U.S.-China power struggle thrusts Panama Canal back into the spotlight

A simmering dispute over two container ports at either end of the Panama Canal risks becoming a geopolitical flashpoint between the world’s two largest economies: the U.S. and China.

It follows a contentious decision from Panama’s top court voiding a license of a subsidiary of Hong Kong-based CK Hutchison for operating two key terminals on the waterway, through which some 40% of all U.S. container traffic transits every year.

The ruling was seen as a major victory for the U.S., given that the White House has made blocking China’s influence over the global trade artery one of its top priorities.

China has sought to raise the stakes in recent days. In its strongest rebuke yet, Beijing warned on Wednesday that the Central American country “will inevitably pay a heavy price both politically and economically,” unless it changes course.

The Hong Kong and Macao Affairs Office of China’s State Council called the court decision “logically flawed” and “utterly ridiculous.”

In response, Panama’s President Jose Raul Mulino dismissed China’s threats, saying on Wednesday that he “firmly rejected” the statement from the Hong Kong and Macao Affairs Office.

Mulino said on social media that Panama was a “rule-of-law country” that respects decisions from its top court, noting that decisions taken by the judiciary were independent of the central government.

CK Hutchison, for its part, said Wednesday that it had taken Panama to international arbitration, adding it “strongly disagrees with the [court’s] determination.”

Analysts expect the fallout from the ruling to last for quite some time.

With questions lingering over the security risks posed by CK’s management of the ports and whether any mitigation measures are in place, it looks like “a simple contest for dominance in Latin America,” said Scott Kennedy, a senior advisor at the Center for Strategic and International Studies.

“The most likely scenario is a drawn-out legal fight in multiple jurisdictions, along with substantial political and economic pressure imposed by both Beijing and Washington,” Kennedy added.

Relations between the two superpowers deteriorated last year as President Donald Trump imposed sweeping tariffs on Chinese exports, drawing Beijing to tighten its grip on rare earth exports. Geopolitical tensions including Beijing’s stance on Taiwan, support for Russia war in Ukraine and U.S. military action in Venezuela and Iran have also weighed on relations.

CK Hutchison had negotiated a $23 billion deal with a BlackRock-led consortium in March last year to sell its non-Chinese port subsidiaries. It later drew criticism from Beijing which described the deal as “kowtowing” to American pressure.

Chinese officials have sought to reshape the deal, demanding that it undergo China’s merger review…