Panama is facing significant repercussions in its ongoing geopolitical tensions between China and the United States after its Supreme Court ruled in January that contracts allowing Hong Kong-based CK Hutchison to operate two key ports on either side of the Panama Canal were unconstitutional. The court’s decision effectively ended Hutchison’s control over the Balboa port on the Pacific coast and Cristóbal port on the Atlantic side, dealing a setback to Chinese influence in the region and aligning with the Trump administration’s efforts to curb China’s presence in Latin America.

Following the ruling, Chinese authorities began intensifying inspections and detentions of Panamanian-flagged vessels at Chinese ports, a practice that has disrupted Panama’s crucial shipping industry. Data from Asia-Pacific port inspections indicate nearly 500 Panamanian-flagged ships have been held for safety issues since January, with a sharp increase to 146 detentions in May alone compared to 23 in January. This response has raised concerns in Washington about the broader impact on U.S. supply chains and trade, given Panama’s significant role in global shipping.

Warren Stephens, the U.S. representative to the International Maritime Organization (IMO), described China’s measures as a swift and punitive campaign aimed at undermining Panama’s sovereignty and destabilizing international trade routes. “Panama-flagged ships carry a meaningful share of U.S. trade, transporting consumer goods, apparel, electronics, and furniture from Chinese ports to the U.S. East Coast via the Panama Canal,” he said. The canal handles approximately 6% of global seaborne trade and has seen a more than 5% increase in traffic recently, underscoring its strategic importance.

Seafarers and ship managers familiar with Chinese port procedures report that detained vessels are typically found to have various safety deficiencies, leading to prolonged holds that can exceed a month. However, China rejects allegations of targeted harassment. Chinese Foreign Ministry spokesperson Lin Jian stated that while Panamanian-flagged vessels account for less than 20% of foreign ships calling at Chinese ports since January, they have been involved in roughly half of the accidents, including fatalities and missing persons.

The escalating pressure has exposed vulnerabilities within Panama’s ship-registration industry, the largest in the world by vessel count. With approximately 8,500 ships registered under the Panamanian flag, some shipowners have reportedly switched to other registries to avoid Chinese inspections. This development could have long-term implications for Panama’s maritime revenues and its ambition to position itself as a global logistics hub, especially amid heightened geostrategic interest in the canal following Iran’s blockade of the Strait of Hormuz.

Meanwhile, CK Hutchison is pursuing $2 billion in damages through international arbitration, arguing its removal from Panama’s ports has damaged the country’s business reputation. Chinese officials have publicly urged Panama to rectify what they call errors in its handling of Chinese enterprises and to safeguard their rights. Xie Feng, China’s ambassador to the Organization of American States, described the dispute as politically motivated during a recent meeting in Panama.

Panamanian authorities maintain their country’s sovereign right to regulate national ports and defend the independence of their judiciary. Foreign Minister Javier Martínez-Acha and other senior officials have engaged in dialogue with Chinese counterparts in hopes of de-escalating tensions ahead of a crucial renewal of China’s maritime agreement, which grants Panama-flagged vessels preferential access to Chinese ports. The outcome of these negotiations may prove decisive for Panama’s future role in global shipping and its balancing act between two major world powers.