▶ 0:17:05Chair Cruz: Good morning everyone, the senate committee will come to order. We are here today to examine a monument to american ingenuity, the panama canal. Senator marino suggests that we opening the hearing by playing van halen. We might not do that.
▶ 0:17:29Chair Cruz: But, between the american construction of the panama canal, the french effort to build the isthmus canal and america's triumphant completion of that canal, the major infrastructure projects across panama cost more than 35,000 lives. The final decade of work on the panama canal, the united states spent nearly $400 million, the equivalent to more than $15 billion today.
▶ 0:18:00Chair Cruz: The panama canal proved a truly invaluable asset, sparing both cargo ships and warships the long journey around south america. When president carter gave it away to panama, americans were puzzled, confused and many outrage.
▶ 0:18:23Chair Cruz: With the passage of time, many have lost sight of the canal's importance, both to national security and the U.S. economy. Not president trump. When he demanded fair treatment for american ships and goods, many in the media scoffed. The panama canal was not just given away. President carter struck a bargain and made a treaty.
▶ 0:18:50Chair Cruz: And president trump is making a serious argument that that treaty is being violated right now. This committee has jurisdiction under this set -- under the senate rules over the panama canal and we will examine evidence of potential violations. President trump has highlighted two key issues, number one the danger of china exploiting or blocking passage through the canal. And then the asked -- and then the cost for transit.
▶ 0:19:19Chair Cruz: Chinese companies are building a bridge across the canal, and at a slow pace so as to take nearly a decade. And chinese companies control container ports at either end. The partially completed bridge gives china the ability to block the canal without warning. And the ports give china a ready observation the time that action. This situation I believe poses acute risks to national security.
▶ 0:19:52Chair Cruz: Meanwhile, the high fees for transit disproportionately affect americans because U.S. cargo accounts for nearly three quarters of canal transit. U.S. navy vessels pay additional fees that apply only to warships. Canal profits regularly exceed $3 billion. This money comes from american taxpayers and consumers in the form of higher costs for goods.
▶ 0:20:17Chair Cruz: American tourists on cruises are essentially captive to any fees that can -- that panama chooses to levy for canal transits and they have paid on-field -- unfair prices for fuel bunkering at terminals as a result of government granted monopoly. Panama's government relies on these exploitation fees key --, nearly 1/10 of its budget is paid with canal profits.
▶ 0:20:46Chair Cruz: As they cascaded through the inerrant -- the american economy, the chinese communist party advances its contest against the united states and takes a militaristic ins -- interest in the canal. President trump has rightly focused on these issues, there are additional problems.
▶ 0:21:04Chair Cruz: In the last two years canal authority generated record revenue even while transits were depressed by drop conditions and the only comfort to ships was that panama might review -- invest in fresh reserve -- fresh reserves in the future. Even as it takes advantage of the system panama has emerged as a bad actor.
▶ 0:21:28Chair Cruz: They have flags dozens of vessels in the iranian ghost fleet, which brought iran tens of billions of dollars in oil profits to fund terror across the world and chinese companies have won contracts often without competition. As the infamous belt and road initiative came to panama. China engages in debt trapped diplomacy to enable political career should.
▶ 0:21:59Chair Cruz: --coercion. In panama it has it -- aided corruption. We also invited the deputy administrator to the panama canal today and she declined that invitation. I understand this witness claimed her absence was due to a scheduling matter that I also recognize that defending the canal authority is an unenviable task.
▶ 0:22:25Chair Cruz: This committee might be obliged to compel her testimony at a future hearing. It will not escape senator's notice that professor kntorovich is appearing virtually and that will be in a usual practice before this committee. The professor was ready to fly from israel to deceit -- to D.C. to appear in person but was unable to because too few american carriers have resumed direct flights to israel.
▶ 0:22:56Chair Cruz: While european airliners are willing to fly to israel, service has been long and expensive. Israel is america's closest ally in the middle east and U.S. carriers are refusing to fly there. Late last week delta announced it would finally restart direct flights to tel aviv in april. I very much hope tha united and american airlines will quickly follow suit and receive direct flights to israel.
▶ 0:23:26Chair Cruz: I am grateful to president trump for raising awareness about the state of the counter -- the panama canal. We cannot afford to let american shippers be extorted and turned a blind eye if panama exploits an asset of vital commercial and military importance and we cannot stay idle while china is on the march in our hemisphere. I expect and hope the testimony to annette -- to enlighten on all of those issues. I will now turn to the ranking member.
▶ 0:23:55Sen. Cantwell: Thank you for having this hearing and the witnesses here today and virtually. Access to the panama canal is essential, maintaining america's supply chains and lowering inflation costs on consumers and goods and ensuring our national security. With about 72% of the goods transiting the canal coming to where from U.S. markets, a stable waterway is vital for states like mine where one in four jobs are related to trade.
▶ 0:24:27Sen. Cantwell: Seattle-based ssa marine operated in the dust in panama for the last 30 years and this is our largest U.S. logistic presence in panama with 19 cargo containers and employing over 1000 people. Washington's maritime economy supports 170,000 jobs and our U.S.
▶ 0:24:55Sen. Cantwell: Maritime economy supports over 21 million jobs and almost 3 trillion in america's gdp. Anything our committee can do to help grow our maritime economy, I am all for it. That is why it is so important that the committee not just focus on panama but the broader solutions to meet the U.S. maritime opportunities and challenges.
▶ 0:25:19Sen. Cantwell: This committee passed the ocean shipping reform act led by senator klobuchar and senator thune to address shipping costs and stop carriers from delaying U.S. cargo. This gave the fmc and the two commissioners that are here today the ability to do better investigations. I look forward to hearing about their investigation on the panama canal and these cost issues.
▶ 0:25:43Sen. Cantwell: Many members of this committee have worked on the infrastructure bill the do dock replacements in alaska, rail improvements, safety improvements, container yard expansion, and I know that my colleagues who represent these maritime investments need a maritime workforce and continued investment. Any of our colleagues have great ideas.
▶ 0:26:07Sen. Cantwell: Senator kelly and young, representatives garamendi and kelly and they have been working with maritime stakeholders on these larger bills. Mr. chairman, if this committee does not embrace a larger agenda it will get the fight -- decided in the finance committee. I hope we can get some of these issues and show that this is the committee for maritime jurisdiction.
▶ 0:26:32Sen. Cantwell: A bill that provides a comprehensive strategy to build america's supply chain supremacy, what is needed to defend our interests in the indo pacific region and to provide -- and to react vitalized sports shipbuilding capacity. A revitalized U.S. maritime strategy would not only be good for our economy but critical for national security.
▶ 0:26:56Sen. Cantwell: At the same time we face cyber threats from foreign adversaries and panama is a perfect example which brings us to the hearing. I am concerned about chinese owned ports in panama and their proximity to their canal and concerned about the installation of chinese equipment from huawei and chinese companies near the canal, which is why we were to get $3 billion to get at the end of last congress.
▶ 0:27:25Sen. Cantwell: So if we are trying to get them out of U.S. scenarios we should not allow them in vessels and backdoors in places like panama. I would like to ask unanimous consent to enter into a record from the two most recent ambassadors to panama who make the case for continued U.S. investment in infrastructure and cybersecurity.
▶ 0:27:44Chair Cruz: Without objection.
▶ 0:27:45Sen. Cantwell: Thank you. They know that america's adversaries have built backdoors into communication technology, software, supply chains both software and hardware. Whether it is a crane over the port or a bridge, we cannot tall wait -- tolerate huawei, tiktok or any adversaries going through the backdoor.
▶ 0:28:13Sen. Cantwell: I am a big fan of the five biggest technology interests and basic to cannot -- democracies forming a technology nato. We should be saying that nobody should be buying technology or equipment that has a government back door. These are complex issues and we need solutions. I will be requesting that the department of defense provide a classified briefing about foreign adversary threats to the panama canal including these adjacent areas.
▶ 0:28:42Sen. Cantwell: I received an initial briefing from the U.S. southern command and I have spoken to former U.S. southern command leader -- general on this issue. I plan to go as a delegation or by myself to panama and visit the canal authority. I invite other members to do so hopefully this spring.
▶ 0:29:05Sen. Cantwell: Any successful strategy also has to not just focus on cybersecurity and cooperation and we will ask some of our witnesses today, but the larger issue is that we need to understand what are the shortfalls of the current agreement that does not get at this upgraded technology concern. I would hope that panama would be very cooperative in discussing these cybersecurity investments and what needs to be made.
▶ 0:29:33Sen. Cantwell: We all know the panama canal is as an authority independent and the chinese government do not start the shipping rates. The authority has been grappling with historic rainfall, climate change, and the solution is for us to work together as the army corps did together on solutions and making sure that instability in water is not the cause of increase in rates. We need to work on these solutions. Mr.
▶ 0:30:00Sen. Cantwell: Chairman, I also believe that the larger issue as you mentioned in your statement about belt and rode initiatives -- road initiatives need to be met with an aggressive response. I firmly believe in trade. Easy for me to say where from texas when you come from a very trade-dependent state. We did have in a passable or -- an investor there for five years.
▶ 0:30:29Sen. Cantwell: You should rethink your strategies when you hold up ambassadors because holding them up and not dealing with these issues put us behind. Expanding exports to 95% of the consumers and roughly 3.5 billion people is a good idea and I hope we could have a more aggressive strategy in latin america.
▶ 0:30:50Sen. Cantwell: I think the proposals by senator cassidy and bennett is a like-minded saying of latin american countries that we can join together in a U.S.,-, mexico -- a U.S.-canada-my -- mexico agreement.
▶ 0:31:08Sen. Cantwell: And link all of our areas would help along with an aggressive strategy on saying no government backdoors in making the kind of investments that the export-import bank can do to combat china. Thank you for organizing these hearing -- this hearing. This insurance applies chains, lower consumer costs and most importantly protect our national security. Thank you.
▶ 0:31:33Chair Cruz: Thank you senator. Our first witness today is chairman louis sola of the federal maritime commission. He was recently in canada -- in panama and can speak to concerning developments that I noted in my opening statement. You are recognized for five minutes.
▶ 0:31:51Mr. Sola: Thank you chairman, ranking member and members of the committee. Thank you for the opportunity to speak about the critical importance of the command -- of the panama canal to U.S. trade and global commerce. I bring a unique perspective as someone who has not only served as a maritime regulator also worked in panama. I have transited the canal over 100 times.
▶ 0:32:16Mr. Sola: This provides me with a profound understanding of its significance and challenges that it faces. Prolonged drought conditions last year forced operational changes, reducing transit slots and restricting vessel types and auctioning of slots, raising alarm about its resilience. The panama canal is managed by the canal authority, an independent agency of the panamanian government.
▶ 0:32:44Mr. Sola: It is a model of public infrastructure management and its independence has been key to ensure safe and reliable transit of vessels critical to the U.S. and global commerce. During my recent visit I had the opportunity to meet with leaders to better understand the reference and to address the ongoing challenges. I saw firsthand their commitment to maintaining the efficiency and resilience.
▶ 0:33:09Mr. Sola: These conversations also highlighted the broader challenges posed by the panamanian government maritime policies which complement -- complicate their mission and raise concerns about corruption in foreign influence. The broader maritime sector in panama including the nation's ports, water rights and the world's largest ship registry falls under the purview of the panamanian government.
▶ 0:33:36Mr. Sola: Unfortunately, this sector has faced challenges including corruption scandals and foreign influence, particularly from brazil and china. They create friction with the acp, especially as it works to address challenges like securing adequate water supplies for the canal. Although the acp operates independently under U.S. law, both it and the government of panama's maritime sector are considered one and the same.
