S.Hrg.119-139

1[Senate Hearing 119-139]2[From the U.S. Government Publishing Office]34                                                        S. Hrg. 119-13956                      FEES AND FOREIGN INFLUENCE:7                 EXAMINING THE PANAMA CANAL AND ITS8           IMPACT ON U.S. TRADE AND NATIONAL SECURITY910=======================================================================1112                                HEARING1314                               BEFORE THE1516                         COMMITTEE ON COMMERCE,17                      SCIENCE, AND TRANSPORTATION18                          UNITED STATES SENATE1920                    ONE HUNDRED NINETEENTH CONGRESS2122                             FIRST SESSION2324                               __________2526                            JANUARY 28, 20252728                               __________2930    Printed for the use of the Committee on Commerce, Science, and31                             Transportation3233[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]3435                Available online: http://www.govinfo.gov3637                                __________3839                   U.S. GOVERNMENT PUBLISHING OFFICE4061-333 PDF                  WASHINGTON : 20254142-----------------------------------------------------------------------------------4344       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION4546                    ONE HUNDRED NINETEENTH CONGRESS4748                             FIRST SESSION4950                       TED CRUZ, Texas, Chairman51JOHN THUNE, South Dakota             MARIA CANTWELL, Washington,52ROGER WICKER, Mississippi                Ranking53DEB FISCHER, Nebraska                AMY KLOBUCHAR, Minnesota54JERRY MORAN, Kansas                  BRIAN SCHATZ, Hawaii55DAN SULLIVAN, Alaska                 EDWARD MARKEY, Massachusetts56MARSHA BLACKBURN, Tennessee          GARY PETERS, Michigan57TODD YOUNG, Indiana                  TAMMY BALDWIN, Wisconsin58TED BUDD, North Carolina             TAMMY DUCKWORTH, Illinois59ERIC SCHMITT, Missouri               JACKY ROSEN, Nevada60JOHN CURTIS, Utah                    BEN RAY LUJAN, New Mexico61BERNIE MORENO, Ohio                  JOHN HICKENLOOPER, Colorado62TIM SHEEHY, Montana                  JOHN FETTERMAN, Pennsylvania63SHELLEY MOORE CAPITO, West Virginia  ANDY KIM, New Jersey64CYNTHIA LUMMIS, Wyoming              LISA BLUNT ROCHESTER, Delaware65                 Brad Grantz, Republican Staff Director66           Nicole Christus, Republican Deputy Staff Director67                     Liam McKenna, General Counsel68                   Lila Harper Helms, Staff Director69                 Melissa Porte7071                            C O N T E N T S7273                              ----------74                                                                   Page75Hearing held on January 28, 2025.................................     176Statement of Senator Cruz........................................     177Statement of Senator Cantwell....................................     378    Letter to Senator Maria Cantwell from John D. Feely, U.S.79      Ambassador to Panama (ret) and MariCarmen Aponte, U.S.80      Ambassador to Panama (ret).................................     581Statement of Senator Fischer.....................................    3382Statement of Senator Blunt Rochester.............................    3483Statement of Senator Sullivan....................................    3684Statement of Senator Baldwin.....................................    3885Statement of Senator Blackburn...................................    4186Statement of Senator Klobuchar...................................    4287Statement of Senator Budd........................................    4488Statement of Senator Kim.........................................    4689Statement of Senator Schmitt.....................................    4890Statement of Senator Curtis......................................    5091Statement of Senator Moreno......................................    5292Statement of Senator Capito......................................    5493Statement of Senator Sheehy......................................    5694Statement of Senator Young.......................................    589596                               Witnesses9798Hon. Louis E. Sola, Chairman, Federal Maritime Commission........     999    Prepared statement...........................................    10100Daniel B. Maffei, Commissioner, Federal Maritime Commission......    12101    Prepared statement...........................................    14102Eugene Kontorovich, Professor, Antonin Scalia Law School, George103  Mason University...............................................    15104    Prepared statement...........................................    17105Joseph Kramek, President and CEO, World Shipping Council.........    20106    Prepared statement...........................................    21107108                                Appendix109110Response to written questions submitted to Hon. Louis E. Sola by:111    Hon. John Thune..............................................    63112    Hon. Roger Wicker............................................    65113    Hon. Dan Sullivan............................................    65114    Hon. Eric Schmitt............................................    65115Response to written questions submitted to Daniel B. Maffei by:..116    Hon. Jacky Rosen.............................................    66117    Hon. Andy Kim................................................    67118Response to written questions submitted by Hon. Eric Schmitt to:.119    Eugene Kontorovich...........................................    68120Response to written questions submitted to Joseph Kramek by:121    Hon. John Thune..............................................    68122    Hon. Jacky Rosen.............................................    68123124                 FEES AND FOREIGN INFLUENCE: EXAMINING125                   THE PANAMA CANAL AND ITS IMPACT ON126                    U.S. TRADE AND NATIONAL SECURITY127128                              ----------129130                       TUESDAY, JANUARY 28, 2025131132                                       U.S. Senate,133        Committee on Commerce, Science, and Transportation,134                                                    Washington, DC.135    The Committee met, pursuant to notice, at 10:07 a.m., in136room SR-253, Russell Senate Office Building, Hon. Ted Cruz,137Chairman of the Committee, presiding.138    Present: Senators Cruz [presiding], Thune, Wicker, Fischer,139Moran, Sullivan, Blackburn, Young, Budd, Schmitt, Curtis,140Moreno, Sheehy, Capito, Lummis, Cantwell, Klobuchar, Schatz,141Markey, Peters, Baldwin, Duckworth, Rosen, Lujan, Hickenlooper,142Kim, and Blunt Rochester.143144              OPENING STATEMENT OF HON. TED CRUZ,145                    U.S. SENATOR FROM TEXAS146147    The Chairman. Good morning, everyone. Welcome. The Senate148Committee on Commerce, Science, and Transportation will come to149order.150    We are here today to examine a monument to American151ingenuity, the Panama Canal. Senator Moreno down there152suggested we open the hearing by playing Van Halen and Panama.153We may not do that. But between the American construction of154the Panama Canal, the French effort to build an Isthmus Canal,155and America's triumphant completion of that canal, the major156infrastructure projects across Panama cost more than 35,000157lives.158    For the final decade of work on the Panama Canal, the159United States spent nearly $400 million, equivalent to more160than $15 billion today. The Panama Canal proved a truly161invaluable asset, sparing both cargo ships and warships the162long journey around South America. When President Carter gave163it away to Panama, Americans were puzzled, confused, and many164outraged.165    With the passage of time, many have lost sight of the166Canal's importance, both to national security and to the U.S.167economy. Not President Trump. When he demanded fair treatment168for American ships and goods, many in the media scoffed. But169the Panama Canal was not just given away. President Carter170struck a bargain. He made a treaty.171    And President Trump is making a serious and substantive172argument that that treaty is being violated right now. This173committee has jurisdiction under the Senate rules over the174Panama Canal, and today we will examine evidence of potential175violations.176    President Trump has highlighted two key issues: Number one,177the danger of China exploiting or blocking passage through the178Canal. And number two, the exorbitant costs for transit.179Chinese companies are right now building a bridge across the180Canal at a slow pace so as to take nearly a decade. And Chinese181companies control container ports at either end.182    The partially completed bridge gives China the ability to183block the Canal without warning. And the ports give China ready184observation posts to time that action. This situation, I185believe, poses acute risks to U.S. national security.186    Meanwhile, the high fees for canal transit187disproportionately affect Americans, because U.S. cargo188accounts for nearly three-quarters of canal transits. U.S. Navy189vessels pay additional fees that apply only to warships. Canal190profits regularly exceed $3 billion. This money comes from both191American taxpayers and consumers in the form of higher costs192for goods. American tourists aboard cruises, particularly those193in the Caribbean Sea, are essentially captive to any fees194Panama chooses to levy for canal transits.195    And they have paid unfair prices for fuel bunkering at196terminals in Panama as a result of government-granted monopoly.197Panama's Government relies on these exploitative fees, nearly198one-tenth of its budget is paid for with canal profit. As those199fees cascade through the American economy in the Federal FISC,200the Chinese Communist Party advances its global economic201contest against the United States and takes a militaristic202interest in the Canal.203    While President Trump has rightly focused on these key204issues, there are additional problems. In the last 2 years, the205Canal Authority generated record revenue even while transits206were depressed by drought conditions. And the only comfort to207delayed and overcharged ships is that Panama may invest in more208freshwater reserves in the future.209    Even as it takes advantage of the global maritime system,210Panama has emerged as a bad actor. Panama has for years flagged211dozens of vessels in the Iranian Ghost Fleet, which brought212Iran tens of billions of dollars in oil profits to fund terror213across the world.214    And Chinese companies have won contracts, often without215fair competition, as the infamous Belt and Road Initiative has216come to Panama. China often engages in debt-trap diplomacy to217enable economic and political coercion. In Panama, it also218seems to have exploited simple corruption.219    We have four panelists with us today. At Ranking Member220Cantwell's request, we also invited the Deputy Administrator of221the Panama Canal to appear today. She declined that invitation.222    I understand this witness claimed her absence was due to a223scheduling matter, but I also recognize that defending the224Panama Canal Authority is an unenviable task. This committee225may be obliged to compel her testimony at a future hearing.226    It will not escape Senators' notice that Professor227Kontorovich is appearing virtually today. That will be a very228unusual practice before this committee. The Professor was ready229to fly from Israel to D.C. to appear in person, but he was230unable to because too few American carriers have resumed direct231flights to Israel. While European airliners are willing to fly232to Israel, service to America has been prohibitively long and233expensive.234    Israel is America's closest ally in the Middle East, and235U.S. carriers are refusing to fly there. Late last week, Delta236Airlines announced it would finally restart direct flights to237Tel Aviv in April. And I very much hope that United Airlines238and American Airlines will very quickly follow suit and resume239direct flights to Israel.240    Turning back to the topic at hand, I am grateful to241President Trump for raising public awareness about the state of242the Panama Canal and the threats to American interests. We243cannot afford to let American shippers be extorted. We cannot244turn a blind eye if Panama exploits an asset of vital245commercial and military importance. And we cannot stay idle246while China is on the march in our hemisphere.247    I expect and hope the testimony today to enlighten all of248those issues.249    I will now turn to Ranking Member Cantwell for her opening250statement.251252               STATEMENT OF HON. MARIA CANTWELL,253                  U.S. SENATOR FROM WASHINGTON254255    Senator Cantwell. Thank you, Mr. Chairman. And thank you256for having this important hearing, and the witnesses that are257here today, and virtually.258    Access to the Panama Canal is essential, maintaining259America's supply chains, lowering inflation costs on consumers260and goods, and ensuring our national security. With about 72261percent of the goods transiting the Canal coming to or from262U.S. markets, a stable waterway is vital for states like mine,263where one in four jobs are related directly or indirectly to264trade.265    Seattle-based SSA Marine, operated in the Manzanillo266International Terminal in Colon, Panama, for the last 30 years,267is our largest U.S. logistics presence in Panama, with 19268massive cranes, 3.5 million cargo containers, and employing269over a thousand people.270    In fact, Washington's maritime economy supports 170,000271jobs and $45 billion in revenue, and our U.S. maritime economy272supports over 21 million jobs and almost $3 trillion in273America's GDP.274    So anything that our committee can do to help grow our275maritime economy, I am all for. That is why it is so important276that the Committee not just focus on Panama, but the broader277solutions to meet our U.S. maritime opportunities and278challenges. This committee passed the Ocean Shipping Reform279Act, led by our colleagues, Senator Klobuchar and Senator280Thune, to address shipping costs and stop carriers from281practices that delay U.S. cargo or increased costs.282    This law also gave the FMC, our two Commissioners that are283here today, the ability to do better investigation. So I look284forward to hearing about their investigation on the Panama285Canal and these cost issues.286    And many members of this committee have worked on the287Infrastructure Bill to do dock replacements in places like288Alaska, rail improvements, pier infrastructure, safety289improvements, container yard expansion. And I know that my290colleagues who represent these maritime investments need a291maritime workforce and continued investment.292    Many of our colleagues, Mr. Chairman, have great ideas.293Senators Kelly and Young from the Senate, Representatives294Garamendi and Kelly from the House, and they have been working295with maritime stakeholders on these larger bills.296    But Mr. Chairman, if this committee does not embrace this297larger agenda, it is going to get decided in the Finance298Committee. So I hope that we can get some of these issues and299show that this committee is the Committee for maritime300jurisdiction.301    A bill that provides a comprehensive strategy to rebuild302America's supply chain supremacy, sea lift capacity that we303need to defend our interests in the South China Sea and the304Indo-Pacific region, and to revitalize our Nation's ports and305shipbuilding capacity. A revitalized U.S. maritime strategy306would not only be good for our economy, but critical for307national security.308    At the same time, we face cyber threats from our foreign309adversaries, and Panama is a perfect example, which brings us310to the hearing today. I am concerned about Chinese-owned ports311in Panama and their proximity to the Canal.312    I am also deeply concerned about the installation of313Chinese equipment from Huawei and Chinese companies near the314Canal. This is why this committee successfully worked to get $3315billion in Rip and Replace at the end of the last Congress. So316if we are trying to get them out of U.S. ports and areas, we317should not certainly allow them in vessels and back doors in318places like Panama.319    Mr. Chairman, I would like to ask unanimous consent to320enter into the record a letter from the two most recent U.S.321Ambassadors to Panama, who make the case for continued U.S.322investment in infrastructure and cybersecurity.323    The Chairman. Without objection.324    Senator Cantwell. Thank you, Mr. Chairman.325    [The information referred to follows:]326327    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]328329    Senator Cantwell. These Ambassadors know better than anyone330that America's adversaries have built back doors into331communication technology, software--supply chains, both332software and hardware. So whether it is a crane over the port,333or a bridge, we cannot tolerate Huawei, TikTok, artificial334intelligence, or other adversaries using a government back335door.336    Mr. Chairman, I am a very big fan of the five biggest337technology interests and basic democracies forming a technology338NATO, we should be saying to the world, nobody should be buying339technology or equipment that has a government back door.340    These are complex issues and we need solutions. I will be341requesting that the Department of Defense provide a classified342briefing to all members of our committee about foreign343adversary threats to the Panama Canal, including these adjacent344areas. I received an initial classified briefing from the U.S.345Southern Command and have spoken to former U.S. Southern346Command leader General Laura Richardson on these issues.347    I also plan to go as a delegation, or by myself, to Panama348and visit the Panama Canal Authority. I invite other members to349do so hopefully this spring.350    Any successful strategy also has to not just focus on351cybersecurity and cooperation, and we will ask some of our352witnesses here today, but the larger issue is we need to353understand what are the shortfalls of the current agreement354that does not get at this upgraded technology concern, I would355hope that Panama would be very cooperative in discussing these356cybersecurity investments and what needs to be made.357    As we all know, the Panama Canal is, as an authority,358independent and the Chinese Government do not start the359shipping rates, but the authority has been grappling with360historic rainfalls, climate change, and the solution, I361believe, is for us to work together, as the Army Corps did362before on solutions, in making sure that instability in water363is not the cause of increase in rates. We need to work on these364solutions.365    But Mr. Chairman, I also believe that the larger issue366here, as you mentioned in your statement about Belt and Road367Initiative by the Chinese and their expansion, needs to be met368with an aggressive response by the United States. I firmly369believe in trade.370    But, again, easy for me to say, or maybe for Texas, when371you are coming from a very trade-dependent state, but the issue372is we did not have an ambassador there for 5 years in Panama.373For all my colleagues who hold up Ambassadors, you should374rethink your strategies when you do this, because holding up375Ambassadors and not dealing with these issues put us behind the376eight ball.377    Expanding exports to 95 percent of the world's consumers378and roughly 3.5 billion people, I believe, is a good idea. I379hope we can have a more aggressive strategy in Latin America.380    I think the proposals by Senator Cassidy and Bennet, the381Americas Act, is also a like-minded thing of Latin American382countries that we could join together in sort of a U.S.-Mexico-383Canada free trade agreement.384    And I also believe that a free trade agreement of the385Americas that link modernization of all our FTAs in Latin386America and the Caribbean would help, along with an aggressive387strategy on saying no government back doors, and making the388kind of investments that the Export-Import Bank can do to389counter China.390    So Mr. Chairman, thank you for organizing this important391hearing. Such investments ensure resilient supply chains, boost392exports, lower consumer costs, and most importantly, protect393our national security. Thank you, Mr. Chairman.394    The Chairman. Thank you, Senator Cantwell. Our first395witness today is Chairman Louis Sola of the Federal Maritime396Commission. He was recently in Panama on a fact-finding mission397and can speak to concerning developments that I noted in my398opening statement.399    Chairman Sola, you are recognized for five minutes.400401          STATEMENT OF HON. LOUIS E. SOLA, CHAIRMAN,402                  FEDERAL MARITIME COMMISSION403404    Mr. Sola. Thank you, Chairman Cruz, Ranking Member405Cantwell, and distinguished members of the Committee. Thank you406for the opportunity to speak today about the critical407importance of the Panama Canal to U.S. trade and global408commerce.409    I bring a unique perspective as someone who has not only410served as a maritime regulator but also lived and worked411extensively in Panama. I have transited the Panama Canal over412100 times. This experience provides me with a profound413understanding of the Canal's significance and challenges it414faces.415    Prolonged drought conditions last year forced operational416changes, reducing transit slots, restricting vessel types, and417auctioning of slots, raising alarm about its resilience. The418Panama Canal is managed by the Panama Canal Authority, ACP, an419independent agency of the Panamanian Government. The ACP is a420model of public infrastructure management and its independence421has been key to ensure a safe and reliable transit of vessels422critical to the U.S. and global commerce.423    During my recent visit to Panama, I had the opportunity to424meet with leaders of the ACP to better understand their efforts425to address the ongoing challenges facing the Canal. I saw426firsthand their commitment to maintaining the Canal's427efficiency and resilience.428    These conversations also highlighted the broader challenges429posed by the Panamanian Government's maritime policies, which430complicate the ACP's mission and raise concerns about431corruption and foreign influence.432    In contrast, the broader maritime sector in Panama,433including the Nation's ports, water rights, and the world's434largest ship registry, falls under the direct purview of the435Panamanian Government. Unfortunately, this sector has faced436persistent challenges, including corruption scandals and437foreign influence, particularly from Brazil and China. These438issues create friction with the ACP, especially as it works to439address long-term challenges, such as securing adequate water440supplies for the Canal.441    Although the ACP operates independently under U.S. law,442both the ACP and the government of Panama's maritime sector are443considered one and the same. This means that any challenges in444Panama's maritime sector, including corruption, lack of445transparency, or foreign influence, can have a direct or446indirect impact on the operations and long-term stability of447the Canal.448    This legal perspective highlights the need for diligence in449monitoring both the ACP's management and Panama Government's450policies affecting maritime operations.451    Since 2015, Chinese companies have increased their presence452and influence throughout Panama. Panama became a member of the453Belt and Road Initiative and ended its diplomatic relations454with Taiwan.455    Chinese companies have been able to pursue billions of456dollars in development contracts in Panama, many of which were457projects directly on or adjacent to the Panama Canal. Many were458no-bid contracts, labor laws were waived, and the Panamanian459people are still waiting to see how they have been benefited.460It is all the more concerning that many of these companies are461state-owned, and in some cases even designated as linked to the462People's Liberation Army.463    We must address the significant growing presence and464influence of China throughout the Americas, and in Panama465specifically. American companies should play a leading role in466enhancing the Canal's infrastructure. By supporting U.S. firms,467we reduce reliance on Chinese contractors and promote fair468competition.469    Additionally, confirming a U.S. Ambassador in Panama is470critical to advancing our national and economic interests. The471FMC will continue to monitor the Canal's pricing practices and472consider broad reviews of Panama's maritime sector. Yes, FMC473has the authority to impose significant remedies, including474fines and restrictions on Panamanian-flagged vessels entering475U.S. ports.476    In closing, the Panama Canal is vital to our economy, with477over 75 percent of its traffic bound for our ports.478Safeguarding the ACP's independence and addressing the479challenges posed by the broader government are essential to480maintaining U.S. competitiveness in a global economy.481    I look forward to your questions.482    [The prepared statement of Mr. Sola follows:]483484          Prepared Statement of Hon. Louis E. Sola, Chairman,485                      Federal Maritime Commission486    Chairman Cruz, Ranking Member Cantwell, and distinguished members487of the Committee: Thank you for the opportunity to appear before you488today to address the vital role the Panama Canal plays in U.S. trade489and the global economy. I understand many of the issues of interest to490you from not only my perspective as a regulator, but as someone who is491a ``Zonian.''492    Panama is a place I know well. I grew-up in Goodland, Indiana, but493Panama has been a part of my life from when I first moved there in my494very early twenties as a young Army Non-Commissioned-Officer. I495launched my post-military career there, my children were born there, I496have transited the Canal 110 times as a Captain, earning the497distinction as ``Honorary Lead Pilot.'' I know the country, I speak the498language at home, I have a genuine affinity for the people of Panama499and for the country itself. Nonetheless, I am not blinded to issues500which should command each of our attention.501    Your interest in the Panama Canal is commendable. Despite the Canal502being more than 100 years old, it remains a critical conduit for trade503moving by vessel. The United States, more than any other nation,504benefits from ships being able to transit the Panama Canal. In excess505of 40 percent of U.S. container traffic, valued at roughly $270 billion506annually, transits this waterway. Nor is Canal traffic limited to507container ships. Vessels of all sorts--container ships, passenger508vessels, bulk and breakbulk vessels, and product tankers--use the509waterway to carry cargoes to and from the United States.510    For much of the more than 100-year history of the Canal, the United511States was responsible for operating the facility, but that512responsibility shifted in 1999 when control of the Canal was513transferred to the Republic of Panama. For the past 25 years, the Canal514has been very ably administered by the (Panama Canal Authority) a515government entity that is separate from the government of Panama.516    Drought conditions had consequential effects on Canal operations in5172024, forcing the Authority to cut the total number of transit slots518available, bar some classes of vessels from transiting at all, and519mandate vessels be more lightly loaded to allow for higher drafts. In520some instances, available transit slots were auctioned off to the521highest bidder. In response to the concerns expressed by many different522sources about how the Canal was being operated, then-Chairman Maffei523and I traveled to Panama last August to meet government, the Authority,524and business executives to learn more about how the drought was525impacting Canal operations and what measures the Authority was taking526to make the Canal more drought resistant.527    Panama Canal Authority executives appeared to be fully transparent528in discussing the management of the Canal and options for making the529waterway more resilient against drought conditions. These improvements530are absolutely critical. Without a solution, projections suggest that531by 2050, the Canal's capacity could decline by as much as 50 percent,532which would have devastating consequences for global trade and U.S.533commerce. The Authority is working to create the additional volumes of534water necessary to operate the Canal, but must do so within the535constraints