Note: This transcript is auto generated and lightly edited.
Monica de Bolle: The Panama Canal is a vital channel for global trade, and most of the goods passing through it are going to or from the US. In 2023 and 2024, the Canal faced severe droughts, forcing the Panama Canal Authority to lower water levels and limit the number of vessels crossing. Transits of goods like liquefied natural gas declined by as much as 73 percent over the last two years, and have not returned to pre-drought levels.
With growing interest in Latin America by the current US administration, the Canal will play a greater role in geopolitics as well as trade. What is the future of the Canal and how will countries navigate these challenges?
You're listening to an episode of Policy for the Planet, a podcast exploring the global response to the climate crisis. I'm your host Monica de Bolle, a senior fellow at the Peterson Institute for International Economics.
To help us dive in deeper into the Panama Canal, I'm joined by:
David Gantz: David Gantz. I'm a retired law professor from the University of Arizona, and I'm currently the Will Clayton Fellow at the Baker Institute for Public Policy at Rice University in Houston.
Monica de Bolle: David spent years researching the Panama Canal and its important role for the region and the world.
So David, welcome to the show. It's a pleasure to have you. This episode on the Panama Canal has been long in the making because I've wanted to have this on policy for the planet for a very long time. So let's just jump right in and let me ask you to please give us sort of a brief overview of the Panama Canal and some of the issues that are currently affecting it and playing into a lot of the tensions and other things that we've seen regarding the canal.
David Gantz: Let me just start by noting that in many periods, the US has not paid a great deal of attention to Latin America. That's clearly changed. If you look at current administration policy, there's a great deal of, to use a good word, interest, not only in the Panama Canal and Panama, but in Venezuela, some friction with Brazil and Colombia.
And I think a great deal of concern overall that China is eclipsing the US, at least in terms of economic relations. with that, talking about the Panama Canal, think a lot of this is something that most Americans are aware of. The canal was constructed under US direction in 1906, 1914, after a French group had failed, mostly because of severe engineering challenges and many, many disease problems. But the idea is an old one. It probably came up at least 500 years ago with the early Spanish and Portuguese explorers who thought the idea of a land route, of a canal or some route across Panama from the Atlantic to the Pacific would be very important economically in those days to the big colonial powers, Spain and Portugal.
The canal has had, essentially had US involvement from the beginning. The United States under President Teddy Roosevelt supported, I put that in quote, Panama's independence from Colombia a few years earlier after Colombia, which then looked at Panama as a colony, decided they didn't want the canal construction.
The Panama Canal Treaty was unusual even for those days. It gave the US control of the canal in perpetuity and created the Canal Zone, which is a 10 mile wide strip of Panama that became US territory for all intents and purposes in terms of the construction, the operation, US schools, a federal district judge. was enough considered US territory. So John McCain, who as everybody remembers, was the 2008 presidential candidate who was born in the canal zone, was considered by most scholars who have met the national born requirements of the constitution to run for president. I think overall, the canal has been of enormous economic and strategic importance to the U.S. ever since it was constructed.
About 70% of the total tonnage passing through the canal today is goods to or from the US. Forty percent of all container traffic between the US East Coast and Asia, for example. The canal also carries various bulk goods, grain, cement destined for the West Coast of South America, and more recently, I guess, liquid natural gas from the US Gulf Coast that's bound for Asia. For the US, of course, the biggest military ships are too big to go through the canal, but most of the rest can transit.
I would point out that if you are shipping goods from Brazil or Argentina to the west coast of Latin America, Peru or Chile or Ecuador, it's typically much more efficient to go through the canal than it is to go around the Cape Horn. So the value is there for South American countries as well as for the US and for everybody who's trading with the US.
I think one of the more important developments was in 2016 when a new set of locks were developed, the canal was expanded, and much larger container ships and other ships could go through, I think up to about 13,000 or 14,000 20-foot equivalent units, which basically covered, at the time, at least most of the container ships that were in operation. So you've got a very significant economic and for the US strategic product in the canal. The canal was under US control from 1914 to 2000. That the so-called perpetuity treaty.