▶ 0:34:07Mr. Sola: That means any challenges in the maritime sector including corruption, lack of transparency or foreign influence can have a direct or indirect impact on the operations and long-term stability of the canal. This perspective highlights the need for diligence and monitoring the management and panama government's policies affecting maritime operations. Since 2015, chinese companies have increased their influence throughout panama.
▶ 0:34:37Mr. Sola: Panama became a member of the belt and road initiative and ended relations with taiwan. Chinese companies have been able to pursue billions of dollars of development contracts, any of which were projects on or adjacent to the panama canal. Many were no-bid contracts, and labor laws were waived, and the panamanian people are still waiting to see how they are benefited.
▶ 0:35:02Mr. Sola: It is all more concerning that many of these companies are state owned and in some cases designated as linked to the people's liberation army. We must address the significant presence and influence of china throughout the americas and in panama hospice. American companies should play a lading -- leading role by supporting U.S. firms and we reduce reliance on chinese contractors and promote fair competition. Additionally confirming a U.S.
▶ 0:35:33Mr. Sola: Ambassador is critical to balancing our national and economic info -- interest. The fomc will monitor its pricing practices and consider broad reviews of the maritime sector. Yes, fmc has the authority to prove -- to impose remedies including fines and restrictions on panamanian flag vessels entering U.S. ports. In closing the panama canal is vital to its economy -- of our economy with over 75% of its traffic bound for our ports.
▶ 0:36:05Mr. Sola: Safeguarding the acp's independence and the challenges posed by the government are essential to maintaining U.S. competitiveness. I look forward to your questions.
▶ 0:36:17Chair Cruz: Thank you. The next witness is commissioner daniel buffet and he was -- maffei and he was also in panama.
▶ 0:36:28Mr. Maffei: Thank you very much. I do want to say that in addition to chairman and myself, max is also here from the federal maritime commission which underscores the importance of this issue. More than 110 years of its opening, it remains vital ■to maintaining resilient supply chains for american importers and exporters.
▶ 0:36:54Mr. Maffei: Because it is a waterway bridge over mountain its terrain it does depend on large supplies of fresh water. Panama has among the world's largest annual rainfalls but insufficient freshwater lane -- rainfalls have occurred such in the 1930's when the madden dam was built to address water shortages. Since that time the canal has undertaken projects to accommodate larger ships.
▶ 0:37:21Mr. Maffei: A trend of worsening droughts in the region has forced limits to the operations. Starting in june of 2023, the canal authority reduce the number of ships allowed to transit per day. The imitations in combination with the de facto closure of the suez canal has had serious consequences increasing rates, fees, and transit times. In the first half of 2024 U.S.
▶ 0:37:50Mr. Maffei: Importers and exporters expressed concerns to the fmc including doubts about reliability and questions about how the authority was determining which ships could transit and how long they would have to wait. The fmc has statutory authorities under the laws of foreign shipping practices to investigate and take counteraction if it finds that a foreign country has contributed to "conditions unfavorable to shipping in foreign trade." given the mandate and consistent
▶ 0:38:21Mr. Maffei: With fmc's mission, we looked deeper into the causes of the issues facing the canal. The first step was to meet with officials and stakeholders about the conditions adversely affecting operations, what was being done to address concerns and whether any aspect of the operations might result in conditions unfavorable to U.S. shipping that should be addressed.
▶ 0:38:45Mr. Maffei: We traveled to panama in july of 2024 and we met with them -- with the recently elected president and officials. We met with the panama canal authority and private sector stakeholders.
▶ 0:38:59Mr. Maffei: We had candid discussions such as panama's plans to work with the water level challenges, abetting processes and the concern that the canal authority was bringing in foreign more revenue during the crisis than it had before limits were forced by water shortages. Both the government of panama and the canal authority did answer our questions subsequently. The canal authority informed us that they were already making changes to the allocation system.
▶ 0:39:29Mr. Maffei: Panama's rainy season has for now alleviated the most acute issues at this that -- at the canal and normal volumes have been restored. That said while the government and canal authority have with the advice of the U.S. army corps of engineers developed credible plans to mitigate future water shortages, they warned that it is likely that at least one more period of reduced transits will occur before the plans can be fully implemented.
▶ 0:39:57Mr. Maffei: Since the meeting the fmc has monitor the progress on this front and examined other policy changes. I do have continuing concerns particularly about the auction slot allocation procedures, not so much that they are applied right now, but when another low fall rain period occurs.
▶ 0:40:18Mr. Maffei: As we learn more about panama and the canal authority, and how they would handle another drought and receive more input from american importers and exporters, we remain position to take appropriate action if warranted. How the operations affect american commerce was a high priority under my chairmanship and remains a high priority at the federal maritime commission and I am extremely pleased that it is a priority for this committee as well. Thank you.
▶ 0:40:48Chair Cruz: Thank you commissioner. The next witness is eugene kontorovich, who can explain panama's treaty obligations and the remedies that the U.S. might seek for potential violations. He is appearing virtually and
▶ 0:41:05You Are Rep. Nunn: -- recognize for your opening statement.
▶ 0:41:08Mr. Kontorovich: Chairman cruz, ranking member cantwell I appreciate and regret the opportunity to testify before you remotely. I have been asked to discuss possible violations of the treaty concerning permanent neutrality and operation of the panama canal entered between the two countries in 1977. I would say determining whether a certain situation violates the treaty is a mixed question.
▶ 0:41:38Mr. Kontorovich: It depends on the meaning of the treaty and the situation on the ground. I have not had any classified intelligence briefings so I am going to speak about the meeting of the treaty primarily. We see that under international law each party to the treaty is entitled to determine whether a violation has occurred. Now, in exchange for the united states ceding control, panama agreed to a special regime of neutrality.
▶ 0:42:08Mr. Kontorovich: The essential features are that the canal must be open to all nations for transit, that is article two. Equitable fees, article three, and exclusive panamanian operation, article five. The exclusion of military presence, article five. That provides that only panama shall operate the canal.
▶ 0:42:33Mr. Kontorovich: Testifying at the meeting of the treaty, the carter administration emphasizes that this prohibits foreign operation of the canal as well as the garrisoning of foreign troops. Article fives appears to be primarily concerned about controlled by foreign sovereigns. If panama signed a treaty with the people's republic of china whether the latter would operate on behalf this would be clear violations.
▶ 0:42:58Mr. Kontorovich: But what if they contracted with port operations with a state firm or a private firm influenced or controlled in part by the chinese government? The suez canal company was itself for being nationalized a private firm in which the united kingdom was a controlling shareholder. This was understood to represent reddish control over the canal. In other words, a company need not be owned by the government to be controlled by the government.
▶ 0:43:27Mr. Kontorovich: The real question is the degree of de jure or defect or control which range from government companies inane authoritarian regime to purely private firms in an open society like the united states but there are many possible situations in the middle. The treaty is decided on how much control is too much and as we will see this as one of the many questions committed to the judgment and discretion of each party.
▶ 0:43:56Mr. Kontorovich: Turning to foreign security forces, the presence of third country troops -- second party troops would -- the presence of foreign security forces could violate the regime of neutrality even if they are not represented an organized and open military formations.
▶ 0:44:17Mr. Kontorovich: Modern more -- warfare has seen belligerent powers trying to evade legal limitations by disguising in civilian garb. From russia's little green men to hamas terrorists, bad actors seek to exploit the fact that international treaties focus on sovereign actors. Many of the man-made islands in the south china sea began as civilian projects before being suddenly militarized.
▶ 0:44:47Mr. Kontorovich: This was discussed in the senate ratification hearings over the treaty. Dean rusk said informal forces would be prohibited, thus the civilian character of the chinese presence around the canal does not in itself mean it could not represent a violation of the treaty that these companies and their employees evolved -- involved, chinese covert agents or other agents of security forces.
▶ 0:45:14Mr. Kontorovich: This leads us to the final question, who determines if neutrality is being threatened or compromised. Unlike other treaties that provide for third-party dispute resolution, the neutrality treaty has no such provision. Instead it makes clear that each party determines for salix -- itself the existence of a violation. Article four says that each party is maintaining a route sheet -- a regime of neutrality making it a second obligation.
▶ 0:45:44Mr. Kontorovich: The understanding made accompanying to ratification made clear that article five allows each party to take " unilateral action." senator jacob says that while the word unilateral is abrasive, we can "decide it is being threatened and then act with whatever means necessary to keep the canal neutral unilaterally." I look forward to your questions.
▶ 0:46:10Chair Cruz: Thank you professor. Our finer -- our final witnesses is a shipping council ceo joseph kramek can discuss the challenges facing container lines moving through the panama canal. You are recognized.
▶ 0:46:27Mr. Kramek: Thank you chairman, ranking member and members of the committee. I am the president and ceo of the world shipping council. The world shipping council is the global supply of shipping and we consist of 90% of the liner shipping which is container vessels and vehicle carriers. They operate on fixed schedules to provide customers with regular service to ship goods and throughout the world.
▶ 0:46:55Mr. Kramek: Our focus is on sustainable, safe and secure international transportation. Nothing could be more important to the U.S. economy and wsc member lines that support the U.S. economy that are sustainable, safe and secure panama canal. As you have heard using the panama canal to transit between the atlantic and pacific saves money. Atypical voyage from asia to the U.S.
▶ 0:47:24Mr. Kramek: Or east coast can be made during 130 days -- 30 days or 40 days if they must take alternate routes. From a commercial trade perspective the big picture is this. One of the world's busiest trade lanes is the transpacific with cargo coming from or going to asia via the united states. Focusing, cargo coming from asia and bound for the U.S., golf and east coast ports always transits the panama canal.
▶ 0:47:56Mr. Kramek: Similarly cargo exported from U.S. and east coast forests, the large share is soybeans, corn, cotton, livestock and dairy also almost always transits the panama canal. The result is that 75% of canal traffic originates in or is bound for the united states.
▶ 0:48:15Mr. Kramek: Some examples include the port of houston which exports 14 billion in trade to asia and the port of new orleans exported 7 billion, not all of which was uncontainable investors. -- container vessels. The port of savannah exported 14 billion to asia. Our member lines are the largest users of the panama canal and we carry the bulk of the trade.
▶ 0:48:43Mr. Kramek: Global ocean trade is facing challenges, as you have heard in the panama canal is no exception. We talked about the drought in 2023 and the historic low water levels that it caused in the lake that feels the canal locks, a unique system that is a freshwater feed as contrasted to an ocean to ocean system which the french tried and failed which is actually active in the suez canal.
▶ 0:49:12Mr. Kramek: These low water levels reduce transits from 36 a day to as low as 22. Additional below water levels required a reduction in maximum allowable draft levels for the depth of the ship below the waterline which for our members reduce the number of containers that they could carry through the canal.
▶ 0:49:33Mr. Kramek: This resulted in a 10% reduction in import volumes for the U.S., golf, and east coast ports with you -- with the port of houston reducing a 26.6% reduction. The volume of container trade into the united states remains at record levels and continues to expand. 2024 numbers are just out, and the impound trade to the U.S.
▶ 0:49:57Mr. Kramek: Expanded 15% which was second only to the 17.5% inbound traffic we experienced during pandemic driven demand. Just yesterday the port reported record-breaking trade volumes with an 8% increase. More broadly, wsc member lines have transported 1.2 million dollars in goods. This contributed to trillion dollars in economic output to the united states and supported six point 4 million U.S.
▶ 0:50:27Mr. Kramek: Jobs and over 442 billion wages and salaries. These are the clothes on your back, the shoes on your feet and the phones likely in your hands. Wsc members look forward on working to maintain the safety, sustainability, and security of the panama canal. It is vital to U.S. trade. The record number of cargo that are members continue to carry demonstrates our commitment.