of laws and regulations administered by the Government of536the Republic of Panama. That relationship has been frictional at times.537The Republic of Panama is responsible for administering that nation's538ports, water rights, and ship registry. The reality is one entity--the539Panama Canal Authority--administers the Canal and is responsible for540its continued viability, but many of the initiatives necessary to541realize that goal are under the control of Panama's government.542    Further complicating this split of authorities is the reputation543the Government of Panama has for corruption and susceptibility to544foreign influence. Transparency International places Panama at 108 out545of 180 rated countries, and the U.S. Department of Commerce546International Trade Administration notes that ``Corruption is Panama's547biggest challenge.'' Prevalent examples exist of the systemic548corruption found in how the Panamanian government does business.549Officials have been sanctioned. The Panamanian Registry included550Iranian-owned vessels that were involved in sanctions busting.551Presidential administrations that preceded that of now-President Mulino552were particularly receptive to Chinese overtures and beginning in 2015,553the People's Republic of China only had to push lightly on a cracked554door in Panama. In subsequent years, Panama became a member of the Belt555and Road Initiative and ended its diplomatic relations with the556Republic of China (Taiwan). Chinese companies have been able to pursue557billions of dollars in development contracts in Panama, many of which558were physical infrastructure projects, some on or adjacent to the559Panama Canal. No bid contracts were awarded, labor laws were waived,560and the Panamanian people are still waiting to see how they benefitted.561    The United States is not without options in addressing the growing562presence of China and Chinese companies in Panama and throughout the563Americas. Nor are we without options as they relate to the continued564viability of the Canal.565    First, we need to increase support for American companies seeking566to do business in Panama and throughout the Americas. Chinese companies567must not be the sole bidders on contracts. Improving the resiliency of568the Panama Canal will require significant engineering and construction569work. U.S. firms can and should be at the top of the list of bids570considered. Further, the United States must address any conduct by571foreign competitors that American companies are legally prohibited from572engaging in. Commercial opportunities abound throughout the Americas573and our foreign and commercial services must embrace their roles as574champions of U.S. businesses in spite of a strong presence of anti-US575and Chinese aligned local media outlets. The U.S. Embassy in Panama is576a crucial part of these efforts. Having an ambassador confirmed, in577place in Panama, and protecting our national interests must be a578priority.579    Second, we must protect the independence of the Panama Canal580Authority. Any effort by other interests in Panama to diminish the581independence or professionalism of the Authority must be stopped.582Building or expanding relationships with the Panama Canal Authority can583increase its capabilities and competencies even further. The United584States should work with the Authority to identify opportunities for585technical collaboration or expertise sharing. One example is the U.S.586Army Corps of Engineers, which has unparalleled experience in managing587large public works projects. The relationship between it and the588Authority could be formalized. Another opportunity for growing589relationships is to foster closer, more frequent consultations between590users, or their representatives, of the Canal and the Authority591leadership. Such exchanges would be productive, particularly if they592identified and alleviated concerning issues before they become593problematic issues.594    Third, the Federal Maritime Commission will continue its monitoring595and review of the practices of the Panama Canal Authority with a596particular eye toward the appropriateness of pricing structure for597transits. The Commission will also consider expanding its ongoing598examination of the Authority to include other maritime/supply chain599businesses operating in Panama. The authorities the Commission600possesses under section 19 of the Merchant Marine Act of 1920 to601address conditions affecting shipping in foreign trade (46 U.S. Code602Chapter 421) authorize the Commission to address foreign government603laws or practices that are harmful to U.S. shipping. More explicitly,604should the Commission formally investigate the practices of the Panama605Canal Authority and find them to be unfavorable, the Commission could606act against the Republic of Panama broadly as opposed to the Authority607specifically. The Commission can levy significant remedies under the608law, including substantial daily fines and barring Panamanian-flagged609vessels from calling at U.S. ports.610    More than one-third of the U.S. economy is tied to goods,611commodities, and inputs that move by sea, and the Panama Canal is an612indispensable part of the ocean-linked supply chains on which we are613reliant. Safeguarding the viability of the Panama Canal for the coming614century and beyond must be a priority we meet if we want to remain615economically competitive.616    Thank you for your attention and interest. I am pleased to address617any questions you might have.618619    The Chairman. Thank you, Chairman.620    Our next witness is Commissioner Daniel Maffei of the621Federal Maritime Commission. He was also in Panama with622Chairman Sola.623    Mr. Maffei, I look forward to your opening statement.624625   STATEMENT OF HON. DANIEL B. MAFFEI, COMMISSIONER, FEDERAL626                      MARITIME COMMISSION627628    Mr. Maffei. Thank you very much, Chairman Cruz, and Ranking629Member Cantwell, and members of the Committee.630    I do want to say that in addition to Chairman Sola and631myself, Commissioner Max Vekich is also here from the Federal632Maritime Commission, which I just think underscores the633importance of this issue to us.634    More than 110 years after its opening, the Panama Canal635does remain absolutely vital to maintaining resilient supply636chains for both American importers and exporters. Because the637Canal is essentially a waterway bridge over mountainous terrain638above sea level, it does depend on large supplies of fresh639water to maintain the full operations.640    Panama has among the world's largest annual rainfalls,641nonetheless, insufficient fresh water levels have occurred642before in the Canal's history, such as in the 1930s when the643Madden Dam and Lake Alejuela were built to address water644shortages. Since that time, the Canal has undertaken several645projects to accommodate larger, more modern ships.646    In the last couple of years, a trend of worsening droughts647in the region once again has forced limits to the operations of648the Canal. Starting in June 2023, the Panama Canal Authority649employed draft restrictions and reduced the number of ships650allowed to transit the Canal per day. Now, the Panama Canal651limitations, in combination with the de facto closure of the652Suez Canal to container traffic, has had serious consequences653for ocean commerce, increasing rates, fees, and transit times.654    In the first half of 2024, U.S. importers and exporters655expressed Panama Canal-related concerns to the FMC, including656doubts about the future reliability of the Canal, and questions657about how the Panama Canal Authority was determining which658ships could transit the Canal, and how long they would have to659wait.660    The FMC has statutory authority under the laws concerning661foreign shipping practices to investigate and potentially take662appropriate counteraction if it finds that a foreign country,663through its laws or regulations, has contributed to, quote,664``Conditions unfavorable to shipping in the foreign trade'',665unquote.666    Given this statutory mandate and consistent with FMC's667mission, I and then Commissioner Louis Sola started to look668deeper into the causes of the issues facing the Canal. The669first step was to meet with Panamanian officials and other670stakeholders, as the Chairman has pointed out, about the671conditions adversely affecting the Canal's operations, about672what was being done to address these concerns, and about673whether any aspect of the Canal's operations might result in674conditions unfavorable to U.S. shipping that should be675addressed under the Commission's authority.676    So we traveled to Panama, which was in July 2024, and we677met with then-recently elected President Jose Mulino and678officials in his administration. We also met with the Panama679Canal Authority, as well as private sector stakeholders.680    We had very candid discussions on key issues, such as681Panama's command to--I am sorry--Panama's plans to ameliorate682the water-level challenges, the bidding processes used to683allocate transits during times of restrictions, and our concern684the Canal Authority was bringing in far more revenue during the685crisis than it had before limits were forced by water686shortages.687    Both the Government of Panama and the Canal Authority did688answer our questions very substantively. The Canal Authority689informed us they were already making changes to that allocation690system. Now, fortunately, Panama's 2024 rainy season has, for691now, alleviated the most acute water supply issues at the692Canal, and normal transit volumes have been restored.693    That said, while the Panamanian Government and Canal694Authority have, with the advice of the U.S. Army Corps of695Engineers, developed credible plans to mitigate future water696shortages, they also warned that it is likely that at least one697more period of reduced transits will occur before these plans698can be fully implemented.699    Now, since our meetings, the FMC has continued to monitor700Panama's progress on this front and examined other policy701changes announced by the Canal Authority. I do have continuing702concerns, particularly about the auction-like slot allocation703procedures, not so much as they are applied right now because704transits are not being rationed, but when another low rainfall705rain period occurs--or rainfall period occurs.706    As we learn more about Panama and the Canal Authority and707how they would handle another drought and receive more input708from American importers and exporters, the Commission does709remain positioned to take appropriate action if warranted. How710the Panama Canal's operations affect American commerce was a711high priority for the FMC under my chairmanship, it remains a712high priority at the Federal Maritime Commission under713Commissioner Sola's chairmanship, and I am extremely pleased714that it is a priority for this committee as well.715    Thank you.716    [The prepared statement of Mr. Maffei follows:]717718       Prepared Statement of Hon. Daniel B. Maffe, Commissioner,719                      Federal Maritime Commission720    Thank you, Chairman Cruz, Ranking Member Cantwell, and members of721the Committee for inviting me to participate.722    The Panama Canal is crucial to ensuring an efficient and reliable723ocean transportation system, particularly for the United States. When724the Canal opened in 1914, global trade by sea was drastically altered725as international commerce benefited from the expedited maritime passage726through Central America. Today--more than 110-years later--the Panama727Canal remains vital to maintaining resilient supply-chains for both728American importers and exporters.729    The Panama Canal has always had limits to its capacity. Because the730Canal is essentially a waterway bridge over mountainous terrain above731sea level, it depends on large supplies of fresh water to maintain full732operations.733    Panama has among the world's largest annual rainfalls. Nonetheless,734insufficient freshwater levels have occurred before in the Canal's735history, such as in the 1930s, when Madden Dam and Lake Alejuela were736built to address water shortages. Since that time, the Canal has737undertaken several projects to accommodate larger, more modern ships.738Less than a decade ago, the Panama Canal Authority opened new sets of739locks on both the Atlantic and Pacific ends.740    In the last couple years, a trend of worsening droughts in the741region forced limits to the operations of the Canal. Starting in June742of 2023, the Canal Authority employed draft restrictions (preventing743some larger and/or heavily loaded ships from passing through the744Canal's lock systems) and reduced the number of ships allowed to745transit the Canal per day.746    The diminished capacity at the Panama Canal, in combination with747the de facto closure of the Suez Canal--due to Houthi attacks in the748Red Sea--had serious consequences for ocean commerce which sometimes749included increased rates, fees, and/or transit times. U.S. importers750and exporters expressed Panama Canal-related concerns to Commissioners751and staff at the FMC, including doubts about the future reliability of752the Canal and questions about how the Panama Canal Authority was753determining which ships could transit the Canal and when.754    The FMC has statutory authority under the laws concerning foreign755shipping practices to investigate and potentially take appropriate756counter action if it finds that a foreign country, through its laws or757regulations, has contributed to ``conditions unfavorable to shipping in758foreign trade.''759    Given this statutory mandate, and consistent with FMC's mission, I760and then-Commissioner Sola started to look deeper into the causes of761the issues facing the Canal. We thought the first step was to meet with762Panamanian officials and other stakeholders and speak to them directly763about the conditions adversely affecting the Canal's operations and764some of the input we had heard from American shippers. We specifically765sought to better understand the current state of the Canal's766operations, what was being done to improve them, and whether any aspect767of the Canal's operation might result in conditions unfavorable to U.S.768shipping that should be formally investigated under the Commission's769authority.770    While in Panama, we met with the then recently elected President,771Jose Mulino, as well as several senior officials in his administration772to discuss maritime policy. We also met with the Canal's Administrator773and other officials of the Panama Canal Authority. We had additional774meetings with private-sector stakeholders.775    We had candid discussions on key issues such as Panama's plans to776ameliorate the water level challenges, the bidding process used to777allocate transits during times of restrictions, and our concern that778the Canal Authority was collecting much more money per transit during779the crisis than it had before the 2023-24 water shortage. Both the780government of Panama and the Canal Authority answered our questions781substantively. The Canal Authority informed us they were already making782changes to the allocation system.783    Fortunately, Panama's 2024 rainy season has now alleviated the most784acute water supply issues at the Canal for the time-being and restored785normal transit volumes. That said, while the Panamanian government and786Canal Authority have, with the advice of the U.S. Army Corps of787Engineers, developed credible plans to mitigate future water shortages,788they also warned that it is likely at least one more period of reduced789transits will occur before these plans can be fully implemented.790    Since our meetings in late July, the Commission has continued to791monitor Panama's progress on this front and examined other policy792changes announced by the Canal Authority. I do have continuing concerns793about the auction-like slot allocation procedures--not so much as they794are applied right now when transits are not being rationed--but when795another lower rainfall period occurs. As we learn more about how Panama796and the Canal Authority would handle another drought crisis and receive797more input from American importers and exporters, the Commission798remains prepared to take any appropriate action, if warranted.799    How the Panama Canal's operations affect American commerce remains800a priority at the Federal Maritime Commission, and I am very pleased801that it is a priority for this Committee as well.802    Thank you.803804    The Chairman. Thank you, Commissioner. Our next witness is805Law Professor Eugene Kontorovich, who can explain Panama's806treaty obligations and the remedies the U.S. might seek for807potential violations.808    Professor Kontorovich is appearing virtually. And809Professor, you are recognized for your opening statement.810811STATEMENT OF EUGENE KONTOROVICH, PROFESSOR, ANTONIN SCALIA LAW812                SCHOOL, GEORGE MASON UNIVERSITY813814    Mr. Kontorovich. Chairman Cruz, Ranking Member Cantwell,815Honorable Members of the Committee, I appreciate and regret the816opportunity to testify before you remotely.817    I have been asked to discuss possible violations of the818treaty concerning the permanent neutrality and operation of the819Panama Canal entered into between the two countries in 1977.820    I should say at the outset that determining whether a821certain situation violates the treaty is a mixed question of822law and fact, depending on both the meaning of the treaty and823the actual situation on the ground. I have not had any824classified intelligence briefings on this subject, so I am825going to speak about the meaning of the treaty primarily. We826shall see that under international law, each party to the827treaty is entitled to determine for itself whether a violation828has occurred.829    Now, in exchange for the United States seizing control of830the Canal, which it built and maintained, Panama agreed to a831special regime of neutrality. The essential features of this832regime of neutrality is that the Canal must be open to all833nations for transit, that is Article II, equitable tolls and834fees, Article III, and exclusive Panamanian operation, Article835V (sic), the prohibition of any foreign military presence,836Article V.837    Article V provides that only Panama shall operate the838Canal. Testifying about the meaning of the treaty at the Senate839ratification hearings, the Carter administration emphasized840that this prohibits foreign operation of the Canal as well as841the garrisoning of foreign troops.842    Now, Article V appears to be primarily concerned about843control by foreign sovereigns. If Panama signed a treaty with844the People's Republic of China, whereby the latter would845operate the Canal on Panama's behalf, this would be a clear846violation. But what if Panama contracted for port operations847with a Chinese state firm, or even a private firm influenced,848or controlled in part by the Chinese Government?849    The Suez Canal Company was itself, before being850nationalized, a private firm in which the United Kingdom was851only a controlling shareholder, yet this was understood to852represent British control over the Canal. In other words, a853company need not be owned by the government to be, in part,854controlled by the government.855    So the real question is the degree of de jure or de facto856control over a foreign sovereign company. And scenarios range857from government companies in an authoritarian regime,858completely controlled, to purely private firms in an open859society like the United States, but those many possible860situations in the middle.861    The treaty is silent on the question of how much control is862too much. And as we will see, this is one of the many questions863committed to the judgment and discretion of each party.864    Now, turning to foreign security forces, the presence of865third-country troops would manifestly violate Article V. But866this does not mean that anything short of a People's Liberation867Army base flying a red flag is permissible. The presence of868foreign security forces could violate the regime of neutrality,869even if they are not represented in organized and open military870formations.871    Modern warfare has seen belligerent powers seek to evade872international legal limitations by disguising their actions in873civilian garb. From Russia's notorious little green men, to874Hamas terrorists hiding in hospitals or disguised as875journalists, bad actors seek to exploit the fact that876international treaties focus on sovereign actors.877    Many of China's man-made islands in the South China Sea878began as civilian projects before being suddenly militarized.879Indeed, this issue was discussed in the Senate ratification880hearings over the treaty.881    Dean Rusk said, ``Informal forces would be prohibited under882the treaty.'' Thus, the ostensible civilian character of the883Chinese presence around the Canal does not in itself mean that884it could not represent a violation of the treaty if, for885example, these companies and their employees involved Chinese886covert agents or other agents of the Chinese security forces.887    So this leads us to the final question: Who determines888whether neutrality is being threatened or compromised? Unlike889many other treaties that provide for third-party dispute890resolution, the Neutrality Treaty has no such provision.891Instead, the treaty makes clear that each party determines for892itself the existence of a violation.893    Article IV provides that each party is separately894authorized to maintain the regime of neutrality, making it a895separate obligation of each party. The Senate's understanding896made accompanying the ratification also made clear that Article897V allows each party to take, quote, ``unilateral action''.898    Senator Jacob Javits, at the markup hearing, said that899while the word ``unilateral'' is abrasive, we can, quote,900``Decide that the regime of neutrality is being threatened and901then act with whatever means are necessary to keep the Canal902neutral, unilaterally.''903    I look forward to your questions.904    [The prepared statement of Mr. Kontorovich follows:]905906Prepared Statement of Professor Eugene Kontorovich, Antonin Scalia Law907 School, George Mason University Senior and Research Fellow, Heritage908                               Foundation909    Chairman Cruz, Ranking Member Cantwell, and Honorable Members of910the Committee:911912    I am Eugene Kontorovich, a professor at George Mason University's913Antonin Scalia Law School, as well as senior research fellow at the914Heritage Foundation's Margaret Thatcher Center for Freedom.\1\ My915research focuses on constitutional and international law.916---------------------------------------------------------------------------917    \1\ The title and affiliation are for identification purposes.918Members of The Heritage Foundation staff testify as individuals919discussing their own independent research. The views expressed here are920my own and do not reflect an institutional position for The Heritage921Foundation, its Board of Trustees, George Mason University, or the922Commonwealth of Virginia.923---------------------------------------------------------------------------924    I have been asked to discuss possible violations of the Treaty925Concerning the Permanent Neutrality and Operation of the Panama Canal,926entered into on September 7, 1977, between the United States and927Republic of Panama. I should say at the outset that determining whether928a certain situation represents a violation of a given treaty is a mixed929question of law and fact. It depends both on the treaty and its930interpretation, as well as on the actual situation on the ground, the931latter of which I have no special information about.932    We shall see that under international law that each party to a933treaty is entitled to determine for itself whether a violation has934occurred. In our constitutional system, that determination is left935primarily to the President, in part because of his superior and ongoing936access to facts, much of which might not be public.937What ``Neutrality'' Means938    The Neutrality Treaty was part of a deal made with Panama and939embodied in two instruments. In one, the Panama Canal Treaty, the940United States agreed to cede the Panama Canal Zone and, as of 1999, the941operation of the Canal, to Panama. In exchange for the United States942ceding the control of the Canal which it built and then maintained and943defended, Panama agreed to a special ``regime of neutrality'' of the944Canal, which is set forth in a separate treaty.945    Under international law, neutrality is a robust and detailed946doctrine focused on third parties treating belligerents equally, or not947affording them certain facilities, in time of war. The rules of948neutrality are complex and detailed. Such rules were of great interest949to the Framers, as they navigated the geopolitics of the Napoleonic950Wars. The technicalities of neutrality are of somewhat less practical951relevance today,\2\ when states of declared war are uncommon, and952belligerence falls in several shades of grey.953---------------------------------------------------------------------------954    \2\ See Stephen P. Mulligan, Cong. Rsch. Serv., LSB10735,955International Neutrality and U.S. Military Assistance to Ukraine956(2022).957---------------------------------------------------------------------------958    In any case, the neutrality spoken of by the Treaty is not the959general doctrines of customary international law, but the specific960``regime of neutrality'' \3\ that is ``spelled out in the treaty961itself,'' as Dean Rusk explained in Senate hearings at the time.\4\962Indeed, the neutrality spoken of in this treaty is different from963classic neutrality in several ways, as it applies in times of peace,964and gives preferential treatment to U.S. warships and Colombian965vessels. This is not general neutrality, but rather a relative966neutrality that places the safeguarding of U.S. interests in a special967position.968---------------------------------------------------------------------------969    \3\ Treaty Concerning the Permanent Neutrality and Operation of the970Panama Canal, U.S.-Panama, Sept. 7, 1977, T.I.A.S. No. 10030, reprinted971in 16 I.L.M. 1022 (1977), Art. I.972    \4\ See Panama Canal Treaties: Hearings Before S. Comm. on Foreign973Relations, 95th Cong., 559-60 (1978) (statement of Dean Rusk, former974U.S. Sec. of State).975---------------------------------------------------------------------------976What Violates Neutrality977    The essential features of the neutrality that must be preserved in978the Canal are the non-discrimination among nations in the right of979transit (Art. II); just and equitable tolls and fees (Art. III);980exclusive Panamanian operation of the Canal (Art. V); and the981prohibition of any foreign military or defense presence in the country982(Art. V). A significant purpose of these provisions was to ensure983foreign powers would not control the Canal.984Foreign Operation of the Canal985    Article V provides that only Panama shall ``operate'' the Canal.986Testifying about the meaning of the treaty in the Senate ratification987hearings, the Carter Administration via Assistant Secretary of State988for Legislative Affairs Douglas J. Bennet, Jr., emphasized that the989treaty ``prohibits foreign operation of the Canal, the garrisoning of990foreign troops.'' \5\991---------------------------------------------------------------------------992    \5\ Id. at 673, 675 (1978) (statement of Douglas J. Bennet, Jr.,993Ass't Sec. of State for Legislative Affairs).994---------------------------------------------------------------------------995    This raises the question of whether the operation of the Canal or996its appurtenant facilities by a private firm, neither American nor997Panamanian, is consistent with the treaty. Article V appears primarily998to be concerned about control by foreign sovereigns. If Panama signed a999treaty with the People's Republic of China, whereby the latter would1000operate the Canal on Panama's behalf, it would be a clear violation of1001the treaty. But what if Panama contracted for port operations with a1002Chinese state firm? Or even a private firm? The Suez Canal company was1003itself a private firm in which the United Kingdom was only a1004controlling shareholder, and yet it was understood to represent Anglo-1005French control over the Canal.1006    One analytic factor would be the degree of de jure or de facto1007control the foreign sovereign has over the company. Here, scenarios1008range from government companies in an authoritarian regime to purely1009private firms in an open society such as the United States. In between1010exists a spectrum of levels of governmental control and influence. The1011treaty is silent on the question of how much is too much. As we shall1012see, that is one of the many questions committed to the judgment and1013discretion of each party.1014    In a communist regime, distinctions between private and government-1015owned firms are not as absolute or clear-cut as in a Western liberal1016society. This is particularly the case for the People's Republic of1017China (PRC), which has an official doctrine known as ``Military-1018Civilian Fusion,'' a top-level strategy of the CCP Central Committee1019since 2019.