In 1977, the Carter administration made a difficult decision with a lot of domestic criticism and concluded a treaty that essentially would eliminate US sovereignty in the canal over the canal zone and eliminate the canal zone and sea control to Panama at the end of the 20th century. There was a separate treaty that guaranteed the canal would forever remain neutral, open to all ships. I think Carter was legitimately concerned that any of the locks, I'll talk a little bit more about them in a minute, could have been disabled very easily by terrorists with a few well-placed bombs.
Also, if you go back and look at the 70s, this was a time when the post-colonial world was rapidly developing and the idea of a big strip of US territory in the middle of a foreign country controlled by the US was very difficult to defend in the fora such as the United Nations and the Organization of American States. So think Mr. Carter had very good reasons for doing what he did despite a lot of skepticism in the United States. Panama's been in complete control of the canal for about 25 years now. The US role is really limited to vague treaty understandings on common defense in case of some sort of foreign adverse power activity, which is important in many respects because Panama doesn't have any military. So this, think, is a major issue.
And I think one of the things that surprised some people, or at least some critics in the US back at the end of the 20th century, is Panama has turned out to be a very good manager of the canal. They've operated well. They managed in financing this massive set of new locks, larger locks that became operable in 2016. They have implemented, and again, something we'll talk about later probably, water conservation measures, so that the new locks are able to reuse about 60% of the fresh water that's needed for every transit. Canal operations are really complex.
I don't know how many people realize this. If you think about the Suez Canal, which was in the news three or four years ago because of a grounding that blocked it, the Suez Canal is a sea level canal. It doesn't have any locks. You don't have to raise or lower the ships. Panama is very different because you have to raise the ships about 85 feet on one end so they can transit across Gatun Lake and then drop them 85 feet on the other side. the mechanical aspects, the engineering aspects of Panama Canal are totally different from a sea level canal like Suez. And you have this challenge constantly.
Monica de Bolle: If I may ask you, how does this uniqueness of the way that the canal is set up in that it functions completely different from a sea level canal, as you were saying, how is that more or less impacted by the climate issues that we've seen affecting the canal?
David Gantz: The is the canal does not use seawater. The canal uses fresh water, primarily from Gatun Lake. So if you have a drought as we did in 2023, where the normal May to December rainfall is much less than is expected, the level of Gatun Lake lowers and water becomes very, very scarce.
And again, what happened in 2023, the Panama Canal Company had to reduce the number of transits in order to conserve water. And they went down from about somewhere around 40, daily to 32, in some cases down into the 20s. But it wasn't just reducing the number of transits. They reduce the depth that was permitted through the canal, again, to conserve water, which meant that some ships had to avoid the canal entirely.
And with others, there were some transits where on the Pacific side, for example, a container ship would unload several hundred containers, put them on a train, ship them across to the Atlantic side, and then reload them, which obviously is a time consuming and expensive process. That's not a good way to run things. So you had this situation going on, I guess, for almost a year before in 2024, the rainfall got back to something close to normal.
There was also some controversy on the way Panama was setting the rates. I don't know whether it was reasonable or not. And for a while they were allowing a ship to get toward the front of the line by paying more tolls. And you had a situation that looked at many of us like what happened off Long Beach and Los Angeles during COVID. And that is you had dozens of ships sitting in anchor waiting to transit the canal. Again, for international commerce, that's not a good situation. So it was a mess.
Monica de Bolle: Is it fair to say that the kind of situation that we saw in 2023 with the drought, with everything that you've just talked about, is it fair to say that this is going to be a recurrent situation going forward? And is it also fair to say that in a sense, unless something is done, the Pan-McCanal is, I'm going to use a very dramatic word, doomed in a sense because of these climate issues, the changes in hydrological slash rain cycles, and the fact that you have this extreme vulnerability in these freshwater reservoirs to these conditions.