▶ 0:50:53Mr. Kramek: We appreciate the committee's continued support and commitment to the liner shipping industry and I look forward to answering your questions. Thank you.
▶ 0:51:03Chair Cruz: Thank you very much. We will move to questioning. I want to start with the chairman. Are you aware of allegations from some vessel operators of disparate treatment such as sweetheart deals or favorable rebates by cap -- by panama effort canal transit?
▶ 0:51:21Mr. Sola: Thank you for the question. We have become aware that there are some complaints by cruise lines that said that they were not given a refund of canal tolls. When we looked into this we found that the panamanian executive order decrease -- decree 73 says that if the cruise line would stop at a certain port they could be well-funded -- refunded 100%. That is the only instance where that exists.
▶ 0:51:53Mr. Maffei: We will continue to look into it but cruise ships is the one area that we have found something that.
▶ 0:51:59Chair Cruz: Some press coverage says the panama canal is nominally independent even though it provides a large share of the panamanian government revenue. Can you describe how the fmc views the canal authority and the panamanian government. Are they distinct entities or a single apparatus?
▶ 0:52:22Mr. Sola: The law is clear and it comes from the merchant marine act that there is only one entity. In addition to that, our predecessor at the federal maritime commission was a U.S. shipping board which was formed in 1916 as a direct result of the panama canal. The first chairman was george washington garth those, the first administration. -- administer. We look at it as one entity.
▶ 0:52:49Mr. Maffei: We might add, it is like the georgia sports authority and the state of georgia. Georgia port authority can do its own bonds and governance but ultimately georgia is responsible for it.
▶ 0:53:03Chair Cruz: So panama was the very first latin american country to join china's belt and road initiative and china is building a fourth bridge across the panama canal for car traffic and light rail. Chairman, why should chinese construction of a bridge near panama city concern the united states?
▶ 0:53:24Mr. Sola: Mr. chairman, we all saw the tragedy that help in -- that happened with the francis scott key bridge incident and the devastated -- the devastation that happened to baltimore and recently what happened in the suez canal when we had a ship get stuck. It is not only the construction of the bridge but the removal called the bridge of the americas which was built in 1961. So it will paralyze cargo traffic in and out of the chair
▶ 0:53:54Cruz: Chair cruz: canal. Panama renewed concessions for two ports for a chinese company. Of course they are controlled by the communist party. How does china use control of those ports for economic gain?
▶ 0:54:10Mr. Sola: Ima regulator, -- I am a competition regulator. The chinese ports let me put them into score -- interscope. The port of balboa is roughly the size of the port of houston. They do about 4 million containers a year with 28 -- and the one on the atlantic is the same of miami and they do about one million containers.
▶ 0:54:40Mr. Sola: So where the port of houston generates $1 billion aware -- a year and miami about $200 million. The panama ports company pay zero for 20 years on that concession. So it is hard to compete against arrow. That is our economic concern that we would have.
▶ 0:54:59Chair Cruz: Anything to add?
▶ 0:55:01Mr. Maffei: I also think it is important. I would point out that you do not have to stop it either port. It is not like they control the entrance to the canal. That is the canal authority. It is of concern. I would point out that the panamanian government thinks it is of concern because they are conducting their own audit. We remain interested as well.
▶ 0:55:24Chair Cruz: So professor, I want to turn to the treaty. President trump made important arguments that both the chinese control over canal infrastructure and exorbitant fees charged for transits are violations of the treaty. I want to highlight three provisions that you mentioned.
▶ 0:55:46Chair Cruz: Article four requires both the united states and panama to establish and maintain "a regime of neutrality." article five limits any foreign control by providing "only the republic of panama shall operate the canal and maintain military forces, defense sites and military installations." article 31c says "tolls and
▶ 0:56:17Chair Cruz: Other charges be reasonable, equitable and consistent with the principles of international law." in your opinion, could the facts discussed here be violations of the neutrality treaty enforce right now between the united states and panama?
▶ 0:56:31Prof. Kontorovich: So, I think, senator, they potentially could. It is impossible to say definitively without knowing more in particular about the degree of chinese control and involvement. It is important to note that these port operation companies that operate the ports, when they received their first contract it was just a few months before hong kong was handed over to china.
▶ 0:56:59Prof. Kontorovich: In other words they received them as british companies so very -- just a few months before the handover. Since then hong kong has been an -- inc. Into china and placed under a special regime and the independence of those companies has been greatly abridged to say nothing of the state owned companies involved elsewhere in the canal area, which raised greater questions.
▶ 0:57:25Prof. Kontorovich: Additionally I should point out that the understandings between president carter and the panamanian leader which were attached to the treaty informed part of the treaty provided that the united states can "defend the canal against any threat to the regime of neutrality." I understand as providing some degree of preemptive authority to intervene, one need not wait until the canal is actually closed by some act of sabotage or aggression which we have heard from the testimony would
▶ 0:57:55Prof. Kontorovich: Be devastating to the united states. But there is some incipient ability to address potential violations.
▶ 0:58:00Chair Cruz: Your final point leads to my last question which is, if the united states determines that panama is in violation of the treaty, what remedies and what is the range of remedies that the united states would have for that treaty violation?
▶ 0:58:16Prof. Kontorovich: It would be shocking to people to hear today, but when one goes over the ratification history and the debates and discussions in this body over the treaty, it was clear that the treaty was understood as giving both sides, separately the right to resort to use armed force to enforce the provisions of the treaty.
▶ 0:58:39Prof. Kontorovich: It is not so surprising when one understands that united states made an extraordinary concession by transferring the canal, which the united states built at great expense and maintained and operated to panama. Gratis. In exchange it received a kind of limitation and a permanent limitation on panamanian sovereignty that panama agreed that the united dates can enforce this regime of neutrality by force.
▶ 0:59:06Prof. Kontorovich: Of course, armed forces never be the force -- the first recourse for any international dispute and should not be arrived at rashly or before negotiations are exhausted. It is clear that the treaty contemplates that as a remedy for violations.
▶ 0:59:25Chair Cruz: Thank you. Ranking member.
▶ 0:59:27Sen. Cantwell: Thank you. Mr. kramek, I think also critical. When you think about it, we are here discussing cost. Why? Consumers pay more when shipping costs are higher, whether you are the farmers trying to export projects during covid, literally products getting left on the docks.
▶ 0:59:55Sen. Cantwell: And importers are paying more if the shipping costs are too high. When we look at these incidents that we now see in our supply chain and we had our own in seattle where the container ship lost power and was careening towards our big ferris wheel down town -- downtown by the ferry terminal. Luckily some vessels were able to push the tug from out of the direct path of severe devastation.
▶ 1:00:24Sen. Cantwell: Now we mentioned the suez canal and we mentioned baltimore and we have our own seattle experience. What do we need to make sure that on the cost side that we are not -- that we are making the right investments from a security level so make sure that these kinds of incidents that could do great harm do not happen? And commissioner, since you were at the U.S.
▶ 1:00:50Sen. Cantwell: Southern command, what do you think we need to do to renegotiate or have a conversation with the panamanians about the security level that needs to exist in panama with this close proximity? And Mr. maffei, this audit, will it lead to a discussion with panama about those contracts?
▶ 1:01:17Sen. Cantwell: As I said, I believe we should be aggressive about U.S. involvement here and in latin america. I think panama represents one of our biggest supporters in that region. But we should engage to get this right on the cost side and security side. If I could just hear your comments on each of those.
▶ 1:01:37Mr. Kramek: Thank you. Even one incident is unacceptable from a safety perspective -- perspective. Our members work hard with the international maritime organization and U.S. coast guard and other entities to try and have the safest operations possible. But accidents do occur. They are rare, if you do count the number of some 7000 port visits a year. One is unacceptable.
▶ 1:02:07Mr. Kramek: Continued investment in U.S. infrastructure and review. And we have a lot of old infrastructure as the tragic incident in baltimore illustrated. We have bridges that need a hard look to whether or not they need additional tendering systems and the like. And investments in our port infrastructure can be helpful along those lines as well. For our members I assure you that they invest in the latest technology.
▶ 1:02:38Mr. Kramek: We have 600 new ships on order with some of the latest technology in the world.
▶ 1:02:43Sen. Cantwell: And I want the U.S. to get a big portion of that. Commissioner, what about just a new U.S. southern command, U.S. government conversation with the canal authorities and the government about the security level that we see?
▶ 1:03:02Mr. Sola: Thank you. First of all, the airborne wing that I am wearing today are decorative and I have not worn a uniform in 35 years. That is my personal experience. I believe that the security of the canal has always been understood to be provided by the united states. Panama does not have a military.
▶ 1:03:27Mr. Sola: I always believe there has been a close relationship with southern command that we would provide that. It would be nice to see a formalization of that one way or another. I do not believe it is in the treaty of all -- at all.
▶ 1:03:40Sen. Cantwell: Formalization of a cybersecurity agreement. You have accidents and then larger issues that you just have to be on top of. What I do not like about anybody who has a back door, I am for the united states advocating do not buy from people who have a government back door because what are you going to do? At some point you will regret that.
▶ 1:04:06Sen. Cantwell: Commissioner, what about this audit, and could we push panama on these issues of looking at closer U.S. structure instead? Particularly since the seachange is what everybody said. Everybody thought it was hong kong and then we thought it was china and then the next thing you know it made more aggressive postures.
▶ 1:04:34Sen. Cantwell: They are making aggressive postures everywhere which is why the united states is saying no government backdoors and getting five other nations to say the same thing and that is going to help us. And so is the investment. What about getting this business or some of that back into proximity under the audit?
▶ 1:04:53Mr. Maffei: It is the controller office and they are investigating contracts. We do not have any jurisdiction over ports per se. Your broader point is important. While we were down there both of us heard several times that the panamanians would -- the ones we talked to would welcome U.S. companies coming in and doing a lot of this work. Frankly, the bids are not competitive with the chinese bids.
▶ 1:05:23Mr. Maffei: Frankly they are not that existent because the U.S. companies can make more money doing things other places. Even if they were it would be difficult to put competitive bids with the chinese bids are so heavily subsidized. You are right, this is a problem and in many other areas of the world that we can get into in subsequent questions. But --
▶ 1:05:44Sen. Cantwell: My time is expired but my major point is, let us be a big maritime powerhouse. Let us revitalize our supply chains and drive down costs for consumers and secure what we need to secure.
▶ 1:06:00Chair Cruz: Thank you. Very quickly you talked about the chinese bids were heavily subsidized by the chinese government. What would china's incentive be to subsidize the bids to undercut american and other companies?
▶ 1:06:15Mr. Maffei: It is not a short answer but china has made norse -- no secret about gaining influence throughout the globe. It has in filler -- invested in 129 ports and runs a majority of 17 points -- ports which does not include this hong kong company. That is just directly, direct chinese own. It has been a part of the belt and road strategy or the maritime silk road for decades.
▶ 1:06:42Mr. Maffei: They believe that this influence, this investment in owning maritime ports is important to their economy.
▶ 1:06:52Chair Cruz: Senator fischer.
▶ 1:06:55Sen. Fischer: Thank you. I would like to follow-up on the ports. And where we are on that. In 2021, hutchinson was awarded those two ports, port balboa and port cristobal in a no-bid process.
▶ 1:07:18Sen. Fischer: Can you tell me, does the united states have any authority or recourse with the panama canal authority under our current agreement with panama to rebid those terminal consists in -- concession contracts and perhaps that is more your purview.
▶ 1:07:45Mr. Maffei: Senator, both of those were redone until 24/7 if I believe. They have to pay $7 million is what the ongoing rate is for the port of houston and miami size concessions.