\6\ Moreover, Panama has formally joined China's ``Belt and1020Road Initiative'' (BRI), a sprawling Chinese governmental policy to1021strengthen its strategic influence overseas. China has used the BRI to1022expand its overseas security footprint in Belt and Road countries.\7\1023---------------------------------------------------------------------------1024    \6\ See U.S. Dep't of Defense, Military and Security Developments1025Involving the People's Republic of China, 28-30 (2023).1026    \7\ Id. at 27.1027---------------------------------------------------------------------------1028    Another formal distinction of uncertain substantive value is that1029between Hong Kong and the PRC. When a Hong Kong company first won1030contracts to manage the ports on each side of the Canal--over vigorous1031U.S. objections\8\--the island was still a British Crown Dependency.1032Just a few months later, it was handed over to China; two years later,1033the Canal Zone was handed over by the United States to Panama. In the1034ensuing decades, China has cemented its control over Hong Kong far1035beyond what was contemplated in its agreement with the United Kingdom,1036culminating in imposition of Chinese security laws in 2020.1037---------------------------------------------------------------------------1038    \8\ The Security of the Panama Canal: Hearings before the S. Armed1039Serv. Comm., 106th Cong. (1999) (statement of Amb. Lino Gutierrez).1040---------------------------------------------------------------------------1041    These developments may have a combined cumulative effect. It1042emerges that the operation of facilities proximate to the Canal is1043under the control of companies subordinate to a rival or even hostile1044power, known for its integration of civilian and military sectors and1045use of infrastructure development to project global power.1046Foreign Security Forces1047    The presence of third-country troops or military infrastructure1048would manifestly violate Article V. But this does not mean that1049anything short of a People's Liberation Army base flying a red flag is1050permissible. The presence of foreign security forces could violate the1051neutrality regime even if they are not represented by organized1052military formations. Modern warfare has seen belligerent powers seek to1053evade international legal limitations by disguising their actions in1054civilian garb. From Russia's notorious ``little green men'' to Hamas1055terrorists in hospitals, bad actors seek to exploit the fact that1056international treaties focus on sovereign actors. Many of China's1057manmade islands in the South China Sea began as ostensibly civilian1058projects before being militarized.1059    Indeed, this issue was discussed in the Senate ratification1060hearings, with Dean Rusk testifying that ``informal forces'' would also1061be prohibited under the Treaty.\9\ (The question of Chinese influence1062over the canal was already discussed with concern by Senator Joe Biden1063during the mark-up hearings on the treaty.) Thus, the ostensible1064civilian character of the Chinese presence around the Canal does not1065mean China cannot be involved in violations of the treaty if, for1066example, the civilian presence includes agents of Chinese intelligence1067or security forces. It would hardly be surprising if these companies1068included agents of Chinese security services, but this is of course a1069factual matter.1070---------------------------------------------------------------------------1071    \9\ Supra note 3 at 539-40 (statement of Dean Rusk, U.S. Sec. of1072State).1073---------------------------------------------------------------------------1074Who Determines Neutrality Violations1075    The operations of Chinese companies have apparently not compromised1076traffic through the Canal in any way at this point. But the treaty is1077not merely violated when transit through the Canal is obstructed in1078wartime--indeed, such a treaty would leave the United States with no1079recourse until it is too late.1080    This leads to the question of who determines whether neutrality is1081being threatened or compromised. Under international law, states1082determine for themselves the meaning of their treaty obligations unless1083a dispute resolution mechanism is provided for. Unlike many other1084treaties, the Neutrality Treaty provides no clause referring disputes1085to some form of third-party resolution.1086    Instead, the treaty makes clear that each party determines for1087itself the existence of a violation. First, Article IV provides that1088each party is separately authorized to ``maintain'' the regime of1089neutrality. The Carter-Herrera Declaration, which is part of the full1090treaty, makes clear that both countries have ``the responsibility'' to1091``defend the canal against any threat to the regime of neutrality.''1092\10\ This is far from the language of the U.N. Charter, which requires1093an ``armed attack'' to trigger a right of self-defense--and even that1094language the United States interprets as allowing for preemptive self-1095defense. By contrast, the Neutrality Treaty makes explicit that the1096United States can act when it deems the neutral operation of the Canal1097threatened--that is, when the danger is still inchoate.1098---------------------------------------------------------------------------1099    \10\ Joint Statement of Understanding Issued Following a Meeting1100Between the President and Brigadier General Omar Torrijos Herrera of1101Panama (Oct. 14, 1977).1102---------------------------------------------------------------------------1103    The Senate ratification amendments also indicate that ``each of the1104two countries'' shall separately be entitled to defend the neutrality1105regime. Indeed, this is the only plausible interpretation, as a1106requirement of joint-decision making would allow Panama to veto any1107U.S. action and violate the neutrality regime with impunity. Similarly,1108the Senate's understandings accompanying ratification make clear that1109Article V allows each party to take ``unilateral action.'' Senator1110Jacob Javits said at the mark-up hearings that, while the word1111``unilateral'' is abrasive, ``we can decide that the regime of1112neutrality is being threatened and then act with whatever means are1113necessary to keep the canal neutral.'' \11\1114---------------------------------------------------------------------------1115    \11\ Hearings on Neutrality Treaty Before the S. Foreign Relations1116Comm., 95th Cong. 71 (1978) (statement of Sen. Jacob Javits).1117---------------------------------------------------------------------------1118How Neutrality Is Enforced1119    There is no doubt that the treaty authorizes the use of force1120against threats to the neutrality of the Canal. This was a matter of1121general consensus in the ratification debates and is made explicit in1122the conditions attached by the Senate to the ratification. The1123Statement of Understanding issued by the United States and Panama also1124makes this clear, adding the limitation that any use of force many not1125be directed against the ``territorial integrity or political1126independence of Panama.'' This phrasing means that while the treaty1127authorizes (but does not require) military force to remove threats to1128the neutrality of the Canal, such force can be used only as for as1129required to remove the threat. The treaty does not provide a basis for1130the reconquest of the Canal on a permanent basis.1131    The fact that the treaty allows the use of military force--in1132contexts when it would otherwise have been forbidden by international1133law--does not mean this should be the first recourse. Needless to say,1134any resort to arms should be not taken lightly and should only follow1135the failure of diplomacy. And as the Statement of Understanding notes,1136the treaty's allowance for military action does not substitute for the1137satisfaction of the ``constitutional processes'' of each party, which1138for us may, depending on the circumstances, require congressional1139authorization.1140    Senators, thank you for your attention.1141                  * * * * * * * * * * * * * * * * * *1142    The Heritage Foundation is a public policy, research, and1143educational organization recognized as exempt under section 501(c)(3)1144of the Internal Revenue Code. It is privately supported and receives no1145funds from any government at any level, nor does it perform any1146government or other contract work.1147    The Heritage Foundation is the most broadly supported think tank in1148the United States. During 2023, it had hundreds of thousands of1149individual, foundation, and corporate supporters representing every1150state in the U.S. Its 2023 operating income came from the following1151sources:11521153        Individuals--82 percent11541155        Foundations--14 percent11561157        Corporations--1 percent11581159        Program revenue and other income--3 percent11601161    The top five corporate givers provided The Heritage Foundation with11621 percent of its 2023 income. The Heritage Foundation's books are1163audited annually by the national accounting firm of RSM US, LLP.11641165    The Chairman. Thank you, Professor.1166    Our final witness, World Shipping Council CEO, Joseph1167Kramek, can discuss the challenges faced by container lines1168moving goods to or from America through the Panama Canal.1169    Mr. Kramek, you are recognized for your opening statement.11701171 STATEMENT OF JOSEPH KRAMEK, PRESIDENT AND CEO, WORLD SHIPPING1172                            COUNCIL11731174    Mr. Kramek. Thank you, Chairman Cruz, Ranking Member1175Cantwell, and members of the Committee.1176    My name is Joe Kramek. I am President and CEO of the World1177Shipping Council.1178    The World Shipping Council is the global voice of the liner1179shipping. Our membership consists of 90 percent of the world's1180liner shipping tonnage, which are container vessels and vehicle1181carriers. They operate on fixed schedules to provide our1182customers with regular service to ship their goods in ports1183throughout the world. Our focus is on sustainable, safe, and1184secure international ocean transportation.1185    Nothing could be more important to the U.S. economy and WSC1186member lines who carry the trade that supports the U.S.1187economy, than a sustainable, safe, and secure Panama Canal. As1188you have heard, using the Panama Canal to transit between the1189Atlantic and Pacific saves significant time and money. A1190typical voyage from Asia to the U.S. or East Coast can be made1191in under 30 days using the Canal, while the same journey can1192take up to 40 days if carriers must take alternate routes.1193    From a commercial trade perspective, the big picture is1194this: One of the world's busiest trade lanes is the Trans-1195Pacific. The Trans-Pacific is cargo coming from and going to1196Asia via the United States. Focusing in a bit, cargo coming1197from Asia and bound for U.S. Gulf and East Coast ports always1198transits the Panama Canal, similarly, cargo being exported from1199U.S. and East Coast ports, a large share of which are U.S.1200agricultural exports like soybeans, corn, cotton, livestock,1201and dairy also almost always transits the Panama Canal.1202    The result is that 75 percent of canal traffic originates1203in or is bound for the United States. Some examples include the1204Port of Houston ships--exports $14 billion in containerized1205trade to Asia. The Port of New Orleans exported $27 billion in1206seaborne trade to Asia, not all of which was on container1207vessels. The Port of New York and New Jersey exported $16.51208billion to Asia. And the Port of Savannah exported $13 billion1209to Asia.1210    Our member lines are the largest users of the Panama Canal,1211and we carry the bulk of this trade. Global ocean trade is1212always facing challenges, as you have heard, and the Panama1213Canal is no exception. We have talked about the drought in 20231214and the historic low water levels that it caused in Lake Gatun,1215which feeds the Canal locks, a unique system that is a1216freshwater feed as a result as contrasted to an ocean-to-ocean1217system, which the French tried and failed, but which is1218actually active in the Suez Canal.1219    These low water levels reduce transits from 36 transits a1220day to as low as 22 per day. Additionally, the low water levels1221required a reduction in maximum allowable draft levels or the1222depth of the ship below the water line which, for our members,1223reduced the amount of containers they could carry through the1224Canal.1225    This resulted in a 10 percent reduction in import volumes1226for U.S. Gulf and East Coast ports, with the Port of Houston1227experiencing a 26.7 percent reduction.1228    Looking forward, the volume of containerized trade coming1229into the United States remains at near record levels and1230continues to expand. 2024 numbers are just out, and the inbound1231trade to the U.S. expanded 15 percent, which is second only to1232the 17.5 percent inbound traffic we experienced during the1233pandemic-driven demand.1234    Just yesterday, the Port of Houston reported record-1235breaking trade volumes with an 8 percent increase. More1236broadly, WSC member lines have transported 1. (sic) trillion in1237goods to and from U.S. ports, which represents 64 percent of1238all seaborne trade, contributed 2 trillion in economic output1239to the United States, supported 6.4 million U.S. jobs, and over1240$442 billion in wages and salaries.1241    These goods are the clothes on your back, the shoes on your1242feet, and the phones likely in your hands or on your dais. WSC1243members look forward to working with the Committee on1244maintaining the sustainability, safety, and security of the1245Panama Canal.1246    It is a vital ocean artery critical to U.S. trade. The1247record volume of cargo that our members continue to carry1248demonstrates our commitment.1249    We appreciate the Committee's continuing support,1250commitment to the liner shipping industry, the U.S. maritime1251industry. And I look forward to answering your questions.1252    Thank you.1253    [The prepared statement of Mr. Kramek follows:]12541255         Prepared Statement of Joe Kramek, President and CEO,1256                         World Shipping Council1257Introduction1258    Chairman Cruz, Ranking Member Cantwell, and members of the1259Committee, thank you for the invitation to testify today. My name is1260Joe Kramek. I am President and CEO of the World Shipping Council1261(``WSC''). WSC is a non-profit global trade association whose goal is1262to provide a coordinated voice for the liner shipping industry in its1263work with policymakers, the public, and other industry groups with an1264interest in sustainable, safe and secure international transportation.1265    WSC members are the international container ocean carriers and1266roll-on roll-off vehicle carriers that make global trade possible by1267offering cost efficient and effective transport for everything from raw1268materials, food, and machinery, to consumer goods like clothes,1269furniture, and electronics.1270Liner Shipping--An Economic Engine of the United States1271    Shipping delivers 80 percent of global trade by volume, and liner1272ships carry 64 percent of all U.S. seaborne trade. In 2023 alone,1273global liner shipping contributed just over $2 trillion to the economic1274output of the nation--transporting nearly $1.5 trillion in goods to and1275from U.S. ports.1276    The liner shipping industry provides American importers and1277exporters with door-to-door delivery service for almost any commodity1278to and from roughly 190 countries.1279    Approximately 1,100 ocean-going liner vessels, mostly1280containerships, make more than 18,000 calls at ports in the United1281States during a given year. The liner shipping industry supports, both1282directly and indirectly, 6.4 million U.S. jobs; with wages and salaries1283paid to U.S. workers amounting to just over $442 billion.1284    WSC members' vessels calling on U.S. ports carry on average over12857,000 twenty-foot equivalents (TEU)--amounting to about 36 million TEUs1286of international trade transported into or out of U.S. ports.\1\ Our1287members' largest vessels can carry 24,000 TEU at one time.1288---------------------------------------------------------------------------1289    \1\ PIERS, S&P Global1290---------------------------------------------------------------------------1291    What makes liner shipping unique is that our vessels operate on1292regularly scheduled services with fixed routes--known as strings or1293loops--much like a bus or train service does. These regularly scheduled1294services provide our members' customers--U.S. importers and exporters1295including agricultural exporters and farmers--with a vessel in a1296particular port several times a week to receive and offload imports or1297load their exports.1298    In 2024, U.S. container import volumes remained at near record1299levels, continuing a trend of higher year-on-year volumes, with1300December marking only the third time in history when imports exceeded13012.3 million TEUs.\2\1302---------------------------------------------------------------------------1303    \2\ Descartes Global Shipping Report 2024, available at https://1304www.descartes.com/resources/global-logistics-shipping-report-resource-1305center1306[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]13071308    These record volumes demonstrate WSC member lines' sustained1309commitment to serving the international trade of the United States.1310Importance of the Panama Canal to the U.S. Trade and Economy1311    The Panama Canal connects the Atlantic and Pacific Oceans running1312some 51 miles across the Isthmus of Panama. The original locks were1313completed in 1914 and can handle ships with a draft of 40 feet, a width1314of 106 feet, and a length of 965 feet--ships of this size have a1315maximum capacity of approximately 4,500 TEU.\3\ The new expanded locks1316were completed in 2016 and can handle ships with a draft of 50 feet, a1317width of 160 feet, and a length of 1200 feet--ships of this size are1318known as Neopanamax vessels and can carry in excess of 14,000 TEU.\4\1319Uniquely, unlike other canals such as the Suez, the Panama Canal is fed1320by freshwater from Lake Gatun, and recent droughts have impacted canal1321water levels, resulting in reduced transits or vessel draft1322restrictions.1323---------------------------------------------------------------------------1324    \3\ https://transportgeography.org/contents/chapter5/maritime-1325transportation/evolution-containerships-classes/1326    \4\ Port Economics and Management Policy 2022, Theo Notteboom,1327Athanasios Pallis and Jean-Paul Routledge, available at Main Components1328of the Panama Canal | Port Economics, Management and Policy1329[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]13301331    The Panama Canal is strategically important to ocean liners1332servicing U.S. markets. The Canal handles about 5 percent of global1333maritime trade, and 75 percent of Panama Canal traffic either1334originates or is bound to the United States. Recently, more than 14,0001335transits through the Panama Canal were made in a single year.1336    Use of the Panama Canal reduces transit time and the associated1337fuel costs that would otherwise be incurred to transit between the1338Atlantic and Pacific Oceans. The reduction in transit time and distance1339facilitates trade between East Asia and the East Coast of the United1340States, as well as between Europe and the West Coast of South America.1341    An ocean carrier transiting from New York to Shanghai via the1342Panama Canal could complete this trip in 29 days using the Panama1343Canal, whereas not using the Panama Canal would require transit via1344Suez Canal or transiting around the Cape of Good Hope which would take134534 or 39 days, respectively.1346[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]13471348    Similarly, a vessel transiting from Peru to New York would take 91349days on average via the Panama Canal, and 26 days via Cape Horn.1350[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]1351    Container liners are the largest users of the Panama Canal,1352accounting for 20 percent-25 percent of all transits, with 2,7871353transits in 2023, and 2,773 transits in 2024.1354[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]13551356    75 percent of all cargo transiting the canal originates in or is1357destined for the United States. In 2024 alone, nearly 100 million long1358tons of cargo originating in the United States (of which 93 percent1359originated in the Gulf or East Coast), and over 57 million long tons of1360cargo destined for the United States (of which 87 percent was destined1361for the Gulf or East Coast) passed through the Panama Canal.\5\1362---------------------------------------------------------------------------1363    \5\ https://pancanal.com/en/statistics/1364    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]13651366    U.S. East and Gulf Coast imports and exports, by a large margin,1367are the most common goods transported through the Panama Canal.13681369    Exports to Asia from the U.S. Gulf and East Coast, also represent a1370significant market, for which the Panama Canal provides the fastest1371route.1372    In 2023, the Port of Houston exported $13.9 billion in1373containerized trade to Asia--the largest commodity being plastics (or1374resins); and while not entirely containerized, the Port of New Orleans1375exported $26.9 billion in seaborne trade to Asia. In that same year1376along the East Coast, the Port of New York and New Jersey exported1377$16.4 billion in containerized commodities headed for Asia. This was1378closely followed by the Port of Savannah with their containerized1379exports to Asia valued at $13.1 billion--the top containerized exports1380being cotton and vehicles.1381    The U.S. exported $71 billion in agriculture exports to Asia in13822023, with the major containerized ports on the Gulf and East Coast1383being Norfolk, New York and New Jersey, Houston, and Savannah.1384Panama Canal Administration, Tariff Schedule and Transit Options1385    The Panama Canal is managed by the Panama Canal Authority (PCA).1386The PCA is an autonomous legal entity with the exclusive responsibility1387for the administration, operation, conservation, regulation,1388maintenance and modernization of the Canal. The PCA sets the tariffs1389schedule to transit the Canal and makes the fees available to the1390public on its website.\6\1391---------------------------------------------------------------------------1392    \6\ Panama Canal Authority, Tariff Schedules, available at https://1393pancanal.com/en/maritime-services/maritime-tariff/1394---------------------------------------------------------------------------1395    Canal transit charges are based on, among other things, the size of1396the vessel, the lock to be used, and the cargo aboard the vessel. Prior1397to revising its tariff schedule, the PCA is required to provide1398interested parties an opportunity to participate in a public1399consultation process.1400    There are several ways to arrange passage through the Panama1401Canal--advanced booking, regular transit and auctions. WSC members,1402because of the nature of liner shipping being on scheduled routes,1403largely book their passage in advance--which can be done up to a year1404in advance.1405    Other types of shipping, such as product tankers or bulk vessels,1406tend to use ``regular transit'' because they receive their orders on a1407per trip basis (known as tramp shipping) and therefore can only book1408their canal transit slot once their destination is known. Vessels1409making regular transit books have their transit order determined by the1410PCA, and may have to wait several days until their transit slot is1411available.1412    Transit slots may also be arranged via auction. While typically1413more costly, the auction process does provide a unique service where1414vessels with high priority cargos, who do not have advanced booking1415slots, and do not wish to wait for slot availability, can bid for1416immediate availability. The PCA typically keeps two extra slots open1417per day for auction customers. In August 2024, the PCA implemented a1418new system for the larger Neopanamax locks--called long term slot1419allocation system (LoTSA)--which is a blind tender bid process starting1420at $200,000, that allows parties to bid for remaining Neopanamax slots.1421Panama Canal--Low Water Level Impacts 2023-20241422    The Panama Canal locks are fed by fresh water from Lake Gatun. The1423rainy season in Panama runs from May to November. However, in 2023,1424Panama experienced a severe drought, which led to historic low water1425levels in Lake Gatun, resulting in the PCA reducing transits through1426the canal from 36 to as low as 22 per day--ultimately reducing1427    yearly transits by 20 percent.\7\ In addition, the PCA reduced the1428maximum allowable draft (i.e., the vertical distance between the1429waterline and the lowest point of the vessel) from 50 feet to 44 feet1430for Neopanamax vessels, to conserve water.\8\1431---------------------------------------------------------------------------1432    \7\ Freightwaves Nov. 29, 2023, ``No reservation at the Panama1433Canal? Prepare for a long wait, available at https://1434www.freightwaves.com/news/no-reservation-at-panama-canal-prepare-for-a-1435long-wait1436    \8\ Panama Canal Authority, Advisory to Shipping No. A-20-20231437---------------------------------------------------------------------------1438    The low water levels had significant impacts on global shipping.1439The impacts on liner shipping resulted in an almost 10 percent1440reduction in import volumes for U.S. Gulf and East Coast Ports, with1441the Port of Houston experiencing a 26.7 percent reduction.\9\1442---------------------------------------------------------------------------1443    \9\ Descartes Global Shipping Report November 2023, Panama Drought1444Impacting East and Gulf Coast Ports, available at https://1445www.descartes.com/resources/knowledge-center/global-shipping-report-1446november-2023-us-container-import-volumes-down-from-october1447---------------------------------------------------------------------------1448    Overall, however, liner shipping experienced the least impact of1449all vessel sectors, because as discussed above, container liners booked1450advanced slot reservations which were honored by the PCA. The average1451wait time for container vessels transiting from North to South1452(Atlantic Ocean to the Pacific Ocean) did not exceed 1.5 days. For1453container vessels transiting from South to the North (Pacific to1454Atlantic) the average wait time did not exceed 1.8 days. Some liner1455companies also elected to move a portion of their loaded containers via1456rail across Panama and retrieve them on the opposite side, as a means1457of dealing with draft restrictions.14581459Facilitating Transshipment--Major Container Ports in Panama1460    Prior to the mid-1990s, Panamanian ports handled small container1461volumes--under 200,000 TEU--and most of those were for domestic use.1462However, between 1995 and 2002, a time corresponding to the initial1463privatization of ports, new container facilities were built in Panama--1464thereby starting the process of making Panama a major regional1465transshipment hub.1466    Transshipment is the process of transferring containers from one1467vessel to another at an intermediate port. This method is critical to1468container shipping as it optimizes shipping routes and reduces costs--1469allowing goods to be routed efficiently to their final destination. The1470main container terminal facilities on the Atlantic side of Panama are1471the Manzanillo International Terminals, and the Colon Container1472Terminal--privatized in 1995 and 1997, respectively. On the Pacific1473side of Panama, the major ports are the Port of Balboa (privatized in14741997) and the PSA Panama International Terminal (opening and privatized1475in 2011).1476    From 2002 through 2011 the Port of Balboa made significant gains in1477the number of TEUs handled--signaling the emergent transshipment1478function that Panama plays in the transpacific and west coast of Latin1479America trade. Thereafter from 2012 through today, ports in Panama have1480increased their transshipment capability with the PSA Panama1481International Terminal starting with an initial container capacity of1482250,000 TEU in 2012 and expanding that capacity to 2 million TEU in14832017.