China’s Control of the Panama Canal Revisited.

China’s Control of the Panama Canal Revisited.
By Yojiro Konno with Nancy Menges.

China’s increasing influence in the Western Hemisphere has been of growing interest to lawmakers on Capitol Hill. In fact, on June 11, 2008, the House Foreign Affairs Subcommittee on the Western Hemisphere held a hearing entitled “The New Challenge: China in the Western Hemisphere.”[i] In the hearing, experts on Latin America pointed out that total trade between China and the Latin American and Caribbean region skyrocketed from $8.2 billion to $102 billion in less than ten years. Furthermore, those testifying mentioned that Chinese President Hu Jintao’s visit to several Latin American countries in 2004 underscored China’s increased presence in the hemisphere. During his visit, Hu stated that China would invest $100 billion in the region over the next decade.

Over the past years, several Latin American countries that had no diplomatic ties with the People’s Republic of China have now established them. For instance, in 2007, Costa Rica aborted its ties with Taiwan and established diplomatic relations with the People’s Republic of China, primarily for economic and financial reasons.[i] However, the most important indicator of China’s growing influence is its control over the ports at both ends of the Panama Canal. China has been operating these ports since 2000 and their influence inside Panama has grown as indicated by a bill submitted last year to the legislature that mandates teaching Mandarin in all Panamanian public schools.[ii]

Currently the Panama Ports Company,[i] a subsidiary of Hutchison Whampoa Ltd.,[ii] has exclusive and extensive rights to control both ends of the Panama Canal. Hutchison Whampoa is a Chinese company owned by Hong Kong billionaire, Li Ka-Shing, who has strong ties with Beijing. Considering Li’s close ties with the Chinese government, it is highly plausible that Hutchison Whampoa has the potential to act as Beijing’s political agent and that their possession of the ports at either end of the Panama Canal constitutes a serious U.S. national security issue.
[i] Panama Ports Company Official Website (http://www.ppc.com.pa/index_eng.php)
[ii] Official website of Hutchison Whampoa clearly mentions that Panama Ports Company is a subsidiary of Hutchison Whampoa (http://www.hutchison-whampoa.com/eng/ports/international/the_americas.htm)

Over the past years, several Latin American countries that had no diplomatic ties with the People’s Republic of China have now established them. For instance, in 2007, Costa Rica aborted its ties with Taiwan and established diplomatic relations with the People’s Republic of China, primarily for economic and financial reasons.[i] However, the most important indicator of China’s growing influence is its control over the ports at both ends of the Panama Canal. China has been operating these ports since 2000 and their influence inside Panama has grown as indicated by a bill submitted last year to the legislature that mandates teaching Mandarin in all Panamanian public schools.[ii]

Currently the Panama Ports Company,[iii] a subsidiary of Hutchison Whampoa Ltd.,[iv] has exclusive and extensive rights to control both ends of the Panama Canal. Hutchison Whampoa is a Chinese company owned by Hong Kong billionaire, Li Ka-Shing, who has strong ties with Beijing. Considering Li’s close ties with the Chinese government, it is highly plausible that Hutchison Whampoa has the potential to act as Beijing’s political agent and that their possession of the ports at either end of the Panama Canal constitutes a serious U.S. national security issue.

Brief Overview of the History of Panama Canal
The Panama Canal was established in 1914 under the leadership of the United States. The Hay-Bunau Varilla Treaty in 1903 granted a right to the United States to build and administer the canal and the surrounding areas indefinitely. However, because this treaty was signed without the consent of the Panamanians, it became a contentious diplomatic issue between Panama and the United States. The Panamanian dissatisfaction toward U.S. control over the Canal Zone reached a peak in January of 1964, when riots over sovereignty of the Canal Zone broke out. Responding to such protests, in 1977 President Carter signed the Neutrality Treaty and the Panama Canal Treaty. Under the Neutrality Treaty, Panama became obliged to guarantee the neutrality of the Canal Zone. In exchange, under the Panama Canal Treaty, the US promised to withdraw from the Canal Zone by the end of 1999 and guaranteed that Panama would assume full sovereignty over the area in 2000.

