Indian Council of World Affairs

Starting from August 2023, the 82-kilometer-long Panama Canal witnessed major congestion caused by ships unable to pass due to reduced water levels on account of the unprecedented drought. The lack of rain was attributed to the El Niño factor. Water in the canal is supplied by the Gatun and the Alajuela Lakes and depends on a system of locks to increase water levels for ships to traverse. Reduction in the volume of water meant that while heavier ships simply could not pass, smaller ones had to wait for longer periods. This led the authorities to restrict shipping traffic through the canal, leading to delays. There were also reports of cargo offloaded and transported by road to the other end of the canal for further transportation by ships.  To avoid the impasse, many ships adopted a dangerous route through the Straits of Magellan and the Drake Passage at the Southern Cone of Latin America. The entire episode exhibits problems in the functioning of the Panama Canal and questions on its long-term viability. On the other hand, authorities in Panama are mulling over options to search for additional supply of water to maintain the functionality of the Panama Canal. Hence, there are questions on the long-term functionality of the Panama Canal and viable alternatives.   

Apart from crisis of logistics, transportation and viability of the Canal, there is a looming geopolitical tussle between the US and China. In 1999, the Government of Panama came to exercise ownership over the Canal subject to neutrality, allowing access to all and non-imposition of discriminatory tolls. China has made investment in ports, logistics and infrastructure along the Canal causing major concerns in the US. While Panama seeks investments, upgrading and building new infrastructure and diversifying its economy, the US seeks to maintain its preponderance over the region. 

Understanding the issue of the Panama Canal 

The Panama Canal allows ships to cross from either the Atlantic or the Pacific Ocean thus reducing cost of transportation and time. Built by the US in 1914, it was handed over to Panama in 1999 and is administered by Panama. It is also a major source of revenue for the country. On an average Panama receives around US$ 3 billion[i] per annum from operating the canal. Owing to the geography of the region, the canal uses a system of locks and two lanes which work as water elevators. These help in raising the water level above the sea level, allowing ships to pass which takes around 8 to 10 hours to reach either side. Water is obtained from two lakes, Lake Gatun and Lake Alajuela[ii]. While Lake Gatun should be ideally above 87 feet it was operating at below 80 feet, similarly the Alajuela Lake was operating at 209 feet short of 215 which is necessary for the canal to function at full potential. It is also important to note that Lake Gatun serves as the main source of potable water for the entire country and was artificially constructed by damming the Chagres River. 

Panama along with Central America experienced extreme drought in 2023 with the rainfall less than 43 percent[iii] of the annual average. Even during the spring and summer seasons Panama received insufficient rainfall which led to shrinking of volume of water in both the lakes. To make matters worse, the El Niño effect which brings warmer currents and disrupts rain bearing winds caused less precipitation. As a result of which, the canal could not properly function leading to shipping restrictions.

This situation shows how changing climatic conditions affect infrastructure, transportation and logistics which in turn hamper international trade and shipping.

Source: Menarguez & Flor (2017). “The New Panama Canal”, Intech, https://www.researchgate.net/figure/General-map-of-the-Panama-Canal-and-its-enlargement-Below-longitudinal-cut-of-the_fig1_319400464.

Effects of reduced functionality of the Panama Canal 

Due to the inability of the Panama Canal to maintain proper operations, the primary impact is on shipping. The canal is responsible for handling 6 percent[iv] of global shipping with countries such as the US, Canada, Japan, China and South Korea apart from Latin American countries dependent on it. Reduced volume of water implied that the Panama Canal Authorities were compelled to put restrictions on shipping, ranging from allowing only 30 to as low as 24 ships[v] per day. Due to these circumstances, ships had to either reroute around the southern tip of Latin America or seek transportation by road. Ships transporting medical and perishable items were awarded priority, while many other chose to offload their cargoes at either end of the canal and continue thereafter by ships. While smaller ships still managed to use the canal, the larger ones were most affected as there was insufficient water to allow them to traverse[vi]. Previously, ships could book a passage and wait for around 3 to 5 days or even wait without booking a slot[vii]. However, waiting time quintupled and in some cases, slots were auctioned off to the highest bidder. These entire processes meant increased cost of transportation, damage to goods and endless waiting for clearance with some ships having to wait between 10 to 21 days[viii] before being allowed to pass. 

These events have led to disruptions in trade and logistics but no other country is as affected as Panama which relies heavily on revenue generated by the canal and also for its own logistics. For instance, it derives around 6.6 percent of its GDP from offering transit rights through the canal and it has already lost around US$ 200 million due to delay in shipping. 

