SENATE COMMERCE, SCIENCE, & TRANSPORTATION COMMITTEE HEARING
Overview
For questions on the note below, please contact Scott Parsons, Edmund Perry, or Ruth Lunsford.
On January 28, the Senate Committee on Commerce, Science, and Transportation held a hearing entitled “Fees and Foreign Influence: Examining the Panama Canal and Its Impact on U.S. Trade and National Security.” The hearing examined the importance of the Panama Canal to the U.S. economy and national security, focusing on the canal’s role in U.S. trade, the challenges of capacity limitations and rising fees, and the potential dangers posed by Chinese and foreign involvement. Witnesses in the hearing were:
- Louis Sola, Chairman, Federal Maritime Commission (FMC)
- Daniel Maffei, Commissioner, FMC
- Eugene Kontorovich, Professor, Scalia Law School, George Mason University
- Joseph Kramek, President & CEO, World Shipping Council
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- A key topic of the hearing was China’s increasing presence in Panama, particularly its control over ports at both ends of the canal. Democratic and Republican Senators stressed the need for diplomatic and economic measures to ensure neutrality and reduce foreign influence, recognizing that operational control of the Canal by the CCP is real and unacceptable.
- Chairman Cruz (R-TX) highlighted that Panama may be in violation of the treaty by failing to maintain neutrality through major concessions to China and generating excessive revenue from tolls that may not meet the treaty’s standards of being “just, reasonable, equitable, and consistent with principles of international law.” Senator Klobuchar (D-MN) criticized Executive Orders freezing funding for the Port Infrastructure Program, arguing it harms exporters and international markets reliant on efficient shipping. She emphasized how disruptions to the Canal increase costs for agricultural exports like soybeans, cotton, and corn, disproportionately impacting Midwestern producers. Senator Young (R-IN) reinforced these concerns, highlighting the economic harm caused by toll increases and delays for corn and soy exporters dependent on the Canal.
- Joseph Kramek, President of the World Shipping Council, highlighted how toll increases, and slot auctions disproportionately harm agricultural exports like soybeans and cotton, which cannot compete with high-value shipments like liquefied natural gas (LNG). Maffei emphasized that cotton perishability exacerbates these challenges, as bidding processes often prioritize LNG carriers, leaving agriculture exporters disproportionately vulnerable to delays alongside imposed costs. Sola confirmed that bulk goods, such as coal and agricultural exports, bear the brunt of toll hikes and draft restrictions, which further disadvantages U.S. producers who cannot pay premium rates to bypass delays. Senator Blackburn (R-TN) added that these practices directly harm regional exporters reliant on ports like Memphis.
Summary
Opening Statements and Testimony
Chairman Ted Cruz (R-TX)
There is a danger of China exploiting or blocking passage through the Canal and exorbitant transit costs are burdening Americans. Chinese companies already control container ports at both ends of the Canal and are building a bridge across it that could block passage without warning, giving China the ability to disrupt global shipping and advance its militaristic interests.
U.S. cargo accounts for nearly 75 percent of canal transit, but Panama imposes excessively high fees, with the canal generating over $3 billion in annual profits that unfairly burden U.S. taxpayers. Senator Cruz also criticized Panama’s reliance on these fees, which make up ten percent of its national budget, and its ties to the Iranian ghost fleet, while accusing China of using “debt-trap diplomacy” in the region.
Senator Maria Cantwell (D-WA)
We must defend U.S. interests in the South China Sea and Indo-Pacific region while revitalizing ports and shipbuilding capacity and address national security threats, particularly cyber threats, with Panama serving as a key modem. We should build on the Ocean Shipping Reform Act, especially given the economic impact of the Panama Canal. U.S. transportation costs through the canal are significant.
I am concerned with China’s ownership of ports near the Panama Canal and its proximity to critical infrastructure, stressing the risks of “government back doors” in communication technology and supply chains. We must have a more aggressive strategy as she advocated for robust investment in maritime infrastructure and strategy, including modernization of free trade agreements across Latin America and the Caribbean and substantial investments in infrastructure to ensure resilient supply chains, national security, and global competitiveness.