Hutchison Whampoa’s Control over the Panama Canal and Panama Law No.5
However, in 1996, Panama decided to auction the rights to manage the canal to a private company. Despite the fact that the Chinese company’s bid came in fourth after the Japanese firm, Kawasaki/I.T.S., the U.S. firm, Bechtel, and the Panamanian American company, M.I.T,[i] Panama awarded the contract to China’s Hutchinson Whampoa. A published report claimed that “Panama preemptively closed the bidding, secretly changed the rules,” and “simply awarded the contract to Hutchison Whampoa.”[ii] According to Constantine Menges, who headed the Latin American desk at the NSC during the Reagan Administration, “China was determined to win the bidding process and used corrupt means to influence the government of Panama in its favor.”[iii] In fact, a 1996 cable to the U.S. Embassy in Panama reported that just before the bidding, Beijing gave $400 million to Hutchison Whampoa through a state-run investment company, China Resources Enterprise,[iv] a company which was identified by Senator Fred Thompson as “an agent of espionage—economic, military, and political—for China” and “has reportedly served as an intelligence-collection front for China.”[v] William J. Hughes, the U.S. ambassador to Panama, and Senator Trent Lott objected to the ‘unorthodox’ bidding process and called for an investigation, but in vain. (See “The Americas Report” April 10, 2008. Article by Nicole M. Ferrand.)

Thus in January of 1997, through a state-contract called “Panama Law No.5,”[vi] Panama officially granted the right to control the canal[vii] to Hutchison Whampoa. Panama Law No. 5 also promised that at the end of the Panama Canal Treaty, “the areas, facilities, and installations” occupied by the Panama Canal Commission and the United States shall be turned over to Hutchison Whampoa (Clause 2.23.g). In other words, Hutchison Whampoa controls not only the ports at both ends of the canal, but also the surrounding areas the United States used to control, including the former U.S. Rodman Naval Station (Clause 2.1) and the former U.S. Albrook Air Force Base.[viii] The length of the lease to Hutchinson Whampoa is 25 years with an automatic renewal for another 25 years (Clause 2.9).

According to Panama Law No.5, Panama gave extensive and exclusive rights to Hutchison Whampoa. The document says, “During the life of this contract and its extension, THE COMPANY shall have the exclusive right to develop, construct, operate, administer and manage THE Ports”[ix] (Emphasis added). Hutchison Whampoa’s rights include: a right to “fence in, at any time, and entirely at its discretion, the area referred to here in as the Bonded Area[x] (Clause 2.1)”; a right to “subcontract all of its rights and activities granted by this concession contract, without the need for approval by THE STATE”; and a right to “carry out operations, transactions, negotiations, and activities in general, be they local or international, with any person or public, private or mixed entity.” That is, taking such extensive rights into accounts, it seems possible for Hutchison Whampoa to host and hide Chinese spying activities in the Canal Zone.

Hutchison Whampoa and Owner Li Ka-Shing’s Connections with Beijing
The owner of Hutchison Whampoa, Li Ka-Shing, has extensive ties with Beijing. In fact, a government document explicitly mentioned that Li “has significant economic and political ties to China.”[xi] For instance, Li and a son of the former Chinese President Jiang Zemin are jointly developing real estate properties inside Tiananmen Square for the communist party.[xii] In addition, in 1994, the Clinton administration provided Li’s bio, along with the bios of the top communist leaders, to the CEO of Loral Aerospace prior to the Ron Brown trade trip to Beijing;[xiii] Li was the only civilian included in the bios.[xiv] Li has also helped the People’s Liberation Army (PLA) purchase satellites in the past and mediated several satellite deals between the U.S. Hughes Corporation and China Hong Kong Satellite (ChinaSat),[xv]a company owned by the Chinese Ministry of Post and Telecommunications.[xvi] One U.S. government document stated that Li Ka-Shing “is willing to use his business influence to further the aims of the Chinese government.”[xvii]