Probable Solutions for the Panama Canal and Alternatives 

The canal authorities have yet not lifted daily restrictions on shipping and are looking for ways to increase the volume of water in the lakes. A proposed solution is to dam the Indio[ix] River which is on the west of the Canal to create an artificial reservoir, from which water could be fed to Lake Gatun to increase its volume. It is suggested that this may not only alleviate the problem of water level in Lake Gatun, but may turn out to be a solution for shortage of potable water. On the other hand, construction of such a dam may be a precarious task given the ecology of the region and such a reservoir will also depend upon adequate rainfall. Similarly, it is possible to draw water from Lake Bayano which is to the east of the Canal, with the only issue being hampering the ecology and the enormous distance between the two. 

As an alternative, Nicaragua in 2013 planned to construct the Nicaragua Canal[x] and awarded 50-year concessions[xi] to a Chinese company, HK Nicaragua Canal Development Investment Group. The project was scrapped due to unavailability of funds, geological and environmental reasons, and only the Pacific wharf was constructed.  Other Latin American countries such as Mexico are looking for alternatives. Mexico’s Interoceanic Corridor[xii] is a project to modernise a 300-kilometre railway which connects the Pacific and the Atlantic coasts. While passenger trains are running, ports on either side at Coatzacoalcos and Salina Cruz need to be upgraded for freight travel.

Source: Constant Geography (2021, https://constantgeography.com/introduction-to-world-geography/central-america/.

The proposed 2250-kilometre Bioceanic Corridor[xiii] seeks to connect Chile, Bolivia, Argentina, Paraguay and Brazil which comprises of a network of highways and railways is with the aim to connect the coasts of Latin America. While some of the infrastructure related works are completed[xiv], there are concerns regarding the construction of a bridge over the Paraguay river and objections from local communities. 

While a similar alternative to the Panama Canal may seem difficult to construct at the moment, land-based routes aid in reducing over reliance on Panama Canal with the downside being issues such as reduced speed and lower cargo capacity by road and rail.

Source: Mongbay. (2023). Bioceanic Corridor. https://news.mongabay.com/2023/06/a-mega-highway-threatens-south-americas-vulnerable-gran-chaco/.

Geopolitical issues between the US and China over the Panama Canal 

With Panama officially assuming ownership of the Canal in 1999, it received a boost to its economy and in the meanwhile the US was content with the Canal’s neutrality, non-discriminatory toll policy and access to all. The US considers the Panama Canal strategically important to augment its position in the hemisphere. Previously, the Canal served as a route for transporting war material during the Second World War and the Vietnam war. The US is top origin and destination[xv] of ships using the Canal followed by China, Japan, South Korea and Mexico. After the expansion of the Canal in 2016, US reliance on it has increased manifold with respect to three key trade routes: the Gulf Coast and East Coast of the US to Asia, the US to Latin America and the US to Europe[xvi]. These trade routes[xvii] are critically important to the US economy and depend on the uninterrupted functioning of the Panama Canal.  Hence, for the US maintaining enormous strategic hold over the Canal is of prime importance. 

China has sought to deepen its presence in Panama for the obvious reasons, to counter US influence and to build strategic depth against it. After China and Panama established diplomatic relations in 2017 it invested significantly in infrastructure, water treatment, constructed a US$ 4 billion High Speed Rail[xviii], and built a US$ 900 million electricity plant. Apart from that, it also controls two ports along the Panama Canal, the Hutchison-Whampoa at Balboa and Cristobal and through a US$ 900 million deal, the Chinese Landbridge Group acquired control of the Margarita Islands and the largest port in the Colón Free Trade Zone. Additionally, China also constructed the Panama-Colón Contained Port with the aid of the China Communications Construction Company and acquired a contract of US$ 1.4 billion to construct a fourth bridge[xix]  over the Panama Canal. China’s goals in increasing its hold over the Panama Canal serves an economic and strategic purpose. In any situation of conflict, the Panama Canal may see disruptions of trade and logistics which may undermine the position of the US. 

China’s approaches has raised major concerns in the US, which seeks to maintain the neutrality of the Canal[xx] and deny China any strategic leverage in its vicinity taking into consideration global Sino-US competition. To add to the concerns, Panama and the larger Central America is also a transit point for narcotics along with a route for migrants. Panama seeks to maximise opportunities[xxi] from both China and the US, disregarding Sino-US competition. It seeks investments, building of assets and infrastructure and economic prosperity. 

Position of Panama regarding the Panama Canal and Sino-US geopolitical competition 

There are few key things which reflect Panama’s position in the context of the Panama Canal, and the geopolitical tussle between the US and China. 