\10\ All told, collectively, container traffic handled at the main1484container ports in Panama exceeded 8 million TEU in 2021 and 2022. The1485drop in 2023 is attributed to the aforementioned drought.\11\1486---------------------------------------------------------------------------1487    \10\ Port Economics and Management Policy 2022, Theo Notteboom,1488Athanasios Pallis and Jean-Paul Routledge, available at https://1489porteconomicsmanagement.org/pemp/contents/part1/interoceanic-passages/1490container-traffic-panamanian-ports/1491    \11\ Id.1492    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]14931494    Container Traffic Handled at the Main Panamanian Ports 1995-20231495\12\1496---------------------------------------------------------------------------1497    \12\ Id.1498---------------------------------------------------------------------------1499Conclusion1500    Thank you for the opportunity to discuss WSC member lines'1501contributions to the U.S. economy and our industry's use of the Panama1502Canal. WSC members appreciate the Committee's continuing support and1503commitment to the liner shipping and maritime industry, and I look1504forward to any questions you and the members of the Committee may have.15051506    The Chairman. Thank you very much. We will now move to1507questioning.1508    I want to start, Chairman Sola, Commissioner Maffei: Are1509you aware of allegations from some vessel operators of1510disparate treatment, such as sweetheart deals or favorable1511rebates, by Panama for canal transits?1512    Mr. Sola. Thank you for the question, Mr. Chairman. We have1513become aware through some complaints by cruise lines that said1514that they were not getting a refund of their canal tolls. When1515we looked into this, we found a Panamanian Executive Order1516Decree 73, that specifically says that if a cruise line would1517stop at a certain port, that they could be refunded 100 percent1518of the fees. As far as I know, that is the only instance where1519that exists.1520    Mr. Maffei. We continue to look into it. But the cruise1521ships is the one area where we have found something that would1522fit that bill, I think, in general.1523    The Chairman. Some press coverage says the Panama Canal is1524nominally independent, even though it provides a large share of1525the Panamanian Government's revenue. Chairman Sola, briefly,1526can you describe how the FMC views the Canal authority and the1527Panamanian Government? Are they distinct entities or a single1528foreign government apparatus that controls the Panama Canal?1529    Mr. Sola. Mr. Chairman, our law is clear. It comes from the1530Merchant Marine Act of 1920 that there is only one entity. And1531in addition to that, that our predecessor at the Federal1532Maritime Commission was the U.S. Shipping Board, it was formed1533in 1916 in direct result of the Panama Canal. The very first1534chairman of that was George Washington Goethals, which was the1535very first administrator of the Canal. We look at it as one1536entity.1537    Mr. Maffei. Yes. If I might just add, Mr. Chairman?1538    The Chairman. Sure.1539    Mr. Maffei. It is sort of like the Georgia Ports Authority1540and the State of Georgia. The Georgia Ports Authority is1541clearly independent. It can do its own bonds, it has got1542independent governance. But ultimately, Georgia is responsible1543for it, the State of Georgia.1544    The Chairman. Right. So Panama was the very first Latin1545American country to join China's Belt and Road Initiative. And1546right now, China is building a fourth bridge across the Panama1547Canal for car traffic and light rail.1548    Chairman Sola, why should Chinese construction of a bridge1549near Panama City concern the United States?1550    Mr. Sola. Mr. Chairman, we all saw the tragedy that1551happened here in the Francis Scott Key Bridge incident and the1552devastation that had happened to Baltimore. We also saw1553recently what happened in the Suez Canal, where we had a ship1554get stuck in there. It is not only the construction of the1555bridge, but it is a removal of a bridge, as I understand it,1556called the Bridge of the Americas, it was built in 1961, and1557that would paralyze cargo traffic in and out of the Canal.1558    The Chairman. Panama also recently renewed the concessions1559for two container ports to a Chinese company, Hutchison Ports1560PPC. Of course, Chinese companies are controlled by the1561Communist Party. How does China use control of those ports for1562economic gain?1563    Mr. Sola. Mr. Chairman, I am a regulator, a competition1564regulator, and the Chinese ports that you are referring to, let1565me put them into scope. The one on the Pacific, the Port of1566Balboa, is roughly the same size as the Port of Houston. They1567do about 4 million containers a year. They have about 28 gantry1568cranes. The one on the Atlantic is the same as my hometown of1569Miami. They do about 1 million containers. So where Roger1570Guenther in the Port of Houston generates about $1 billion a1571year, and Hydi Webb in Miami does about $200 million, the1572Panama Ports company paid zero, zero for 20 years on that1573concession.1574    It is really hard to compete against zero. So I think that1575is our concern, our economic concern that we would have.1576    The Chairman. Commissioner Maffei, anything to add on that?1577    Mr. Maffei. Yes. I do, too, also think it is important. And1578I would point out that you do not have to stop at either port.1579It is not like these two ports control the entrance to the1580Canal. That is the Canal Authority that does control that.1581However, I think it is of concern. I would also point out that1582the Panamanian Government thinks it is of concern, too, because1583they are conducting their audit of those particular deals. But1584we remain very interested as well.1585    The Chairman. So Professor Kontorovich, I want to turn to1586the treaty. So President Trump has made important arguments,1587both the Chinese control over canal infrastructure and1588exorbitant fees charged for canal transits are violations of1589the Neutrality Treaty.1590    I want to highlight three specific provisions that you1591mentioned in your opening statement. Article IV of the1592neutrality treatment requires both the United States and Panama1593to establish and maintain ``A regime of neutrality''.1594    Article V limits any foreign control by providing, ``Only1595the Republic of Panama shall operate the Canal and maintain1596military forces, defense sites, and military installations1597within its national territory''.1598    And finally, Article 3(1)(c) requires that, ``Tolls and1599other charges be just, reasonable, equitable, and consistent1600with the principles of international law.'' In your opinion, as1601an expert in international law, could the facts discussed here1602be considered violations of the Neutrality Treaty in force1603right now between the United States and Panama?1604    Mr. Kontorovich. So I think, Senator, I think potentially1605they could, but it is impossible to say definitively without1606knowing more, in particular about the degree of Chinese control1607and involvement in these companies. I think it is important to1608note that these port operation companies that operate the ports1609on both sides, when they received their first contract, it was1610just a few months before Hong Kong was handed over to China.1611    In other words, they received them as British companies,1612sort of very oddly, just a few months before the handover. Now,1613of course, since then, Hong Kong has incorporated--been1614incorporated into China, has been placed under a Special1615National Security regime, and the independence of those1616companies has been greatly abridged. To say nothing of state-1617owned companies involved elsewhere in the Canal area, which1618raise significantly greater questions.1619    Additionally, I should point out that the understandings1620between President Carter and Panamanian Leader Herrera, which1621were attached to the treaty and formed part of the treaty,1622provide that the United States can, ``Defend the Canal against1623any threat to the regime of neutrality''. And I understand that1624as providing some degree of preemptive authority to intervene,1625one need not wait until the Canal is actually closed by some1626act of sabotage or aggression, which, as we heard from the1627testimony, would be devastating to the United States. But there1628is some incipient ability to address potential violations.1629    The Chairman. And your final point there leads to my last1630question, which is, if the United States determines that Panama1631is in violation of the treaty, what remedies, what is the range1632of remedies the United States would have for that treaty1633violation?1634    Mr. Kontorovich. So I think it may be shocking to people to1635hear today, but when one goes over the ratification history and1636the debates and discussions in this body over this treaty, it1637was clear that the treaty was understood as giving both sides,1638separately, the right to resort to use armed force to enforce1639the provisions of the treaty.1640    And it is not so surprising when one understands that the1641United States made an extraordinary concession to Panama by1642transferring this canal, which the United States built at great1643expense, and maintained, and operated, to Panama, gratis. And1644in exchange, it received a kind of limitation, a permanent1645limitation on Panamanian sovereignty, that Panama agreed that1646the United States could enforce this regime of neutrality by1647force.1648    Now, of course, armed force should never be the first1649recourse for any kind of international dispute, and should not1650be arrived at sort of rashly, or before negotiations and other1651kinds of good offices are exhausted. But it is quite clear that1652the treaty contemplates that as a remedy for violations.1653    The Chairman. Thank you very much.1654    Ranking Member Cantwell.1655    Senator Cantwell. Thank you, Mr. Chairman.1656    Mr. Kramek, I think costs are critical. When you think1657about it, we are here discussing costs. Why? Because consumers1658pay more when shipping costs are higher, whether their--or our1659farmers who are trying to export their products, as we saw1660during COVID, are literally our products getting left on the1661docks. And importers are paying more if shipping costs are too1662high.1663    So when we look at these incidents that we now see in our1664supply chain, and we had our own incident in Seattle where a1665container ship lost power and was careening toward our big1666Ferris wheel in the downtown, right next to our ferry terminal;1667luckily, some ferry, a passenger ferry vessels were able to1668push the tug from, you know, out of the direct path of severe1669devastation.1670    So now we mentioned Suez Canal, we mentioned Baltimore. We1671have our own Seattle experience. What do we need to do to make1672sure, on the cost side, that we are not--that we are making the1673right investments from a security level to make sure that these1674kinds of incidents that can do great harm do not happen?1675    And Commissioner Sola, since you were at U.S. Southern1676Command, what do you think we need to do to renegotiate or to1677have a conversation with the Panamanians about the security1678level that we think needs to exist in Panama with this close1679proximity?1680    And Mr. Maffei, this audit, will the audit lead to a1681discussion with Panama about those contracts? As I have said in1682my opening statement, I believe we should be very aggressive1683about U.S. involvement here and in Latin America. I think1684Panama represents one of our--the biggest U.S. supporters in1685that region. But we should engage to get this right, both on1686the cost side and on the security side.1687    So if I could just hear your comments on each of those.1688    Mr. Kramek. Thank you, Senator Cantwell. Well, certainly1689even one incident is unacceptable from a safety perspective1690that you are citing. Our members work tremendously hard with1691the International Maritime Organization, the U.S. Coast Guard,1692and other entities to try to have the safest operations1693possible. But accidents do occur. They are rare if you really,1694if you count the number of some 7,000 port visits a year. But1695again, one is unacceptable.1696    So continued investment, obviously, in U.S. infrastructure1697and a review, I mean, we have a lot of old infrastructure as1698the tragic incident in Baltimore illustrated, unfortunately,1699when we have these bridges that need a hard look to whether or1700not they need additional fendering systems, and the like. And1701investments in our ports and infrastructure can be helpful1702along those lines as well.1703    And for our members, I can assure you that they continue to1704invest in the latest technology. We have over 600 new ships on1705order with some of the latest technology in the world. So we1706are playing our role with this----1707    Senator Cantwell. And I want the U.S. to get a big portion1708of that. That is why we need to reinvigorate.1709    Mr. Kramek. Yes, ma'am.1710    Senator Cantwell. Commissioner Sola, what about just a new1711U.S. Southern Command, U.S. Government conversation with the1712Canal Authorities and the Government about the security level1713that we seek?1714    Mr. Sola. Thank you very much, Senator. First of all, the1715airborne wing that I am wearing today is decorative. I have not1716worn a uniform in 35 years. So this is my personal experience1717here.1718    I believe that the security of the Canal has always been1719understood to be provided by the United States. Panama does not1720have a military, and I always believe that there has been a1721close relationship with Southern Command that we would provide1722that. And it would be nice to see if we had a formalization of1723that in one way or another, because I do not believe that it is1724in the treaty at all.1725    Senator Cantwell. OK, so formalization of maybe a1726cybersecurity agreement? You see, I am thinking this is--you1727have accidents, and then you have larger cybersecurity issues1728that you just have to be on top of. And what I do not like1729about anybody that has a back door is, I am for the United1730States advocating, do not buy from people who have a government1731back door. Do not do it. Because what are you going to do? At1732some point in time, you are going to regret that.1733    Commissioner Maffei, what about this audit, and could we1734push Panama on these issues of looking at closer U.S.----1735    Mr. Maffei. You mean, yes----1736    Senator Cantwell.--infrastructure instead, particularly1737since, you know, the sea change here is like what everybody1738said? Like everybody thought this was Hong Kong, then it turned1739into China. We did not have an ambassador after that. Next1740thing you know, they have made more aggressive postures.1741    They are making aggressive postures everywhere. That is why1742the United States saying no government back doors in technology1743and getting five other technology nations and democracies to1744say the same thing and evangelize that every day is going to1745help us.1746    Mr. Maffei. Yes.1747    Senator Cantwell. And so is the investment. But what about1748getting the stevedoring business or some of that back into1749proximity under the audit?1750    Mr. Maffei. Well, it is the Panama Comptroller's Office and1751they are investigating, you know, contracts at Panamanian1752ports. And we do not have any jurisdiction over Panamanian1753ports, per se.1754    But your broader point, I think, is very, very important.1755While we were down there, both of us heard, I think, several1756times, that the Panamanians would--the ones we talked to1757anyway, would welcome U.S. companies coming in and doing a lot1758of this work. Frankly, their bids are not competitive with the1759Chinese bids. Frankly, they are not that existent because the1760U.S. companies can make more money doing things other places.1761    But even if they were existent, it is difficult to put1762competitive bids when the Chinese bids are so heavily1763subsidized by China. So you are absolutely right. This is a1764problem and it is a problem in many, many other areas of the1765world that we can get into if you want in subsequent questions.1766But that is the concern.1767    Senator Cantwell. I think my time has expired, but I think1768my major point is, let us be a big maritime powerhouse. Let us1769revitalize our supply chains, drive down costs for consumers,1770and secure what we need to secure.1771    Thank you, Mr. Chairman.1772    The Chairman. Thank you, Senator Cantwell.1773    And very quickly, Commissioner Maffei, you talked about the1774Chinese bids were heavily subsidized by the Chinese Government.1775What would China's incentive be to heavily subsidize those bids1776to undercut American companies and other companies?1777    Mr. Maffei. Yes, and so it is not a real short answer, but1778Senator, China has made no secret of its ambitious policies to1779gain influence at ports throughout the globe. It has invested1780in 129 ports in dozens of countries. It runs a majority of 171781ports. That does not include this Hong Kong company, right, so1782that is just directly, direct Chinese-owned ports.1783    So it has been a part of their Belt and Road Strategy,1784whatever you want to call it, the Maritime Silk Road for1785decades. So they believe that this influence, this investment1786in owning maritime ports is important to their economy.1787    The Chairman. Senator Fischer.17881789                STATEMENT OF HON. DEB FISCHER,1790                   U.S. SENATOR FROM NEBRASKA17911792    Senator Fischer. Thank you, Mr. Chairman. I would like to1793follow up on the ports and where we are on that. In 2021,1794Hutchinson was awarded those two ports, Port Balboa and Port1795Cristobal, in a no-bid award process. Can you tell me, does the1796United States have any authority or recourse with the Panama1797Canal Authority under our current agreement with Panama to re-1798bid those terminal concession contracts? And perhaps, Mr.1799Kontorovich, that is more in your purview?1800    Mr. Sola. Senator----1801    Mr. Kontorovich. Senator Fischer----1802    Mr. Sola. Both of those ports were redone for 25 years,1803until 2047, if I believe. And they have to pay $7 million, is1804what the ongoing rate is for the Port of Houston and the Port1805of Miami size concessions. As far----1806    Senator Fischer. And it cannot be rebid until after that1807date?1808    Mr. Sola. Well, I believe that that is what the1809Comptroller's Office is auditing, both of those ports and that1810contract. And that was done under the previous Panamanian1811administration. A new administration came in and they called1812for an audit of that contract immediately.1813    Senator Fischer. Mr. Maffei, you were talking about how to1814incentivize, perhaps incentivize companies from the United1815States to be able to participate in a bid process that does not1816seem to be reasonable. And do you think that the Panamanians1817would welcome viable alternatives? Are we in that position yet?1818    Mr. Maffei. Senator, let me first say that this is outside1819the scope of what the Federal Maritime Commission does. But1820having gone there, having looked at this issue very carefully,1821I think it would--it is very important. It was mentioned1822actually, Senator Cantwell just mentioned EXIM Bank programs.1823    So it is not like this does not happen. But it certainly1824has not been a huge priority of the United States to try to, if1825you will, match these bids, to create programs widely available1826to U.S. firms in order to put together more competitive bids in1827these countries, where some of their domestic laws, I am not1828sure about Panama, but some of their domestic laws actually1829require that you go to the lowest bidder sometimes, just as1830ours do.1831    So yes, I think if you are looking for places to do--U.S.1832policy to counter this, I think you definitely want to look at1833whether the United States should be, for strategic and economic1834reasons, investing in infrastructure, in important maritime1835locations all over the world.1836    China certainly has done that. And they have been doing it1837for 20 years, and it is a cow that has long left the barn.1838    Senator Fischer. You mentioned investing in infrastructure.1839I was at the Panama Canal in 2023, and I learned at that time1840about the loss of fresh water with each ship movement through1841the Canal.1842    You talked about the drought, sir, in your opening1843comments. Fresh water is vital to the workings with the Canal.1844How effective do you think investments in increasing that fresh1845water storage are? Are they happening? Are they viable? You1846touched on it briefly in your opening comments, but how do we1847see those investments happening so that we can have operational1848stability?1849    Mr. Maffei. Yes. That is a good question, a bit out of my1850purview, but I will say that there are several investments.1851There is water reclamation, pumping water up, et cetera, but1852the main thing, the main plan that the U.S. Army Corps of1853Engineers has helped the Panamanian Authority develop involves1854another basic expansion of bringing in even more water at an1855elevation that you could then use to continue the Canal. Now,1856there is a lot of issues with implementing that, not the least1857of which being indigenous people in those areas.1858    Not a huge number, but certainly towns, and thanks, and1859negotiating that and all sorts of other issues, just as if it1860was in the United States, there would be issues, but it is a1861very--it is viable. In that part of the world, you can make1862more fresh water available to make the Canal not have to be1863limited. However, it takes time, and there will at least be one1864more incidence of severe limitations before that occurs unless1865we get really, really lucky, and there could be more than that.1866    Senator Fischer. Thank you. Thank you, Mr. Chair.1867    The Chairman. Thank you. Senator Blunt Rochester.18681869            STATEMENT OF HON. LISA BLUNT ROCHESTER,1870                   U.S. SENATOR FROM DELAWARE18711872    Senator Blunt Rochester. Thank you Chairman Cruz, and1873Ranking Member Cantwell.1874    At the heart of this hearing is a fundamental question1875about how the U.S. will compete on the world stage and maintain1876our national security. These are the questions that will define1877the future of this country.1878    For American families to see lower prices and better1879economic opportunities, we have to meet this moment honestly1880and seriously, and I am proud to have joined Senators Cantwell1881and Blackburn to reintroduce the bipartisan Promoting Resilient1882Supply Chains Act, a legislation that I led and authored in the1883House.1884    This bill ensures that we have a national strategy to1885address our broken supply chains, whether it is a bridge1886collapse, a major global conflict, or unions striking for their1887rights. Interruptions and disruptions to our supply chains1888severely impact our economy. Our bipartisan legislation tackles1889this issue by elevating supply chains, like the disruptions at1890the Panama Canal, to be proactive and strategic.1891    It helps us understand how we strengthen our ties with our1892friends and allies instead of pushing them into the arms of our1893competitors. I agree with Ranking Member Cantwell that we1894should have a hearing on how we compete with countries like1895China, and I have grave concerns about China's global1896infrastructure investments and any cyber threats to the U.S.,1897addressing these are our national security interests.1898    With that, I would like to shift to my first line of1899questioning, and it is for you, Captain Kramek. It is no secret1900that the Canal has had issues due to droughts, nor is the1901increasingly frequent drought a new phenomenon. Do you believe1902the Panama Canal Authority did enough to anticipate the issues1903impacting the Canal's operation?1904    Mr. Kramek. Senator Blunt-Rochester, thanks for your1905question. They did the best, I guess, with the information that1906they had. I do not know that they anticipated a drought of that1907magnitude.1908    I would say, going forward, with what Commissioner Maffei1909just discussed about the development of a second reservoir to1910feed into Lake Gatun and the U.S. Army Corps of Engineers doing1911a feasibility review of that project, as well as some other1912projects that were mentioned, that that seems to be a good path1913forward in terms of resiliency of the Panama Canal and making1914it a viable waterway for 2050 and beyond.1915    Senator Blunt Rochester. I think part of the challenge is1916that it was recently started and time is of the essence. Did1917you think that the Canal Authority considered the obvious1918impacts from drought in its planning?1919    Mr. Kramek. Senator Blunt Rochester, I do not have that1920information on what they considered.1921    Senator Blunt Rochester. It is clear that the Canal1922Authority knew that this would have an impact on shipping and1923that enough had not been done to address it. Now that we are1924faced with this impact, what do you think the Canal Authority1925needs to do expeditiously to bring the Canal back into full1926authority and full operation?1927    Mr. Kramek. So they are back to full operation, is my1928understanding. Traffic is flowing well. But looking forward, I1929think it is taking a hard look at some of these infrastructure1930projects to make the Canal more viable, like I mentioned.1931    Senator Blunt Rochester. The Port of Wilmington is in my1932state. We are very proud of it. It is one of the leading1933importers of fruits. The delays through the Canal have an1934outsized impact on perishable goods like those that my port1935handles. Do you believe the Canal Authority can and should1936prioritize perishable goods? Or provide some other solution to1937support perishable goods? And anyone on the panel can answer1938that.1939    Mr. Maffei. Yes, ma'am. Let me address your question,1940because I am not sure it is my place to exactly answer it. But1941you are quite right. So one of the complaints that we have1942heard is from container shippers, mostly exporters that export1943goods, as you say, and many other commodities, too, are1944sensitive, either because of market conditions such as cotton,1945or because of actual perishability of the product, such as what1946you mentioned.1947    However, they are on container ships, and most of the cargo1948on the container ship is less time-sensitive. In the bidding1949process that the Panamanian Canal Authority developed in order,1950when they did have to ration these slots, it was a bidding1951process, and the highest bidder got the first slot, got the1952less of a delay.1953    The challenge there is every kind of commodity, and every1954kind of ship was bidding, so liquid natural gas, which is1955extraordinarily, all the cargo on that ship is both1956extraordinarily valuable, not that your agricultural1957commodities are not valuable, but compared pound for pound to1958the LNG, and very, very--I mean, it is out, you know, there is1959a--you are losing volume every delay. So they would far outbid1960the container shippers.1961    Now, whether or not there is something that can be done1962specifically to help these container, I am not sure we have1963been looking into that, but it does remain a large concern is,1964how do we figure out a way for these agricultural shippers who1965are, you know, not the main players on these ships, but part of1966it, an important part of it, particularly for the United1967States.1968    So you bring up a great question. I wish I had a better1969answer, but.1970    Senator Blunt Rochester. Thank you for your answer. I will1971be submitting some questions for the record because I know my1972time has run out, and I really want to understand also what we1973can do, as the United States, in terms of us being able to bid1974and be competitive in these bids. What can we do better?1975    So I will be submitting questions for the record. Thank1976you, Mr. Chairman, and I yield back.1977    The Chairman. Thank you.1978    Senator Sullivan.19791980                STATEMENT OF HON. DAN SULLIVAN,1981                    U.S. SENATOR FROM ALASKA19821983    Senator Sullivan. Thank