David Gantz: I think doomed is probably a bit of an overstatement, but clearly, particularly from climate factors, obviously none of us know when the next drought could take place. We don't know nearly as much about the effects of climate change as we would like to, but certainly you could have a situation where the reduction in transit numbers, the difficulties this caused for world commerce would occur again.
And in 2023, there was a phenomenon called El Nino, which is believed, nobody really knows for sure, to limit rainfall. There's going to be another one in 2027. So I think one would have to be extremely naive or very, very optimistic to believe, well, 2023 was a one time occurrence and everything's going to be fine from now on. You're going to have plenty of rainfall and you won't have to worry. It's like looking at the Colorado River in the US and saying, well, that 20-year drought is going to go away and we'll have plenty of water for all the farmers and subdivisions in the Southwest. It doesn't seem to be very sensible to think that way. So obviously, if the canal is going to continue to play the same high level of, the same role as it has in the past, remedial measures would be very advisable.
Monica de Bolle: What are some of those measures, David? Because I know you've discussed a bit, you know, these, some of these plans that the government, the
Panamanian government has to deal with issues surrounding the canal, including potential climate issues that may be affecting it in ways that we don't exactly have a clear idea of how, but we know that they're, they're effect. What is the government thinking of doing? What is it already doing?
David Gantz: Well, certainly, as I mentioned earlier, the expanded canal locks that were completed in 2016 are designed to conserve as much fresh water as possible. In other words, to reuse it to the extent it's possible when you're operating the lock. So that was one step, which I think has had some positive benefit, but it didn't help that much in 2023, as we saw. There are two other projects that are going to be going forward probably in the next year or so. First of all, the government is going to spend, I don't know, somewhere over $1.5 billion to dam up the Rio Indio, the Indio River Dam, which includes about half a billion dollars to relocate a lot of Panamanians who would be flooded otherwise.
But it's not going to happen as quickly as it is supposed to, you know, it's a massive project. It's supposed to begin in 2027, but it won't be finished until 2032. So, you know, by these standards, that's a long time. There's a second project, which is, I think, more innovative, but may also be more uncertain as to the results. The government wants to construct a pipeline across the Isthmus, 58 or so miles, along with a terminals for to roll trucks on and off terminals. That's supposed to cost about four to eight billion.
But it also won't be completed certainly by 2030. The idea is if you have a liquid natural gas, an LNG ship leaving from the Gulf Coast, let's say, to go to Asia through the Panama Canal, if the ship is too big to go through the canal, what you would do is you would unload the natural gas, pipe it over to the Pacific and load it on another ship. So...
Obviously, there are a lot of cost factors involved. If it is cost effective for ships to do this, if the fees and the delays are not substantial, it probably will work. But a lot of LNG ships that used to go through the canal up until 2023 are now going around the Cape of Good Hope. And if you want those ships to come back, the costs obviously have to be competitive. And I'm assuming that the Panamanian government has consulted with carriers and has done some studies and is convinced that they can produce this pipeline and make it economical for people to use it as a significant means of getting ill in liquid natural gas from the U.S. to Asia.
Monica de Bolle: So in essence, there are initiatives, there are plans. There's great uncertainty, obviously, around these plans. But the fact is that none of them are really going to come off the ground anytime soon. the canal is still very much vulnerable to, and obviously trade and shipping and everything that goes through the canal is vulnerable to, this possibility of continued droughts and continued effects on the canal.
David Gantz: I think probably, yes, I think another drought between now and 2031 or 2032 is at least possible. It's so much certain even in 2027, if you have an El Nino, doesn't necessarily mean the rainfall will be disrupted the way it was in 2023. But certainly the level of uncertainty remains relatively high.