A report by the RAND Corporation in 1997 pointed out that Li Ka-Shing was negotiating for PLA wireless system contracts.[xviii] Li was also a member of the board of directors of the China International Trust and Investment Corporation (CITIC), [xix] a bank of the Chinese army that provides money for Chinese weapon sales and Western technology purchases.[xx] Indeed, William Triplett, co-author of Red Dragon Rising, described Li as “the Banker for the Chinese Military.”[xxi] The fact that Hutchison has exclusive contracts with the state-owned China Ocean Shipping Company (COSCO) also suggests that Li Ka-Shing has a close relationship with Beijing.[xxii] COSCO is known for its failed attempts to acquire the former Long Beach Naval station in California.[xxiii] Furthermore, according to a RAND report, a COSCO ship attempted to smuggle over 2,000 fully automatic machine guns into the United States in 1996.[xxiv]

In 1991, Li Ka-Shing also attempted to gain control over Subic Bay, a strategic port in the Philippines that had been vacated by the United States. Due to warnings from U.S. Marine Corps personnel, Philippine President Ramos vetoed Hutchinson's take over of Subic Bay and Li Ka-Shing was unable to obtain the port.[xxv]

In 2003, Li attempted to take over the largest U.S. telecommunications company, Global Crossing Ltd. According to the New York Times,[xxvi] Global Crossing once agreed to make a deal with Hutchison Whampoa. However, Hutchison Whampoa decided to withdraw from the bid a few days after a review committee of foreign investment in U.S. companies announced that it had begun an investigation of the deal. Because a Chinese company with strong connections with Beijing was about to buy communication networks used by the federal government and other critical private sectors, members of congress and some governmental officials had raised national security concerns. Global Crossing provides services to the federal government, more than 35 percent of Fortune 500 companies, 700 carriers, mobile companies, and internet service providers.[xxvii] Global Crossing controls 20 percent of all the fiber-optic cable in the United States and is a major bidder for U.S. Defense communications contracts.[xxviii] Given Li Ka-Shing’s close ties with Beijing, as well as his attempts to control important U.S. infrastructure and a strategically important port in the Philippines it should make those responsible for U.S. national security question the national security implications of Hutchison Whampoa’s control over the Panama Canal.

In addition, Beijing seems to treat Li Ka-Shing in a special manner. For example, Beijing has given Li exclusive rights of first refusal over all mainland Chinese ports south of the Yangtze River. “This involves a close working relationship with the Chinese military and businesses controlled by the People’s Liberation Army,” said Al Santoli, a former national security advisor to the House of Representatives.[xxix] Further, Li’s bio provided by the Clinton Administration mentioned that Li was convicted of insider trading in 1984 but never punished.[xxx]

National Security Implications of Chinese Control of the Panama Canal
Now that Hutchison Whampoa controls both ends of the Panama Canal there are three major national security concerns that come to mind. These include; possible covert Chinese spying activities, strategic denial in the case of a serious conflict between China and the U.S., and strengthened Chinese political power that could threaten U.S. national interests. First, since Hutchison Whampoa has exclusive rights over the canal areas as Panama Law No.5 guarantees, the Chinese company could easily provide cover for Chinese espionage. This concern becomes more realistic when one considers China’s recent spying activities[i] and Li’s special relationships with Beijing and the PLA.

Secondly, in the event of a serious military conflict with the United States, such as one over Taiwan, it would be highly possible for Beijing to use Hutchison Whampoa to effectively interrupt U.S. intervention. As former Secretary of Defense Casper Weinberger puts it, Hutchison Whampoa’s control of the canal is a national security threat because “The Company would not be able to survive if they don’t do something the Chinese government tells them to.”[ii] Admiral Moore, a former chairman of the Joint Chiefs of Staff, claims that in case of military conflict in the Pacific, a large number of logistic ships need uninterrupted access to the canal to support deployed forces.[iii] If the use of the canal were denied, those ships would need to travel an extra 9,000 miles around South America and would not be able to sustain combat effectiveness in the Pacific.[iv] “It is not ‘managing traffic’ under normal circumstances with which I am concerned,” said Moore, “it is the ability of a potential enemy to disrupt traffic so as to block military supply, which in times of conflict is 80 to 90 percent dependent upon sea lift capability for there to be any sustained forward effort.”[v] It is also important to remember that Chinese denial of the use of the canal would significantly damage the U.S. economy; the United States is the largest user of the canal and 15-20 percent of total U.S. trade, including 40 percent of grain exports and 670,000 barrels of oil per day, come through the canal. [vi]