The Panama Canal occupies an important position in the country, not only in terms of revenue and employment but also as a part of its national identity. From the perspective of Panama, despite shortcomings, maintaining the primacy of the Panama Canal is an important objective[xxii]. Panama will hold elections on 5^th May 2024 and various political parties have expressed concerns regarding the shortage of water and the functioning of the Panama Canal. There is a consensus among all political parties that the challenges posed by environmental factors need attention[xxiii]. Some of the broader proposals that have emerged are expanding the hydrographic basin and seeking access to more water[xxiv], and rationalising the use of water for the Canal as well as for consumption. There are operational issues with the Canal, and hence there is a requirement to look for alternative shipping routes. While, land-corridors in Latin America are functional, as of now there is no immediate alternative to the Panama Canal. 

With regards to the geopolitical tussle between the US and China, Panama seeks to maintain healthy relations with both and maximise its benefits. Panama’s recognition of China in 2017 under the Presidency of Juan Carlos Varela not only raised concerns within the US but also within domestic circles.  For instance, while the agricultural sector expressed positivity, concerns were raised by the livestock sector on engaging in trade with China as they feared losses. Issues related to widening balance of payment and possible friction with the US were prominent. In 2019 with the election of President Laurentino Cortizo many projects in association with China were reviewed and some were halted[xxv]. Despite growing relations between Panama and China, the US remains an important partner, although it faces competition from China[xxvi]. Some complementary interests between Panama and the US ranges from access to US markets, managing migration, combatting illegal drug and human trafficking and access to finance from the US. The US is also the top user of the Panama Canal and has robust economic relations with Panama under the purview of a Bilateral Investment Treaty and Trade Promotion Agreement[xxvii]. 

While the US and China are wary of each other regarding their approaches towards Panama and especially the Panama Canal, what Panama seeks are larger economic benefits from both keeping its strategic location as a point of leverage. 

Conclusion 

The crisis related to the Panama Canal highlights how changing climatic conditions affects transportation, trade and the economy on a large scale. The Canal which is not only a major source of revenue for Panama but also its landmark is facing serious shortcomings owing to reduced rainfall and consequently low water levels. While global trade is certainly affected and the trend will continue till the Canal’s full-functionality is restored, it is difficult to look for alternatives in the short-term which can be economically sustainable as the Panama Canal. This has also dented the economy of Panama which generates significant revenue from the Canal. Additionally, Panama is also witnessing steady Sino-US competition with it seeking investments and engaging in cooperation with both, while maintain equidistance. While the Panama Canal Authorities are optimistic about its full functionality, this entire episode highlights the dependency upon the Panama Canal, increased geopolitical contestations between China and the US, and the lack of immediate alternatives.

*****

*Dr. Arnab Chakrabarty, Research Fellow, Indian Council of World Affairs, New Delhi.
The views expressed are personal.

End Notes

[i] Barrons. (18th December 2023).  Panama says its canal produced record revenue despite drought. Accessed 11^th April 2024. https://www.barrons.com/news/panama-says-its-canal-produced-record-revenue-despite-drought-8368e0aa.

[ii] Smithsonian Tropical Research Institute. (17^th January 2024). More trees, more water. Accessed 12^th April 2024. https://stri.si.edu/es/node/889.

[iii] Sarah Ruiz & Christina Shintani. (20^th February 2024).  Drought in Panama is disrupting global shipping. These 7 graphics show how.  Woodwell Climate Research Center. Accessed 11^th April 2024. https://www.woodwellclimate.org/drought-panama-canal-7-graphics/.

[iv] Ibid.

[v] Canal de Panama (2023). Panama Canal faces high demand of vessels. Accessed 11^th April 2024. https://pancanal.com/en/panama-canal-faces-high-demand-of-vessels/.

[vi] Since September 2023 the number of ships traversing through the canal continued to drop to an average of 12 per day in December 2023. Even since the start of January 2024 and till date less than 30 ships are allowed to use the canal. As on April 2024, 36 ships are still waiting for transit. Under normal circumstances, around 1000 ships pass through the canal each month.

[vii] David Becker. (12^th October 2023). Shipping faces challenge to adapt to latest Panama Canal transit limit and booking system changes for the long haul. Inchape Shipping Services, Accessed 23^rd April 2024. https://www.iss-shipping.com/shipping-faces-challenge-to-adapt-to-latest-panama-canal-transit-limit-and-booking-system-changes-for-the-long-haul/#:~:text=Battle%20to%20curb%20waiting%20times&text=Ayala%20said%20daily%20transits%20have,waiting%20to%20traverse%20the%20canal..

[viii] Rebecca Cohen (23^rd August 2023). More than 200 ships are in a traffic jam outside the Panama Canal, showing we can’t get through a year without big boats getting stuck.  Business Insider, Accessed 23^rd April 2024. https://www.businessinsider.in/thelife/news/more-than-200-ships-are-in-a-traffic-jam-outside-the-panama-canal-showing-we-cant-get-through-a-year-without-big-boats-getting-stuck/articleshow/102956147.cms.