Monica de Bolle: Yeah. So I very much like the way you started our conversation by looking at the sort of broader picture of what's going on in Latin America in general and the fact that the current US administration seems to be way more focused on the region than previous administrations have been. The Panama Canal is obviously here as one of the touch points for this renewed, let's say, U.S. interest in the region.
You've spoken of Brazil and Colombia and Venezuela, also Argentina, as we've seen with the recent lifelines and things that have been proposed for it. But back to the canal and the thing you said about, you know, China, the way that China has been very present in Latin America in the last few years and how it has completely reshaped its relationship with a lot of these countries. In Panama specifically, can you speak about how, what is China doing and what is it that the US doesn't want to see China doing?
David Gantz: Well, I think that's a very good question. Obviously, the context is one in which if you looked at US policy, other than with regards, say, to Cuba and Venezuela, you could argue that US-Latin relations, particularly economic relations, have suffered from a not so benign neglect. More attention, typically, reasonably, has been paid to Asia and to the Middle East.
But I think one of the results of that is that it has allowed China to make enormous economic inroads in Latin America. I'm not sure what we could have done even if it had been a high priority. We don't have a belt and road policy which provides billions of dollars for infrastructure.
Monica de Bolle: Yeah.
David Gantz: We haven't done anything like building the new Peruvian port of Schenke, which is a big container port controlled essentially by Costco, a Chinese agency, which makes it much easier and faster to send ships from Peru directly to China without going through North America, and eventually may well be connected to a land bridge, railroads or roads that go across the Andes. This is a huge engineering feat as well to Brazil and Argentina. So goods from Brazil and Argentina could be shipped across South America rather than through the canal.
And so as we are all aware, China is the world's largest consumer of soybeans. Most of the soybeans they consumed a few years up until a few years ago came from the United States. Now they almost all come from Brazil or Argentina. The Chinese have helped building ports in most of those countries. But many of those, of course, are either going around the Cape or more likely through the canal. So you could have a situation in the future where China has even more control over its economic needs in the area of soybeans and, of course, from China coming the other direction.
I think the US has been engaged for quite some time and what you might call an effort to win friends and influence people. In my personal opinion, they're not doing very well right now in Latin America with the threats to Panama and the very severe tariffs on Brazil, threats against Colombia. And I think you don't have to be an experienced historian of US-Latin American relations to know that the number of interventions, shall we say, in many Latin American countries over the year, including Panama 25 years ago, are such that governments that worry about their own sovereignty are concerned. And also you have a government of China, which frankly, when it does projects, is not terribly concerned by human rights issues, which many past American administrations have been.
So countries like Nicaragua, Bolivia, Venezuela, and the like. So I think it's a complex aspect of a much broader problem, which is US and China competing for, I won't say world domination, but for advantages. And there a lot of questions about whether the president administration is doing a really good job of this. But there also been questions about earlier US policies as well. But basically, getting more directly to your issue for many years, at least over 20 years. The major container ports, both on the Atlantic side in Cologne and on the Pacific side in Panama City, have been managed by a company called CK Hutchinson, which is a Hong Kong based company. That didn't seem to be a big concern years ago because Hong Kong was semi-autonomous, British for a long time. But now, of course, it's controlled totally by China.
So there are concerns in the US, which are not entirely irrational in my view, that having that big presence in Panama is an obvious opportunity for spying, at least on ships. And in the event of a real confrontation between the US and China, might find military purposes. So one of Mr. Trump's earliest efforts whether or not you like the methodology, think, again, I say there's rational basis, was to say to Panama, either we're gonna take over the canal or we're gonna find somebody else to run those ports. And actually a lot of progress was made in April, a group headed by the American Investing Company, BlackRock, put together consortium.
They worked out a deal to buy not only the two Panamanian container ports, but about two or three dozen others elsewhere in the world, except in China. I don't know, for 22 or 23 billion. But for reasons which are not entirely irrational, Chinese government did not like that idea. And things have pretty much been stalled for the last six months or so. There's been very, very little reporting that's public on what's going on.
