COULD US President Donald Trump declare Panama in violation of the Panama Canal neutrality treaty signed in 1977? He certainly could, and it’s a decent bet that he will, but what would come next?

Panama has had full legal sovereignty over the canal for 25 years and the canal is the centrepiece of the country’s economy, so the only way the US could recover the waterway would be a military invasion and imperialist takeover.

Trump has complained about high canal fees, but a US invasion would disrupt if not shut down the canal, causing freight rates to spike and increasing costs for US importers and exporters.

A US takeover of the waterway would also jeopardise the very neutrality — the equal treatment for ships of all nations — that is at the centre of the debate. Trump has stated that the US deserves a special deal on fees, and America has a long history of sanctions and tariffs that disadvantage other countries.

The US Senate Committee on Commerce, Science and Transportation held a hearing on the Panama Canal on Tuesday. The gist of comments from Republican senators: Trump is right, the neutrality treaty has been violated, China and its spies are entrenched in Panama, and the US has the rationale to pre-emptively take the canal back.

Alleged security risks to US

Much of the concern during the hearing focused on the two port concessions to Hong Kong’s Hutchison — Balboa on the Pacific side of Panama and Cristobal on the Atlantic — as well as a contract with Chinese state-owned companies for the construction of a bridge over the canal.

“The danger is China exploiting or blocking passage through the canal,” said Ted Cruz, a Republican senator from Texas.

“Chinese companies are right now building a bridge across the canal, at a slow pace, so as to take nearly a decade. The partially completed bridge gives China the ability to block the canal without warning. Chinese companies control container ports at either end. The ports give China ready observation posts to time that action. This situation, I believe, poses acute risks to our national security.”

According to Eric Schmitt, a Republican senator from Missouri, “America is sleepwalking into a carefully laid Chinese trap, and fortunately, people like president Trump aren’t falling for it.”

Schmitt laid out a scenario in which “Taiwan is under siege and the CCP [Chinese Communist Party] has determined to crush Taiwan’s resistance and prevent a US response, activating a multi-pronged strategy, leveraging its control over global port and shipping infrastructure in Panama, and the Chinese-controlled ports at both sides of the canal suddenly collapse. Ships carrying goods, oil and military supplies are turned away, paralysing the economy.

“China’s ZMPC, which supplies 80% of US port cranes, has equipped their cranes with cellular modems that create exploitable vulnerabilities. These cranes at US ports mysteriously malfunction, halting critical operations. Factories close, millions lose their jobs. The economy grinds to a halt. While this scenario may seem hypothetical, it’s totally plausible.

“Therefore, the canal must remain neutral to the US. But the operational control of the Panama Canal is really by the CCP,” alleged Schmitt.

Senator Dan Sullivan, a Republican senator from Alaska said, “CCP officials are known to bribe officials in other countries. They do it all the time. No offense to Panama, but they don’t have the greatest reputation of having officials who are on the take.

He continued, “Let’s assume China invaded Taiwan or the Philippines or went to war somewhere in the South China Sea, and we were surging our Navy to the Pacific through the Panama Canal, are the companies controlling both sides of the Panama Canal subject to the Chinese national security laws that mandate cooperation with the military and state intelligence agencies?

“Isn’t that a huge risk to us right now, that they could go to these companies and say, ‘Hey, shut it down. Sink a ship in the canal.’ Wouldn’t they be obligated to do that under Chinese law?” asked Sullivan.

There was also considerable talk of Chinese spies embedded in Hutchison ports, and in the companies building the bridge across the Panama Canal.

“I think we can assume that these companies [referring to Balboa and Cristobal] have Chinese spies or military officials within the ranks of their employees. I don’t think that’s a big assumption. I think that’s probably true,” said Sullivan.

There could also be Chinese spies among the workers building the Panama bridge. “There could be some sort of surveillance or something like that on the bridges,” said Louis Sola, the chairman of the Federal Maritime Commission, newly appointed by Trump.

