25 Years since the Transfer of the Panama Canal

Every year, 5 percent of global trade is estimated to pass through the Panama Canal’s locks. The principal trading route that the canal services is that of cargo coming to and from the United States’ East Coast and Asia. Some of the main commodities that transit are metals, minerals, oil, fuels, grains, and chemicals.

Even after the transfer, the canal has continued to be intricately tied to U.S. trade, with around 40 percent of all U.S. container traffic travelling through its locks. Thus, the United States is still, by a large margin, the primary user of the canal, as the origin or destination country of 74 percent of the tons of cargo shipped through it. China and Japan follow with 21 percent and 14 percent, respectively.

Other countries have attempted to compete with the Panama Canal’s route, aiming to find other ways to transport cargo between the Pacific and Atlantic oceans. In 2013, the Nicaraguan government signed an agreement with a Chinese company to build a canal through the Central American nation. These plans have yet to materialize. Mexico has also proposed an interoceanic railway project to transport cargo from coast to coast. 

On October 22, 2006, less than seven years after the transfer, Panamanians cast their votes in a referendum on whether to take on a major project as a country: expand the canal. It passed with 76 percent of voters approving with a turnout of 43 percent of the electorate. 

The project began construction in 2007 and was inaugurated in 2016, with a total cost of over $5.2 billion. The expansion increased the canal’s capacity by building a third set of locks that allows larger vessels to pass through. This set of locks built in the expansion project are designed to fit Neopanamax ships, which are larger than the Panamax ships, the size the original locks can accommodate. The new locks are 70 feet wider and 18 feet deeper than the original ones.

The project also widened and deepened parts of the waterway and increased the water levels of Gatun Lake, the main lake servicing the canal. The expansion of the canal prioritized water efficiency, creating water-saving basins next to the expanded locks, which recycle 60 percent of the water used per transit.

What has the canal expansion meant for trade volumes?

Panama experiences two seasons every year: a dry season that runs from January to May and a rainy season that runs from May to January. While this cycle is expected, the El Niño and La Niña climate phenomena—periods of excessive heat and rainfall, respectively—exacerbate the two seasons. This creates uncertainty around the canal's water levels, as the it runs on freshwater from lakes and rivers.

In late 2023 and early 2024, a drought exacerbated by the El Niño, decreased Gatun Lake’s usual water levels. The Panama Canal Authority had to limit the amount of ships that were able to cross daily.  During normal operation, this number oscillates between 36 to 38 ships. In December 2023, it was limited to 22. Some companies announced they would start using alternative routes, like transporting cargo through Panama by land or undertaking the longer traverse through the Strait of Magellan, to avoid the canal during the drought.

By August 2024, the number was raised back to 36 after rains increased the water levels. Water levels are expected to hit an all-time high in December 2024. 

To tackle this problem, the board of directors of the Panama Canal Authority has proposed the construction of a reservoir in the Rio Indio basin, located west of the Gatun Lake. The reservoir construction, which would take around four years to complete and require the relocation of 2,000 people, would help maintain the canal’s water supply during droughts, increasing the amount of traffic possible. The project has also been deemed important for ensuring that Panama’s population continues to have reliable access to water, as over half of the country relies on the lakes that the canal administers for clean drinking water.

“The Rio Indio reservoir project would be the most complete solution in a 50-year horizon,” said the Panama Canal Authority Deputy Administrator Ilya Espino de Marotta. Panama’s President José Raúl Mulino, said that the reservoir project will be properly presented to Panamanians in 2025, though he has not defined what that will look like.