At one point, China said, OK, we don't object to the consortium, but we want Costco, which is the Chinese government-controlled shipping entity, to be part of the package, which I'm assuming that the Trump administration does not favor, at least I wouldn't. So I don't know where things go at the moment. I assume discussions are going on. I think it's very likely that BlackRock, China government and the US government will be, Panamanian government, able to work out something. Meanwhile, Panama has essentially said, we're going to cancel the concession that was renewed back in 2022.
We think there were some irregularities unspecified as to how that was done. The cancellation is now before the Panamanian Supreme Court. And my assumption is it's more likely than not that they will say yes, the government was wise to cancel the Hutchinson concessions. Where we go beyond that, I think, is one of the uncertainties. I don't believe there will be a gap in operating ports. But who is going to be operating it three months, six months from now, I think, is a very interesting and un-answerable question.
Monica de Bolle: Yeah, it's quite fascinating, particularly as we consider these latest actions by the US in the Atlantic, as well as in the Pacific with the boats, you know, the boats that are circulating off the coast of Venezuela and Colombia and some of the ships and boats on the other side as well. The bombing campaigns and all of that with the canal right there and with these these absolutely fascinating geopolitical slash economic issues playing out. So.
As you say, it's a fascinating thing to continue to follow because it will likely play out as other things in the region are playing out. David, may I ask you, if you were to give sort of a...A brief overview of what you believe may be the outlook for the canal. Would we fall more on a pessimistic side, optimistic side, neutral? Where are you with respect to, you know, how to look at the canal going forward?
David Gantz: Well, I guess I would be on the moderately optimistic side. I think my sense is that what the Panama government, the canal company are doing in terms of this new source of water on the different river and with the pipeline have been thought out pretty well because certainly the expansion of locks back 10 or 12 years ago was very well thought out. And I think that will help.
I think the great uncertainty here as in so many other places in the world is what is going to happen with climate change. Will droughts become more frequent? Will they become more severe? If there is a drought in Panama and you have a new dam in addition to the Gatun Lake, but there's no rain, it's still not going to solve the problem. So whether or not Panama, the canal continues to play as major a role today in 10, 15, 20 years as it does today, it seems to me is very difficult for anybody, certainly for me to predict. I'm hopeful that these changes will help things at least for the next few decades.
But whether if you started looking further on, whether we practical, how many other alternatives shipping companies going to have to concern around the Cape of Good Hope, a lot of goods coming from the Far East to the US already are unloaded at Los Angeles and Long Beach, put on double-decker railroad cars and shipped to the Midwest and the East, it's entirely possible that that traffic will increase, even though my guess is it's more important, it's more expensive than shipping through the Panama Canal. Obviously, the canal toll rates will have an effect as well. Shippers are going to be balancing between different options to get goods from the Far East to the West Coast whether they're from China or Vietnam or anywhere else.
How that all pans out, I think, is a very complicated question, even for somebody who is a lot more expert in shipping logistics than I am. You have additional factors that come into play. I think the Trump administration, as of next week or the week after, is going to start imposing very high taxes on ships built in China calling on US ports. I don't think that directly affects the canal, but it probably will affect traffic to some extent, particularly since China is retaliating by similar port taxes on US-owned ships, which is quite a huge, is a big number of ships, even though they're not built in the United States. So there are all sorts of other factors, it seems to me, that could interfere in this. I don't expect in the foreseeable future for there to be a hot war between the US and China. But the trade war obviously is a long-term factor. And to some extent, at least, although maybe not that much, it does affect worldwide shipping, including shipping through the pandemic.
Monica de Bolle: Well, David, thank you very much. This was a fascinating conversation and there are so many issues that we need to continue to follow and keep our eye on. We would love to have you back in the future when things perhaps may be a little bit clearer or not. In any case, thank you so much for coming on the show and giving us your thoughts about the situation with the Panama.
David Gantz: Certainly my pleasure to be here.
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