you, Mr. Chairman, for this1984important hearing. And I appreciate the witnesses.1985    I have questions, for now primarily focused on Chairman1986Sola and Professor Kontorovich. So let us just--the setting in1987which you testified, two Chinese companies operate the two huge1988ports on both ends of the Panama Canal, and the concession for1989these ports were extended in 2021 for a 25-year period without1990any bidding, is that correct?1991    Mr. Sola. That is correct, Senator.1992    Senator Sullivan. OK, so it was clearly a sweetheart deal,1993correct?1994    Mr. Sola. According to the press releases, the company paid1995back taxes of $150 million.1996    Senator Sullivan. And the Panama Deputy Attorney General1997has now objected to that. That is my understanding. Is that1998correct?1999    Mr. Sola. The Comptroller of the country has asked for an2000audit of----2001    Senator Sullivan. But someone objected to it when it was2002going on, a lot in Panama?2003    Mr. Sola. A lot of people objected to it.2004    Senator Sullivan. So Chinese Communist Party officials are2005known to bribe other officials in countries all around the2006world. We know that, they do it all the time. No offense to2007Panama, but they do not have the greatest reputation of having2008officials who are not on the take.2009    So is there any evidence that the Chinese bribed people for2010this great concession? And if so, Professor, would that be a2011violation of the treaty? Let us assume we find evidence that2012Chinese Communist Party officials bribed Panama officials for2013this sweetheart deal, would that be a--and I think it is2014probably likely because the Chinese do this everywhere--would2015that be a violation of this treaty?2016    Mr. Kontorovich. So in itself, that would not be a2017violation. What would be a violation is actual threats to the2018operation of the Canal.2019    Senator Sullivan. OK.2020    Mr. Kontorovich. However, to the extent that the Chinese2021Government was involved in procuring these contracts, it2022strongly, it provides sort of additional support for the notion2023that these companies are serving some kind of governmental2024interest. And that would not be a violation itself.2025    Senator Sullivan. All right. Let us say--I do not want to--2026sorry to interrupt.2027    Mr. Kontorovich. There would be circumstantial evidence to2028support it.2029    Senator Sullivan. Let me get to the issue of threats. Let2030us assume the PRC, the PLA invaded Taiwan, or invaded the2031Philippines, or went to war somewhere in the South China Sea,2032and we were surging our Navy to the Indo-Pacific through the2033Panama Canal. Are the companies now controlling both sides of2034the Panama Canal, the Chinese companies, subject to the PRC's2035National Security Laws that mandate cooperation with the2036military, with state intelligence agencies? Does anyone know2037that?2038    Professor, do you know that?2039    Mr. Kontorovich. They are subject all the time.2040    Senator Sullivan. Do you know that----2041    Mr. Kontorovich. They are subject to those--they are2042subject to those laws all the time by virtue of being Hong Kong2043companies. And you know, they face, of course, consequences for2044not complying with the wishes of the Chinese Government, and2045one of the companies----2046    Senator Sullivan. And would not that be a--would not that2047be a violation of the treaty? And isn't that a huge risk to us2048right now that the Chinese, the PLA invaded----2049    Mr. Kontorovich. So that is a threat to be in the2050neutrality.2051    Senator Sullivan. They invaded Taiwan, invaded the2052Philippines. They could go to these two companies saying, hey,2053shut it down, make it hard, sink a ship in the Canal. And2054wouldn't they be obligated to do that under Chinese law if they2055were ordered to by the PLA or the CCP?2056    Mr. Kontorovich. I do not know if they would be obligated,2057but certainly the People's Republic of China would have many2058tools of leverage and pressure on these companies. That is why2059the treaty specifically says that we can act not just to end2060actual obstructions to the Canal. We do not have to wait until2061the Canal is closed by hostile military action. That would be a2062suicide pact. That would be catastrophic for us.2063    But rather that we can respond at the inchoate, incipient2064level to threats. And then this is up to the President to2065determine whether this is significantly robust to constitute2066any threat.2067    Senator Sullivan. So Professor, aren't we kind of walking2068up to the idea of a suicide pact, because we have got two big2069Chinese companies on both ends of the Panama Canal who, if2070there is a war, INDOPACOM, Taiwan that involves us and China,2071these companies would be obligated to do the bidding of the2072Chinese Communist Party and PLA? I mean, isn't that--aren't we2073kind of walking up to a very significant national security2074threat already?2075    Mr. Kontorovich. Certainly there is a threat. And I think2076what makes the action of the Chinese Government so difficult to2077respond to, but important to respond to, is that they conceal2078this in sort of levels of gray, right, without direct control.2079    Senator Sullivan. Yes. Well, let me ask you on that topic,2080this is my last question, Professor. Let us assume that we find2081out, and again, it would not be surprising. I think you can2082almost assume it, that these two companies have Chinese spies2083or military officials within the ranks of the employees of the2084companies. Let us assume we found that out, that somehow that2085becomes public. But I do not think it is a big assumption. It2086is probably true right now.2087    So you have spies and military personnel within the ranks2088of these two companies that are controlling both ends of the2089Panama Canal. For you, Professor and Chairman Sola: would not2090that be a blatant violation of Article V of the Neutrality2091Treaty if that were true; which probably is true?2092    Mr. Kontorovich. Yes, I do think----2093    Senator Sullivan. What is your answer, Professor?2094    Mr. Kontorovich.--it would be a--yes, I do think it would2095be a clear violation. As Dean Rusk, Former Secretary of State2096Dean Rusk said at the ratification hearings, informal forces2097can violate Article V as well as formal forces. It is a clear--2098--2099    [Crosstalk.]2100    Senator Sullivan. And Chairman Sola, do you agree with2101that? Is there any evidence of Chinese spies or other nefarious2102Chinese actors embedded in these companies?2103    Mr. Sola. Senator, we have no information of that.2104    Senator Sullivan. OK.2105    Mr. Sola. And that is not under the purview of the2106Federal----2107    Senator Sullivan. But you agree that would be a violation2108of Article V of the Neutrality Treaty?2109    Mr. Sola. I do.2110    Senator Sullivan. Thank you. Thank you, Mr. Chairman.2111    The Chairman. Thank you. Senator Baldwin.21122113               STATEMENT OF HON. TAMMY BALDWIN,2114                  U.S. SENATOR FROM WISCONSIN21152116    Senator Baldwin. Thank you. Commissioner Maffei, good to2117see you, thank you for being here today.2118    Mr. Maffei. Thank you.2119    Senator Baldwin. I am very concerned about China's large2120and growing influence in the world's infrastructure network. A2121company from Hong Kong operates two ports in the Panama Canal,2122one on each end. And while the company is not Chinese state-2123owned, it is subject to China's national intelligence law as we2124have been discussing. Moreover, a Chinese state-owned entity is2125currently building a bridge over the Panama Canal.2126    But the Panama Canal is just one example of how far China's2127influence stretches. Their dominance in maritime, logistics,2128and shipbuilding sectors lessens competitions--competition2129creates supply chain risks, and creates opportunities for2130surveillance and information gathering. In order to facilitate2131the movement of goods throughout the world, it is essential to2132have a secure and level playing field, which we currently do2133not. Chinese current practices do not allow for that.2134    The United States trade representative recently2135investigated China's practicing--practices in the commercial2136shipbuilding sector under Section 301, and recently concluded2137that their dominance is a burden to United States commerce.2138    One, a few decades back, we were the dominant country in2139commercial shipbuilding. Last, or in 2023, we built five2140commercial ships, and China built over 1,700 according to2141that--according to that investigation.2142    So what policies would you recommend to prioritize growth2143of the United States influence in the maritime and logistics2144sector to compete with China and level the playing field?2145    Mr. Maffei. I will answer in less than a minute.2146    Senator Baldwin. Yes.2147    Mr. Maffei. Senator Baldwin, it is very good to see you2148again. And we were colleagues for one term in the House, and I2149appreciate that.2150    I think the best I can answer in the short term is to amen2151to everything you said. And as an illustration, Senator2152Sullivan was talking about Hutchison Ports. That is actually2153the same company that runs terminals on both ends of the Canal.2154I am concerned about that.2155    However, if we want be concerned about that, all of us2156should lose a lot more sleep than we are losing, because if2157there are spies there, then there might be spies at other2158Hutchison Ports. And there are other Hutchison Ports in almost2159every part of the world. They own the largest container port in2160the United Kingdom, Felixstowe, which is responsible for nearly2161half of Britain's container trade.2162    They control major maritime terminals in Argentina,2163Australia, the Bahamas, Germany, Indonesia, Mexico, Myanmar,2164the Netherlands, South Korea, and Tanzania. If owning and2165managing adjacent ports means that China somehow like has2166operational control or strategic control over the Panama Canal,2167they also have it over the Suez, the Singapore Straits, the2168Mediterranean Sea, and the English Channel. That is just one2169aspect of what you were talking about.2170    That does not include the shipbuilding, heavily subsidized,2171such that now, I believe over half of new ships that are in the2172companies that belong to the World Shipping Council are coming2173from China, not because these are bad companies, but because2174they are undercutting other things. And it is a problem that2175has been going on for 20 years, which makes it very difficult2176to answer your question. It is a long answer.2177    This is not a problem that occurred last week. This is not2178something that President Trump identified. This was going on2179all of President Biden's term, but all of President Trump's2180first term. It has been going on for decades and decades2181through both U.S. Republicans and Democrats as President.2182    The only thing I can say is I echo what Ranking Member2183Cantwell said, and I think others of both parties have echoed2184it, that we need some sort of overall maritime strategy. We2185have to acknowledge that this is part of our national security.2186That economic resilience is extraordinarily important. And I2187believe this is the greatest country in the world. I think if2188we start countering some of these efforts, we can do it, but it2189has to become a national priority.2190    And part of the challenge is, we are talking about outside2191the borders of our U.S., investing outside the borders of our2192U.S. does not make a very good campaign ad, but it may be2193necessary to secure, particularly with such an aggressive, and2194frankly on this, open strategy that China has had.2195    Senator Baldwin. Thank you for that answer. I know my time2196is now short.2197    I will allow Professor Kontorovich to answer this for the2198record. But Professor, I would like to ask for your help in2199finding productive actions we can take to overcome some of the2200challenges that are being discussed today. I am confident that2201we can find bipartisan solutions to pursue.2202    It is my view that we should strengthen our relationship2203with Panama through mutually beneficial actions. For one, we2204should have a fully staffed embassy. The United States went2205without an ambassador to Panama from 2018 to 2022, largely due2206to partisan gridlock in the Senate confirmation process.2207    So what additional strategies would you suggest the U.S.2208pursue to encourage Panama to enhance its security relationship2209with us, the United States of America, rather than China? And2210how can we leverage the strength of the American private sector2211to encourage more investment in the important infrastructure2212projects where China currently has a strong presence, in fact,2213dominance?2214    Mr. Kontorovich. So thank you. So my understanding of the2215Chinese advantage is that to the extent that they are using--2216willing to use their government wealth to consistently underbid2217contracts, they have an advantage that cannot be beat. And thus2218leaving these kinds of issues to contracting is going to put2219American companies perpetually at a disadvantage.2220    You know, I think one potential action would be to make2221clear to Panama that based on these changes that have occurred2222over the years, increasing Chinese control over Hong Kong, the2223passage of the national security law, the Belt and Road2224Initiative, the military-civilian integration doctrine of2225China, that contracts with Chinese-based companies are2226considered suspect and incompatible with the neutrality regime2227of the treaty. That would at least give American companies and2228other truly private companies a fighting chance.2229    The Chairman. Thank you. Senator Blackburn.22302231              STATEMENT OF HON. MARSHA BLACKBURN,2232                  U.S. SENATOR FROM TENNESSEE22332234    Senator Blackburn. Thank you, Mr. Chairman. Yes or no,2235quickly, for the three of you, just for the record. Is the2236China investment into the Panama Canal a direct threat to U.S.2237national security? Yes or no?2238    Mr. Sola, I will start with you down the panel. Thank you.2239    Mr. Sola. To the economic security, yes Senator.2240    Mr. Maffei. Yes.2241    Mr. Kramek. I do not have that information as an Industry2242Trade Association, Senator.2243    Senator Blackburn. OK. All right. And we have talked some2244about the Neutrality Treaty, which I think is of concern to all2245of us. And as I have looked at this, and I appreciated Senator2246Sullivan's questioning on this, we look at how President Trump2247is going to push forward with getting this issue addressed. And2248we have heard a good bit about this from our shippers that are2249looking at what happens coming out of the port of Memphis.2250    And I think that the Government of Columbia learned a2251lesson last week that we are not going to go soft on some of2252these issues. And when you look at the fact that the U.S. is a2253primary user, it is the primary user of the Panama Canal. And2254we are also Panama's largest provider of direct foreign2255investment. I think those two things should be significant. Our2256foreign investment into Panama is $3.8 billion annually. This2257is why people are looking at this issue.2258    So Professor, let me come to you on this, and we thank you2259for joining us remotely. Should not our investment in Panama be2260contingent on their adherence to that Neutrality Committee,2261ensuring that Panama and Panama alone would control that canal?2262    Mr. Kontorovich. So certainly that is an action we can take2263to enforce the treaty and to enforce our understanding of the2264treaty. That is an action we can take even without the treaty.2265So to the extent that the United States considers the Chinese2266operation of facilities around the Canal to be against its2267interests, it can certainly condition aid and economic2268relationships on the exclusion of China.2269    Now, the United States has typically not worked that way.2270And that may be one of the reasons why, as we heard in the2271testimony, China has basically made inroads everywhere. But for2272that, we do not even need the treaty. Certainly, if we consider2273the treaty to be violated, measures like that, far short of the2274Armed Force authorized by the treaty, would be reasonable to2275start a----2276    Senator Blackburn. And Professor, let me interrupt you2277there, because I do want to move on. I think that as you look2278at how China has used the Belt and Road Initiative, and we have2279talked some about that this morning, we know that they have2280pushed the digital yuan.2281    And I am concerned that given their control over much of2282that infrastructure around the Canal, that they would attempt2283to force U.S. shippers, or our allies to bypass the dollar and2284use the digital yuan as they are in other countries, where they2285are practicing debt diplomacy, and where they are expanding the2286Belt and Road Initiative.2287    So Chairman Sola, could you speak for a moment about the2288potential for fee manipulation with the CCP? Because as I2289mentioned, we are hearing a good bit about that, we are hearing2290that the toll structure disadvantages U.S. companies, that the2291Canal Authority has begun charging millions of dollars to skip2292the queue.2293    And these fees put many bulk shippers in an adverse2294position. And these bulk shippers have a huge impact on ports2295along the lower Mississippi River. And these exorbitant fees2296are there unless you are going to face delays at the Canal. And2297then the impact of hearing these Chinese companies would2298preference the yuan as opposed to the dollar.2299    Mr. Sola. Thank you, Senator. The fees that I think we are2300looking at, or we have been looked at, and the reason that we2301went there was because of the auctioning of the slots. And so2302what Panama did is they had a smaller percentage, maybe 202303percent allocation, and then they moved it up to 30 percent and230440 percent because it became a moneymaker for them. So as they2305were doing this----2306    Senator Blackburn. OK, and let us--let me interject here.2307The auctioning of the slots gives these the right to skip the2308queue?2309    Mr. Sola. Yes, ma'am.2310    Senator Blackburn. OK. So just for the record there,2311continue.2312    Mr. Sola. So the auctioning of the slot--under maritime2313law, it is first come, first serve. But Panama has always put a2314certain percentage aside. And they started to put more and2315more. So we got a lot of complaints. We got a lot of complaints2316from LNG carriers that paid $4 million to go through. And we2317got a lot of complaints from agriculture that did not have the2318money to pay to go through because their goods were going to--2319their goods were going to go down.2320    So if you look at the financial statements, I am a nerd, I2321look at financial statements of everybody, but the Canal2322increased the amount of revenue that they had from about $5002323million to $1.8 billion in the last three years just because of2324those fees, so this is what is very concerning to us and for2325the American shipping.2326    Senator Blackburn. And have you seen a tendency to2327preference the digital yuan over the dollar?2328    Mr. Sola. I have heard of the digital yuan, and I have also2329heard of it used in international shipping as a currency.2330    Senator Blackburn. OK.2331    Mr. Sola. It is something that I would say that we have an2332eye on because we have a digital shipping exchange rule coming2333up.2334    Senator Blackburn. Yes.2335    Mr. Sola. But we will keep monitoring it.2336    Senator Blackburn. OK, thank you, Mr. Chairman.2337    The Chairman. Thank you. Senator Klobuchar.23382339               STATEMENT OF HON. AMY KLOBUCHAR,2340                  U.S. SENATOR FROM MINNESOTA23412342    Senator Klobuchar. Thank you very much, Mr. Chairman. And I2343cannot help but think as we debate this issue of the Panama2344Canal, while it is important, if you want to look at what is2345happening right now as in the middle of the night last night2346when an executive order was issued by--well, not an executive2347order, just a memo by the Acting Budget Director which put a2348pause on all Federal funding for not only NIH research of2349cancer trials, and not only HeadStart, and people are in a2350panic in calling our offices, it is also a severe problem for2351trade and America's innovation.2352    Freezing all Federal funding already granted to improve2353port and freight infrastructure through the Port Infrastructure2354Program seems to me a major problem we should be addressing if2355we are talking about America's shipping interests.2356    But I will go to the topic at hand. The Panama Canal is a2357critical trade corridor that allows for American farmers, other2358businesses to reach international customers. I care a lot about2359the shipping issue. As many of you know, Senator Thune and I2360joined forces two years ago to pass a very important bill that2361took on the international shippers in terms of giving more2362power to the Maritime Commission in taking on the rates they2363were charging businesses, and farmers, and manufacturers in2364America, and it actually immediately had an impact because they2365knew what was coming their way, and continues to. I will get to2366that in a minute.2367    But I do want to raise with you, Commissioner Maffei, do2368you know of any instances where the United States has been2369singled out, or treated unfairly under the Neutrality Treaty in2370the operation of the Canal?2371    Mr. Maffei. I do not. I would add that one of the reasons2372why saying the U.S. is disproportionately affected by raises in2373canal fees, and other kinds of fees at the Canal, is because2374the United States disproportionately utilizes the Canal.2375    Senator Klobuchar. Right. and that is something that would2376affect the total number of fees, and we know it is a critical,2377critical trade corridor and want to continue to use that2378corridor and be treated in a fair way. But I do think one of2379the things that has not been brought out as we look at the2380periods of congestion or reduced capacity at the Canal which we2381know have occurred, like we saw with last year's drought can2382delay shipments, increase transportation costs, potentially2383leading to higher consumer prices.2384    Commissioner, what steps can be taken to minimize2385disruptions and prevent cascading costs for consumers during2386periods of operational strain?2387    Mr. Maffei. At the Panama Canal?2388    Senator Klobuchar. Yes.2389    Mr. Maffei. I mean, the main thing is that companies,2390importers, and exporters need to make sure that they have very2391resilient supply chains. Depending on any one sea lane is2392awfully risky in this very, very difficult to predict world. It2393is one of the reasons why the Panama Canal is so important. In2394fact, it may be a bigger reason than a particular transit or2395line transit is the fact that it is there in case something2396goes wrong on the other end of the world, say for instance, the2397Suez Canal, right.2398    And it is that lack of redundancy right now that has been a2399big problem, and frankly, one of the reasons why shipping costs2400have gone up, because if you have to go all the way around2401Africa, or go all the way around the Americas, you are taking2402fewer ships, so yes.2403    Senator Klobuchar. Thank you. Mr. Kramek, in your testimony2404you described how drought reduced imports at U.S. ports. Do2405these reductions affect prices for American consumers, or could2406they?2407    Mr. Kramek. Yes.2408    Senator Klobuchar. OK, thank you. I love that short answer.2409Ocean Reform Act, I mentioned, back to you, Commissioner, has2410that law improved the ability of shippers to have unreasonable2411charges waived or refunded by ocean carriers? As we know, this2412has been a major problem for our carriers, which can translate2413into prices, and talk about how it has empowered shippers to2414file complaints against unreasonable practices by the carriers.2415    Mr. Maffei. Yes.2416    Senator Klobuchar. But the shippers, of course, you know2417what I mean. I do not mean the carriers themselves, I mean the2418people that are trying to do business and sell their stuff so--2419--2420    Mr. Maffei. American exporters, American importers.2421    Senator Klobuchar. American exporters?2422    Mr. Maffei. Absolutely. Look, I do not have a lot of time,2423but yes, it has a tremendous effect. We have seen instances of2424waiving or forgiving detention demurrage fees or even refunding2425go way up. We have seen settlements go up with the major2426carriers. We have seen a lot more cases filed. So many, in2427fact, that we have had to take--we have had one--we used to2428have one administrative law judge, now we have three and they2429still have too many cases, so a huge impact.2430    Senator Klobuchar. Mm-hmm. And are you concerned--I will2431just end where I started--are you concerned about freezing2432funding that has already been granted for port and2433infrastructure improvement right now, given what we are trying2434to do with American ports so we can make stuff here and ship it2435instead of having it all come to us?2436    Mr. Maffei. That is a complicated question. I will just say2437at the Federal Maritime Commission, we try to do an awful lot2438with less. As the New York Times reporter has pointed out, we2439are funded at approximately our entire annual budget, about 12440hour of the container ship industry's profits during the COVID2441pandemic. Because of that legislation and subsequent2442appropriations, that is more like 68 minutes now, it is still a2443fraction of it. I do not know where, and I do not believe the2444chairman knows where we----2445    Senator Klobuchar. Well, of course, we only found this out244612 hours ago at midnight from an unknown bureaucrat. So our2447hope is that we will be able to give you those numbers to show2448what will happen to infrastructure if we simply freeze funding2449for all of these things across America. Thank you.2450    The Chairman. Thank you. Senator Budd.24512452                  STATEMENT OF HON. TED BUDD,2453                U.S. SENATOR FROM NORTH CAROLINA24542455    Senator Budd. Thank you, Mr. Chairman. Again, thank the2456panel for being here. It is good to see you all.2457    Mr. Sola, the November 2024 report from the U.S.