▶ 1:08:00Sen. Fischer: And it cannot be rebid until after?
▶ 1:08:04Mr. Sola: I believe that is what the comptroller's office is auditing. That was done under the previous panamanian administration. A new administration came in and they called for an audit of the contract immediately.
▶ 1:08:22Sen. Fischer: You are talking about how to incentivize perhaps companies from the united states to be able to participate in a bid process that does not seem to be reasonable. And do you think that the panamanians would welcome viable alternatives? Are we in that position let? -- yet.
▶ 1:08:51Mr. Maffei: This is out scott -- outside the scope of what we do but having have gone there and looked at this issue I think it is very important. It was mentioned, and senator cantwell just mentioned a program. It is not like this does not happen but it has not been a huge priority of the united states to try to, if you will match these bids to create programs widely available to U.S.
▶ 1:09:21Mr. Maffei: Firms in order to put together more competitive bids in these countries where some of their domestic laws actually require that you go to the lowest bidder sometimes just as arsdale. So yes, if you are looking for places to do U.S.
▶ 1:09:37Mr. Maffei: Policy to counter this, you definitely want to look at whether the united states for strategic and economic reasons be investing in infrastructure and important maritime locations all over the world. China has done that and they have been doing it for 20 years. And it is a cow long left the barn.
▶ 1:09:59Sen. Fischer: You mentioned investing in infrastructure. I was at the panama canal in 2023. I learned in that time about the loss of freshwater with each ship movement through the canal. You talked about the droughts in your opening comments. Freshwater is vital to the workings with the canal.
▶ 1:10:25Sen. Fischer: How effective do you think investments in increasing that freshwater storage are? Are they happening, are they viable? You touched on it briefly in your opening comments. How do we see those investments happening so that we can have operational stability?
▶ 1:10:47Mr. Maffei: That is a good question and a bit out of my purview. There are several investments. Water reclamation and pumping water up. The main plan that the U.S. army corps of engineers has helped panamanian authority develop involves another basic expansion of bringing in more water at elevation that you could then use to continue the canal.
▶ 1:11:16Mr. Maffei: There are a lot of issues with implementing that, not the least of which being indigenous people in those areas. Not a huge number but towns and negotiating those. Just in the united states how those are issues. It is viable. In that part of the world you can make more freshwater available to make the canal not limited. It takes time and there will at least be one more incident of severe limitations before that occurs unless we get really lucky. There could be more than that.
▶ 1:11:45Sen. Fischer: Thank you.
▶ 1:11:47Chair Cruz: Thank you. Senator blunt rochester.
▶ 1:11:55Sen. Budd: Rochester at the heart of this hearing is a fundamental question about how the U.S. will compete on the world stage and maintain our national security. These are the questions that will define the future of this country. For american families to see lower prices and better economic opportunities we have to meet moment honestly and seriously.
▶ 1:12:20Sen. Budd: I am proud to have joined senators cantwell and lectern to introduce the --blackburn to introduce the promoting resilient supply chains act. This ensures that we have a national strategy to address our broken supply chains, whether it is a bridge collapse, a major global conflict or union striking for their rights. Interruptions and disruptions to the supply chains severely impact our economy.
▶ 1:12:50Sen. Budd: Our legislation tackles this issue by elevating supply chains like the disruptions at the panama canal to be proactive and strategic. It helps us understand how we strengthen ties with friends and allies instead of pushing them into the arms of our competitors.
▶ 1:13:10Sen. Budd: I agree with ranking member cantwell that we should have a hearing on how we compete with countries like china and I have grave concerns about china's global infrastructure investments and cyber threats to the U.S.. Addressing these are national security interests. With that, I would like to shift semi first line of questioning and it is for you.
▶ 1:13:32Sen. Budd: It is no secret that the canal has had issues due to droughts, nor is the increasingly frequent drought a new phenomenon. Do you believe that the panama canal authority dead enough to anticipate the issues impacting the operation?
▶ 1:13:50Mr. Kramek: Senator, thank you for your question. They did the best I guess with the information that they had. I do not know that they anticipated a drought of that magnitude. I would say going forward what the commissioner just discussed about the development of a second reservoir to feed into the lake, and the U.S.
▶ 1:14:13Mr. Kramek: Army corps of engineers doing a feasibility review of the project, as well as some other projects mentioned, that seems to be a good path forward in terms of resiliency of the canal and making it a viable waterway for 2050 and beyond.
▶ 1:14:33Sen. Blunt Rochester: Part of the challenge is that it was recently started and time is of the essence. Do you think the canal authority considered the obvious impacts in its planning?
▶ 1:14:46Mr. Kramek: C1 >> I don't have that information. >> now that we are faced with this impact, what do you think the canal authority needs to do to bring the canal into full authority and full operation?
▶ 1:15:14Mr. Kramek: They are back to full operation. Going forward it is taking a look at these projects to make the canal more viable. >> the port of wilmington is in my state, one of the leading importers of fruit. The delays through the canal have an impact on perishable goods like those that my port handles.
▶ 1:15:38Mr. Kramek: Do you believe the canal authority should prioritize perishable goods or provide some of the solution to support perishable goods? Anyone on the panel can answer. >> let me address your question because I am not sure it is my place to answer it. You are right.
▶ 1:15:58Mr. Kramek: One of the complaints we have heard is from container shippers who export goods and many other commodities that are sensitive are there because of market conditions or perishable products. They are on container ships and most of the cargo on the container ship is less time sensitive.
▶ 1:16:18Mr. Kramek: In the bidding process that the authority developed when they had to rush in the slots, the highest bidder got the first lot . The challenge there is every kind of commodity is bidding.
▶ 1:16:36Mr. Kramek: Liquid natural gas which is extraordinarily valuable, not that you are agricultural commodities are not valuable but compared to the lng, you are losing volume every delay so they would far out to the container shippers. Whether there should be something done to help these, we are looking into that but it is a large concern.
▶ 1:17:06Mr. Kramek: How do we figure out a way for these agriculture shippers who are not the main players on the ships but an important part of it. I wish I had a better answer. >> I will submit questions for the record because I know my time has run out. I want to understand what we can do as the united states in terms of us being able to be competitive. What can we do better? I will submit questions for the record. I yield back. >> senator sullivan.
▶ 1:17:38Sen. Sullivan: Thank you. I appreciate the witnesses. I have questions for Mr. sola and Mr. kontorovich. The setting in which you testified two chinese companies operate the two huge ports on both ends of the panama canal.
▶ 1:18:02Sen. Sullivan: The concession for these ports were extended in 2021 for a 25 year period without any bidding. Is that correct? It was clearly a sweetheart deal, correct.
▶ 1:18:18Mr. Sola: According to press releases the company paid back taxes of $150 million.
▶ 1:18:27Sen. Sullivan: The panama deputy attorney general has objected to that?
▶ 1:18:31Mr. Sola: The comptroller has asked for an audit.
▶ 1:18:35Sen. Sullivan: But somebody objected?
▶ 1:18:37Mr. Sola: A lot of people objected.
▶ 1:18:39Sen. Sullivan: Chinese communist party officials are known to bribe other officials in countries all around the world. We know that. They do it all the time. No offense to panama but they don't have the greatest reputation of having offensive -- officials who are not on the take. Is there any evidence that the chinese bribe people for this concession? If so, would that be a violation of the treaty?
▶ 1:19:07Sen. Sullivan: Let's assume we find evidence that chinese communist party officials bribe panama officials. I think it is likely because the chinese do this everywhere. Would that be a violation of this treaty?
▶ 1:19:21Mr. Kontorovich: In itself, that would not be a violation. What would be a violation is actual threats to the operation of the canal. To the extent that the chinese government was involved in procuring these projects, it provides support for the notion that these companies are stirring some type of governmental interest.
▶ 1:19:43Sen. Sullivan: Sorry to interrupt. Let me get to the issue of threats. Let's assume the prc and pla invaded taiwan and the philippines or went to war somewhere in the south china sea and we were surging our navy through the indo-pacific, through the panama canal.
▶ 1:20:07Sen. Sullivan: Are the companies now controlling both sides of the canal, the chinese companies, subject to the prc national security laws that mandate cooperation with the military and state intelligence agencies? Does anybody know that?
▶ 1:20:29Mr. Kontorovich: They are subject to those laws all the time by virtue of being hong kong companies. They face consequences for not complying.
▶ 1:20:40Sen. Sullivan: Wouldn't that be a violation of the treaty? Isn't that a huge risk to us right now? They invaded taiwan, they invaded the philippines. They could go to these two companies and say shut it down, make it hard, sink a ship in the canal. Wouldn't they be obligated to do that under chinese law if they were ordered to by the ccp?
▶ 1:21:10Mr. Kontorovich: I don't know that they would be obligated but the people's republic of china would have many leverage. That is why the treaty specifically says that we can act not just to end actual obstructions to the canal. We don't have to wait until the canal is closed by hostile military action.
▶ 1:21:33Mr. Kontorovich: But rather that we can respond at the incipient level to threats and this is up to the president whether to determine whether this is robust to Sen.
▶ 1:21:47Sullivan: Constitute. Aren't we walking up to the idea of a suicide pact? We have two chinese companies on both ends of the panama canal who if there is a war that evolves us and china, these companies would be obligated to do the bidding of the chinese communist party and pla? Aren't we walking up to a very significant national security threat already?
▶ 1:22:14Mr. Kontorovich: There is a threat in what makes the action of the chinese government difficult to respond to but important to respond to is that they conceal this in levels of gray without direct control.
▶ 1:22:30Sen. Sullivan: Let me ask you on that topic. Let's assume that we find out and it would not be surprising, that these two companies have chinese spies or military officials within the ranks of the employees of the companies. Let's assume we found that out. I don't think it is a big assumption. It is probably true right now.
▶ 1:23:00Sen. Sullivan: You have spies and military personnel within the ranks of these two companies that are controlling both ends of the panama canal. Wouldn't that be a blatant violation of article five of the neutrality treaty? It probably is true?
▶ 1:23:17Mr. Kontorovich: Yes. I do think it would be a clear violation. As the former secretary of state said at the ratification hearings, informal forces can violate article five as well as formal forces.
▶ 1:23:33Sen. Sullivan: Mr. sola, you agree with that? Is there any evidence of chinese spies or other nefarious chinese actors embedded in these companies?
▶ 1:23:44Mr. Sola: We have no information. That is not under the purview.
▶ 1:23:49Sen. Sullivan: But you agree that would be a violation of article five will be the neutrality treaty?
▶ 1:23:54Mr. Sola: I do. >> senator baldwin.
▶ 1:24:01Sen. Baldwin: Thank you. Commissioner maffei, good to see you. Thank you for being here today. I am very concerned about china's growing influence in the world's infrastructure network. A company from hong kong operates two ports in the panama canal on each end. While the company is not chinese state owned, it is subject to china's national intelligence law.
▶ 1:24:31Sen. Baldwin: Moreover, a chinese state-owned entity is currently building a bridge over the panama canal. The panama canal is just one example of how far china's influence stretches. Their dominance in maritime, logistics and shipbuilding sectors lessons competition, creates supply chain risks and creates opportunities for surveillance and information gathering.
▶ 1:25:00Sen. Baldwin: In order to facilitate the movement of goods throughout the world, it is essential to have a secure and level playing field which we currently do not. Chinese current practices do not allow for that. The united states trade representative recently investigated china's practices in the commercial shipbuilding sector under section 301 and recently concluded that their dominance is a burden to united
▶ 1:25:31Sen. Baldwin: States commerce. A few decades back we were the dominant country in commercial shipbuilding. In 2023 we build five commercial ships and china built over 1700 according to that investigation.
