THE Trump-Panama Canal drama continues to unfold – on one hand farcical, on the other frightening.

“Merry Christmas to all, including to the wonderful soldiers of China, who are lovingly, but illegally, operating the Panama Canal,” said US president-elect Donald Trump in his holiday message on Wednesday.

The Chinese military is not operating the canal. The waterway is run by the Panama Canal Authority (ACP).

“There are no Chinese soldiers in the canal, for the love of God,” said Panama president Jose Raul Mulino in a press conference on Thursday. “What he has said on that subject is nonsense. There is not a single solider in the canal, for God’s sake.

“There is absolutely no Chinese interference or participation in anything that has to do with the Panama Canal,” he emphasised, adding that the only Chinese in the canal are on cruise ships or in the visitor centre.

Lars Jensen, founder of shipping consultancy Vespucci Maritime, wrote in an online post on Friday, “Irrespective of whether anyone believes Trump is merely using this as a negotiating strategy, as some do, the objective reality is that Trump’s statements are entirely fact-free in relation to the practical and commercial operation of the canal.”

‘The canal is Panamanian. Period’

Trump threatened to “demand the return” of the waterway to the US and has posted an image of a canal with an American flag and a tagline “Welcome to the United States Canal!” But the US has no legal means to take back the Panama Canal and could only do so by military force.

Mulino noted that Trump is not currently the US president – Joseph Biden is – so there will be no communications with Trump on anything until after his inauguration on January 20. After that, there will be no discussions on the transfer of the canal.

“There is nothing to talk about. The canal is Panamanian. Period. There is no possibility of opening any kind of conversation on this.”

Nor is there any possibility that Trump can somehow negotiate a special discount for US cargoes or US military vessels.

“The answer is no, because the tolls are not set at the whim of the president or the [canal] administrator. There is an established process to set the tolls for the canal that has been respected from day one,” said Mulino.

Those tolls are bound by the Neutrality Treaty, agreed to in perpetuity by the US and Panama in 1977, which mandates that the canal “shall be permanently neutral…with no discrimination against any nation, its citizens or subjects, concerning the conditions or charges of transit, for any reason”.

A discount for US cargo alone would be impossible to implement even if it were legal, meaning that Trump’s demand for lower US tolls is effectively a demand for lower tolls for all.

US cargo is overwhelming carried aboard non-US ships. The canal customers that carry US cargo – who directly pay the ACP tolls and would receive any discount – are companies like China’s Cosco, France’s CMA CGM, Switzerland’s MSC, Israel’s Zim and Denmark’s Maersk. Meanwhile, many of these vessels are not carrying cargo exclusively for US destinations; after they pass through the canal and pay their tolls, they often stop at Caribbean basin transhipment hubs to unload a portion of their cargo bound for Latin America.

Regarding transits of US naval vessels, which Trump claims are being treated unfairly, Mulino responded, “Since 1914, since the day of the first transit through the canal, the toll paid by warships of any nation, including the United States, is calculated based on tonnes of maximum water displacement. There is no discrimination against any warship, neither from the United States nor from any other country, which can use the route as any merchant ship does.”

Trump alleged in a social media post on Thursday that Panama is “a country that is ripping us off on the Panama Canal, far beyond their wildest dreams”.

Mulino countered that, on the contrary, the canal has significantly helped the US, with the neopanamax locks allowing larger vessels to transit with American imports and exports. The ACP spent over $5bn on the neopanamax locks, which debuted in 2016.

The neopanamax locks have benefited America by providing larger containerships a shorter route from Asia to US east and Gulf ports, and by providing tankers carrying US liquified natural gas and propane exports a shorter route to Asia from the US Gulf. At the same time, the older panamax locks managed by the ACP continue to play a key role for US grain exports to Asia.

‘The timing of Trump’s statement was horrific’

Trump’s statements, at this point, are nothing but the talk of a private US citizen. But Trump will soon be commander in chief of the US miliary, and the US did invade Panama before, in 1989, when the US deposed Panamanian leader Manuel Noriega.

Around 300 Panamanian soldiers and 214 Panamanian citizens were killed, according to official US estimates (other estimates are double that), as well as 23 US soldiers. Since 2022, Panama has declared December 20, the day of the US invasion, as a national holiday and day of mourning.

Trump’s initial tirade against Panama occurred on December 21, the day after the day of mourning and 10 days before Panama celebrates the 25-year anniversary of its takeover of the canal on December 31, 1999.

Calvin Froedge, a US citizen and Panamanian resident who founded the Marhelm shipping data platform, said in an online post on Tuesday, “While people are making memes and discussing a new invasion of Panama right after the memorial day for when 1,000 Panamanian lives were lost in 1989 when the US invaded, I think you need to stop and remember that on the other side of this, there are real people, including 50,000 American citizens and millions of Panamanians, who will be impacted by any US actions or even rhetoric around the canal.

“Even if Trump is just joking, even if he is just trying to create some negotiating leverage for some other position, I want to remind you that this rhetoric is harmful to the Panamanian people and to myself personally. I have already seen announcements of demonstrations, American flag burning – people are getting really angry and rightfully so.

“The timing of Trump’s statement was horrific. To say those things on the memorial day for when nearly 1,000 Panamanians were killed is unconscionable,” said Froedge.

Scenarios for freight rate impacts

The war of words over the canal is not affecting shipping markets, but future impacts are theoretically possible.

To the extent vessels use the Panama Canal to reduce voyage distance, effective vessel capacity increases, reducing rates (all else being equal). To the extent ships take longer routes and abstain from the canal, effective capacity decreases, a tailwind for rates.

The canal is currently attempting to woo more customers back after last year’s drought restrictions. If rhetoric – or actual actions during the Trump presidency – were to ever make shipping customers less comfortable with the Panama Canal route, it would render shipping networks less efficient, and thus more expensive.

The ACP is in the early stages of a plan to address its water needs, which have substantially increased with the addition of the neopanamax locks. The ratio of water usage in the neopanamax locks to the panamax locks is 2.1 to one. The current plan is to build a dam and create a new reservoir at Rio Indio at a cost of $1.6bn. It will be the ACP’s largest project since the neopanamax locks construction.

The success of the project will limit drought impacts in the future, reducing rate spikes from weather. Any US rhetoric or actions that make the Rio Indio plan more difficult to finance or otherwise impede the process would theoretically lead to higher future drought disruptions and thus higher rates.

The big “what if?” involves the scenario of the US taking over the canal by force – the only way the US could actually get the canal back.

“It’s hard to know how seriously to take Trump’s broadsides, but threatening a takeover that would require an invasion may court more trouble than he imagines,” warned the Wall Street Journal editorial board.

The canal system itself is highly complex to operate, particularly so after the addition of the neopanamax locks. The waterway is integrated into a broader cross-isthmus cargo network that involves port transhipment, rail and trucking.

If the US were to ever attempt to militarily take back the canal, shipping disruptions from that event and its aftermath would be significant and lengthy, which would theoretically lead to higher freight costs for US imports and exports.

There would be “upwards pressure on rates”, Jensen told Lloyd’s List. “Basically, the impact, at least conceptually, would be of the same nature as the low-water issue during El Nino if a US takeover leads to reduced efficiency, and hence, fewer transits.”