“I would say that my biggest concern is that when a Chinese contractor gets a contract in Latin America, they usually put a clause in there that they bring their own workers in from China, and these workers are housed in camps, and these camps will have guards on them, and they will have, sometimes they in Panama, for example, they have barbed wire around the camps.

“So, we really don’t know who’s in the camps. And that causes me concern on who’s in the camp, and what are they doing? These are actually sometimes thousands of workers that are brought in, for example, for the bridge or to do a port or something like this, to undercut the local labour.”

Arguments that neutrality treaty has been violated

Eugene Kontorovich, speaking on behalf of the conservative think tank Heritage Foundation, testified that the US could unilaterally decide that the Panama-US neutrality treaty has been violated. There is no clause for third-party dispute resolution.

In his prepared statements, he said, that the treaty “allows the use of military force, [although] this does not mean it should be the first recourse”.

Article Five of the neutrality treaty provides that only Panama shall operate the canal. Kontorovich said, “If Panama signed a treaty with China, whereby the latter would operate the canal, this would be a clear violation. But what if Panama contracted for port operations with a Chinese state firm, or even a private firm influenced or controlled in part by the Chinese government?

“A company need not be owned by a government to be in part controlled by the government. So, the real question is the degree of control. How much control is too much is at the discretion of the parties [of the treaty].

“Turning to foreign security forces, the presence of third-country troops would manifestly violate Article Five. But this does not mean anything short of a People’s Liberation Army base flying a red flag is permissible.

“The presence of foreign security forces could violate the regime of neutrality even if they’re not represented in organised and open military formation,” said Kontrorovich, noting that “modern warfare has seen belligerent powers seek to evade international limitations by disguising their actions in civilian garb…[such as] Hamas terrorists hiding in hospitals disguised as journalists”.

Kontrorovich also argued that the Panama concessions to Hutchison could violate the neutrality treaty.

“The presence of the Chinese government — Chinese companies, especially Chinese state companies, but not limited to them — does raise serious issues and concerns for the neutrality treaty. The canal, for purposes of the neutrality treaty, is not limited to the actual locks of the canal and the transits of ships in the canal. It includes the entrances of the canal and the territorial sea adjacent to it.”

Fact check

The Panama Canal is not run by the Chinese, as alleged by Trump and Schmitt. It is run by the Panamanians of the Panama Canal Authority (ACP).

The focus of US politicians is on PPC’s Balboa and Cristobal terminals.  PPC is a subsidiary of Hong Kong’s Hutchison Port Holdings. Hutchison is not a Chinese state-owned company. It is a publicly listed company, whose largest shareholding company is controlled by Hong Kong billionaire Li Ka-shing.

Hutchison is the world’s sixth-largest port operator, with terminals throughout the Americas, Europe, the Middle East and Asia.

Hutchison’s PPC has had concessions for Balboa and Cristobal since 1997, back when Hong Kong was still a British colony and before the US transfer of the Panama Canal.

What has changed for PPC over the last 28 years is the political status of Hong Kong and the concurrent rise of China as a world power.

The senators stressed that Hong Kong businesses have been subject to China’s National Security Law since 2020 and alleged that China has a role in PPC that could somehow impact the canal operations and allow China to gather intelligence.

Regarding the intelligence concern, containership cargo manifests are available for purchase in private markets. You don’t need to operate a port to get the information or to have spies building bridges.

Regarding the idea that Chinese spies could cause a bridge across the canal to collapse or sink a ship to block to canal, the impediment would be removed. Panama has a strong interest in keeping trade flowing. Chinese exporters have a strong interest in keeping cargo flowing to the US — that’s how they make their money.

Regarding the theory that China would block the canal as part of a defensive measure in the event of an attack on Taiwan, thwarting US Navy repositionings to the Pacific, modern US aircraft carriers do not fit through the Panama Canal, and would need to travel to the Pacific by other routes with their escort vessels.