▶ 1:25:55Sen. Baldwin: What policies would you recommend to prioritize growth of the united states influence in the maritime and logistics sector to compete with china and level the playing field?
▶ 1:26:08Mr. Maffei: Senator baldwin, it is very good to see you. We were colleagues for a term in the house. I appreciate that. Amen to everything you said. As an illustration, senator sullivan was talking about hutchison ports. It is the same company that runs at terminal on both ends of the canal. I am concerned about that.
▶ 1:26:33Mr. Maffei: However if we want to be concerned about that, all of us should lose more sleep than we are losing because if there are spies there, there might be spies at other hutchison ports and there are other hutchison ports in almost every part of the world. They owned the largest container port in the united kingdom, responsible for nearly half of britain's container trade.
▶ 1:26:56Mr. Maffei: They control major terminals in argentina, australia, the bahamas, indonesia, the netherlands, south korea and tanzania. If owning and managing ports means that china somehow has strategic control of the panama canal, they also have it over the suez canal, the singapore straits, the mediterranean sea and the english channel. That is one aspect of what you were talking about.
▶ 1:27:20Mr. Maffei: That is not including the shipbuilding heavily subsidized such that now I believe over half of new ships in the world should be counsel or coming from china. Not because these are bad companies, but because they are undercutting other things. It has been going on for 20 years which makes it difficult to answer your question. It is a long answer this. Is not a problem that occurred last week.
▶ 1:27:46Mr. Maffei: This was going on all of resident biden's term -- president biden's term, president trump's first term. The only thing I can say is I echo what ranking member cantwell said and members of both parties have echoed it, that we need some type of overall maritime strategy and that economic resilience is important and I believe this is the greatest country in the world.
▶ 1:28:17Mr. Maffei: If we start countering some of these efforts, we can do it. It has become a national priority. We are talking about outside the borders, investing outside the borders does not make a good campaign ad but it might be necessary to secure such an aggressive and open strategy that china has.
▶ 1:28:37Sen. Baldwin: Thank you for that answer. My time is short. I will allow Mr. kontorovich to answer this for the record. I would like your help in providing actions we can take to overcome the challenges being discussed today. I am confident we can find bipartisan pollutions to pursue.
▶ 1:29:02Sen. Baldwin: It is my view that we should strengthen our relationship with panama through mutually beneficial actions. For one, we should have a fully staffed embassy. The united states went without an ambassador to panama from 2018 to 2022 largely due to partisan gridlock in the senate confirmation process. What strategies would you suggest the U.S.
▶ 1:29:27Sen. Baldwin: Pursue to encourage panama to enhance its security relationship with us, the united states of america, rather than china and how can we leverage the strength of the american private sector to encourage more investment in the important infrastructure projects where china currently has a strong presence and dominance?
▶ 1:29:50Prof. Kontorovich: Thank you. My understanding of the chinese advantage is to the extent that they are willing to use their government wealth to consistently underbid contracts. They have an advantage that cannot be beat. Thus, leaving these issues to contracting will put american companies at a disadvantage.
▶ 1:30:18Prof. Kontorovich: One potential action would be to make clear to panama that based on these changes that have occurred, increasing chinese control over hong kong, the passage of the national security law, the belton road initiative, the military civilian integration doctrine of china, that contracts with chinese-based companies are considered suspect and incompatible with the regime of the treaty.
▶ 1:30:48Prof. Kontorovich: That would give american companies and other companies a fighting chance. >> thank you senator blackburn.
▶ 1:30:59Sen. Blackburn: Thank you, chairman. Yes or no, it is the china investment into the panama canal a direct threat to U.S. national security, yes or no? Mr. sola, I will start with you. Thank you.
▶ 1:31:18Mr. Sola: I don't have that information, senator.
▶ 1:31:22Sen. Blackburn: Ok. And, we have talked about the neutrality treaty which is of concern to all of us. As I have looked at this and I appreciated senator sullivan's questioning on this, we look at how president trump is going to push forward with getting this issue addressed.
▶ 1:31:52Sen. Blackburn: We have heard a good bit about this from our shippers that are looking at what happens coming out of the port of memphis. I think the government of columbia learned a lesson last week that we are not going to go soft on some of these issues. When you look at the fact that the U.S. is a primary user, it is the primary user of the panama canal.
▶ 1:32:24Sen. Blackburn: We are panama's largest provider of direct foreign investment. I think those two things should be significant. Foreign investment into panama is $3.8 billion annually. This is why people looking -- why people are looking at this issue. Professor, thank you for joining us.
▶ 1:32:55Sen. Blackburn: Shouldn't our investment in panama be contingent on their adherence to that neutrality committee, ensuring that panama and panama alone would control that can now? -- canal?
▶ 1:33:14Prof. Kontorovich: That is an action we can take to enforce the treaty. That is an action we can take even without the treaty perhaps to the extent that the united states considers the chinese operation of facilities around the canal to be against its interest, it can condition economic relationships on the exclusion of china. The U.S. typically does not work that way.
▶ 1:33:41Prof. Kontorovich: That may be one of the reasons why china has made inroads everywhere. For that, we don't need to treaty. If we consider the treaty to be violated, measures like that fall short of the armed forced authorized by the treaty --
▶ 1:34:00Sen. Blackburn: Let me interrupt you because I want to move on. As you look at how china has used the belton road initiative and we talked about that this morning, we know that they have pushed the digital yuan. I am concerned that given their control over much of that infrastructure around the canal that they would attempt to force U.S.
▶ 1:34:26Sen. Blackburn: Shippers or our allies to bypass the dollar and use the digital yuan as they are in other countries where they are practicing debt diplomacy and expanding the belton road initiative. Mr. sola, can you speak for a moment about the potential for manipulation because as I mentioned, we are hearing a good bit about that.
▶ 1:34:58Sen. Blackburn: We are hearing that the toll structure disadvantages U.S. companies, that the canal authority has begun charging millions of dollars to skip the queue. These fees put many shippers in an adverse position and these shippers have a huge impact on ports along the lower mississippi or mississippi river.
▶ 1:35:26Sen. Blackburn: These exorbitant fees are there unless you will face delays at the canal. Then the impact of hearing these chinese companies would preference the yuan as opposed to the dollar.
▶ 1:35:41Mr. Sola: Thank you, senator. The fees that we are looking at was because of the auctioning of the slots. Panama had a smaller percentage, maybe 20% allocation and then they moved it up to 30% and 40% because it became a moneymaker for them.
▶ 1:36:03Sen. Blackburn: Ok. Let me interject. The auctioning of the slots gives these the right to skip the queue?
▶ 1:36:14Mr. Sola: Yes.
▶ 1:36:15Sen. Blackburn: Continue.
▶ 1:36:17Mr. Sola: Under maritime law, it is first-come, first serve. Panama has always put percentage is high. We have gotten a lot of complaints from lng that pay $4 million to go through. We have a lot of complaints from those who did not have the money to go through. If you look at the financial statements, I look at the financial statements of everybody.
▶ 1:36:46Mr. Sola: The canal increase the revenue they had from $500 million to $1.8 billion in the last three years just because of those fees. This is very concerning to us and for the americans.
▶ 1:37:00Sen. Blackburn: Have you seen a tendency to preference the digital yuan over the dollar?
▶ 1:37:07Mr. Sola: I have heard of the digital yuan and I have heard of it used in international shipping as a currency. It is something we are watching because we have a digital chat exchange rule coming up. We will continue to monitor.
▶ 1:37:25Sen. Blackburn: Thank you. >> senator klobuchar.
▶ 1:37:30Sen. Kobluchar: Thank you. I cannot help but think as we debate this issue of the panama canal, while it is important, if you want to look at what is happening right now as in the middle of the night last night when an executive order, a memo was issued by the acting budget director which put a pause on all federal funding for not only nih research of cancer trials
▶ 1:38:04Sen. Kobluchar: And head start and people are in a panic and calling our offices, it is also a severe problem for trade and america's innovation. Freezing all federal funding already granted to improve port infrastructure seems a major problem we should be addressing. We are talking about america's shipping interests. I will go to the topic at hand.
▶ 1:38:34Sen. Kobluchar: The panama canal is a critical trade corridor that allows for american farmers and businesses to reach international customers. I care a lot about this shipping issue as many of you know.
▶ 1:38:47Sen. Kobluchar: Senator thune and I joined forces two years ago to pass a very important bill that took on the international shippers in terms of giving more power to the maritime commission and taking on the rates they were charging businesses and farmers and manufacturers in america. They knew what was coming their way. I will get to that.
▶ 1:39:13Sen. Kobluchar: I want to raise with you commissioner maffei, do you know of any instances where the united states has been signaled out -- singled out or treated unfairly under the neutrality treaty in the operation of the canal?
▶ 1:39:29Mr. Maffei: I do not. One of the reasons the U.S. is disproportionately affected by fees is because the united states disproportionately uses the canal.
▶ 1:39:41Sen. Kobluchar: That is something that would affect the number of fees and we know it as a critical trade corridor and want to continue to use that corridor and be treated in a fair way. I think one of the things that has not been brought out as we look at the periods of congestion or reduced capacity of the canal which we know have occurred like we saw with last year's drought.
▶ 1:40:12Sen. Kobluchar: It can delay shipments, increased transportation costs, leading to higher consumer prices. What steps can be taken to minimize disruptions and prevent cascading costs for consumers during periods of operational strain?
▶ 1:40:30Mr. Maffei: The main thing is that exporters need to make sure they have resilient supply chains. Depending on one lane is risky in this difficult to predict world. That is why the panama canal is so important. It may be a bigger reason than a particular transit is the fact that it is there in case something goes wrong on the other end of the world like the suez canal.
▶ 1:40:56Mr. Maffei: It is the lack of redundancy that has been a big problem and one of the reasons why shipping costs have gone up. If you have to go all the way around africa or the americas, you are taking fewer ships.
▶ 1:41:08Sen. Kobluchar: Thank you. Mr. kramek, in your testimony you described how drought reduced imports to U.S. sports. Do these affect prices for american consumers?
▶ 1:41:20Mr. Kramek: . Yes.
▶ 1:41:22Sen. Kobluchar: I love that short answer. Back to you, commissioner. Has the law improve the ability of shippers to have unreasonable charges waived or refunded by ocean carriers? This has been a major problem for our carriers which can translate into prices and talk about how it has empowered shippers to file complaints against unreasonable practices by the carriers.
▶ 1:41:54Sen. Kobluchar: By the shippers, you know what I mean. I don't mean the carriers themselves. I mean the people who are trying to do business. American exporters.
▶ 1:42:03Mr. Maffei: I don't have a lot of time but it has a tremendous effect. We have seen instances of waving or forgiving detention fees. We have seen settlements go up with major carriers. We have seen cases filed, so many that we have had one and now we have three and too many cases. A huge impact.
▶ 1:42:28Sen. Kobluchar: I will end where I started. Are you concerned about freezing funding that has already been granted for port and infrastructure improvement given what we are trying to do with american ports? We can make stuff here and ship it instead of having it all come to us?
▶ 1:42:48Mr. Maffei: At the maritime commission we try to do a lot with less. As the reporter pointed out, we are funded our annual budget of one hour of the container industry's profits because of covid. Because of that legislation, it is more like 68 minutes. It is still a fraction of it.
▶ 1:43:11Sen. Kobluchar: We only found this out 12 hours ago at midnight from an unknown bureaucrat. Our hope is that we will be able to give you those numbers to show what will happen to the infrastructure if we freeze funding for all of these things across america. Thank you. >> thank you. Senator budd.