-China2458Economic and Security Review Commission, it details China's2459efforts to deepen ties with countries across Latin America and2460the Caribbean.2461    So Mr. Chairman, I would like to ask unanimous consent to2462enter that report into the record. Mr. Chairman, if that is OK.2463    The Chairman. Without objection.2464    [The report referred to can be found on the www.uscc.gov2465website.]2466    Senator Budd. OK, all right. Thank you. All right. I think2467it is important to view the Chinese Communist Party's, CCP,2468activities in the Panama Canal Zone in the context of the CCP's2469broader efforts to further access Latin America's markets, and2470obstruct American interests in our own backyard.2471    Mr. Sola, would you agree with that, that you see the CCP2472activity, and hopefully, to interrupt America's interests in2473the region?2474    Mr. Sola. Definitely an economic interest, Senator.2475    Senator Budd. I was able to travel there a few years ago to2476see this firsthand, and see the CCP's encroachment. So in your2477experience, are there noticeable differences in port operations2478when they are controlled by Chinese companies and financed or2479backed by Chinese loans, and if so would you explain that?2480    Mr. Sola. We have a wonderful example because we have a2481U.S. port there, SSA, out of Washington State, and I actually2482worked on the development of many years ago, and helped2483develop. That used to be a former United States Navy Submarine2484Base, and we converted that.2485    As far as the two ports that we have, they are completely2486different. One is a major infrastructure footprint and also a2487container port that is moving four million containers a year.2488That is almost--I mean, that is really a phenomenal amount--2489that is more than Miami, Fort Lauderdale, and you probably have2490to add Tampa, and a little bit of Jacksonville in there to get2491that type of volume.2492    And on the other side, we have a very small port, but it is2493a very strategic port on the Atlantic. So how are the2494operations done? Yes I--I do not know how they do not make2495money. I mean, if you want to come to--right down to it, is2496that they have been operating port for 20 years, and they say2497that they have not made any money, so they have not been able2498to pay the Government, that is what concerns me. Because I2499believe that we are on a level playing field with the American2500ports.2501    Senator Budd. I appreciate that, Mr. Kramek. What would be2502the consequences for U.S. trade and for the U.S. economy if2503access to the Canal was suddenly revoked or significantly2504decreased for U.S. shippers?2505    Mr. Kramek. It would be pretty catastrophic, Senator. And2506we have a good example. I mean, we have experienced that with2507the denial of the Red Sea right now being able to use that, and2508as Chairman Maffei said, having to go around, down the2509Continent of Africa 40 percent longer voyages, at significantly2510more costs in crew, maintenance, fuel, and even emissions.2511    Senator Budd. Do you have a ballpark on the difference if2512they are able to transit the Canal versus going around South2513America?2514    Mr. Kramek. I do not have a figure, but I can tell you in2515days, and it depends.2516    Senator Budd. 30 days?2517    Mr. Kramek. So it is about 30 days if you can go through2518the Canal, about 40 days right now because we cannot use the2519Suez Canal, if you want to go from, say, Asia, Asia cargo going2520to the U.S. East Coast.2521    Senator Budd. Thank you. Mr. Sola, another question. China2522is pouring billions of dollars into infrastructure projects all2523over Central and South America. And one example is in Ecuador,2524China made a deal with them to fund a $3.4 billion2525hydroelectric dam. There are 17,000 cracks already, and there2526is a lot of corruption. Ecuadorian officials have been2527imprisoned on some bribery charges.2528    Using that as an example for the region, the strategy of2529China is clear, because to take--and this is in the words of an2530Ecuadorian minister--the strategy of China is clear that they2531want to take economic control of countries. In Panama, for2532instance, it is about 7.7 percent of their GDP, as I understand2533it.2534    So using Ecuador as an example, should Congress be2535concerned that China could extract significant leverage over2536Panama, given the outsized role and revenue from the Canal in2537their finances? If you could turn your microphone on.2538    Mr. Sola. Yes, Senator, it very well could. And I believe2539that we are in a very fortunate position now with Secretary2540Rubio, who knows the area very well, and also knows China.2541    Senator Budd. Thank you very much. Mr. Chairman.2542    Mr. Maffei. Senator, can I just say. You should also look2543at the Port of Chancay in Peru. It will fit that pattern----2544    Senator Budd. Thank you very much.2545    Mr. Maffei.--of Chinese investment.2546    Senator Budd. Thank you.2547    The Chairman. Thank you. Senator Kim.25482549                  STATEMENT OF HON. ANDY KIM,2550                  U.S. SENATOR FROM NEW JERSEY25512552    Senator Kim. Thank you, Chairman. Thank you to all of you2553for coming out here.2554    I will be honest with you. When I talk to some of my2555constituents in New Jersey about this, they mostly understand2556this issue right now because of the words of President Trump.2557So if you do not mind, I just kind of wanted to start there and2558work backward.2559    So Chairman Sola, you know, President Trump said, quote,2560``China is operating the Panama Canal. We did not give it to2561China, we gave it to Panama, and we are taking it back.'' I2562guess I just wanted your assessment there. Is China operating2563the Panama Canal?2564    Mr. Sola. Chairman--I mean, Senator Kim, I never discredit2565anything that President Trump says.2566    Senator Kim. Yes, he----2567    Mr. Sola. He has a different briefing book than I do.2568    Senator Kim. Mm-hmm.2569    Mr. Sola. What I can say is that the Panama Canal is2570operated, as far as I know, by the ACP, the Panama Canal2571Authority, and they are very efficient at operating the Canal2572and the throughput that they are able to do.2573    Senator Kim. So you are saying from your knowledge, you do2574not know of any reason to believe that China is operating the2575Panama Canal, from the knowledge that you have?2576    Mr. Sola. From the knowledge that I have on whether the--2577Senator, what we have here is the Panama Canal Authority is the2578authority where people will pay into the Panama Canal.2579    Senator Kim. Mm-hmm.2580    Mr. Sola. I think that what--if you will allow me to--if a2581company is able to operate both ports----2582    Senator Kim. Oh. I see. So you are talking about Hutchison2583Ports, right?2584    Mr. Sola. Yes.2585    Senator Kim. So we are talking about like Balboa and2586Cristobal Ports, right.2587    Mr. Sola. And they are subsidized. They are subsidized.2588    Senator Kim. They are subsidized? I guess my question to2589you is, does Hutchison Port actually control the locks of the2590Canal?2591    Mr. Sola. No.2592    Senator Kim. Does it control, directly, the entrance to the2593Canal?2594    Mr. Sola. Both ports are in operational control of the2595Canal. In order for those ports to operate, the Canal has to2596give them a special permit. And the reason is because when they2597are bringing a ship in or bringing a ship out, they block the2598traffic of the Canal every single time.2599    Senator Kim. I see, so----2600    Mr. Sola. They have to have pilots, two pilots that are2601going on?2602    Senator Kim. Is Balboa or Cristobal Port under the2603jurisdiction of the Panama Canal Authority?2604    Mr. Sola. They have been given by the Panama Government,2605the concessions. However, they are in the operational range of2606the Panama Canal, they are reframing.2607    Senator Kim. Does that make them--does that make those two2608ports under the jurisdiction of the treaty?2609    Mr. Sola. Let me say this, because I was in Panama when the2610treaty--when the Panama Canal was turned over.2611    Senator Kim. Mm-hmm.2612    Mr. Sola. We did not just give back the Panama Canal. We2613also gave back all the land and all the water on the entryway2614to it, and including what we had was a lot of military bases2615along there. So as soon as you come out of the Panama Canal,2616and I invite you to come there, I will be happy to take you.2617    Senator Kim. Well, let us--we do need to have----2618    Mr. Sola. But as soon as you come out of the lock you run2619into Corozal, which was a former military base. Corozal is run,2620not by Panama--by the Panama Canal Authorities, it is run by2621the Panama Government. After you pass that, you run into the2622Port of Balboa. So what I am trying to say is when we talk2623about the Panama Canal Authority, they operate only where the2624ships go up, and go down, and come out.2625    After that, you have where the pilots--we have where the2626pilots will take you on the boat and take you off. So is it2627operational control of the Panama Canal? Yes, because the2628pilots are the ones that have to bring you in there and bring2629you out. And again, every time a ship goes into one of those2630ports, they block the traffic of the Panama Canal.2631    Senator Kim. Yes. Well, look, I guess I wanted to just ask2632you directly then, what is your assessment of the Panama2633Canal's Authority, you know, in terms of their ability to2634administer the Canal?2635    Mr. Sola. I think the Panama Canal Authority and their2636independence is, if you read my opening statement and my2637written statement, they have done a fantastic job. And Panama2638has been running the Canal for 25 years. They have promoted--2639they have given $28 billion to the coffers of the Government in2640those 25 years.2641    In the 25 years that the two ports that we call--the two2642ports, they have contributed zero. So I do not understand why2643Panama would allow those two ports to operate and take--and put2644into jeopardy what they have and--the operations that they do2645have in the Canal.2646    Senator Kim. I want to just end here on this because I2647thought you had a really poignant point in your written2648testimony, where you said, ``We must protect the independence2649of the Panama Canal Authority. Any efforts by other interests2650in Panama to diminish the independence or professionalism of2651the authority must be stopped.''2652    And I would just say, venture to say, as we talk about this2653as a committee, as a Government, that we should try to follow2654those same words as well. You know, we try to have nuance and2655precision with the words that we use, otherwise, it very much2656looks like some of what we talk about is going to be perceived2657as undermining the Panama Canal Authority. And you said that2658you warned that would be something that would actually boost up2659China's capacity in the region.2660    So I just ask, as we deal with this going forward, that we2661be precise about it and try to make sure we are talking about2662exactly what we are addressing.2663    Mr. Sola. And specifically, what I was talking about is the2664Board of Directors of the Panama Canal. I mean, are some of the2665Board of Directors on the Board of Directors of the ports that2666we have in question? So when you look at the annual report of2667those two ports, they have a hidden--or not a hidden, it2668basically says that they have local partners that are not2669identified. So I believe that if we had those identified, we2670would know more.2671    Senator Kim. Yes, and more precision there. Thank you so2672much. I yield back, Mr. Chair.2673    The Chairman. Thank you. Senator Schmitt.26742675                STATEMENT OF HON. ERIC SCHMITT,2676                   U.S. SENATOR FROM MISSOURI26772678    Senator Schmitt. Thank you, Mr. Chairman. I want the2679Committee to just imagine that Taiwan is under siege. The CCP,2680determined to crush Taiwan's resistance and prevent a U.S.2681response, activates a multi-prong strategy, leveraging its2682control over global ports and shipping infrastructure. At the2683Panama Canal, one of America's most vital trade arteries2684handling 40 percent of U.S. container traffic.2685    Chinese-controlled ports at both ends suddenly close. Ships2686carrying food, oil, and military supplies are turned away2687because of technical difficulties, paralyzing the global2688economy. Gasoline prices soar, supermarket shelves empty, and2689supply chains collapse within days. China's state-owned ZPMC,2690which supplies 80 percent of U.S. port cranes, has equipped2691their cranes with cellular modems that create explosive2692vulnerabilities--exploitable vulnerabilities.2693    These cranes at U.S. ports mysteriously malfunction,2694halting critical operations. Factories close, millions lose2695their jobs, and the economy grinds to a halt. While this2696scenario may seem hypothetical, it is entirely plausible.2697    Therefore, the Canal must remain neutral, and the U.S. must2698ensure the CCP does not encroach on our vital economic and2699national security interests. In 2017, Senators Markey, Schatz,2700and Rubio urged President Trump to address China's aggressive2701maritime actions. Their warnings apply today, as China's2702growing control over critical infrastructure, ports, and2703strategic waterways, like the Panama Canal, pose an2704unacceptable threat.2705    America is sleepwalking into a carefully laid Chinese trap.2706Fortunately, people like President Trump are not falling for2707it. I am glad he is raised this issue. This dangerous2708complacency must end. That is why, last week, I introduced a2709Senate resolution to safeguard the Panama Canal from Chinese2710influence. It calls on Panama to expel Chinese entities in2711foreign control and honor its neutrality under the 19772712transfer agreement. The cost of inaction is too great.2713    I want, and I will offer this up for anyone, but I think2714the biggest concern here is this Belt and Road Initiative, we2715have talked about it creating a debt trap, which is true, and2716building a bridge in Bangladesh is very different than this. I2717mean, there are reports of the CCP building airports, and then2718when people are critical of the CCP, all of a sudden flights2719are canceled.2720    Controlling a grid--they can turn it off, and they can turn2721it off, and there is just no way on God's green earth, that2722China can control the Panama Canal. So however you want to2723define it, and I hope my Democrat colleagues this is an issue2724that affects America, and it should not be partisan. And I hope2725they are not blinded by the fact that President Trump has come2726out so boldly on this. But we should not tolerate this.2727    The witnesses have stated they have operational control. We2728can get into the semantics of the Port Authority versus the2729control, but operational control of the Panama Canal is real by2730the CCP. The witnesses have also stated that a Chinese company2731got a sweetheart deal, a no-bid contract for control--2732operational control ultimately of these ports.2733    So I guess I want to ask, because I talked too long and do2734not have much time for questions, but Professor Kontorovich, I2735do want to ask you. As it relates to the treaty, I am glad2736Senator Cruz--or Chairman Cruz, has called this up, because2737there are real concerns about treaty violations here.2738    What are the most blatant? What are the most obvious? Is it2739the unfair--is the fact that we are being charged more? Is it2740the fact that these are Chinese-owned companies that are2741controlled by the CCP? What are the top two or three reasons2742you would argue that they are, in fact, in violation of the2743treaty?2744    Mr. Kontorovich. So again, I think the different--I think2745the charges and fees are less of an issue because they do not2746discriminate across countries. We pay more because we use more,2747but it is not nationally discriminatory. The presence of2748Chinese Government--of Chinese companies, especially Chinese2749State Governments but not limited to them, do raise serious2750issues and concerns for the neutrality of the treaty.2751    And I should point out, in relation to some of the earlier2752questioning, the Canal, for purposes of the Neutrality Treaty,2753is not limited just to the actual locks of the Canal and the2754transit of ships through the Canal. According to Annex 1,2755Paragraph 1 of the Treaty, it includes also the entrances of2756the Canal, and the territorial sea of Panama adjacent to it.2757    So all of the activities we are talking about are within2758the neutrality regime, the geographic scope of the neutrality2759regime in the treaty.2760    Senator Schmitt. So the most--I am out of time--but the2761most dead on hit here is the treaty specifically prevents2762foreign operations, and that is exactly what we have.2763    Mr. Kontorovich. Yes. So to the extent these companies are,2764in fact, de facto controlled by China, this is something that2765could threaten the neutrality regime of the treaty.2766    Senator Schmitt. OK.2767    Mr. Maffei. Senator, may I make a point of clarification?2768    Senator Schmitt. Sure.2769    Mr. Maffei. You said that we all stated that China had2770operational control. I do not believe that China currently has2771operational control over the Panama Canal. I am not sure if2772any----2773    Senator Schmitt. No, I did not say all of you did. I said2774one of the witnesses.2775    Mr. Maffei. OK. Well, let me say this: I did agree that2776there was a threat posed by this ownership. I do think, though,2777that if your assumptions are correct, you are way understating2778the problem. That is right, understating the problem, because2779they also control the Suez Canal, and the Mediterranean Sea.2780And I actually have to admit, I am a little confused as to why2781some of the senators asking this question, Senator Blackburn,2782are not more concerned about the biggest port in the United2783Kingdom being run by the Chinese.2784    Piraeus in the port nearest Athens, one of the biggest2785ports in the Mediterranean is not just run by a Chinese-linked2786company; it is run directly by a Chinese-owned company. And I2787was there. So you are on to something. But if you are just2788focusing on Panama, that is only part of it.2789    Senator Schmitt. No, I agree with you. I think the2790difference here is that we gave it away. Huge mistake. Both2791Missouri Senators voted for it back then, huge mistake. But the2792one thing we got out of it, the one thing we got out of it was2793a guarantee of neutrality. And that is the issue here. Thanks.2794    The Chairman. Thank you, Senator Curtis.27952796                STATEMENT OF HON. JOHN CURTIS,2797                     U.S. SENATOR FROM UTAH27982799    Senator Curtis. Thank you, Mr. Chairman. Great hearing. I2800appreciate this opportunity today. I would like to touch on2801something I have not heard discussed today, and that is,2802unfortunately China is not the only hostile country that2803exploits Panama to endanger our national security. Iranian2804vessels under the Panamanian flag registry have been a problem2805for many years.2806    Chairman Sola, can you explain how Panama has enabled Iran2807to evade our sanctions?2808    Mr. Sola. Yes. Thank you, Senator. About a year ago, when2809we were having this drought issue, there was also a lot of2810focus on Iran and how they were funding Hamas and the Houthis2811because they were attacking the Red Sea. What we found was, or2812what the United States has found is that Iranian vessels are2813sometimes flagged by Panama in order to avoid sanctions so they2814can sell the fuel that they have, and then can have--they can2815take that money and use it as they wish.2816    Panama, at the time, had a very complicated process to2817deflag the vessels. There was an investigation. There was an2818appeals process. By the time we would--OFAC or Treasury would2819go ahead and identify one of those vessels, by the time that2820they were doing the appeals, and stuff like this, they had2821already changed flags to somewhere else.2822    So when we went to Panama, we met with the Panamanian2823President. And I must say, we were very impressed because2824that--he was 30 minutes late, but he was breaking relations2825with Venezuela at the time because the election was the day2826before.2827    We explained to him the situation. The very next day, we2828met with the Maritime Minister, with U.S. Embassy personnel,2829and Panama actually adjusted their appeals process to make it2830more expedient. So if the United States or OFAC would to come2831and say that this Iranian vessel is avoiding sanctions, now we2832have a process in place to go ahead and do that. And 53 vessels2833were deflagged because of that meeting.2834    Senator Curtis. OK. If you would, keep working on that,2835because that is a big deal. Thank you for that answer.2836    Let me also go to--I mean, we have hammered on this a2837little bit--and I have heard several times some of you2838acknowledge that the interest from China is an economic threat2839to us. But let me come back to this defense. I think we have2840asked a number of times in different ways, but let me go back2841to the analogy of, if China puts a blockade on Taiwan and we2842are trying to move ships into that area quickly, can any of you2843say this is not just an economic threat to the United States2844but a defensive threat as well?2845    Mr. Maffei. At the FMC, it is not our area of expertise. We2846will leave that to the military experts. I will just say that2847to me, an economic threat is a military threat.2848    Senator Curtis. Sure.2849    Mr. Maffei. I mean, indirectly, but it is.2850    Senator Curtis. I just, I know there are panels----2851    Mr. Maffei. But in terms of--you know, if terms of what you2852are directly asking----2853    Senator Curtis.--in reference to economics.2854    Mr. Maffei. We at the Federal Maritime Commission do not2855have that area.2856    Senator Curtis. Chairman.2857    Mr. Sola. I would say that my biggest concern is that when2858a Chinese contractor gets a contract in Latin America, they2859usually put a clause in there that they bring their own workers2860in from China. And these workers are housed in camps outside,2861and these camps will have guards on them, and they will have--2862sometimes they--in Panama, for example, they have barbed wire2863around the camps.2864    So we really do not know who is in the camps, and I think2865that, to me, causes me more concern, on who is in the camp and2866what are they doing. These are actually sometimes thousands of2867workers that are brought in, for example, for a bridge or to do2868a port, or something like this, to undercut the local labor.2869    Senator Curtis. Along those lines, let me just talk about2870dollars from China spent. We far outspend China in the region,2871yet if you look back on when Panama switched diplomatic2872recognition from Taiwan, and we had comments from the2873President, Taiwan is an inalienable part of Chinese territory,2874it coincided with economic investment from China in the region.2875Is that something, overall, in addition to the Canal, we need2876to watch?2877    Mr. Sola. Yes, we definitely need to watch economics, and2878we need to--the United States has left a void there. We really2879have not been competitive in Panama, and hopefully, we can be.2880    Senator Curtis. OK. And I have got just a few seconds. So2881this bridge, we have brought this up a couple of times, the2882possibility of this bridge being damaged and closing the Canal.2883But it reminds me of going through TSA, a suitcase going2884through the TSA, is there any reason that China cannot watch or2885do whatever they want from this bridge to get their intel from2886these containers, and does that concern anybody?2887    Mr. Sola. Well, it definitely concerns Southern Command2888because they have brought it up on numerous occasions that2889there could be some sort of surveillance or something like that2890on the bridges.2891    Senator Curtis. OK. I yield my time. Thanks, Chairman.2892    The Chairman. Thank you, Senator Moreno.28932894               STATEMENT OF HON. BERNIE MORENO,2895                     U.S. SENATOR FROM OHIO28962897    Senator Moreno. First of all, thank you, Chairman, for2898putting this hearing together. I think it is very timely.2899    Mr. Sola, I heard you say, it kind of rang in my head, you2900have navigated the Canal a hundred times. I mean, that is a--2901you have a pretty good experience. I want to turn the testimony2902in a little bit different direction. You obviously have been2903there that much. Tell me, for the testimony, what are the2904people of Panama, you have obviously probably been to my home2905country, where I was born, in Colombia, what is the sentiment2906among the people for how they feel about America?2907    Mr. Sola. Senator, I have many friends, family, and2908professional relationships in Panama, and the bond between the2909United States and Panama is very deep. It is almost like the2910United States and Great Britain, for example. The Panamanians2911love baseball. They love basically a lot of the same things2912that we do. The people are absolutely wonderful.2913    Senator Moreno. Now, they have suffered through2914catastrophically bad leaders, especially today. The President2915of Colombia, Petro, we do not have to go down that path. But2916here is what I would ask you. Obviously, we understand about2917shipping, we understand the issues of trade, and that has been2918well documented. I think the treaty is clearly in violation,2919there is no question about that.2920    In fact, Mr. Chairman, I would like to see us speedily get2921to a point where we get a resolution allowing the President to2922renegotiate or cancel that treaty. But here is my question to2923you. The Darien Gap is a stone's throw away, here to Annapolis,2924maybe not even a little bit further than that. It used to be2925this insurmountable piece of geography that separated Colombia2926from Panama, but it is now used as a massive human and drug2927trafficking operation.2928    The presence of multinational gangs, multinational criminal2929organizations in that area, primarily, I will suggest funded by2930the Chinese--you do not have to comment on that--but what is2931the impact of these transnational gangs, this increase in human2932and drug trafficking, doing to maritime activity along the2933Canal?2934    Mr. Kramek. Senator, the Darien Gap is one of the most2935dangerous tracks that I think anybody can do. And thank God for2936the new policy that we have on migrants, and people coming into2937the country because countless people have been harmed, died, or2938even--you know, very bad things happen to them through there.2939    On transnational gangs, I mean, anytime there is money in a2940black market, they are going to fill that void. So hopefully,2941as I understand it, the Darien Gap is not being utilized very2942much right now because people are coming to the United States2943and now cannot come in.2944    Senator Moreno. Right, but the point is: What is the impact2945on maritime activity there? In other words, security, Mr.2946Kramek, has got to be an issue for your members. And having2947that increased presence of transnational gang activity, and2948drug trafficking, you are talking about billions and billions2949of dollars. Cocaine production in Colombia is at an all-time2950high. What impact does that have on your members?2951    Mr. Kramek. Senator, it is something we work hard on every2952day. The World Shipping Council has partnered with the World2953Customs Organization and 58 customs agencies throughout the2954world. We ran actual operations to give data that we have on2955our supply chain and where there are anomalies to those customs2956officials and law enforcement authorities so they can act on2957it.2958    A lot of the flow for commercial vessels, not into the2959United States, but to the European Union, is coming from the2960transshipment point in Panama, where our containers are being2961exploited and contaminated. And so we are working hard as we2962sit here right now on that problem.2963    Senator Moreno. And of course, the point I am making is2964that China's influence there, whether we want to make it a2965technical question as to what control means, it does not2966matter. When you have Chinese companies operating on both sides2967of the Canal, having influence there through drug trafficking,2968they bring basic chemicals into Mexico, which makes its way2969here, as fentanyl, you have enormous Chinese influence in2970Central and South America.2971    And Mr. Sola, I go back to you with my final question. Do2972you think, fundamentally, the problem here is that America has2973just failed to engage properly with Latin America?2974    Mr. Sola. Yes, I do. I believe that we have not had a2975presence there for long enough. The State Department has2976designated countless past Panamanian presidents for corruption,2977but we have not had the DOJ go ahead and get any convictions on2978those. I think that if we did have a conviction one way or2979another, I think that that would change the narrative quite2980considerably.2981    Senator Moreno. And just one quick follow up. So if the2982U.S. took control back of the Canal, if that territory was2983completely controlled and protected by the United States of2984America, what influence could we have in solving a variety of2985problems, the shipping ones that we have talked about, but also2986having a U.S. presence with military backup there in Panama,2987preventing transnational organizations, preventing human2988trafficking, preventing drug trafficking; wouldn't that be2989celebrated among the free world as something that would be2990absolutely a net huge positive to that area?2991    Mr. Sola. Well, I can say this--that is probably one of the2992top contraband areas in the world, just because of its2993geographical location and the amount of containers they move.2994So I think anytime we can lower the amount of contraband being2995distributed around the world, we would be doing a good service.2996    Senator Moreno. So Mr. Chairman, like I said earlier, we2997ratified that treaty here in the U.S. Senate. I would love to2998see us deratify it.2999    The Chairman. Thank you, Senator Capito.30003001            STATEMENT OF HON. SHELLEY MOORE CAPITO,3002                U.S. SENATOR FROM WEST VIRGINIA30033004    Senator Capito. Thank you, Mr. Chairman. Thank you all for3005being here today, really interesting hearing.3006    In the year 1913, the West Virginia--or the Governor of3007West Virginia said that the Panama Canal would be critical to3008the state's coal industry. What was then true is still true3009today, 11 percent of the cargo that goes through that canal is3010coal.3011    Chairman Sola, thank you for your military service and for3012your great insight into this, into Panama. I know that the3013draft restrictions have been brought up already today, but the3014fact that bulk