Chinese Control of the Panama Canal as Part of a Larger Global Strategy
Third and most importantly, Chinese control of the canal is only part of a larger Beijing strategy to strengthen its geo-strategic positioning around the globe. The Center for Security Policy reported in 2002 that China is working hard to acquire strategic “choke points” around the world, including the Caribbean’s Bahamas, Subic Bay in the Philippines, the Mediterranean’s Malt, the Persian Gulf’s Straits of Hormuz, the Panama Canal[vii], and even cyberspace,[viii] outer space, and U.S. telecommunications.[ix] In addition, on April 20, 2008, “The Americas Report” stated that Hong Kong-based Hutchinson Port Holdings (HPH) had expressed interest in the Manta Port in Ecuador. In October, 2006 HPH gave a 1 million dollar bond to the Manta Port Authority and in November, 2006, HPH was the only final bidder and the Manta Port Authority (MPA) gave HPH operating concessions in exchange for $486 million (added to $55 million promised by the MPA) to upgrade facilities over the next 30 years. Hutchinson Port Holdings is the port-operating subsidiary of Hong Kong’s Hutchison-Whampoa which in 2001 bought out Philippines-based port operator ICTSI, which had various Latin American interests in Argentina, Mexico and the Bahamas. Manta is a desirable port for HPH as it is the closest port to Asia on Latin America’s west coast. Also, Hutchison Whampoa Ltd. has a significant presence at the Lazaro Cardenas seaport in Mexico, as well as other Mexican ports. China has been very effective in securing strategic locations which they clearly understand will give them the upper hand in the event of any future confrontation with the U.S.

Therefore, strengthened Chinese strategic positioning has U.S. national security implications, as conflicts with China are foreseeable. The Congressional Research Service has reported that China has three main long-term goals which include “asserting China’s regional military leadership while displacing U.S. regional military influence, prevailing in regional rivalries, and encouraging eventual U.S. military withdrawal from the region [Western Pacific].”[x] These goals are clearly incompatible with U.S. national security interests.[xi] The Taiwan situation and competition over natural resources could also lead to conflicts in the future.

To conclude our loss of the Panama Canal was a major strategic blunder by the Carter Administration that was followed up in 1997 by the Clinton Administration’s failure to assure that the bidding process was open and fair. Since China, through Hutchison Whampoa, now has almost total sovereignty over the Canal, the Neutrality Treaty agreed to by President Carter has little significance in terms of protecting future U.S. interests. In the event of a future conflict between China and the U.S., it will be China not Panama that will be calling the shots. (Please find footnotes at the end of the Report).

* Yojiro Konno is a senior sociology major at Grinnell College, IA. He is interested in public policy and is currently an intern at the Center for Security Policy.

*Nancy Menges is co-founder of the Menges Hemispheric Security Project at the Center and Editor-in-Chief of the Americas Report.