▶ 1:43:34Sen. Budd: Thank you. Mr. sola the report from the U.S. china economic review commission details china's efforts to deepen ties with countries across latin america and the caribbean. I would like to ask unanimous consent to enter that report into the record. If that is ok. Without objection, ok. Thank you.
▶ 1:43:59Sen. Budd: I think it is important to view the chinese communist party activities in the panama canal zone in the context of broader efforts to further access latin america's markets and obstruct american interest in our own backyard. Mr. sola, would you agree with that? That you see the ccp activity hopefully to interrupt america's interest in the region?
▶ 1:44:26Mr. Sola: Definitely an economic interest, senator.
▶ 1:44:33Sen. Budd: I was able to travel there and see this firsthand. Are there noticeable differences in port operations when they are controlled by chinese companies and financed by chinese loans? If so, would you explain?
▶ 1:44:51Mr. Sola: We have a wonderful example because we have a U.S. port there. I worked on the development of that many years ago and helped develop it. It used to be a former U.S. navy submarine. As far as the two ports we have, they are completely different. One is a major infrastructure footprint and container port that is moving 4 million containers per year.
▶ 1:45:21Mr. Sola: That is really phenomenal. That is more than miami, fort lauderdale, probably a little bit of jacksonville with that type of volume. On the other side we have a small port but it is a very strategic port on the atlantic. How are the operations done? I don't know how they don't make money.
▶ 1:45:47Mr. Sola: They have been operating for 20 years and they have not made any money so they have not been able to pay the government. That is what concerns me.
▶ 1:45:57Sen. Budd: I appreciate that. What would be the consequences for U.S. trade and for the U.S. economy if access to the canal was revoked or significantly decreased for U.S. shippers?
▶ 1:46:08Mr. Kramek: It would be catastrophic. We have a good example. We experienced that with the denial of the red sea and having to go around the continent of africa. 40% longer voyages, significantly more costs and crew, maintenance, fuel and emissions.
▶ 1:46:32Sen. Budd: Do you have a ballpark in the difference if they are able to transit the canal rather than go around south africa?
▶ 1:46:42Mr. Kramek: It depends. It is about 30 days if you could go through the canal, 40 days right now because we cannot use the suez canal if you want to go from asia going to the coast of usc.
▶ 1:47:04Sen. Budd: China is pouring billions into infrastructure projects around central and south america. One example is in ecuador china made a deal to fund a $3.4 billion hydroelectric dam. There are 17,000 cracks already and a lot of corruption. Ecuadorian officials have been imprisoned on bribery charges. Using that as an example for the region, the strategy of china is clear.
▶ 1:47:36Sen. Budd: This is in the words of an ecuadorian minister. The strategy of china is clear, they want to take economic control of countries. Panama, it is about 7.7% of their gdp. Using ecuador as an example, should congress be concerned that china could extract significant leverage over panama given the outsized role in revenue from the canal that it plays in their finances?
▶ 1:48:06Mr. Sola: It very well could. I believe we are in a fortunate position now with secretary rubio who knows the area very well and who knows china.
▶ 1:48:16Sen. Budd: Thank you very much. >> senator, you should look at the port in peru and look at that pattern of chinese investment. >> senator kim.
▶ 1:48:30Sen. Kim: Thank you. I talked to constituents in new jersey, they understand this issue right now because of the words of president trump. I want to start there and work backwards. Mr. sola, president said, "china is operating the panama canal.
▶ 1:48:54Sen. Kim: We did not give it to china, we gave it to panama and we are taking it back." is china operating the panama canal?
▶ 1:49:02Mr. Sola: Senator kim, I never discredit anything that president trump says. He has a different briefing book than I do. Panama canal is operated by the panama canal authority and they are very efficient at operating the canal.
▶ 1:49:26Sen. Kim: From your knowledge, you don't know of reasoning to believe that china is operating the panama canal? From the knowledge that you have?
▶ 1:49:36Mr. Sola: From the knowledge that I have, senator, what we have here is the panama canal authority is the authority where people will pay into the panama canal. I think that if you will allow me to, if a company is able to operate both ports --
▶ 1:50:01Sen. Kim: You are talking about hutchison ports. Balboa and cristobal ports? They are subsidized. Does hutchison ports control the walks of the canal?
▶ 1:50:15Mr. Sola: No.
▶ 1:50:16Sen. Kim: Does it control the entrance to the canal?
▶ 1:50:20Mr. Sola: Both ports are in operational control of the canal . For the ports to operate, the canal has to give them a permit because when they are bringing a ship in or out, they block the traffic of the canal every single time.
▶ 1:50:38Sen. Kim: Is balboa or cristobal courts under the jurisdiction of the panama canal authority?
▶ 1:50:46Mr. Sola: They have been given by the panama government the concessions but they are in the operational range of the panama canal.
▶ 1:50:55Sen. Kim: Does that make those two ports under the jurisdiction of the treaty?
▶ 1:51:03Mr. Sola: I was in panama when the canal was turned over. We did not just give back to the panama canal. We also gave all the land and the water on the entryway including a lot of military bases. As soon as you come out of the panama canal, and I invite you to come there. You will run into a former military base. It is run not by panama, it is run by the panama government.
▶ 1:51:33Mr. Sola: After you pass that, you run into port is balboa. -- port of balboa. When we talk about the panama canal authority, they operate only were the ships go up and go down and come out. After that, you have where the pilots will take you on the boat and take you off. Is it in operational control of the panama canal?
▶ 1:52:02Mr. Sola: Yes because the pilots have to take you in and out. Every time a ship comes in, they block the traffic.
▶ 1:52:08Sen. Kim: I wanted to ask you directly what is your assessment of the panama canal's authority in terms of their ability to administer?
▶ 1:52:21Mr. Sola: I think they are authority and independence if you read my opening statement and my written statement they have done a fantastic job. Panama has been running the canal for 25 years. They have given $28 billion to the government in those 25 years. In the 25 years that the two ports that we call two ports, they have contributed zero.
▶ 1:52:47Mr. Sola: I don't understand why panama would not allow those two ports to operate and put into jeopardy the operations they do have in canal.
▶ 1:53:02Sen. Kim: I thought you had a point in your written testimony where you said, "we must protect the independence of the panama canal authority and the efforts to diminish professionalism and authority must be stopped." as we talk about this as a government, we should try to follow those same words.
▶ 1:53:24Sen. Kim: We try to have position with the words that we use otherwise it looks like someone will be perceived as undermining the panama canal authority and you said that and you warned that that would boost china's capacity in the region. As we deal with this going forward, I ask that we be precise when we talk about what we are addressing.
▶ 1:53:47Mr. Sola: What I was talking about was the board of directors of the panama canal. Some of those directors are on the board of directors of courts. When you look at the annual report of those two ports, it basically says they have local partners that are not identified. I believe that if we had those identified, we would know more.
▶ 1:54:11Sen. Kim: Thank you so much. I yield back. >> senator schmitt.
▶ 1:54:18Sen. Schmitt: I want the committee to imagine that taiwan is under siege, the ccp determined to crush taiwan's existence activates a multipronged strategy leveraging control over mobile ports and shipping infrastructure.
▶ 1:54:40Sen. Schmitt: The panama canal handling 40% of container traffic, chinese control ports and both ends suddenly close. Ships carrying food, oil and military supplies are turned away because of technical difficulties, paralyzing the global economy. Gasoline prices soar. Supermarket shelves empty and supply chains collapsed within days.
▶ 1:55:05Sen. Schmitt: China's state owned zpmc which supplies 80% of U.S. ports has equipped their crates with explosive vulnerabilities and they will seriously malfunction halting critical operations, factories close and the economy grinds to a halt. While this scenario might seem hypothetical, it is plausible.
▶ 1:55:37Sen. Schmitt: Therefore the canal must remain neutral and the U.S. must ensure the ccp does not encroach on our vital economic and national security interests. In 2017 senator schatz, senator markey and senator rubio pushed to address these actions. Their warnings pose an unacceptable threat.
▶ 1:56:06Sen. Schmitt: America is sleepwalking into a carefully laid chinese trap. Unfortunately people like president trump are not falling for it. I am glad he has raised this issue. This dangerous complacency must end. That is why last week I introduced a resolution to safeguard the panama canal from chinese influence and calls on panama to expel chinese entities in for control and honor its neutrality under the 1977 transfer agreement.
▶ 1:56:35Sen. Schmitt: The cost of inaction is too great. I want to offer this up for anyone. The biggest concern here is this belton road initiative, we have talked about it creating a death trap which is true. And building a bridge in bangladesh is very different than this.
▶ 1:57:02Sen. Schmitt: There are reports of this ccp building airports and then when people are critical of the ccp, flights are canceled suddenly. Controlling the grid. They can turn it off. There is just no way on gods green earth that china can control the panama canal. However you want to define it and I hope my democrat colleagues, this is an issue that affects america. I hope they are not blinded by the fact that president trump has come out boldly on this.
▶ 1:57:33Sen. Schmitt: We should not tolerate this. Witnesses have stated they have operational control. We can get into the semantics of the port authority. Operational control of the panama canal is real by the ccp. The witnesses have also stated that a chinese company got a sweetheart deal, a no bid contract for operational control of these ports.
▶ 1:58:03Sen. Schmitt: I want to ask because I have talked to long. I don't have much time for questions. Professor kontorovich, as it relates to the treaty and I'm glad chairman cruz has called this up because they are real concerns about treaty violations here. What are the most blatant? What are the most obvious? Is it the unfair -- is it the fact that we are being charged more?
▶ 1:58:34Sen. Schmitt: Is it the fact that these are chinese owned companies that are controlled by the ccp? What are the top reasons you would argue that they are in violation of the treaty?
▶ 1:58:45Prof. Kontorovich: I think the charges are less of an issue because they don't discriminate across countries. We pay more because we use more. The presence of chinese companies, especially chinese state companies, do raise serious issues with the neutrality of the treaty.
▶ 1:59:08Prof. Kontorovich: In relation to the earlier question, I should point out that the canal is not limited to the actual locks of the canal and the transit of ships through the canal. According to our annex 1, it includes the entrances of the canal and the territorial sea of panama adjacent to it. All of the activities are within the neutrality regime, the traffic scope of the neutrality regime of the treaty.
▶ 1:59:36Sen. Schmitt: The most dead on hit here is the treaty specifically prevents foreign operations and that is exactly what we have.
▶ 1:59:45Prof. Kontorovich: Yes. To the extent of these companies are controlled by china, this is something that could threaten the neutrality regime of the treaty. >> may I make a point of clarification? >> you said that we all said that we also china has operational control. I do not believe that shauna has -- I do not believe that china has operational control over the pin p canal.
▶ 2:00:15Prof. Kontorovich: I think if your assumptions are correct, you are understating the problem. They also then control the suez canal and the mediterranean sea. I have to believe I am confused why you all are not more concerned about the biggest port in the united kingdom being run by the chinese.
▶ 2:00:41Prof. Kontorovich: The port nearest athens, one of the biggest ports in the mediterranean is not just run by a chinese company, it is run directly by a chinese owned company. I was there. You are onto something but you just focusing on panama, that is only part of it.
▶ 2:00:54Sen. Schmitt: I agree. The difference is we gave it away. Huge mistake. Both missouri senators voted for it back then. Huge mistake. The one thing we got out of it, a guarantee of neutrality and that is the issue here. >> thank you. Senator curtis.
▶ 2:01:16Sen. Curtis: Thank you I would like to touch on something I did not hear discussed. Unfortunately china is not the only hostile country that exports had them mob our national security. Iranian vessels under the panamanian flag have been a problem for many years. Can you explain how panama has enabled them to evade our sanctions?
▶ 2:01:40Mr. Sola: Yes. About a year ago when we were having this issue, there was also a lot of focus on iran and how they were funding,'s and the houthi's -- funding hamas and the houthi's.