goods, like West Virginia coal, and other forms3015of energy cannot always be fully loaded to go through the Canal3016is a major problem.3017    I know they are investing about $900 million to try to make3018the Canal more resilient, but what ways can we ensure that our3019state's energy exports are actually getting where they need to3020go, when they need to get there?3021    Mr. Sola. That is a very good question, Senator, and the3022bulk and the coal are probably the most affected by the draft3023restrictions that we have. The container ships and the3024passenger vessels have a much lighter draft. We talked3025extensively with the Canal Authority and also with the3026Government of Panama on how they need to add water to the--3027fresh water to the system.3028    They are losing about one or two percent a year, so if they3029continue this way, the Panama Canal will be severely diminished3030by up to maybe 40 percent by 2050, so fresh water is definitely3031the key to this. I know that they are working with the Army3032Corps of Engineers. We have seen some of those studies, and3033they have put a variety of options out there for the Canal3034Authority to go ahead and take advantage of it.3035    Senator Capito. Let me ask, this probably quite simple3036question: Why would they be in opposition to putting more fresh3037water in the Canal?3038    Mr. Sola. I do not believe--well, the Canal Authority is3039not----3040    Senator Capito. It sounds easy. So maybe it is not quite as3041easy.3042    Mr. Sola. The Canal Authority isn't, the issue that they3043have is maybe 10 years ago, environmentalists kind of3044restricted what their watershed was of the Canal, and that law3045has just recently been overturned. So now the Canal actually3046has access to the watershed. What they have to do is a major3047infrastructure project to go ahead and pull that water in. At3048the same time that they are saving up or raising the fees for3049the major infrastructure project, they are giving more and more3050money to the national coffers, so it is up to about $2.43051billion right now, and they are saving for the infrastructure3052project.3053    Senator Capito. Is that the $900 million infrastructure3054package like I referenced? Is that the same project?3055    Mr. Sola. I believe it is. Is it the Rio M deal?3056    Senator Capito. Yes.3057    Mr. Sola. Yes.3058    Senator Capito. So along with that, the issue going through3059the Canal, not just the offloading or--I mean, it is hard to3060offload coal out of a bulk container. I mean, that is not an3061easy thing to do if you can even do it. Is this whole thing3062about congestion pricing kind of--nobody here from New York,3063are they; but you know, the congestion pricing at the Canal3064where you can outbid and skip the line, so then the line can be3065like 14 days later even if you were at the front of the line.3066    This is probably what Senator Sheehy, is wondering like:3067How did I get in front of him, kind of question.3068    So how is that working? And is that fair? And who makes the3069judgment? That, to me--you are talking about corruption, that3070to me sounds like you could really be padding somebody's3071pockets here to be able to jump the line and have a significant3072effect.3073    Mr. Maffei. Yes, Senator, it is an auction system. It is3074being utilized more and more, and it is what I was most3075concerned about, and continue to be most concerned about--not3076necessarily right now because the unusual draft restrictions3077are not going on. But if there is another water shortage, the3078regular toll revenue has increased in terms of the Canal.3079    But what has really increased is the special revenue that3080they get from various fees and from this auction thing. That3081revenue has gone up about close to 300 percent for other3082transit services, so that is a huge amount. It also, it is3083analogous to me in some ways. I know a lot of the ocean carrier3084companies got a lot of heat when they were making more money3085during the--you know, during the--like the congestion during3086COVID.3087    Well, this is sort of similar. They are providing fewer3088transits, and at the same time, they are making more money3089because of a market mechanism. Though, you know, talking about3090the Chinese Communist Party, well, this is the other way, this3091is capitalist, but it is a different way of allocating space3092that they are more--they are utilizing more and more to make3093more and more money.3094    Now, I have no idea, to the best of my knowledge the money3095is going back to the Panamanian Government. I do not know of3096any reason to doubt that, but it is--that is a big cost. And as3097I said before, it does disadvantage certain kinds of cargos3098if--because they might feel that they do not--you know, they3099are on a ship which does not prioritize its time passage as3100much as other kinds of cargos. I do not know how that affects3101coal.3102    Senator Capito. All right, thank you very much.3103    The Chairman. Thank you. Senator Sheehy.31043105                 STATEMENT OF HON. TIM SHEEHY,3106                   U.S. SENATOR FROM MONTANA31073108    Senator Sheehy. How long would it take China to block the3109Canal for our usage if they decided to do it? I know you are3110not military experts, but I think you have been in the Canal3111100 times, you are all experts on the industry. If they wanted3112to deny our usage of it, how long would it take them to do it?3113    Mr. Sola. Senator, I can say that prior to the year 2000,3114the Canal had a quick reaction force that kind of took all3115possibilities into consideration, either a ship be installed in3116the Canal or to be able to move one out. I do not know what3117those capabilities, or what the planning for that would be.3118    Senator Sheehy. So effectively, we do not have a ready3119response. But if China----3120    Mr. Sola. I am sure Southern Command does.3121    Senator Sheehy. I do not like the--I do not like the3122mindset that has kind of pervaded that, there is this far-off3123hypothesis that someone someday could----3124    Mr. Maffei. Well, Senator, you are not--you are talking--3125you are not talking military experts. We are here because it is3126commercial reasons, if this is not----3127    Senator Sheehy. Yes. But this is not a military question. I3128mean, if he has driven the Canal 100 times, and you are3129maritime experts, you know, a couple of years ago, as you3130remember, I think it was the Ever Given jackknifed in the Suez3131Canal. That is not a military operation. That is a ship that3132turns sideways. So if China chose to, how fast could they close3133the Canal to our usage?3134    Mr. Maffei. Well, they could probably do a similar thing,3135but it would more be an act of terrorism than it would be3136because they have facilities there. Most of this discussion has3137involved the economic threats that China is bringing up because3138of the Belt and Road Initiative and having these investments in3139other countries.3140    But yes, I mean, it is not hard to close off a waterway.3141The Panama Canal is actually quite vulnerable in terms of3142infrastructure. It is not--you know, this is not a fort or3143militarily reinforced location.3144    Now, that is--you are getting to the end of my knowledge of3145that. But no, it would not take long, but I do not know what it3146has to do with--it is not accelerated because they have people3147out of their port unless--I mean, unless you believe that they3148are, in theory, it is easier to infiltrate those ports with3149Chinese spies than it is other kinds of things. But that is3150totally out of my purview. That is more assignment for----3151    Senator Sheehy. I do not think it is out of your purview. I3152think the reality is the Canal is an economic engine. It is3153also a national security engine, and I appreciate--I am not3154trying to be combative or setting you in traps. I am just3155trying to ask a commonsense question, which is, we can dance3156around, I am not an expert in this, I am an expert in that, but3157the Canal is vulnerable, as we have stated.3158    Mr. Maffei. I guess, Senator, I am just saying why would3159they--why would bother with a military-like operation when they3160can get what they want with non-military means?3161    Senator Sheehy. Exactly.3162    Mr. Maffei. If they can have influence in other ways.3163    Senator Sheehy. That is the point of the question. That is3164point of the question.3165    Mr. Maffei. OK.3166    Senator Sheehy. As we segregate ourselves artificially in a3167way that they do not. We segregate ourselves. Well, let us talk3168about military, let us talk about intelligence, let us talk3169about economics. They do not--China does not work that way. It3170is a whole-of-government approach. They do not draw delineation3171between an economics discussion and a military one. And their3172attack may not look like Pearl Harbor.3173    It may look like an everyday ship that decides, you know,3174it pulls into the locks and blows itself up, and now the locks3175are nonfunctional for our usage and we cannot support an inter-3176ocean fleet transfer. And our ability to defend it, as you3177referred to, Chairman, is now inhibited by the fact that we no3178longer have the military infrastructure around the Canal that3179we did just as recently as 1999.3180    So from a commercial perspective, do the shipping companies3181have concerns over the security of the narrow waterways? We3182have got Strait of Malacca, we have got Suez Canal, we have got3183Gibraltar, we have got Panama, is that a concern that is thrown3184around the boardrooms of the largest shipping corporations in3185the world?3186    Mr. Kramek. Senator, I think it is something to think about3187every day. I mean, really, it has drawn into sharp relief with3188the Red Sea. That it was, what I call, a pink flamingo. Like,3189there are black swans that just come up, and there is, well,3190there are pink flamingos that you can see, but you do not act.3191But no one really thought a whole lot that one of the most3192important waterways in the world could be denied. And moreover,3193that it could be denied for such a sustained period.3194    The good news is that--and denied, I might add, by a3195disaffected non-state actor of Bedouins running around with3196rocket launchers who also managed to beat us in a 20-year war3197in Afghanistan.3198    But my point in saying all this is we have--we are just3199debating operational control of the Canal, yet it seems very3200clear to all of us that a very simple act can debilitate the3201Canal and eliminate our ability to use it in a matter of3202minutes, with no warning. And we have no ability to intervene3203or stop that. To me, that means we do not have operational3204control of the Canal.3205    Thank you, Chairman.3206    The Chairman. Thank you. I am told Senator Young is on his3207way, so I am going to ask a couple of questions and give him a3208few minutes to get here.3209    Chairman Sola, you have a deep understanding of Panama and3210the Canal from personal experience, in addition to your work on3211the Federal Maritime Commission. One example of China's3212influence with the Panamanian Government was the effort to3213seize land near the Pacific end of the Canal to build a new3214Chinese embassy, including your land. Can you describe your3215personal experience, including how Panama ignored property3216rights as it sought to appease China with the new embassy?3217    Mr. Sola. Yes, Senator. About 10 years ago, the maritime3218business of my family expanded tremendously, and we were given3219a concession to build a marina on the Pacific area of Panama.3220We also incorporated a cruise component to that. We brought the3221cruise companies to Panama. This would have been the very first3222cruise port in the Pacific.3223    We spent millions of dollars on consultants with Atkins3224Global, Moffatt and Nichol, all the best consultants in the3225world, and everything was fine. When Panama turned over to Belt3226and Roads, they told us that that concession was going to be3227nationalized.3228    Then what they did is they rescinded our concession for the3229property, they--that we were going to build the cruise port for3230$30 million, U.S. private funds. They gave the concession to a3231Chinese competitor and paid the Chinese competitor to date $3003232million to build that cruise port. It is going to take the3233Panamanian people 375 years to get it back. I am from Miami.3234That is the most expensive cruise port in the world by far, by3235passenger.3236    In addition to that, they took where our land was going to3237be for the marina, and they designated that to be the embassy3238for the People's Republic of China. So what happened next is3239absolutely appalling, because when I went to the U.S. Embassy3240and I went to the Commerce Department, they told me to fill out3241a complaint.3242    When I filled out the complaint, I went to my senator at3243the time, was Bill Nelson, and I remember that I was denied3244being able to even file the complaint, because the land that3245the Chinese embassy, or the land that was going to be used for3246the Chinese embassy, my environmental permit for the marina was3247going to expire in 6 months. So the United States Commerce3248Department would not even allow me to file a complaint.3249    So I brought that issue here, and thanks to the good work3250of, at the time, I think it was Chairman Nelson and Chairman3251Wicker, we were able to unwind that. After about 6 years,3252Panama did the right thing and returned the land to my family.3253    The Chairman. Very instructive. Senator Young,32543255                 STATEMENT OF HON. TODD YOUNG,3256                   U.S. SENATOR FROM INDIANA32573258    Senator Young. Thank you, Chairman, for holding this3259important hearing. Thank you, gentlemen, for being here.3260    The Panama Canal underpins our current economic strength3261and national security. When 40 percent of U.S.-bound container3262traffic depends on a single waterway, we cannot afford3263unilateral toll hikes that choke out competition and leave our3264smaller carriers or our Midwestern exporters on the hook.3265    For instance, in my home state of Indiana, manufacturing3266firms and farmers rely on consistent, reasonably priced3267shipping routes to move heavy machinery, auto parts, and ag3268products like corn and soy. If the Canal Authority's auction3269system prices them out, the ripple effects in American jobs and3270supply chains could be devastating.3271    Chairman Sola, given our enormous stake in the Canal's3272operation, do you believe Congress or the FMC should more3273aggressively use existing legal authorities, or even create new3274legislative tools to block or penalize toll practices that3275disproportionately harm U.S. shippers and exporters?3276    Mr. Sola. Thank you, Senator, for the question. And I grew3277up in Goodland, Indiana, so that you know.3278    Senator Young. Fantastic.3279    Mr. Sola. I do believe that, you know, we should continue3280to monitor the situation, and if we do need more regulations or3281statutes, that we would come back to Congress because we get3282our marching instructions from you. Moving the agricultural3283products that we get out of the Midwest, and all over the world3284and through the country, not only do we focus on the Panama3285Canal, but we also focus on about $5 trillion worth of goods3286coming in and leaving the United States here at the Federal3287Maritime Commission. So it is definitely one of our main3288concerns.3289    Senator Young. Well, thank you. I am not surprised. I3290always tell people Indiana is a maritime state. If you think3291about our dependence on the waterways, and our shipping lines,3292and all the rest, so you are certainly proving that.3293    So we will stay in touch, and if you in the future would3294like to outline any mechanisms or measures that you think would3295be effective to help ensure fair treatment for our interests,3296please let me and others on this committee know.3297    When the two Panama Canal treaties were signed, we lived in3298a different world, one where Chinese state-backed actors did3299not wield strong influence over global infrastructure, and3300issues like drought were rarely factored into international3301agreements. As we all know, times have certainly changed. But3302the United States is still the Canal's biggest customer, and3303quite frankly, we have every right to expect an operational3304framework that acknowledges our modern security and economic3305challenges. States like Indiana, with robust exports, feel3306these impacts even if we are far from the Canal itself.3307    Chairman Sola--and then I will allow others to respond--in3308light of evolving conditions, especially increased foreign3309investment from China, do you believe the U.S. should explore a3310more comprehensive update or supplemental protocols to these3311decades-old treaties?3312    Mr. Sola. I definitely believe that we should support U.S.3313investment, and not having an ambassador for so long that has3314been detrimental to us, especially as the case that I just3315mentioned earlier, where we did not have an ambassador and we3316had a U.S. company in need of service.3317    So however, we can promote U.S. investment, especially in3318infrastructure. This is where China is definitely beating us3319with the Belt and Road, where they understand that. I believe3320that our EXIM Bank and our DFC is so limited in what they can3321do by the restrictions that they have, that we are not able to3322invest in infrastructure like we should.3323    Senator Young. I hope the administration will prioritize3324this Ambassador spot as nominations are made. I hope we will3325prioritize it in the Senate, and my colleagues on the3326Democratic side of the aisle will be warm to that nomination3327and moving it quickly. Something both parties, frankly, have3328fallen short on in recent years is prioritizing these.3329    But other comments, Mr. Maffei?3330    Mr. Maffei. Yes. Well, Senator, I will not surprise you,3331since you and I served together in the House, that I actually3332am pretty bipartisan and agreed with the Chairman on what he3333said. I will say that certainly we need to look at other kinds3334of ways to get U.S. companies in positions where they can truly3335compete with the Chinese on some of these things. And blaming3336it all on Panama really misses the point.3337    I have seen the same thing in Greece, where Greece did not3338want to give the concession of its largest port to a Chinese3339company, but because of its financial difficulties, it was3340getting pressure from international organizations such as the3341IMF, Europe, and even maybe some in the United States to do so.3342So I just ask you to look at that.3343    And I do want to say one quick thing. You are right about3344the cost, and as I said before, you were able to get here. The3345Panamanians are making far more on their Canal than they ever3346had before. That is not necessarily a bad thing, as long as it3347is going to the right place. But where they are really making3348the money is on these auctions, and that is why it remains a3349concern of mine. I am sure the Chairman's.3350    And that is where we are looking at, potentially, using our3351authority under Section 19 of the Merchant Marine Act, where we3352could, if we can show that it is, basically, a problem with the3353foreign trade of the U.S., it is interfering with foreign trade3354of the U.S. There are certain things that we can do. But I do3355think we need more information before we could make that kind3356of action. But we are certainly working on that, and we do have3357that authority at the FMC.3358    Senator Young. Thank you, and good to see you again, sir.3359    Mr. Kramek, did you have anything?3360    Mr. Kramek. We had discussed, Senator Young, some of the3361infrastructure projects to make the Canal more sustainable and3362viable, and how the United States, on the U.S. Army Corps of3363Engineers has already done some feasibility reviews of those3364projects. So that would certainly be something to take a look3365at to make the Canal viable with additional supplies of fresh3366water.3367    Senator Young. Thank you. Chairman?3368    Mr. Kontorovich. Senator, if I may?3369    Senator Young. Sure.3370    Mr. Kontorovich. Sorry, I am on Zoom. You spoke about3371renegotiating the treaties.3372    Senator Young. Yes.3373    Mr. Kontorovich. And I think one of the things about3374treaties, as an instrument of governance, is they are not very3375flexible and they do not really have automatic processes,3376typically, for easy amendment, and I spent--before this3377hearing, a fair amount of time reviewing the ratification3378hearings in the Senate in 1978. Back then, the principal3379concerns the Senate was concerned with then is the Soviets and3380Cuba, actually, not China and Iran.3381    So the world has changed a huge amount, China's role has3382changed a huge amount, and of course, back then, 1999 seemed3383very far off, 2025 seemed a world away. As a result, I think it3384is useful to revisit treaties and seek to renegotiate them to3385update them to sort of current events. Of course, the United3386States has a considerable leverage it can use to seek such3387additional protocols to modernize these treaties to current3388events and current geopolitical realities.3389    Senator Young. Makes great sense, and I am glad you spoke3390up. Thank you, Mr. Kontorovich.3391    Mr. Chairman.3392    The Chairman. Thank you. I want to ask a couple of follow-3393ups, and then we are going to wrap up the hearing.3394    Commissioner Maffei you mentioned a minute ago, if a3395determination was made that this was having negative impacts on3396U.S. trade, you said there are a number of remedies that are3397possible, and you did not specify what those were. So I just3398wanted to ask what you were referring to?3399    Mr. Maffei. Yes. I mean, there are certain things we can do3400as countermeasures, such as sanctioning Panamanian ships. That3401could be Panamanian flagships. The Panamanian flag is one of3402their major sources of revenue. It is the number one, what we3403call flag of convenience in the world. There are several3404others, and I think I would like to get back to you in writing.3405I mean, I am not trying to avoid the question but----3406    The Chairman. Yes. And I would love if----3407    Mr. Maffei. That way I can put--you know, we can--and we3408will, if you do not mind, we will get together and do a joint3409answer. We will put where our authority comes from, what we3410think we can do, and maybe even what we are concerned about or3411what the limits to that would be.3412    The Chairman. Well, and I will say that this hearing has3413been a nice bipartisan demonstration of a lot of expertise.3414There is a reason you guys have the role you have because you3415know what you are talking about.3416    Mr. Maffei. I am hoping my chairmanship, which ended last3417week after a full term, will result in a full, very successful3418term for my good friend and colleague as Chairman, may be the3419friendliest transition in Washington.3420    The Chairman. Professor Kontorovich, I want to get back3421also to the exchange you had with Senator Young, and then it3422hearkens back to the opening exchange you and I had. We have3423heard testimony that Panama may well be in violation of this3424treaty in at least two regards: one, with respect to its3425obligation to keeping the Panama Canal neutral; and the major3426concessions to China, the control that China has over ports on3427both ends, and the bridge across the Canal, which has the3428potential to shut down transit.3429    We also heard testimony about the degree of revenue that3430Panama is taking, and that is potentially in violation of the3431obligation that tolls and other charges shall be just,3432reasonable, equitable, and consistent with principles of3433international law.3434    I want to ask you, Professor, assume that the United States3435makes the determination that Panama is in violation of this3436treaty. I asked about what the remedies were, and you mentioned3437at the time military force. Military force is always one3438potential remedy. What other potential remedies are there?3439    And in particular, could a consequence of being in breach3440of the treaty be a determination that the treaty is null and3441void. That the concession of control of the Panama Canal to3442Panama is no longer in force? And could that, under3443international law, result in the United States returning to3444operating the Panama Canal? What is your judgment?3445    Mr. Kontorovich. Yes, I think treaties like this3446demonstrate that countries really need to think long and hard3447before they give away strategic assets, because the United3448States is free to cancel this treaty at any time, withdraw from3449the treaty, as it were. But given that the United States has3450transferred control and sovereignty of the Canal Zone to3451Panama, the cancellation of the treaty would not necessarily3452reverse that concession.3453    Concessions that have to do with sovereign control are not3454particularly reversible. For example, Israel made a deal with3455Lebanon to give maritime territory to Lebanon in exchange for3456peace just two years ago. It did not get peace. It is not clear3457that it can simply cancel and get that territory back.3458    Now, it is the case that America can take all sorts of3459measures to insist on neutrality, and if neutrality means3460putting American firms in operation or otherwise taking other3461steps, that is something that can be done. But a kind of3462territorial control is not a clear remedy unless it is3463something that just accompanies the steps needed to restore the3464regime of neutrality.3465    The Chairman. All right, well, I want to thank all the3466witnesses for their important testimony here today.3467    Senators will have until the close of business on Tuesday,3468February 4, to submit questions for the record. The witnesses3469will have until the end of the day on Tuesday, February 18, to3470respond to those questions.3471    And this concludes today's hearing. The Committee stands3472adjourned.3473    [Whereupon, at 12:23 p.m., the hearing was adjourned.]34743475                            A P P E N D I X34763477     Response to Written Questions Submitted by Hon. John Thune to3478                           Hon. Louis E. Sola3479    Question 1. Under the Foreign Shipping Practices Act, the Federal3480Maritime Commission (FMC) has the ability to investigate unfair3481shipping practices. Based on what you saw on your trip to the Panama in3482the summer of 2024, do you believe that Panama is treating the United3483States unfairly?3484    Answer. The Federal Maritime Commission's ongoing monitoring of the3485operational and business practices of the Canal enables the agency to3486examine whether the practices, including pricing and the new3487reservation system, of the Panama Canal Authority create unfavorable3488shipping conditions in the U.S. foreign trade. If the Commission finds3489that such conditions exist and are due to the Canal Authority's3490practices and decisions, it can impose countervailing penalties,3491including port visit fees on Panamanian-flagged vessels. Panama's ship3492registry is among the largest in the world.3493    The actions of the Government of the Republic of Panama, separate3494from the Canal Authority, should also be considered. Under Presidential3495administrations that preceded President Mulino, Chinese companies made3496notable commercial and diplomatic inroads to Panama. This came at the3497expense of other nations and parties that were not Panamanian or3498Chinese. Prevalent corruption at the highest levels of Panamanian3499society creates conditions favorable to the sort of checkbook3500``diplomacy'' routinely conducted by the People's Republic of China.3501The welcome reception previous Panamanian Presidential administrations3502gave the Chinese provided benefits to a strategic and economic3503competitor to the United States. In my opinion, this situation merits3504further engagement by the United States, including the Federal Maritime3505Commission.35063507    Question 2. Can you describe the relationship between Panama and3508China as it relates to the canal and associated infrastructure?3509    Answer. The relationship between the Republic of Panama and the3510People's Republic of China grew closer under the administrations of3511previous Panamanian Presidents. While President Mulino does not seem to3512share the same intention as some of his predecessors to build closer3513ties to Beijing, over the years, the Chinese presence in Panama has3514become more deeply rooted across a