Trump plays hardball over the Panama Canal

Marco Rubio arrived in Panama this week, kicking off his tenure as America’s top diplomat with a stern message for the longtime US ally: Trump doesn’t want China anywhere near the Panama Canal. 

“China is running the Panama Canal. It was not given to China, it was given to Panama foolishly. But they violated the agreement and we’re going to take it back, or something very powerful is going to happen,” Trump warned on Sunday, without elaborating on what steps he would take. He had previously suggested that he may use US troops to retake the canal. 

The Panama episode is the latest in a string of diplomatic dustups in the opening weeks of Trump 2.0 that has left even America’s closest allies shaken. Trump’s willingness to crack the whip on partners and adversaries alike may be effective at extracting short term concessions from his designated targets, but it raises serious questions about the future of the US-led globalised world order. 

The canal, originally completed by the US in 1914, was handed back to Panama in 1999 under the Torrijos-Carter Treaty signed between the two in 1977, which declared that the canal should be “permanently neutral”. The 82km passage between the Atlantic and Pacific Oceans handles 5% of global trade each year.

China hawks like Rubio believe that China could seek to close the canal to US shipping in the event of a conflict, arguing that Beijing is able to extend its influence over the vital trade artery through two ports on each end that are run on concession by a subsidiary of CK-Hutchison, a Hong Kong-listed conglomerate. While CK-Hutchison is not owned by the Chinese state, Rubio said on 30 January that “you are not a company in China if the Chinese Government doesn’t control you”, drawing a comparison to the ongoing controversy over Bytedance’s ownership of TikTok. 

Trump has also railed at the cost of transit for US vessels in the canal, describing the fees Panama charges as “ridiculous” and “a complete rip-off”. 

So far, Trump’s hardball negotiating style seems to have worked: Panamanian president Murilo has launched an audit into the port concessions, ruled out renewing Panama’s participation in Beijing’s Belt and Road Initiative, and offered free passage of the canal to US warships.

Trump has proven more willing than ever to throw his weight around. His first week saw a dramatic showdown with major US ally Colombia, in which he used the threat of 25% tariffs and a government travel ban to coerce president Gustavo Petro to accept military deportation flights of Colombian migrants. 

Now, neighbours Canada and Mexico find themselves staring down the barrel of similar 25% tariffs unless they agree to Trump’s demands on curbing illegal immigration and fentanyl flows into the US. Both have managed to secure a one month delay in their implementation by pledging to beef up border security, with Mexico’s president Claudia Sheinbaum offering to send 10,000 troops to the US border. It remains unclear if Trump’s overtures to Greenland will squeeze any comparable concessions out of Denmark. 

But the problem with this slash-and-burn approach is that it undermines a liberal, globalised world order that is ultimately beneficial to Washington’s interests. While America remains the preeminent global hard power in both military and economic terms, its influence is nonetheless contingent on the goodwill of its partners. 

The US wields such influence, even as a monopoly, because its allies perceive it as a generally reliable partner. They accept US development aid because they believe the White House will not pull the plug on its projects overnight (the US is the world’s single largest spender on overseas development aid). They allow the US to operate overseas military bases (it has more than 800 in over 70 countries) because they believe the US is a reliable security guarantor. They buy American technology, settle their trade in US dollars and comply with US sanctions on Iran or Venezuela because they believe that the US is an innovative, stable and crucially open economy that they benefit from being integrated with. 

Abuse of this monopoly power will cause foreign capitals to think again and balance their dependance on an unpredictable US with another power. This will only accelerate many developing countries’ deepening involvement with China, as well as creating an opening for other secondary powers, such as Russia, India or Saudi Arabia. It is notable that China has already displaced the US as Panama’s largest trading partner, accounting for 32.7% of its exports in 2023. India has similarly overtaken the US as an export destination for Panamanian goods and services.

This adds momentum to a process of economic fragmentation already set in motion by the war in Ukraine and the sanctions imposed by the West on Russian oil and gas exports. The need to evade these sanctions has led to a proliferation of trading channels outside the dollar financial system, with much of the oil purchased by China from Russia now being settled in yuan. 

Initiatives such as the BRICS - an alliance of emerging economies originally set up by Brazil, Russia, India, China and South Africa - could gain new relevance in this multipolar economic world order. The bloc has launched its own development bank, headquartered in Shanghai. It has also floated nascent plans to replace the dollar as a reserve currency in international trade. While such proposals face numerous obstacles and are a long way from being realised, Trump’s capricious gunboat diplomacy has made them more salient. 

Trump may have got what he wanted from the Panamanians, but it has come with the risk of damaging US credibility as a force for stability in the region and beyond. America’s adversaries will be watching with interest.

Read more about the likely impact of Trump’s tariffs here…