Numerous senators during the hearing cited the potential for China to somehow use Hutchison ports at either end of the waterway to “block” the canal. But the closing of ports at either end of the waterway would not affect the canal. The ports are adjacent to the waterway; they are transhipment hubs.

There are five large container ports in Panama. Two are the Pacific side: PPC’s Balboa and PSA Panama, which is operated by Singapore’s PSA, the world’s largest port operator. Three are on the Atlantic: PPC’s Cristobal; MIT, which is operated by US-based Carrix; and CCT, which is operated by Taiwan’s Evergreen.

These five ports handled  a combined 9.4m teu in 2024, up 14% versus 2023 (transhipment moves are double-counted in teu totals, and are not equivalent to teu totals as domestic-cargo-only ports). The largest Panama hub is US-based MIT, the smallest is PPC’s Cristobal.

Transhipment cargo from Asia unloaded in Balboa and PSA is reloaded for delivery to final destinations on the Pacific coast of the Americas. Transhipment cargo unloaded at MIT, CCT and Cristobal is delivered to final destinations in South and Central America, the Caribbean, and the US. Other cargo unloaded at these ports is for domestic consumption in Panama, or bound for Panama’s free trade zones for re-export.

Panama’s ports are separate from the canal and complement cross-isthmus transport. Balboa on the Pacific and the three Atlantic ports are connected by the Panama Canal Railway, which is operated by NYSE-listed Canadian Pacific Kansas City Southern.

Some containerised cargo is unloaded at Balboa and moved by rail to the Atlantic ports, then reloaded on ships for final delivery. Other cargo moves in the opposite direction. There are also cross-isthmus trucking moves, particularly in the case of PSA Panama on the Pacific, which is on the opposite side of the canal as the railway.

The theory that Chinese influence at either Balboa or Cristobal could affect canal transits is false. When Balboa was closed for 12 days by a port labour strike in 2019, the cargo reflowed around the logjam. There are other avenues due to the multiple options in Panama’s cross-isthmus system.

Implications of a war

What if the US does invade Panama? While the question may sound implausible, it is no longer as hypothetical as it once was.

Schmitt has introduced a resolution calling for Panama to terminate agreements with PPC, put the canal in joint US-Panama operational control and “develop a joint US-Panama task force to oversee canal security”.

In fact, the US, Panama and other Latin American nations already have a joint defence operation to oversee canal security, called Exercise PANAMAX. This military exercise, led by US Southern Command (Southcom), has been conducted biennially since 2003. It was last conducted in August 2024.

James Stavrides is a retired US Navy admiral and former supreme commander of Nato, and currently a vice chairman of global affairs at the Carlyle Group. As commander of Southcom, he was involved in PANAMAX from 2006-2009. He published an editorial in Bloomberg on the threat of a US invasion of Panama on January 24.

The irony of the PANAMAX exercise is that it is led by the US military and directed at hypothetical military threats to the Panama Canal from outside forces, not the US. “None of the study or drills was directed against the contingency of a US attack on Panama,” wrote Stavrides.

“An actual attack to seize the canal would be a significant mistake in every dimension, and lead to a host of dangerous consequences both in the Americas and around the world,” he warned.

“Politically and diplomatically, it would be disastrous for our relations through the Americas. The US would instantly lose all credibility in the region.

“Militarily, we would be wise to pause and ask ourselves the degree to which the Panamanians would defend themselves. My guess — based on experience and discussing it with well-informed friends in the region — is that they would fight. They would receive a great deal of political and possibly military support from other nations in Latin America.”

Stavrides said that counterinsurgency expert Peter Bergen estimated that “going to war with a highly nationalistic country of nearly 4.5m people would require a force of at least 90,000 troops. It would also close the canal to shipping, and might well lead to attacks against merchant vessels though the Caribbean in retaliation. Are we looking for a major combat deployment and possible long-term counterinsurgency operations in our backyard?”