[i] Demetri Sevastopulo. Feb. 11, 2008. “Four arrested in US-China spy cases.” Financial Times. (http://www.ft.com/cms/s/0/c0a576d0-d8cd-11dc-8b22-0000779fd2ac.html)
[ii] Menges, Constantine C. 2005. China: the gathering threat. Nelson Current. Page 397
[iii] Ed Oliver and Joseph Farah. November 9, 1998. “The Panama Canal debate rages: Admiral, ambassador square off in Senate testimony.” WorldNetDaily. (http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=16790)
[iv] Ed Oliver. October 18, 1998. “Admiral: I see big trouble in Panama.” WorldNetDaily. (http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=16751)
[v] Ed Oliver and Joseph Farah. November 9, 1998. “The Panama Canal debate rages: Admiral, ambassador square off in Senate testimony.” WorldNetDaily. (http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=16790)
[vi] Menges, Constantine C. 2005. China: the gathering threat. Nelson Current. Page 396
[vii]The Center for Security Policy, cited in Slate Magazine Online. July 9, 2008. (http://fray.slate.com/discuss/forums/post/1357239.aspx)
[viii] “China’s Cyber-Militia” May 31, 2008. National Journal (http://www.nationaljournal.com/njmagazine/print_friendly.php?ID=cs_20080531_6948)
[ix] Glater, Jonathon D. May 1, 2003. “TECHNOLOGY; Hong Kong Partner Quits Joint Bid for Global Crossing.” New York Times.
[x] Ronald O’Rourke Page 44. “CRS Report for Congress: China Naval Modernization: Implications for U.S. Navy Capabilities—Background and Issues for Congress.” Congressional Research Service.
[xi] Dr. Richard Weixing Hu, a visiting scholar at the Brookings Institution, too, mentions that China wants the U.S. withdraw from East Asia at the event “Perceptions of U.S. Foreign Policy in East Asia” on June 3, 2008 (http://www.brookings.edu/events/2008/0603_cnaps.aspx)

[i] EagleForum.org. 1999. “Red China: Gatekeeper of the Panama Canal.” (http://www.eagleforum.org/psr/1999/nov99/psrnov99.html)
[ii] Menges, Constantine C. 2005. China: the gathering threat. Nelson Current. Page 397.
[iii] Menges, Constantine C. 2005. China: the gathering threat. Nelson Current. Page 397.
[iv] Smith, Charles R. February 12, 2002. “Chinese Billionaire Wants Global Crossing.” NewsMax. (http://archive.newsmax.com/archives/articles/2002/2/11/184102.shtml)
[v]Smith, Charles R. August 6, 2002. “Li Ka-Shing Seeks U.S. Contract.” NewsMax. (http://archive.newsmax.com/archives/articles/2002/8/5/181935.shtml)
[vi] Actual Texts from American Defense Center (http://www.americandefensecenter.org/documents.aspx) and ConservativeUSA (http://www.conservativeusa.org/panamalaw5.htm)
[vii] The document calls the two ports (Balboa and Cristobal) and surrounding areas combined as “The Existing Ports”
[viii] Menges, Constantine C. 2005. China: the gathering threat. Nelson Current. Page 397.
[ix] “The Ports” in the document includes lands, facilities, and installations of “The Existing Ports” as well as “The Future Extension.”
[x] “The Bonded Area”: combined areas of “The Existing Ports” and “The Future Extension”
[xi] SoftWar. June 24, 2008. “Li Ka-Shing.” (http://www.softwar.net/kashing.html)
[xii] Smith, Charles R. August 6. 2002. “Li Ka-Shing Seeks U.S. Contract.” NewsMax (http://archive.newsmax.com/archives/articles/2002/8/5/181935.shtml)
[xiii] SoftWar. June 24, 2008. “Li Ka-Shing.” (http://www.softwar.net/kashing.html)
[xiv] Smith, Charles R. August 6. 2002. “Li Ka-Shing Seeks U.S. Contract.” NewsMax.
[xv] Smith, Charles R. August 6. 2002. “Li Ka-Shing Seeks U.S. Contract.” NewsMax
[xvi] Federation of American Scientists. June 20, 1998. “Zhongxing / Chinasat.” (http://www.fas.org/spp/guide/china/comm/chinasat.htm)
[xvii] Menges, Constantine C. 2005. China: the gathering threat. Nelson Current. Page 397.
[xviii]SoftWar. July 9, 2008. “Rand Corporation Report Chinese Military Commerce and U.S. National Security.” (http://www.softwar.net/rand.html)
Smith, Charles R. February 12, 2002. “Chinese Billionaire Wants Global Crossing.” Newsmax. (http://archive.newsmax.com/archives/articles/2002/2/11/184102.shtml)
[xix] SoftWar. June 24, 2008. (http://www.softwar.net/kashing.html)
[xx] Smith, Charles R. February 27, 2003. “Global Double Crossing.” NewsMax. (http://archive.newsmax.com/archives/articles/2003/2/26/182009.shtml)
[xxi] Smith, Charles. December 8, 1999. “‘Dirty’ War in Panama.” (http://ads.wnd.com/news/printer-friendly.asp?ARTICLE_ID=17277)
[xxii] Smith, Charles R. March 6, 2003. “Billionaire Fails in Bid for Global Crossing.” NewMax. (http://archive.newsmax.com/archives/articles/2003/3/5/162452.shtml)
[xxiii] Smith, Charles R. March 6, 2003. “Billionaire Fails in Bid for Global Crossing” NewsMax. (http://archive.newsmax.com/archives/articles/2003/3/5/162452.shtml)
[xxiv] SoftWar. July 9, 2008. “Rand Corporation Report Chinese Military Commerce and U.S. National Security.” (http://www.softwar.net/rand.html)
Smith, Charles. May 25, 1999. “Chinagate's smoking gun.” WorldNetDaily. (http://pqasb.pqarchiver.com/latimes/access/29879182.html?dids=29879182:29879182&FMT=ABS&FMTS=ABS:FT&date=Jun+02%2C+1998&author=PAUL+RICHTER&pub=Los+Angeles+Times&desc=Long+Beach+Deal+Put+in+Jeopardy+by+China+Fears&pqatl=google)
[xxv] Smith, Charles. May 25, 1998. “The Panama-China connection: Port company at canal has close ties to Lippo group” The World Net Daily. (http://www.worldnetdaily.com/index.php?pageId=3251)
[xxvi] Glater, Jonathon D. May 1, 2003. “TECHNOLOGY; Hong Kong Partner Quits Joint Bid for Global Crossing.” New York Times. (http://query.nytimes.com/gst/fullpage.html?res=9B05E2DD1F3DF932A35756C0A9659C8B63 )
[xxvii] Global Crossing Official Website. July 8, 2008. “About us” (http://www.globalcrossing.com/company/company_landing.aspx)
[xxviii] Smith, Charles R. February 12, 2002. “Chinese Billionaire Wants Global Crossing.” NewsMax. (http://archive.newsmax.com/archives/articles/2002/2/11/184102.shtml)
[xxix] Menges, Constantine C. 2005. China: the gathering threat. Nelson Current. Page 397
[xxx] SoftWar. “Li Ka-Shing.” (http://www.softwar.net/kashing.html)

