The Panama Canal is among the world’s most important trade routes. The man made waterway is an artery which connects the Atlantic and Pacific Oceans, expediting maritime trade and travel. Built by the Americans in the early 20th century, the canal has been wholly owned by Panama since 1999, following an agreement by the Central American country that the channel would remain neutral in perpetuity.

But that settlement has now been thrown into doubt after President-Elect Donald Trump threatened to retake the Panama Canal, over complaints about the fees being levied on American vessels by the Panama Canal Authority. While some observers say the incoming President’s threats are a negotiating tactic, others think his comments may telegraph drastic measures. In either case, the row threatens to impact global trade, for better or worse, with knock-on effects for economies worldwide. So, could the US really take back the Panama Canal, and what would it mean for the economy?

Trump threatens to retake the Panama Canal

Taking to his social media platform, Truth Social, President-Elect Trump issued a lengthy post in which he complained that the Panamanian government were charging US vessels ‘exorbitant’ fees and that its control of the canal had been compromised by Chinese influence. The President-Elect further described the Panama Canal as a ‘Vital national security asset’ and vowed that if concessions are not made the US will ‘[D]emand that the Panama Canal be returned to us, in full, and without question.’ In his inimitable style, the President-Elect followed up on social media with an AI-generated image of a US flag over the Panama Canal, among other trademark jabs at his Panamanian counterparts.

While the President-Elect is well known for his social media antics, he escalated the comments into more serious territory when he doubled down and repeated the threat in an address to supporters in Arizona on Monday. Speaking in Phoenix, the incoming President accused Panama of ripping off the US and said it would be a ‘good idea’ to take it back.

The row has broken out following an increase in transit costs which have been attributed to a recent drought by one leading shipping industry publication. As The Guardian reports: “As a result of severe drought in late 2023, only 22 ships crossed the canal each day instead of the usual 36, forcing ships to queue for weeks or pay as much as $4m to jump ahead. Transits fell by nearly a third in the year to this September.

“The canal authority has allowed rising numbers of ships to use the canal over 2024, easing congestion, but will increase charges and introduce some additional fees on 1 January 2025. Panama’s president, José Raúl Mulino, said the canal’s transit fees were not inflated.”

Amid the drought in 2023, passage was being granted to ships by way of bidding wars, with many vessels forced to circumvent the channel, adding 15,000 km, or 28 days, to their journeys. Given that the vast majority of ships which use the Panama Canal are from the US, and that the canal provides the majority of Panama’s revenue, it is not altogether surprising the US would seek adjustments to the present arrangement.

While some commentators believe the President-Elect is using the threat of a ‘takeover’ as leverage, perhaps eyeing the inflation-busting power of cheaper transit, others believe he might be considering a literal intervention. Responding to the comments, the President of Panama said: “I want to express precisely that every square metre of the Panama Canal and its adjacent area belong to Panama, and will continue to be. The sovereignty and independence of our country are not negotiable,”

How important is the Panama Canal to global trade?

The Panama Canal is a key artery through which global trade flows. An agreement which reduces transit charges could be good news for consumers, resulting in lower prices on shop shelves and at petrol pumps. Conversely, an extended row over the ownership of the channel could result in uncertainty for businesses and consumers.

The US International Trade Administration describes the Panama Canal as a “[C]ritical cornerstone of global maritime transportation” which plays a crucial role in the transportation of chemicals, LPG, LNG, vehicles and refrigerated cargo, amongst other goods. The time saved by travelling through the canal is especially important for just-in-time supply chains and perishable goods.

The freight industry publication Freight Waves reports that any disruption to the functioning of the canal could have “profound implications for the U.S. economy, particularly for industries reliant on timely and cost-effective shipping routes.”

In January, McKinsey published an analysis of how restrictions to passage through the Panama Canal could impact global supply chains. They found that:

“New routes could increase the total ocean transport costs of trade currently moving through the Panama Canal by about 5 per cent, or an estimated annual $1.1 billion. Additionally, these new routes will likely slow ships’ journeys by about 20 per cent: many ships that used to traverse the canal (taking on average of 22.6 days to reach their destinations) could opt to sail different routes, which would likely take on average four more days.”

In short, the Panama Canal helps extradite global trade, reducing the cost in both time and money to transport goods. With more than 70 per cent of vessels making use of the passage flying a US flag, any renegotiation which resulted in lower fees would be likely to result in falling prices for US consumers on many goods, including fuel. However, if current tensions escalate and result in significant disruption to the transit route, prices could spike as freighters begin to take longer and more costly journeys to bypass the channel.

How could the Panama Canal dispute impact the economy?

The ongoing dispute between the United States and Panama over the Panama Canal could either result in disruption for business or smooth sailing for trade. President-elect Donald Trump’s comments suggesting a U.S. reclamation of the canal—citing “exorbitant” fees and alleged Chinese influence—have drawn a sharp rebuke from Panamanian President José Raúl Mulino, who reaffirmed the canal’s sovereignty as “non-negotiable.”

Since the U.S. transferred control to Panama in 1999 under the Torrijos-Carter Treaties, the canal has been operated by the Panama Canal Authority, which has been praised for its effective management. This waterway facilitates approximately 5 per cent of global trade, with U.S.-flagged vessels making up a significant majority of the traffic. Recent operational challenges, including drought-induced restrictions, have driven up transit costs, sparking frustration among shippers, including major U.S. companies.

Economic analysis reveals the high stakes of disrupting canal operations. McKinsey projects that rerouting vessels through alternatives like the Cape of Good Hope would increase global shipping costs by 5 per cent, or $1.1 billion annually, and add days to transit times, impacting industries reliant on timely supply chains. Additionally, drought conditions in 2023 forced shipping delays and increased competition for transit slots, exacerbating costs for exporters.

The economic implications for both nations are profound. The U.S. benefits from the canal’s role in facilitating trade, particularly for energy exports and time-sensitive goods. Conversely, Panama relies on canal revenues, which constitute a substantial portion of its GDP. A unilateral U.S. move could disrupt this balance, damaging trade relations and could raise costs for consumers globally.

The Panama Canal is central to global commerce, and its uninterrupted operation is in the interest of all stakeholders. If the current row comes to nothing then the same will be true of its impact on business. But where this war of words ends up, and who emerges the victor of any new deal, will have serious ramifications for businesses not just in the US but potentially around the world.