▶ 2:02:06Mr. Sola: Iranian vessels are sometimes flagged by panama so they can sell the fuel they have and they can take that money and use it as they wish. Panama at the time had a very complicated process to deflag the vessels. There was an investigation and an appeals process. By the time the treasury identified one of those vessels, by the time they were doing the appeals, they had already changed flags to somewhere else.
▶ 2:02:37Mr. Sola: When we went to panama, we met with the panamanian president. We were very impressed because he was 30 minutes late but he was breaking relations with venezuela at the time because the election was the day before. We explained to him the situation and the very next day we met with the maritime minister with U.S. embassy personnel and panama actually adjusted their appeals process to make it more expedient.
▶ 2:03:09Mr. Sola: If the united states or opec said this iranian vessel is avoiding sanctions, now we have a process in place to do that. 53 vessels were deflagged. >> if you would keep working on that. We have hammered on this a little bit. I have heard several times some of you acknowledge that interest from china is an economic threat to us.
▶ 2:03:38Mr. Sola: Let me come back to this defense. We have asked a number of times in different ways but let me go back to the analogy of china puts a blockade on taiwan and we are trying to move ships into that area quickly. Can any of you say this is not just an economic threat to the united states but a defensive threat as well?
▶ 2:04:05Mr. Maffei: It is not our expertise. To me an economic threat is a military threat. In terms of what you are directly asking, we do not have that area.
▶ 2:04:25Mr. Sola: My biggest concern is that when a chinese contractor gets a contract in latin america, they put a clause in there that they bring their own workers from china. These workers are housed in camps outside and these camps will have guards on them and they will, in panama, sometimes they have barbed wire around the camp. We really do not know who is in the camps.
▶ 2:04:54Mr. Sola: That causes me more concern on who is in the camp and what are they doing. These are sometimes thousands of workers that are brought in for the bridge or to do a report or to undercut the local labor.
▶ 2:05:09Sen. Curtis: We far out spin china in the region yet if you look back on panama switched diplomatic recognition from taiwan and we had comments from the president of taiwan, it coincided with economic investment from china in the region. Is that something overall we need to watch?
▶ 2:05:38Mr. Sola: Yes. We definitely need to watch economics. The united states has left a void there. We have not been competitive in panama.
▶ 2:05:49Sen. Curtis: I have a few seconds. This bridge, we have brought this up a couple of times, the possibility of the bridge being damaged. It reminds me of the suitcase going through tsa. Is there any reason that china cannot watch or do whatever they want on this bridge to get the intel through these containers and does that concern anybody?
▶ 2:06:12Mr. Sola: It concerns solving -- southern command because there could be some sort of surveillance on the bridge.
▶ 2:06:21Sen. Curtis: Thanks. >> senator moreno. >> thank you for putting this hearing together. Mr. sola, you have navigated the canal hundreds of times.
▶ 2:06:44Sen. Curtis: You obviously having been there that much, what are the people of panama all, what is the sentiment among the people for how they feel about america?
▶ 2:07:00Mr. Sola: I have many friends and family and professional relationships in panama. The bond between the united states and panama is very deep. It is almost like the united states and great britain. Panamanians love baseball. They love a lot of the same things that we do. The people are absolutely wonderful.
▶ 2:07:22Sen. Moreno: They have suffered through catastrophically bad leaders especially today with the president of columbia. We don't have to go down that path. Obviously we understand about shipping. We understand the issues of trade. That has been well documented. The treaty is clearly in violation. There is no question about that. Mr. chairman, I would like us to get to a resolution to allow the president to renegotiate or cancel the treaty.
▶ 2:07:53Sen. Moreno: The gap is a stones throw away here to annapolis, may be a little bit further than that. It used to be this insurmountable piece of geography that separated columbia from panama but it is now used as a massive human and drug trafficking situation.
▶ 2:08:18Sen. Moreno: The presence of criminal organizations in that area suggest funded by the chinese, but what is the impact of these transnational gangs, this increase in human and drug trafficking, doing to maritime activity along the canal?
▶ 2:08:38Mr. Sola: Senator, the darien gap is one of the most dangerous treks that anybody can do. Countless people have been armed, died or very bad things have happened to them.
▶ 2:09:03Mr. Sola: On transnational gangs, anytime there is money in a black market, they will fill that void . As I understand the darien gap is not being used very much right now.
▶ 2:09:18Sen. Moreno: What is the impact on maritime activity? In other words, security has to be an issue for your members. Having that increased presence of transnational gang activity, drug trafficking, you are talking about billions of dollars. Cocaine production in columbia is at an all-time high. What impact does that have on your members?
▶ 2:09:45Mr. Kramek: It is something we work hard every day. The real shipping council has partnered with the customs organizations and customs organizations throughout the world. We have ran actual authorizations to give data on those customs to get to law enforcement to action it is on the flow for commercial vessels not to the united states but to the european union coming from the transshipment plant in
▶ 2:10:16Mr. Kramek: Panama are our containers are being exploited and contaminated. We are working hard as we sit here right now on that problem.
▶ 2:10:23Sen. Moreno: The point I am making is that china's influence there whether we want to make it a technical question, is to control means. It does not matter. When you have chinese companies operating on both sides of the canal, having influence there through drug trafficking, they bring basic chemicals into mexico which make their way here as fentanyl, you have an enormous chinese influence in central and south america. Mr. sola, I will go back to you.
▶ 2:10:56Sen. Moreno: Do you think the problem here is that america has failed to engage properly with latin america?
▶ 2:11:00Mr. Sola: Yes, I do. We have not had a presence there for long enough. The state department has designated countless past panamanian presidents for corruption but we have not had the doj have any convictions on those. If we did have a conviction one way or another, that would change the narrative considerably.
▶ 2:11:26Sen. Moreno: If the U.S. took control back of the canal, if that territory was protected by the united states of america, what influence could we have in solving a variety of problems? The shipping that we talked about but also having U.S.
▶ 2:11:45Sen. Moreno: Presence with military back up there in panama preventing transnational organizations, preventing human trafficking, preventing drug trafficking, wouldn't that be celebrated among the free world as something that would be a huge positive to that area?
▶ 2:12:02Mr. Sola: That is probably one of the top contraband areas in the world just because of its geographical location and the amount of the containers they move. Anytime we can lower the amount of contraband being distributed around the world, we would be doing a good service.
▶ 2:12:21Sen. Moreno: Like I said earlier, we ratified that treaty here in the united states senate. I would love to see us de-ratify. >> thank you. Sen. capito. In 1913 the governor of west virginia said the panama canal would be critical to the states coal industry. What was then true is still true today. 11% of the cargo that goes through that canal is coal.
▶ 2:12:54Sen. Moreno: Thank you for your military service and your great insight into panama. I know the draft restrictions have been brought up already today but the fact that bulk goods like west virginia coal and other forms of energy cannot always be fully loaded to go through the canal. They are investing $900 million to try to make the canal more resilient. What ways can we assure that our states energy exports are actually getting where they need to go when they need to get there?
▶ 2:13:22Mr. Sola: That is a very good question. The bulk and the coal are probably most affected. We talked extensively with the canal authority and the government of panama on how they need to add water to the system. They are losing about 1% or 2% per year.
▶ 2:13:51Mr. Sola: If they continue this way the panama canal will be severely diminished by 40% by 2050. Freshwater is definitely the key to this. I know they are working with the army corps of engineers. We have seen some of those studies. They have put a variety of options out there for the canal authority to take advantage of.
▶ 2:14:13Sen. Capito: Let me ask you a simple question. Why would they be in opposition to putting more freshwater in the canal? It sounds easy.
▶ 2:14:23Mr. Sola: The canal authority -- the issue they have is maybe 10 years ago, environmentalists restricted what their watershed was on the canal and that law has recently been overturned so now the canal has access to the watershed. What they have to do is a major infrastructure project to go ahead and pull that water in.
▶ 2:14:48Mr. Sola: At the same time that they are saving up or raising the fees for the major projects, they are giving more money to the national coffers. About 2.4 billion dollars right now and they are saving for the infrastructure project.
▶ 2:15:03Sen. Capito: Is that the $900 million per cheshire package that I referenced?
▶ 2:15:08Mr. Sola: I believe it is.
▶ 2:15:11Sen. Capito: Yes. Along with that, the issue going through the canal, not just the offloading, it is hard to offload coal out of a bulk container. That is not an easy thing to do. Is this whole thing about congestion pricing. Nobody here is from new york, are they? The congestion pricing at the canal where you can outbid and skip the line for the line can be 14 days later even if you were at the front of the line.
▶ 2:15:45Sen. Capito: This is probably what senator sheehy is wondering. How is that working and is that fair? Who makes the judgment? Talk about corruption. It sounds like you could really be patting somebody's pockets to be able to jump the line and have a significant effect.
▶ 2:16:10Mr. Kramek: It is an option system that is being used more and more. Unusual draft restrictions are not going on but if there is another water shortage, the regular total revenue has increased in terms of the canal but what has really increased as the special revenue that they get from various fees and from this auction thing. That revenue has gone up about close to 300% for other transit services.
▶ 2:16:42Mr. Kramek: That is a huge amount. Also it is analogous to me in some ways, I know a lot of the ocean carrier companies got a lot of heat when they were making more money during the lack of congestion during covid. This is similar. They are providing fewer transits and at the same time making more money because of a market mechanism. Talking about the chinese communist party, this is the other way.
▶ 2:17:09Mr. Kramek: It is capitalist but it is a different way of allocating space that they are using more to make more money. I have no idea if the money is going back to the panamanian government. I have no reason to doubt that. That is a big cost. It does disadvantaged certain types of cargoes because they might feel that they are on a ship that does not prioritize its time passage is much as other kinds of cargoes.
▶ 2:17:39Sen. Capito: Thank you very much. >> thank you. Senator sheehy.
▶ 2:17:47Sen. Sheehy: How long would it take china to lock the canal for usage if they decided to do it? If they wanted to deny our usage, how long would it take them to do it?
▶ 2:18:05Mr. Sola: I can say that prior to the year 2000, the canal had a quick reaction. They took all possibilities into consideration to be able to move one out. I don't know what the planning for that would be.
▶ 2:18:29Sen. Sheehy: Effectively we don't have a ready response.
▶ 2:18:34Mr. Sola: I am sure southern command does.
▶ 2:18:36Sen. Sheehy: I don't like the man said -- mindset --
▶ 2:18:45Mr. Maffei: You are not talking to military experts.
▶ 2:18:49Sen. Sheehy: This is not a military question. He has driven the canal hundreds of times. The suez canal, not a military option but a ship that turned sideways. How can fast could try to close the canal?
▶ 2:19:07Mr. Maffei: They could do a similar thing but it would not be an act of terrorism. Most of the discussion involves economic threats because of the boat road initiative. -- the belton road initiative. Panama canal is quite vulnerable in terms of infrastructure. This is not military or a militarily reinforced location. You are getting to the end of my knowledge of that.
▶ 2:19:37Mr. Maffei: It would not take long but I don't know what it has to do with, it is not accelerated because they have people at that port. Unless you believe that it is easier to infiltrate those ports with chinese spies than other kinds of things. That is totally out of my purview.
▶ 2:19:53Sen. Sheehy: I don't think it is out of your purview. I think the reality is the canal is an economic engine, a national security engine. I am not trying to be combative, I'm trying to sk, since question which is we can dance around I am not an expert in this or that but the canal is vulnerable.
▶ 2:20:14Mr. Maffei: Why would they bother with a military operation when they can get what they want with nonmilitary means? If they can have influence in other ways?
