Panama Canal’s Role Part One

The Panama Canal continued to play a central role in world trade and Panama's economy in the mid-1980s. Some 5 percent of the world's trade in goods passed through the canal, contributing 9 percent of Panamanian GDP in 1983. This canal's location at one of the crossroads of international trade has spawned a plethora of other service-oriented activities, such as storage, ship repair, break bulk (the unloading of a portion or all of a ship's cargo), transshipment, bunkering, and distribution and services to ship travelers. The dynamism of the canal also was instrumental in the development of the CFZ, the trans-isthmian pipeline, and offshore financing. Evidence suggests, however, that the canal's relative importance to world trade is likely to continue to experience a small relative decline in the future, which has led Panama, together with the United States and Japan, to study alternatives for improving or replacing the canal.

Role of the Canal From 1903 to 1977

In 1903 the United States secured the right, by treaty, to build a canal across Panama. The United States rejected plans to build a sea-level canal similar to that attempted by the French and opted instead for a system based on locks. Construction began in 1907 and was facilitated by medical work that largely eradicated yellow fever and reduced the incidence of malaria.

Construction of the canal involved damming the Río Chagres to create the huge Gatun Lake in the middle of the isthmus. Channels were dug from each coast, and locks were built to raise and lower ships between sea level and Gatun Lake. Three sets of locks were constructed: Gatun Locks on the Atlantic side, and the Pedro Miguel and Miraflores Locks on the Pacific side. The lock chambers were 303 meters long by 33 meters wide, which limited vessel size to approximately 287 meters in length and 32 meters in width. Distance through the canal is eighty-two kilometers, and in 1987 transit took about fifteen hours, nearly half of which was spent in waiting. The canal began commercial operations in 1914.

The United States operated the canal and set tolls from the beginning of operation. Tolls covered operation costs but were kept low to encourage canal use. Direct benefits to Panama were minimal, consisting of annual annuity payments that increased infrequently, usually in response to Panamanian demands. In the 1975 to 1977 period, the annuity payments reached US$2.3 million a year. Indirect benefits to Panama's economy were substantial, however, and included the jobs of its citizens working in the Canal Zone, value of goods and services sold to the Canal Zone and to passing ships, and expenditures by visitors.

Economic Implications of the 1977 Treaties

The 1977 treaties and the related documents, which became effective October 1, 1979, signaled important changes for the Panamanian economy. The most obvious benefit was in receipts from operation of the canal. Under the terms of the treaties, the government of Panama receives from the Panama Canal Commission: a fixed annuity of US$10 million; an annual payment of US$10 million for public services such as police and fire protection, garbage collection, and street maintenance, which Panama provides in the canal operating areas and housing areas covered by the treaties; a variable payment of US$0.30 per Panama Canal net ton for each vessel transiting the canal (in 1986 this amounted to US$57.6 million); and an additional annuity, not to exceed US$10 million, to be paid only when canal operations produce a profit. In 1986, for example, US$1.1 million was paid; in 1984, on the other hand, canal operations registered a US$4.1-million loss, and no payment was made.

The United States controls the tolls because of its majority (five members) on the nine-member Panama Canal Commission, which will operate the canal until December 31, 1999. In order to encourage use of the canal, tolls have remained relatively low, although high enough to cover costs. (Under the United States law that implemented the canal treaties, the canal must be operated on a self-sustaining basis.) Maximum use of the canal is in Panama's interest, because its annuity depends on transit tonnage. Tolls were raised by nearly 30 percent in October 1979 and by an additional 9.8 percent in March 1983.

Under treaty provisions, the canal administrator is an American and his deputy is a Panamanian. In 1989, a Panamanian will become administrator and the deputy an American. In order to prepare Panama to assume operation of the canal in the year 2000, the Panama Canal Commission has encouraged the hiring and training of Panamanians for all types of canal-related work. The commission's work force was approximately 82 percent Panamanian in 1987.