Federal Maritime Commission (FMC) Chairman Louis Sola
The canal is operated by the Panama Canal Authority (ACP), an independent agency of the Panamanian government, which serves as a model of public infrastructure management. There are persistent challenges with Panama’s maritime policies, including corruption and foreign influence, particularly from Brazil and China, which create friction with the ACP. There are billions of dollars in development contracts have been awarded to Chinese groups for projects directly on or adjacent to the canal, raising significant concerns about national security and foreign control.
The U.S. should take a leading role in enhancing Panama’s infrastructure, reducing reliance on Chinese contractors, and promoting fair competition. With 75 percent of canal traffic bound for U.S. ports, U.S. Trade is vital to the canal’s success. FMC has authority to impose remedies, including fines or restrictions, on Panamanian-flagged vessels entering U.S. ports if necessary to safeguard national economic and security interests.
FMC Commissioner Daniel Maffei
The Panama Canal is facing significant challenges, particularly the worsening droughts in recent years, which have severely impacted Canal operations. While the Canal has historically experienced large annual rainfalls, recent droughts have led to severe water shortages, limiting the Canal’s ability to function at full capacity. In response, the ACP imposed draft restrictions and reduced the number of daily transits from thirty-six to as low as twenty-two ships per day. FMC has statutory authority to investigate and take counteraction against “conditions unfavorable to shipping in the foreign trade,” which includes addressing concerns over how the ACP allocates transit slots during restrictions and the overall impact of these policies on U.S. commerce. FMC has already engaged with Panamanian officials and stakeholders to address these issues and will continue monitoring the situation closely.
Professor Eugene Kontorovich, Scalia Law School, George Mason University
Under international law, each party of the Panama treaty can independently determine whether a violation has occurred, particularly regarding the “regime of neutrality” designed to ensure the Canal’s open and equitable use. The treaty does not specify how much foreign influence violates Article V of the treaty, noting that companies need not be government-owned to be partially controlled by a foreign state. Bad actors can exploit the treaty’s focus on sovereign actors by disguising foreign control under civilian entities, especially since the treaty lacks a mechanism for third-party dispute resolution, allowing each party to unilaterally determine whether neutrality is threatened or compromised. Article V grants the U.S. the right to take “unilateral action” to maintain the canal’s neutrality if it perceives a threat.
Joseph Kramek, President & CEO, World Shipping Council
The Panama Canal’s is vital to global trade and U.S. economic interests as 75 percent of Panama Canal traffic originates in or is bound for the U.S., with much of the cargo traveling the transpacific trade lane between Asia and the United States, including significant agricultural exports like soybeans, corn, cotton, livestock, and dairy.
Low water levels have reduced daily transits from 36 to 22 percent and imposed draft restrictions that cut cargo capacity, with subsequent disruptions causing a ten percent drop in import volumes for Gulf and East Coast ports, with the Port of Houston experiencing a 26.7 percent decline. Despite these disruptions, 2024 saw a fifteen percent increase in inbound U.S. trade, following a 17.5 percent surge during pandemic-driven demand, with the Port of Houston reporting record-breaking trade volumes and eight percent growth.
Discussion
Chairman Cruz (R-TX): How does the FMC view the Canal Authority and the Panamanian government? President Trump argued that Chinese control of canal infrastructure and excessive fees may violate the Panama Canal Neutrality Treaty. Do the facts discussed here violate the treaty? If the U.S. determines Panama violated the treaty, what remedies are available? Sola: We view them as one entity; Maffei: Chinese ports do not control canal entry, which is managed by the Canal Authority, but port control remains a concern. The Panamanian government is auditing these deals, and we are monitoring the situation; Kontorovich: There is potentially a violation of the neutrality treaty, but definitive conclusions require more details, particularly about Chinese control. These port companies received contracts just before Hong Kong’s handover to China, initially operating as British firms. The treaty allows U.S. intervention to defend neutrality, even preemptively, before sabotage or aggression closes the canal. The treaty allows both parties to enforce provisions, including through armed force if necessary. The U.S. made a significant concession transferring the canal to Panama, agreeing to limitations on Panamanian sovereignty to ensure neutrality.
