and a photograph of U.S. Secretary of State Marco Rubio burn during a protest ahead of Rubio’s visit to Panama, in Panama City, Panama January 31, 2025. — Reuters pic

Do higher canal tolls violate neutrality?

Some U.S. officials have also asserted that an increase in passage fees by the Panama Canal in recent years “disproportionately affects Americans.”

Over three-quarters of all vessels passing through the canal originate in or are bound for the U.S., but the canal’s tolling system does not differentiate by flag, origin or destination.

In the fiscal year that ended in September, the canal reported a 5 per cent decline in its toll revenue to $3.18 billion following a severe drought. But between 2020 and 2023, the canal’s toll revenue had increased almost 26 per cent, its annual reports showed.

However, the canal’s fee structure is based on reservations by type of vessel and size, combined with auctions for ships arriving without reservations and a variable water surcharge.

Military vessels from any nation are subject to tolls different from commercial vessels. U.S. military ships have priority of passage.

The treaty only states that “tolls and other charges for transit and ancillary services shall be just, reasonable, equitable and consistent with the principles of international law.”

The U.S. is disproportionately affected by canal fee raises mainly “because the U.S. disproportionately utilises it,” commissioner Daniel Maffei from the FMC said at the hearing.

“We know it is a critical trade corridor, and want to continue to use that corridor and be treated in a fair way,” he added.

Toll increases have been applied not only by Panama but by other waterways in recent years, including the Suez Canal, amid demand spikes, geopolitical conflicts and adverse weather conditions worsened by climate change, shipping experts have warned.

“The U.S. no longer operates a fleet of commercial vessels. Less than 10 per cent of all cargo arriving or leaving the U.S. in the 60s were American-flagged. Now it is 1.5 per cent,” said former U.S. ambassador to Panama, John Feeley, in a TV interview last week, adding that Panama’s toll raise has mainly been triggered by its use of freshwater, equally affecting all ships. — Reuters