▶ 2:20:23Sen. Sheehy: That is the point of the question. We segregate ourselves artificially in a way that they do not. Let's talk about military, let's talk about intelligence, let's talk about economics. China does not work that way. It is a whole of government approach. They do not draw delineations. Their attack might not look like pearl harbor.
▶ 2:20:44Sen. Sheehy: It may look like an everyday shipment pulls into the locks and blows itself up and now the locks are not functional for usage and we cannot support fleet transfer. Our ability to defend it, as you referred to, is not inhibited by the fact that we no longer have the military infrastructure around the canal that we did as recently as 1999.
▶ 2:21:13Sen. Sheehy: Do the shipment companies have concerns over the security of the narrow waterways? We have the suez canal, gibraltar, panama. Is that a concern that is thrown around the board rooms of the largest shipping corporations of the world?
▶ 2:21:27Mr. Maffei: It is something we think about every day. It was what I would call a pink flamingo. There are black swans and there are pink flamingos that you can see. Nobody really thought a whole lot that one of the most important waterways in the world could be denied and moreover, that it could be denied for such a sustained period. The good news is that --
▶ 2:21:55Sen. Sheehy: Denied by a disaffected nonstate actor who also managed to beat us in a 20-year war with afghanistan. We are debating operational control of the canal. It seems clear to all of us that a very simple act can debilitate the canal and limit our ability to use it in a matter of minutes with no warning. We have no ability to intervene or stop that.
▶ 2:22:24Sen. Sheehy: To me, that means we do not have operational control of the canal. >> thank you. Senator young is on his way so I will ask a couple of questions and give him a few minutes to get here. Chairman sola, you have a deep understanding of the panama canal in addition to your work for the federal maritime commission.
▶ 2:22:51Sen. Sheehy: One example of china's influence was seizing land near the pacific end of the canal to build a new chinese embassy. Can you describe your experience including how panama ignored property rights as it sought to appease china with a new embassy?
▶ 2:23:05Mr. Sola: Yes. About 10 years ago the maritime business of my family expanded tremendously. We were given a concession to build a marina on the pacific area of panama. We also incorporated a cruise component to that. We brought the crews companies to ban them all.
▶ 2:23:35Mr. Sola: This would have been the very first crews port in the pacific. We spent millions of dollars on consultants with atkins global, all the best consultants in the world and everything was fine. When panama turned over to the belton road initiative, they told us that concession would be nationalized. What they did was they rescinded our concession for the property.
▶ 2:24:08Mr. Sola: We were going to build the crews port for $30 million with U.S. private funds. They gave the concession to a chinese competitor and paid the computer -- paid the competitor $300 million to build that cruise port. It will take the panamanian people 375 years to get it back.
▶ 2:24:34Mr. Sola: That is the most expensive cruise port in the world by far right passenger. In addition to that, they took where our land is going to be for the marina, they designated that for the people's republic of china. What happened next is absolutely appalling because when I went to the U.S. embassy and I went to the commerce department, they told me to fill out a complaint.
▶ 2:25:03Mr. Sola: When I filled out the complaint, I went to my senator at the time who was bill nelson. I remember that I was denied being able to even file a complaint because the land that the chinese embassy, the land that was going to be used by the chinese embassy, my environmental permit for the marina was going to expire in six months. The united states commerce department would not even allow me to file a complaint.
▶ 2:25:32Mr. Sola: I brought that issue here and thanks to the good work at the time of chairman nelson and chairman wicker, we were able to unwind that after six years and panama did the right thing and returned the land to my family.
▶ 2:25:52Sen. Young: Thank you for holding this hearing. Thank you for being here. The panama canal underpins our current economic strength and national security when 40% of U.S. bound container traffic depends on a single waterway, we cannot afford unilateral toll hikes that choke out competition and leave our smaller carriers or are midwestern exporters on the hook.
▶ 2:26:21Sen. Young: In my home state of indiana, manufacturing firms and farmers rely on consistent reasonably priced shipping routes to move machinery, auto parts and products like corn and soil. If the canal authorities option system price is the amount, the ripple effects of american jobs and supply chains could be devastating.
▶ 2:26:43Sen. Young: Senator cantwell, -- chairman sola, do you believe congress or the fmc should aggressively use existing legal authorities or even create new legislative tools to block or penalize toll practices that disproportionately harm U.S. shippers and exporters?
▶ 2:27:07Mr. Sola: Thank you for the question. I grew up in indiana. I believe we should continue to monitor the situation and if we do need more regulations or statutes, that we would come back to congress because we get our marching instructions from you.
▶ 2:27:30Mr. Sola: Moving the agricultural products that we get on the midwest and all over the world and through the country, not only did we focus on the panama canal but we also focus on $5 trillion worth of goods coming and leaving the united states as part of the maritime. Commission.
▶ 2:27:47Sen. Young: Thank you. I always tell people that indiana is a maritime state if you think about our dependence on the waterways, shipping lines and you are certainly proving that.
▶ 2:28:03Sen. Young: We will stay in touch and if you would like to outline any mechanisms in the future that you think would be effective to help ensure fair treatment for our interests, please let me and others on this committee no. -- know. When the two panama canal treaties were signed, we lived in a different world where chinese backed actors did not wield global influence over infrastructure.
▶ 2:28:33Sen. Young: Issues like drought were rarely factored into international agreements. As we all know times have certainly changed but the united states is still the canal's biggest customer and quite frankly we have every right to expect an operational framework that acknowledges our modern security and economic challenges. States like indiana with robust exports fuel -- feel these impacts even if we are far from the canal itself.
▶ 2:29:03Sen. Young: Chairman sola, in light of evolving conditions is specially increased foreign investment from china, do you believe the U.S. should explore more comprehensive updates or supplemental protocols to these decades of treaties?
▶ 2:29:20Mr. Sola: I believe we should support U.S. investment and not having an ambassador there so long was detrimental. We did not have an ambassador and we had a U.S. company in need of service. However we can promote U.S. investment, especially in infrastructure. This is where they are beating us with the belton roads.
▶ 2:29:49Mr. Sola: I believe that our dfc is so limited in what they can do by the restrictions that they have that we are not able to invest into infrastructure like we should.
▶ 2:30:01Sen. Young: I hope the administration will prioritize this ambassador spot as nominations are made. I will prioritize it in the senate with my colleagues on the democratic side of the aisle will be warm to that nomination and moving it quickly, something both parties have fallen short on in recent years. Other comments?
▶ 2:30:27Mr. Maffei: Senator, we served together in the house and I agree with the chairman on what he said. I will say that certainly we need to look at other kinds of ways to get U.S. companies in positions where they can truly compete with the chinese on some of these things. Blaming it all on panama really misses the point.
▶ 2:30:52Mr. Maffei: I have seen the same thing in greece where it did not want to give the concession of its largest point to a chinese company but because of china also -- because of financial difficulties, it was getting pressure from the imf and the united states to do so. I would ask you to look at that. You are right about the cost. As I said before you were able to get here, the panamanians are making far more on their canal than they ever have before.
▶ 2:31:23Mr. Maffei: It is not a bad thing as long as it is going to the right place. Where they are really making the money is on these auctions and that is why he remains a concern of mine and that is where we are looking at potentially using our authority under section 19 of the merchant marine act where we could if we show that it is a basically a problem with the foreign trade in the U.S.. There are certain things that we can do.
▶ 2:31:54Mr. Maffei: I do think that we need more information before we can make that action but we are certainly working on that.
▶ 2:31:59Sen. Young: Thank you will be good to see you again. Did you have anything Mr. kramek ?
▶ 2:32:06Mr. Kramek: We had discussed some of the infrastructure projects to make the canal more sustainable and viable and how the united states has already done some feasibility reviews of those projects. That would certainly be something to take a look at to make the canal viable with additional supplies of freshwater.
▶ 2:32:28Sen. Young: Thank you.
▶ 2:32:31Prof. Kontorovich: If I may? I am on zoom. You spoke about renegotiating the treaties. One of the things about treaties as an instrument of governance is they are not very flexible and they do not have automatic processes for easy amendment.
▶ 2:32:54Prof. Kontorovich: For this hearing I spent a fair amount of time reviewing the ratification hearings in the senate in 1978. Back then the principal concerns, the senate was concerned within was the soviets and cuba, not china and iran. The world has changed. China's role has changed and back then 1999 seemed very far off. 2025 seemed a world away.
▶ 2:33:22Prof. Kontorovich: As a result, it is useful to revisit treaties and to seek to renegotiate them and update them to current events and the united states has a considerable amount of leverage it can use to seek such additional protocols to modernize these treaties to current events and current geopolitical realities. >> makes great sense. I am glad you spoke up. Thank you professor kontorovich.
▶ 2:33:50Prof. Kontorovich: >> I want to ask a couple of follow-ups. Mr. maffei you mentioned a minute ago if they determine that this is having negative impacts on U.S. trade, you said there are a number of remedies that are possible. You did not specify what those were. I want to ask what you were referring to.
▶ 2:34:10Mr. Maffei: There are certain things we can do as countermeasures such as panamanian flagships. The panamanian flag is one of their major sources of revenue. It is one of the most flag conveniences in the world. If you don't mind, we can get together and do a joint answer.
▶ 2:34:38Mr. Maffei: We will put where our authority comes from, what we think we can do and what we are concerned about. >> this hearing has been a nice bipartisan demonstration of a lot of expertise. There is a reason you guys have the role you have because you know what you are talking about.
▶ 2:34:55Mr. Maffei: I hope my chairmanship which ended last week will result in a very successful term for my good friend and colleague. Maybe the friendliest transition in washington.
▶ 2:35:07Sen. Cruz: Professor kontorovich , I want to get back to the exchange you have with senator young and this harkens back to the opening exchange. We have heard testimony that panama may well be in violation of this treaty in at least two regards.
▶ 2:35:30Sen. Cruz: One with respect to its obligation to keeping the panama canal neutral and the major concessions to china to control -- a control that china has on both ends and the bridge across the canal which has the potential to shut down transit.
▶ 2:35:47Sen. Cruz: We also heard testimony about the degree of revenue that panama is taking and that is potentially in violation of the obligation that tolls and other charges should be reasonable and consistent with principles of international law. I want to ask you to assume that the united states makes the determination that panama is in violation of this treaty. I asked about what the remedies were and you mentioned at the time military force.
▶ 2:36:19Sen. Cruz: Military force is also a potential -- always a potential remedy. What other remedies could be a consequence of being in breach of the treaty? Be it the treaty is null in be it the treaty is null ia nd void and could that under international law or result in the united states returning to operating the panama canal?
▶ 2:36:49Prof. Kontorovich: I think treaties like this demonstrate that countries need to think hard before they give away strategic assets. United states is free to cancel this treaty at any time, withdraw from the treaty. But given that the united states has transferred control and sovereignty of the canal zone to panama, the cancellation of the treaty would not necessarily reverse that concession.
▶ 2:37:21Prof. Kontorovich: Concessions that have to do with sovereign control are not particularly reversible. Israel made a deal with lebanon to give maritime territory to lebanon in exchange for peace and did not get peace. It is not clear that they can cancel and get the territory back. It is the case that america can take measures to insist on neutrality and if neutrality means putting american firms in operation or otherwise taking other steps, that is something that can be done.
▶ 2:37:54Prof. Kontorovich: A territorial control is not a clear remedy unless it is something that just accompanies the steps needed to restore the regime of neutrality.
▶ 2:38:04Sen. Cruz: I want to thank all the witnesses for their important testimony here today. Senators will have until the close of business on tuesday, february 4 to submit questions for the record. The witnesses will have until the end of the day on february 18 to respond to those questions. This concludes today's hearing. This committee is adjourned.