[ix] The proposed project is estimated at around US$ 900 million and may take around 6 years to complete. Even then, there are diverse groups within the country that oppose such projects considering the pristine ecology of the country.

[x] Similar to the Panama Canal, the Nicaragua Canal sought to create a route based on Lake Nicaragua and connect the Atlantic and Pacific coasts of the country. If completed, it is estimated that it could surpass the capacity of the Panama Canal owing to the large amount of water reserves in Lake Nicaragua.

[xi] Jean Paul Rodrigue & Theo Notteboom. (2022). The Nicaragua Canal Project. Port Economics, Management and Policy. Accessed 24th April 2024. https://porteconomicsmanagement.org/pemp/contents/part9/nicaragua-canal-project/.

[xii] Known as the Interoceanic Corridor of the Isthmus of Tehuantepec (CIIT), it is a revival of a century old Tehuantepec Railway built during the tenure of President Porfirio Diaz in 1907.

[xiii] in 2015 the governments of Brazil, Argentina, Chile, Paraguay signed the Asunción Declaration to create the Bioceanic Corridor. The objective was to strengthen transportation and logistics capacities such as railway, roads and tunnels to facilitate passenger and goods transportation.

[xiv] Mapfre Global Risks. (8^th January 2024). Bioceanic Corridor- a transportation artery across Latin America. Accessed 24^th April 2024. https://www.mapfreglobalrisks.com/en/risks-insurance-management/article/bi-oceanic-corridor-a-transportation-artery-across-latin-america/.

[xv] 72.5 percent of ships passing through the Canal has its origin or destination in the US, which also accounts for 40 percent of the total contained traffic annually.

[xvi] Nathaniel J. Swank. (2022). United States National Security Policy towards the Panama Canal in an era of Great Power Confict.  Naval Postgraduate School. Accessed 24^th April 2024. https://mail.google.com/mail/u/0/#sent/KtbxLvhKPbVWqTVsswVjwxGnRjXggxkVLq?projector=1&messagePartId=0.1.

[xvii] The US is a major supplier and importer of goods such as raw materials, agricultural goods, chemicals and petroleum products which depends on the functionality of the Panama Canal.

[xviii] Daniel Runde & Amy Doring. (21^st May 2021). Key decision point coming for the Panama Canal.  CSIS, Accessed 23^rd April 2024. https://www.csis.org/analysis/key-decision-point-coming-panama-canal.

[xix] Selwyn Parker. (22^nd January 2024).  US, China clash over neutrality of drought-hit Panama Canal. Riviera, Accessed 23^rd April 2024. https://www.rivieramm.com/news-content-hub/news-content-hub/us-and-china-clash-over-neutrality-of-drought-hit-panama-canal-79323.

[xx] John Grady. (24^th March 2022).   Chinese investment near Panama Canal, Strait of Magellan major concern for US Southern Command.  USNI News, Accessed 24^th April 2024. https://news.usni.org/2022/03/24/chinese-investment-near-panama-canal-strait-of-magellan-major-concern-for-u-s-southern-command.

[xxi] Michael Stott. (3^rd May 2023). US-China rivalry could trample Panama underfoot. Financial Times, Accessed 23^rd April 2023. https://www.ft.com/content/4ed2907c-4c9e-40e5-b6c8-dcbb832eba99.

[xxii] Seth O’Farrell. (14^th November 2023). Climate change throws Panama into chaos. FDI Intelligence, Accessed 30^th April 2024. https://www.fdiintelligence.com/content/news/climate-change-throws-panama-into-chaos-83162.

[xxiii] Maxwell Radwin. (30^th April 2024). What’s at stake for the environment in Panama’s upcoming election? Mongbay, Accessed 30^th April 2024. https://news.mongabay.com/2024/04/whats-at-stake-for-the-environment-in-panamas-upcoming-election/.

[xxiv] Some of these proposals range from building water treatment plants and inter-linking rivers to generate more volume of water. Others aim at forest conservation and reforestation that may positively impact the hydrological cycle over a longer period. Political parties have expressed concerns regarding mining, but there are sections of the society which believe that mining is crucial for revenue generation, despite environmental concerns and water consumption.

[xxv] Some of the Chinese funded projects that were reviewed or halted were a high-speed train, an electrical transmission project on the Caribbean coast and the Panama Metro project’s third line.

[xxvi] Loro Horta. (21^st August 2020).  China and Panama: Penetrating America’s Backyard, RSIS, Accessed 30^th April 2024. https://www.rsis.edu.sg/rsis-publication/rsis/china-and-panama-penetrating-americas-backyard/.

[xxvii] US Department of State. (17^th October 2023).  US Relations with Panama. Accessed 30^th April 2024. https://www.state.gov/u-s-relations-with-panama/.