[i] Edward Cody. July 9, 2007. “China's Diplomatic Gain Is Taiwan's Loss” Washington Post (http://www.washingtonpost.com/wp-dyn/content/article/2007/07/08/AR2007070801065_pf.html)
[ii] BBC News. December 7, 2007. “Panama schools to teach Chinese.” BBC. (http://news.bbc.co.uk/mobile/bbc_news/world/americas/713/71312/story7131205.shtml?page_id=16)
[iii] Panama Ports Company Official Website (http://www.ppc.com.pa/index_eng.php)
[iv] Official website of Hutchison Whampoa clearly mentions that Panama Ports Company is a subsidiary of Hutchison Whampoa (http://www.hutchison-whampoa.com/eng/ports/international/the_americas.htm)

[i] Edward Cody. July 9, 2007. “China's Diplomatic Gain Is Taiwan's Loss” Washington Post (http://www.washingtonpost.com/wp-dyn/content/article/2007/07/08/AR2007070801065_pf.html)
[ii] BBC News. December 7, 2007. “Panama schools to teach Chinese.” BBC. (http://news.bbc.co.uk/mobile/bbc_news/world/americas/713/71312/story7131205.shtml?page_id=16)

[i] House Committee of Foreign Affairs. June 11, 2008. “New Challenge: China in the Western Hemisphere.” (http://www.internationalrelations.house.gov/hearing_notice.asp?id=1004)