Chairman Cruz (R-TX): What would China’s incentive be to heavily subsidize bids and undercut American and other companies? Maffei: China has been clear about its ambitious policies to gain global influence through port investments. It has invested in 129 ports across dozens of countries and directly runs the majority of seventeen ports, not counting ports owned by Hong Kong-based companies. This has been part of their Belt and Road Initiative, or Maritime Silk Road, for decades because they view control and investment in maritime ports as critical to their economic and strategic goals.
Ranking Member Cantwell (D-WA): How can we ensure proper security investments to prevent harmful incidents? Should we renegotiate security measures with Panama, or initiate a new U.S. Southern Command-level discussion about the canal? The U.S. should advocate against purchasing from companies with government backdoors. Will the audit prompt contract discussions? Kramer: While they are rare considering 7,000 annual port visits, accidents still happen. Continued investment in U.S. infrastructure is critical, as shown by the Baltimore bridge tragedy. Sola: The U.S. has historically ensured canal security, as Panama has no military. This is managed through a close relationship with U.S. Southern Command. However, formalizing this arrangement would be beneficial, as it is not explicitly stated in the treaty; Maffei: The Panama Comptroller’s office is auditing port contracts. While we lack jurisdiction over Panamanian ports, Panamanians expressed interest in U.S. companies handling more work. However, competing with heavily subsidized Chinese bids is challenging as it is a global issue beyond just Panama.
Senator Fischer (R-NE): In 2021, Hutchison was awarded the Port Balboa and Port Cristobal terminals in a no-bid process. Does the U.S. have any authority or recourse under our current agreement with Panama to rebid those terminal concession contracts? Do you think the Panamanians would welcome viable alternatives? Are we in that position yet? Sola: Those ports were renewed for twenty-five years until 2047, with an ongoing rate of $7 million annually for concessions the size of the Port of Houston and Port of Miami. The current Administration called for an audit immediately upon taking office, but they cannot be rebid until after that date; Countries like Panama often require contracts to go to the lowest bidder, just as U.S. law sometimes does. Strategically and economically, the U.S. should consider investing in global maritime infrastructure. China has been doing this for twenty years, and for the U.S., this is an area worth serious attention, but the opportunity to counter these practices may have passed in many cases.
Senator Blunt Rochester (D-DE): Do you think the Panama Canal Authority adequately anticipated operational issues like the recent drought? Kramer: They did the best they could with the information available but likely did not anticipate a drought of that magnitude.
Senator Blunt Rochester (D-DE): Delays through the canal disproportionately impact perishable goods. Should the Canal Authority prioritize these shipments? Maffei: Perishable goods, such as cotton, face challenges due to the bidding process used during rationing, where high-value cargo like liquefied natural gas (LNG) outbids agricultural products. LNG’s value and urgency make it hard for containerized goods to compete. While solutions for agricultural shippers remain unclear, the issue warrants further exploration to balance priorities.
Senator Sullivan (R-AK): Are the Chinese companies controlling both sides of the canal subject to laws mandating cooperation with the Chinese government? If ordered by the People’s Republic of China (PRC) to shut down the canal, would these companies be obligated to comply under Chinese law? Kontorovich: Yes, as Hong Kong-based companies, they are subject to PRC laws and could face consequences for not complying with Chinese government demands. They may not be explicitly obligated, but the PRC has significant leverage over them. This is why the treaty allows action against potential threats, not just actual obstructions. Waiting until the canal is closed would be catastrophic.
Senator Baldwin (D-WI): What policies would you recommend to strengthen U.S. influence in maritime and logistics to compete with China? Maffei: If port control equates to strategic influence, China already dominates critical chokepoints like the Suez Canal and Singapore Straits. There is bipartisan agreement that the U.S. needs a comprehensive national maritime strategy that prioritizes economic resilience as a national security imperative; Kontorovich: China’s advantage lies in government-backed underbidding, which American companies cannot match. The U.S. should signal to Panama that contracts with Chinese companies are incompatible with the neutrality treaty, given China’s increasing control over Hong Kong, its national security law, the Belt and Road Initiative, and its military-civilian integration doctrine. This would give American firms a fairer chance to compete and encourage Panama to align more closely with the U.S.
