Greatest Maritime Infrastructure Project Ever Still Benefits US More Than A Century Later: Part 1
The MOC
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Center for Maritime Strategy
Center for Maritime Strategy
By John D. McCown
It was just two decades after Spanish explorer Balboa crossed the Isthmus of Panama in 1513 and became the first European to set eyes on the Pacific Ocean that the first initiative to look into building a canal began. In 1534, Spain’s King Charles V ordered a survey for a route through the Americas so ships could sail between Spain and Peru which would give Spain an advantage over archrival Portugal. More initiatives by others would occur over the ensuing centuries, but for a long time the only tangible results would be an overland road linking two steamship legs to move people from the U.S. East Coast to California in the years after gold was discovered in 1848. With demand resulting from more than 300,000 people wanting to go to California, many with their goods, a railroad across the isthmus was built and it became an early major intermodal trade lane.
The first effort at actually constructing a canal started in 1881 by a French syndicate led by the originator of the Suez Canal, Ferdinand de Lesseps . While only 40 percent as long as the Suez Canal, the Panama Canal route came with challenges that proved to be insurmountable and the effort went bankrupt in 1889. The U.S. government decided in 1903 to take on the challenge. That resulted in Panama separating from Colombia with American backing and being recognized as a separate country. An agreement was reached that the Panama Canal Zone, generally extending 5 miles on either side of the centerline of the planned canal, would be controlled by the United States, which purchased all the land from its owners.
Construction began in 1904 and was completed in 1914. Advancements in new equipment made in the United States played a key role. Chief among them were more than 100 rail mounted steam shovels that were particularly effective in moving more than 17 million cubic yards of material. President Theodore Roosevelt championed building the canal and visited during construction where he was photographed sitting in the operator’s chair of a steam shovel.
While the final canal would be 51 miles long from the locks near one ocean to the locks on the other ocean, the artificially created Gatun Lake in the middle of the isthmus would constitute 21 miles of the total transit. The largest manmade lake ever was but one of many engineering records that were established in building the canal.
Essential to the success in building the canal was the work of Dr. Walter Reed and Colonel George C. Gorgas. Records indicate that 5,600 workers died during the U.S. construction of the canal, with most perishing due to disease. Dr. Reed’s work in determining that yellow fever and malaria were mosquito borne illnesses resulted in Colonel Gorgas implementing measures that would nearly eliminate those diseases. Most of the thousands of workers that died were West Indian laborers, but their number also included 350 Americans.
With the canal reducing voyage distances by some 8,000 nautical miles compared to going around Cape Horn at the tip of South America—twice the typical distance savings from the Suez Canal—it was embraced by the shipping industry. The U.S. government would operate the canal under a structure giving it control of the Panama Canal Zone for decades. Canal tolls were established to cover operating costs, but the canal was not viewed as an asset to generate a profit as the U.S. government recognized that much of the cargo moving through the canal originated in or was destined for the United States.
While historical data on cargo mix going back to the canal’s opening is not available, based on the author’s knowledge of trade and shipping commerce it is reasonable to say that there has been a consistent upward trend in the mix of cargo linked to the United States. Today, 75 percent of the cargo moving through the canal is directly linked to the United States. National security was also a key motivation behind U.S. control and the U.S. Navy heavily utilized the canal during World War Two. In fact, prior to the war, the policy of the Navy was that no ship would be built that was too large to transit the Panama Canal.
Owing to Washington’s control of the canal and the historical bilateral relationship, the United States was able to exert influence over Panama. One example of this in the maritime sector was an initiative that proved to be the catalyst for the establishment of the first major flag of convenience registry. Historically, most ships flew the flag of the country where the owner was based and were subject to all its rules and regulations. In 1939, the United States passed the Neutrality Act that was driven by President Roosevelt’s desire to avoid having any shipments from the United States going to Germany or Italy. When it was realized the same act would prevent U.S.-flag merchant ships from moving supplies to Great Britain and France, the government quietly gave certain American ship owners permission to transfer some of their ships to foreign registry. Panama was chosen as the country to host foreign registered but U.S.-owned ships. In order to encourage American ship owners to re-flag in Panama, the Roosevelt Administration pressured the Panamanian government to impose few restrictions for the ships it registered and to reduce taxes related to shipping. This framework would prove to be attractive to ship owners. After World War Two, Liberia and other flags of convenience registries would join Panama. Today, the top three registries are all flags of convenience and together they represent half of the worldwide cargo fleet.
