The Panama Canal

What it is

The Panama Canal is an 80-kilometre artificial waterway across the Isthmus of Panama, connecting the Caribbean Sea (Atlantic approach) with the Gulf of Panama (Pacific approach). Ships are raised 26 metres through a series of locks into Gatun Lake, cross the lake, then descend on the far side. The canal runs on gravity-fed freshwater, making Gatun Lake both the operational reservoir and the system's principal vulnerability. Original Panamax locks, completed in 1914, were joined by wider Neopanamax locks in June 2016 (US$5.25 billion expansion), accommodating vessels up to 366 metres long. The Autoridad del Canal de Panama (ACP), a Panamanian state authority, has operated the canal since December 31, 1999.

About 13,000 to 14,000 vessels transit annually in a normal year, generating US$4 to US$5 billion in tolls, roughly a quarter of Panama's government income. In the first half of fiscal year 2026 (October 2025 to March 2026) the ACP recorded 6,288 transits and 254 million PC/UMS tons, roughly 5% above the prior year.

History

The United States built the canal between 1904 and 1914, acquiring rights from a newly independent Panama (separated from Colombia with US backing in 1903). The canal opened August 15, 1914. Two treaties signed in September 1977 by US President Jimmy Carter and Panamanian General Omar Torrijos transferred operations progressively from 1979, with full Panamanian sovereignty restored December 31, 1999; a second treaty guaranteed permanent neutrality and US warship priority transit. Hong Kong-based Hutchison Whampoa (later CK Hutchison Holdings) won a 25-year concession in 1997 to operate the Balboa and Cristobal port terminals at each end of the canal.

Current state

The canal recovered through 2025 from its worst drought on record. Low rainfall from late 2022 into 2024 dropped Gatun Lake to levels not seen since at least 1995, forcing the ACP to cut daily transits from a normal 36-38 down to 18 per day by February 2024 and to cap vessel draft at 44 feet, well below normal maximums. Queues of 150 or more ships formed at both entrances. The ACP lifted the last restrictions in August 2024 after heavy wet-season rains refilled the lake, and as of early 2026 the canal is operating at full capacity with a 50-foot draft restored. The ACP is studying a new reservoir project, the Indio River diversion, to buffer against future droughts.

The geopolitical situation shifted sharply in early 2025. US President Donald Trump, in his January 20, 2025 inaugural address, declared the canal had been "foolishly given" to Panama and said the US would "take it back." Panama's President Jose Raul Mulino rejected the claim, brought the matter to the UN Security Council, and confirmed Panama would not renew its 2017 memorandum of understanding with China's Belt and Road Initiative. Under pressure from Washington, CK Hutchison agreed in early 2025 to sell its Balboa and Cristobal terminal concessions to a BlackRock-led consortium; Panama's Supreme Court separately invalidated Hutchison's legal concession framework in January 2026. The sale remained incomplete as of mid-2026. The three other port terminals alongside the canal are operated by US, Singaporean, and Taiwanese companies. China does not operate the canal itself.

Relationships

The canal serves the Asia-to-US-East-Coast container corridor, US Gulf Coast LNG exports, US grain exports to Asia, and Andean copper heading to Europe. Route alternatives are the Bab el-Mandeb / Suez Canal corridor and the Cape of Good Hope (adds about 14 days). The two corridors act as partial substitutes: Houthi attacks on the Red Sea in 2024 pushed some carriers back through Panama as traffic recovered. A broader discussion of key bottlenecks is at Chokepoints: the eight straits and canals that govern global trade.

What to watch

Gatun Lake hydrology is the top operational risk. Climate models project drier dry seasons and more intense El Nino cycles for Panama through the 2030s; the Indio River reservoir proposal requires a multi-billion-dollar ACP investment decision this decade. The BlackRock-Hutchison port sale still requires Panamanian government and regulatory approval. The 1977 neutrality treaty is increasingly invoked in US political debate; renegotiating it would require ratification by both the US Senate and Panama's National Assembly. ACP toll levels, a significant lever on global freight economics, are set for the next tariff review cycle.