number of critical sectors.3515    Chinese companies involved in the transportation, terminal,3516telecommunications, construction, and logistics sectors are active in3517Panama and in many cases pursuing development deals. Chinese companies3518involved in trade and commerce have a significant presence in the Colon3519Free Trade Zone.3520    While the Chinese presence in and around the Panama Canal should3521concern U.S. policymakers, the broad extent to which the People's3522Republic of China has made inroads throughout the Western Hemisphere3523must command our attention. Panama is but one of many nations3524throughout the Americas where the Chinese are building a stronger3525influence and gaining a surer foothold in port, bridge, rail, and other3526infrastructure projects.35273528    Question 3. Do you have reason to believe that Panama's unfair3529treatment is motivated by the country's increasingly close ties with3530China?3531    Answer. There are several issues of concern to the Federal Maritime3532Commission.3533    The first is the business practices of the Panama Canal Authority.3534The United States ran the Panama Canal on a model akin to a public3535utility. In recent years, the Panama Canal Authority appears to be3536treating the Panama Canal as a for-profit entity and seeking to3537maximize revenue production. The Commission has questions regarding how3538the Panama Canal Authority prices its services, its use of ancillary3539fees, and the use of an auction system during the recent drought and3540what appears to be continuing to today in some form. The Commission is3541continuing its monitoring of the practices of the Canal Authority and3542could initiate more formal proceedings.3543    The second matter of concern to the Commission is what steps the3544Panama Canal Authority will take to mitigate against future droughts.3545Major infrastructure projects are necessary to increase water reserves3546necessary to operate the Panama Canal in dry years. The United States3547must be vigilant in making certain that engineering, design,3548construction, and related contracts for this project are awarded3549properly and free from both corruption and influence from China.3550    A third matter of concern relates to potential rebating of fees3551paid to transit the Panama Canal. The Commission has reports that3552agencies within the Government of Panama (and separate from the Panama3553Canal Authority) have offered to rebate or refund Canal fees in3554exchange for stopping at certain facilities in Panama. Some of these3555facilities have direct or indirect ties to the People's Republic of3556China. These allegations deserve further review and if proven could3557raise questions about whether the Government of the Republic of Panama3558is engaging in conditions unfavorable to shipping.3559    The cause of the matters commanding our attention are more likely3560driven by money. Considering circumstances in Panama beyond the limits3561of Commission authorities, however, should give one concern about the3562strong foothold the People's Republic of China and its proxies have3563established in a part of the world critical to the economic,3564diplomatic, and security interests of the United States.35653566    Question 4. Based on the various experiences you have had over your3567career working in Panama, can you explain how Panama's treatment3568towards the United States has changed over time?3569    Answer. Bilateral relationships are never static, but the Republic3570of Panama and the United States of America have enjoyed close,3571favorable, and mutually beneficial relations for most of the past 1223572years.3573    The decade between 2015 and 2025 was aberrant in that Presidential3574administrations of that era took deliberate steps toward the People's3575Republic of China. Beijing made many promises to the government and3576people of Panama and delivered on very few of them. To the extent3577anyone benefitted from any of the development promised by China, it was3578Chinese companies and citizens and not local populations. That access3579to Chinese largesse was at least in part contingent upon the Republic3580of Panama severing relations with the Republic of Taiwan, which makes3581the improved relations between Panama and the PRC all the more3582distasteful.3583    President Mulino seems to desire cordial relations with the United3584States. Additionally, he does not seem to share the same instincts as3585some of his predecessors when it comes to relations with China.3586    On a much more personal note, despite how the relationships between3587nations might wax and wane, I have never noticed anything less than3588good will among the Panamanian people toward the United States. Our two3589nations have more that binds us in common than sets us apart; the3590average Panamanian knows this.35913592    Question 5. From your analysis, does the Panama Canal pose a3593significant security threat to the United States?3594    Answer. The Panama Canal itself does not pose a significant3595security threat to the United States, but the risk of loss of access to3596the Canal, caused either by weather conditions or the increased3597presence and influence of the People's Republic of China in and around3598the Canal, and throughout Panama, certainly does.3599    The Chinese have for decades engaged in a comprehensive and3600integrated level of investment and overtures to increase their3601influence and presence globally. Beijing dangles increased trade3602coupled with infrastructure development projects to lure other nations3603into the Sinosphere. Many of the development projects the Chinese are3604most interested in pursuing are related to ports, railroads, and other3605infrastructure associated with trade and logistics. Many of China's3606projects are ``dual use'' in nature, meaning that they can be easily3607repurposed to support Chinese military operations. In the case of some3608telecommunications, research, and space related developments, including3609in the Americas, it is not unreasonable to assume that those facilities3610could be involved in intelligence gathering operations, activities3611designed to improve capabilities of the Chinese missile forces, or3612towards the further militarization of space.3613    What is happening in Panama is an alarm bell for U.S. policymakers3614to look north and south from the Isthmus and see the extent to which3615the People's Republic of China has embedded itself on the American3616continents.3617    I believe it is worth noting that Panama Canal Authority essential3618personnel, such as marine traffic controllers and the pilots who3619transit the ships through the Canal, are forced to pass through Chinese3620security on the Atlantic side as the facility they use, the Panama3621Canal Port Captain's Office, is located within the Hutchison ports3622complex. This is clearly visible on Google Maps.3623                                 ______36243625    Response to Written Questions Submitted by Hon. Roger Wicker to3626                           Hon. Louis E. Sola3627    Question 1. In 1996, a U.S. marine terminal operator bid and was3628awarded a terminal lease contract by Panamanian authorities. Panamanian3629authorities re-bid the contract in a process determined by the Federal3630Maritime Commission (FMC) to be commercially ``irregular.''3631Subsequently, that contract was awarded to a PRC-controlled marine3632terminal operator. Another terminal lease contract was awarded to the3633PRC-controlled marine terminal operator on the other coast. Those lease3634agreements continue to this day.3635    Given national security concerns, would it be in the United States'3636national security interest for Panamanian authorities to reevaluate the3637propriety of extending those PRC-controlled marine terminal operators3638additional lease options?3639    Answer. Yes.3640    The Comptroller General of Panama initiated an audit of the3641Panamanian-based operations of Hutchison Ports in January.36423643    Question 1a. Of even more urgent concern than terminals in Panama3644is terminals in the United States. Has the FMC assessed the PRC-3645controlled investment and levels of operational control at US-based3646marine terminals? Would you provide the Committee with an assessment of3647PRC investment and control of U.S. marine terminals?3648    Answer. The Federal Maritime Commission has not to date conducted3649an assessment of investment by the People's Republic of China, or3650companies based in China in marine terminals based in the United3651States. I will task the Commission's Bureau of Trade Analysis to3652conduct such a survey and commit to sharing the results of their review3653with you immediately upon conclusion.3654                                 ______36553656    Response to Written Question Submitted by Hon. Dan Sullivan to3657                           Hon. Louis E. Sola3658    Question. Chairman Sola, congratulations on your appointment as3659chair of the Commission. The Commission has an important role to play3660in ocean commerce, and we look forward to working with you on those3661issues. Over the past several years, we've witnessed the Commission's3662efforts to expand its jurisdiction over chassis and rail terminals.3663I've expressed my concern over that expansive approach, preferring3664market-based solutions to regulatory overreach. So, as it relates to3665the Panama Canal, can you please explain to the committee the FMC's3666jurisdiction over Panama or operations of the canal? I'm asking so that3667the committee not only has a clearer understanding of your jurisdiction3668but also of the tools at our disposal to addressing matters involving3669the Panama Canal.3670    Answer. I am grateful for your well wishes and honored to have this3671opportunity to serve.3672    I share your concern about any government agency exceeding its3673statutory authorities and I am mindful of the limits of the laws we3674administer.3675    The Commission authorities applicable to how the Panama Canal3676Authority operates the Panama Canal are 46 U.S.C. 421 and 46 U.S.C.3677423.3678    The Commission began its examination of how the Panama Canal3679Authority was managing through drought conditions, as well as changes3680to its pricing structure, following repeated reports from shippers,3681cargo owners, shipping lines, forwarders, and even officials of other3682governments expressing frustrations of the conduct of the Canal3683Authority.3684                                 ______36853686    Response to Written Questions Submitted by Hon. Eric Schmitt to3687                           Hon. Louis E. Sola3688    Question 1. In 2021, the Ever Given container ship was grounded in3689the Suez Canal, for 6 days. It resulted in $9.6 billion of trade3690delayed each day. If the Panama Canal were blocked and ships were3691forced to circumnavigate Cape Horn, what would be the economic3692repercussions?3693    Answer. Although the Federal Maritime Commission has not conducted3694an economic modeling analysis on the increased costs if all vessels3695were forced to go around Cape Horn instead of using the Panama Canal,3696it is safe to say that this would be a significant shock to the freight3697delivery system. Such effects would not be limited to the value of3698goods in transit taking the longer route. Shipping companies, shippers,3699and consumers would be faced with higher costs related to increased3700crew requirements, higher insurance, more fuel necessary to make the3701longer voyage, disrupted supply chains, and loss of business3702opportunities for commodities with short shelf lives.3703    Closures of the Suez Canal resulting from the grounding of the Ever3704Given or Houthi attacks on commercial shipping in the Red Sea provide3705useful examples to make informed presumptions about the consequences of3706a closed Panama Canal. The Commission held a hearing on February 7,37072024, to examine the effects of Houthi attacks in the Red Sea, and3708heard evidence that the Houthi attacks on merchant shipping in the Red3709Sea and Gulf of Aden had serious consequences for ocean commerce.3710    Moreover, recent experience has demonstrated that the Panama Canal3711does not have to shut down entirely for U.S. supply chains to feel the3712consequences. The Panama Canal's service level was significantly3713reduced in 2024 as the result of drought conditions, which in turn3714caused significant operational and commercial impacts. The Panama Canal3715Authority was forced to reduce the overall number of transits by almost371640 percent. Some ships were not permitted to transit the Canal, the3717carrying capacity of other vessels had to be reduced, and some3718companies explored land bridging the Isthmus. The cost to transit the3719Canal rose as the Panama Canal Authority auctioned off transit3720reservations to the highest bidder, causing companies transporting high3721value time sensitive cargoes to pay record rates to jump the queue of3722ships. Other shipping companies paid higher operating costs in both3723having to loiter for a transit slot to open and disruptions to vessel3724schedules. In other words, a loss of less than half of the operational3725capacity of the Panama Canal led to fewer ships carrying less cargo for3726higher costs and at opportunities lost.3727    Finally, there is one crucial impact to the American economy and3728consumers from a closure of the Panama Canal that we can be sure of--3729the economic impact would disproportionately affect American companies3730and interests. In excess of 70 percent of the traffic transiting the3731Panama Canal is either U.S. origin or destined, whereas the majority of3732the traffic through the Suez Canal serves European markets.3733Irrespective of the value of the trade having to go around Cape Horn,3734or the added costs and time from such a journey, the United States3735would endure any disruption to the operations of the Panama Canal more3736than any other nation.37373738    Question 1a. Are there contingency plans in place to mitigate the3739economic fallout if the Panama Canal were blocked, similar to the3740disruption caused by the Ever Given incident in the Suez Canal?3741    Answer. The Commission does not have jurisdiction over the3742contingency plans of the commercial shipping companies that use the3743Canal. It seems likely that their experiences during the drought that3744caused significant cutbacks in Canal passages would inform their future3745risk assessments.37463747    Question 2. How does the presence of Chinese-affiliated entities at3748critical Canal infrastructure, like Balboa and Cristobal, compromise3749the neutrality mandated by the 1977 Neutrality Treaty? In your3750assessment, should we consider Hong Kong-based companies subject to the3751PRC's national security laws as purely commercial? How does the PRC's3752civil-military fusion model pose a risk to the neutrality mandated in3753the 1977 Neutrality Treaty?3754    Answer. I cannot speak to how actions of the Republic of Panama3755and/or the Panama Canal Authority might compromise the neutrality3756requirements of the 1977 Neutrality Treaty. I will note that3757circumstances have established sufficient doubt that some experts now3758argue that the Panamanians are in breach of their commitments. As3759Chairman of the Federal Maritime Commission, I am interested in how the3760Government of the Republic of Panama and the Panama Canal Authority3761treat maritime commerce and charge for use of the Canal. I note that3762the Commission also regulates common carriers that are owned or3763controlled by the PRC. The Commission scrutinizes these government-3764controlled carriers under 46 U.S.C. Chapter 407 to ensure that they do3765not use their state-sponsored position to distort the commercial3766shipping market. One such company is COSCO, which was recently found by3767the U.S. Department of Defense to be a Chinese military company under3768Section 1260H of the William M. (``Mac'') Thornberry National Defense3769Authorization Act for Fiscal Year 2021.3770                                 ______37713772    Response to Written Questions Submitted by Hon. Jacky Rosen to3773                            Daniel B. Maffei3774    Question 1. It is critical for us to maintain strong diplomatic3775relations with Panama, which has been a close and longstanding U.S.3776ally. Since his inauguration last year, President Mulino's government3777has been a partner on major U.S. foreign policy and national security3778objectives, including regional approaches to addressing migration,3779standing up to the Maduro regime in Venezuela, leading on the Alliance3780for Development in Democracy (ADD), and much more. Panama also3781works closely with other U.S. allies, having been one of Israel's3782staunchest supporters in Latin America for years. I also share my3783colleagues' concerns with increased presence from China in and around3784the canal, but we must ensure our actions do not have the unintended3785consequence of pushing our allies away from collaboration with the U.S.3786and closer to the PRC.3787    Do you have concerns that aggressive, unilateral statements about3788``taking back the canal'' could inadvertently push Panama to deepen3789ties with China?3790    Answer. The PRC's diplomatic, military, or economic advancement3791with any of the United States' allies is always concerning to me. In3792the case of Panama, I too share the concerns of you, Senator Rosen, and3793your colleagues that companies linked with the PRC are making inroads3794in or around the Panama Canal. When Chairman Sola and I visited Panama3795last year, however, President Mulino and Canal officials were very3796receptive to our presence and appeared, to me at least, to be eager to3797engage in continued cooperation with the Federal Maritime Commission3798and the U.S. overall with regards to the operation of the Canal. Since3799that time, I have not received any indication from Panamanian officials3800that their cooperation with our agency in particular or the U.S.3801government in general is in jeopardy. Certainly, the Canal remains of3802vital importance to the United States' economy and global maritime3803commerce and efficient and predictable access to the Canal for ships3804making port calls in the United States remains a high priority for the3805Federal Maritime Commission.38063807    Question 2. Despite facing robust sanctions from the U.S. and3808others, Iran has managed to build a vast network of tankers to3809facilitate its illicit oil exports, raising around $54 billion in oil3810revenues in 2023 alone. Iran uses these revenues to fund its terrorist3811proxies, its nuclear program, and other destabilizing behavior around3812the world. In recent years, the U.S. has deepened its cooperation with3813Panama to put a stop to Iran's tanker fleet, and continuing this3814cooperation is a national security imperative.3815    How could President Trump's unilateral actions with respect to the3816canal undermine our partnership with the government of Panama to3817crackdown on the illicit transport of Iranian oil?3818    Answer. This is not an area where I have any access to classified3819national security information. My answer is only informed by the3820discussions Chairman Sola and I had with Panamanian government3821officials concerning the issue of Iranian ships bearing Panamanian3822flags being granted passage through the Canal last summer. At that3823time, the Panamanian authorities were taking decisive action to address3824this issue through an aggressive program to de-flag Iranian vessels3825having connections to the funding of terrorist organizations and other3826illicit causes. The Panamanians reported to us that they would continue3827to de-flag any such vessels to thwart the Iranian's efforts in the3828future. I have no knowledge beyond that given to us by Panamanian3829authorities and have received no information that their position on the3830issue has changed.3831                                 ______38323833      Response to Written Questions Submitted by Hon. Andy Kim to3834                            Daniel B. Maffei3835    Question 1. Is China operating the Panama Canal?3836    Answer. Based on the materials available to me, which does not3837include any classified national security information related to this3838topic, from my personal observations and knowledge gained while in3839Panama, and as reported in open sources, I have no information or3840knowledge that the Panama Canal is being operated by anyone other than3841the Panama Canal Authority, which is an independent agency of the3842Panamanian government.38433844    Question 2. Does CK Hutchison Holdings, the Hong Kong-based3845conglomerate that received the contract to manage the Balboa and3846Cristobal ports, control the locks or entrance to the canal?3847    Answer. Based on the materials available to me, which does not3848include any classified national security information related to this3849topic, from my personal observations and knowledge while in Panama, and3850as reported in open sources, I have no information or knowledge that3851the Panama Canal, including its entrances and locks, is being operated3852by anyone other than the Panama Canal Authority, which is an3853independent agency of the Panamanian government. Certainly, however,3854the Ports of Balboa and Cristobal are operated by CK Hutchison3855Holdings. These ports are geographically proximate, but currently do3856not exert control over the waters that ships traverse to approach and3857exit the Canal.38583859    Question 3. Is Balboa or Cristobal Canal under the jurisdiction of3860the Panama Canal Authority? And what is your assessment of the Panama3861Canal Authority and their ability to administer the Canal?3862    Answer. Based on the materials available to me, which does not3863include any classified national security information related to this3864topic, and as reported in open sources, it is my understanding that the3865Panama Maritime Authority (a separate agency from the Panama Canal3866Authority) has primary jurisdiction over the Ports of Balboa and3867Cristobal.3868    Based on the materials available to me, which does not include any3869classified national security information related to this topic, from my3870personal observations and knowledge gained while in Panama, and as3871reported in open sources, the Panama Canal Authority has competently3872run the Canal. As discussed during the hearing, the low water levels at3873the Canal have presented capacity issues. That said, I believe the3874Canal Authority has, and continues, to take steps towards implementing3875short-and long-term solutions to these issues, including working with3876the U.S. Army Corps of Engineers to plan new infrastructure projects3877geared at alleviating the Canal's water supply. In terms of a business,3878the Canal Authority generally makes a profit on the Canal, which they3879maintain goes to improvements, administrative costs at the Canal, and3880payments back to the government of Panama. In contrast, when the United3881States managed the Canal through the U.S. Canal Authority, the Canal3882was often operated at a deficit.3883                                 ______38843885    Response to Written Questions Submitted by Hon. Eric Schmitt to3886                           Eugene Kontorovich3887    Question 1. How do Chinese national security laws ensure that even3888``private'' companies that are based in China remain beholden to the3889CCP?3890    Answer. China's law requires that ``all organizations and citizens3891shall support, assist, and cooperate with national intelligence3892efforts.''38933894    Question 2. Some critics of President Trump's rhetoric around the3895Panama Canal argue that the companies in question, like CK Hutchinson,3896are Hong Kong-based, and therefore outside of the scope of Beijing3897influence. However, Hong Kong's 2019 national security laws effectively3898ended the ``one country, two systems'' framework that the CCP had3899committed to. Now Hong Kong companies are just as beholden to the CCP3900as mainland companies. Do you see a meaningful distinction between Hong3901Kong and the mainland in terms of subjection to draconian CCP state3902control?3903    Answer. Even if Hong Kong companies are somewhat less subject to3904CCP control, this does not mean the degree of control would not be3905enough to raise questions under the Neutrality Treaty. In any case, the3906Hong Kong national security law is only one way a communist regime with3907absolute power can extract compliance from nominally private entities.3908The power to arrest, confiscate, etc., without serious legal recourse3909create a relationship of subservience unlike private companies in free3910countries.3911                                 ______39123913     Response to Written Question Submitted by Hon. John Thune to3914                             Joseph Kramek3915    Question. Since the Panama Canal's dynamic pricing model was3916unveiled in 2016, how have production costs been impacted and how does3917this hurt producers and consumers?3918    Answer. WSC does not have access to information on how U.S.3919production costs for exporters and importers have been impacted by the3920Panama Canal Authority (PCA) pricing model.3921    WSC member lines, like other carriers, pay the PCA's published3922rates to transit the Canal. If the published rates change, there are3923often contingency provisions in the contracts between the carrier and3924the shipper customer (i.e., the exporter or importer) that can3925accommodate the change in rates or surcharges.3926                                 ______39273928    Response to Written Questions Submitted by Hon. Jacky Rosen to3929                             Joseph Kramek3930    Question 1. The Panama Canal is essential for international supply3931chains, handling about forty percent of all U.S. seaborne container3932trade. However, the number of ships that are permitted to travel3933through the Panama Canal has significantly fallen in recent years due3934to drought, which has increased costs for shipping companies and raised3935concerns about the Canal's aging infrastructure and Panama's ability to3936manage the water supply. Without increased water supply, the canal3937could lose significant amounts of business, affecting shipping costs3938and the supply chain and eventually raising prices on consumers.3939    How are American companies adjusting to the concern about reduced3940traffic at the Panama Canal? What has been the impact on the costs for3941shipping companies using the canal, and are you concerned that these3942costs will be passed along to consumers?3943    Answer. Liner shipping experienced the least impact from the3944drought of all vessel sectors, because liners know their schedules3945often up to a year in advance--and therefore will typically book canal3946transit reservations in advance. The reservations made by our members3947were honored by the Panama Canal Authority (PCA) during the drought.3948Notably, there was an increased wait time for vessels transiting the3949Panama Canal during the drought; that said the average wait time for3950container vessels transiting from North to South (Atlantic Ocean to the3951Pacific Ocean) did not exceed 1.5 days, and for container vessels3952transiting from South to the North (Pacific to Atlantic) the average3953wait time did not exceed 1.8 days.3954    Water levels in the Panama Canal have recovered since the drought,3955and the Panama Canal is currently operating without the restrictions3956implemented during the drought.3957    WSC member lines pay the PCA's published tariff rate for canal3958transits. If the published rates change, many liners' contracts with3959their shipper customers (i.e., the importers and exporters) contain3960contingency provisions that can accommodate changes in rates.39613962    Question 2. What can the U.S. do to partner with Panama to address3963water shortages, and to ensure resilience to climate change?3964    Answer. WSC understands that the Panama Canal Authority has a3965longstanding relationship with the U.S. Army Corps of Engineers (ACOE)3966and has previously signed contracts with the ACOE for consultation and3967technical advisory services for the Water Projects Program--which3968consists of a portfolio of projects to supply additional water sources3969to make the Canal's operations more sustainable during future periods3970of droughts. More broadly, the ACOE has a long history of working with3971Panama and the PCA.3972    Continued agreements with the ACOE and other U.S. government3973agencies with expertise in this area, as well as U.S. private entities3974supporting this work, could have the dual benefit of enhancing the3975partnership between the U.S. and Panama, and protecting this vital3976trade artery.39773978                                  [all]