While the Panama Canal Zone territory represented just 1.7 percent of Panama’s total size, it bisected the country and control of the canal and the adjacent land became more contentious over time. In the postwar era, many Panamanians believed that the territory rightfully belonged to their country and protests were met by fencing in the zone and an increased U.S. military presence. The dissent increased in 1956 when the United States pushed for France and the United Kingdom to abandon any attempt to retake the Suez Canal after it was nationalized by Egypt. The calls for Panama to takeover the canal continued to grow and riots in 1964 resulted in the deaths of dozens of Panamanians and several U.S. soldiers. Panama broke off relations with the United States and said it would not resume ties unless Washington agreed to begin negotiations on a new treaty. The United States stated that it would adopt procedures for the “elimination of the causes of conflict between the two countries.”
Negotiations began that resulted in a proposed new treaty in 1967 that was rejected by Panama. The Nixon Administration continued talks that had begun by the Johnson Administration and with Henry Kissinger’s involvement a framework was agreed to in 1974 that would be the basis of discussions going forward. President Jimmy Carter made this a priority issue and signed a new treaty in 1977. The United States would initially turn over some of the adjacent land to Panama and then the canal itself more than 20 years later at the end of 1999. The agreement was ratified by more than two-thirds of all voters in Panama and passed 68-32 in the U.S. Senate with bipartisan support. During the 1980 presidential election cycle, Ronald Reagan made the canal a major campaign issue with his “we built it, we paid for it, it’s ours” refrain. After he was elected, however, he took no action to reverse the agreement.
The United States continued to manage the canal during the transition. Between that period and the period of Panamanian control this century, little has changed from a shipping perspective, although the tolls have increased over and above the rate of inflation. This author was in Panama in 1982 to see a U.S.-flag cargo ship moving USAID grain to El Salvador through the canal. A Panama Canal Commission 10-year report from that period showed $325.589 million in toll revenues from 14,142 transits for a $23,023 overall average. In 2023, $3.343 billion in tolls were collected from 14,080 ships transiting the canal. That is equivalent to an average toll of $237,711, which works out to an inflation rate over the 41-year period of 6.2 percent per year. Over that same period, the U.S. consumer price index has increased at a 2.8 percent annual rate.
Canal tolls are assessed based on a detailed formula that takes into account the ship size and type as well as the amount of cargo onboard. The Panama Canal Authority annual reports include statistics on the ships and cargo transiting the canal each year along with the results of its operations. The table below shows the crossings by ship type along with revenue and profit along with the related margins for the last nine years.
The period above covers both before and after the expansion of the canal allowing larger ships. The Panama Canal Authority spent $5.2 billion to expand the canal by building a third set of locks that began commercial operation in mid-2016. The growing size of container ships and the loss of larger ships to the Suez Canal drove this expansion. The larger locks allowed container ships, which now carry the majority of the cargo value moving through the canal, to move three times as many boxes as they could prior to the expansion. The U.S. Maritime Administration prepared a detailed 2013 report on the expected trade effects in the United States from the Panama Canal expansion that primarily saw benefits in the container sector from larger more cost-efficient ships from Asia to the East and Gulf coasts. This author’s regular reports on U.S. container volume going back to 2016 corroborate this and show a trend line indicating a switch of almost eight percentage points to East and Gulf coast ports since 2016. This transition has resulted in an array of cost, environmental and congestion benefits to the United States.
Next Week: Can the greatest maritime infrastructure project ever provide even more benefits to the United States? The next edition of this two-part article explores the contemporary issues surrounding the canal and the Trump Administration’s plans.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown has four decades of experience related to the shipping industry. His research, analysis and writings for the Center for Maritime Strategy focus on the intersection of merchant shipping and maritime commerce with national security.
The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.