Senator Blackburn (R-TN): Shippers, including those connected to the Port of Memphis, have voiced concerns about the canal. Should our investment in Panama not be contingent on their adherence to the neutrality treaty, ensuring Panama’s control over the canal? Kontorovich: Yes, the U.S. can condition aid and economic relationships on excluding China from facilities around the Canal and can be done even without invoking the treaty.
Senator Blackburn (R-TN): Have you seen a preference for the digital yuan central bank digital currency over the dollar? Sola: I have heard of the digital yuan being used in international shipping. It is a development that we are monitoring closely, particularly with upcoming digital shipping exchange rules.
Senator Klobuchar (D-MN): Do you know of any instances where the U.S. has been singled out or treated unfairly under the neutrality treaty in the operation of the canal? Maffei: I do not, but the U.S. disproportionately utilizes the canal, which means fee increases disproportionately impact us. Companies need resilient supply chains and relying on one sea lane is risky in an unpredictable world. The Panama Canal is crucial as a backup in case of issues elsewhere, like the Suez Canal. The lack of resiliency has driven up shipping costs since alternative routes, like going around Africa or the Americas, add significant time and expense.
Senator Klobuchar (D-MN): Has the Ocean Shipping Reform Act we passed improved shippers’ ability to waive or refund unreasonable charges by ocean carriers? Maffei: Yes, it has had a tremendous impact as instances of waived or refunded detention and demurrage fees have increased significantly. Settlements with carriers have risen, and we have seen a surge in cases filed.
Senator Budd (R-NC): What would be the consequences for U.S. trade and the economy if access to the canal were revoked or significantly reduced for U.S. shippers? Kramer: It would be catastrophic. A similar issue with the Red Sea now forces ships to detour around Africa, resulting in forty percent longer voyages, higher costs for fuel, crew, and maintenance, and increased emissions.
Senator Schmitt (R-MO): What are the most blatant treaty violations, and what would you argue are the top two or three reasons they are in violation? Kontorovich: The presence of Chinese government-linked companies raises serious concerns for the treaty’s neutrality. According to Annex 1, Paragraph 1 of the treaty, the neutrality regime applies not only to the canal itself but also to its entrances and Panama’s adjacent territorial seas. This means the activities of Chinese companies within this scope directly falls within the neutrality regime.
Senator Curtis (R-UT): China is helping to construct bridges for Panama’s infrastructure projects that are funded and built by Chinese companies as part of China’s broader efforts under the Belt and Road Initiative. Can we agree that it is not just an economic threat but also a defensive threat? Sola: My greater concern lies with Chinese contractors in Latin America as they often bring in thousands of their own workers, undercutting local labor and raising security concerns.
Senator Capito (R-WV): How does the congestion pricing system work, and is it not potentially corrupt? Maffei: The auction system allows ships to bid for priority passage, and it is being used more frequently, especially during water shortages. While regular toll revenue has increased, auction-based fees have surged nearly three hundred percent, allowing the Canal to make more money despite providing fewer transits. While it is a capitalist mechanism, it raises concerns about fairness, especially when some cargo types, such as bulk goods like coal, may be disproportionately affected.
Senator Young (R-IN): With 40 percent of U.S.-bound container traffic relying on the Panama Canal, we cannot afford unilateral toll hikes that price out and disadvantage smaller carriers and Midwestern exporters as farmers and manufacturers depend on consistent, reasonably priced shipping routes for agriculture. Should Congress or the FMC take more aggressive action or create new tools to block or penalize these toll practices? Sola: Yes, Congress should consider additional regulations or statutes to ensure fair practices.
Chairman Cruz (R-TX): If Panama is found in breach of the neutrality regime, could the U.S. declare the treaty null and void and reclaim control of the canal? Kontorovich: The U.S. is free to withdraw from the treaty but canceling it would not reverse the transfer of control or sovereignty over the canal as sovereignty-related concessions are typically irreversible. However, the U.S. could enforce neutrality through measures like reintroducing American operations or taking steps to restore the neutrality regime. Reasserting territorial control would only be justified if essential to maintaining neutrality, but it is not a straightforward remedy under international law.