While threats of tariffs against China, Mexico and Canada have dominated headlines early on in President Donald Trump's second term, a conflict over control of the Panama Canal has become the next major battleground for Trump's aggressive approach to global trade.

The idea that the U.S. should retake control of the Panama Canal was brought front and center in Trump's inaugural address January 20, in which he claimed that the U.S. has been "treated very badly from this foolish gift that should never have been made, and Panama's promise to us has been broken." 

But strong-arming Panama into handing the canal back over to the U.S. would face a mountain of legal obstacles, says attorney Vanessa Miller, who specializes in international supply chain agreements and commercial contracts as a partner at Foley & Larder LLP.

"I think it's fairly unrealistic at this point in time, and there are a lot of reasons for it," Miller says. 

The Panama Canal was built by the U.S., which also operated it from its opening in 1914 until 1977, when then-President Jimmy Carter signed a pair of treaties to hand over control over to Panama. One guaranteed that, after a period of joint American–Panamanian control, the Panama government would take sole control in 1999, which it did. The second was a neutrality treaty still in effect today, which mandates equal treatment of all countries transiting the waterway. 

At the core of Trump's dispute with Panama is his claim that the country has violated the neutrality treaty by allowing China to grow its influence in the region, in particular that Hong Kong-owned CK Hutchison Holdings has been allowed to operate two ports at either end of the waterway since 1997. Panama also became the first Latin American country, in 2017, to sign onto China's Belt and Road initiative, which has poured billions of dollars into infrastructure in developing nations across the globe. 

Miller argues, however, that the neutrality treaty between the U.S. and Panama doesn't contain any provisions that dictate how a dispute between the two countries should be settled, nor does it lay out a legal mechanism for reversing the agreement. Second, the only court that would likely be equipped to hear a legal challenge from the U.S. would be the International Court of Justice (ICJ), to which the U.S. isn't even a signatory. Further, there's no guarantee that the ICJ — which is governed by 15 judges, each from a different UN nation — would be inclined to side with the U.S., given the implications of allowing a geopolitical superpower to seize control of one of the world's most critical trade routes. 

Panama also has a powerful financial interest in doing everything it can to hold onto the canal, with the waterway generating nearly 24% of the country's income in 2024, according to an analysis from investment and finance firm IDB Invest.

If the U.S. attempts to take the canal using military force, it could lead to the very situation that Trump is trying to work against, by setting China up as Panama's ally in a large-scale conflict with the U.S., says Tiffany Comprés, who works in trade and treaty law as an international arbitration attorney with Pierson Ferdinand LLP. 

"This could very well push Panama into China's arms," Comprés says, adding, "I don't know that the U.S. government would have significant backing from other nations if it tried to use force." She warns that the U.S. would also find itself buried under a slew of lawsuits from private investors with money tied up in Panama, who would stand on strong legal ground claiming that the U.S. had threatened their investments by throwing the region into chaos.

So, the question now — as it has been regarding Trump's threats to impose tariffs against any number of major U.S. trade partners — is whether the most extreme outcome is actually the desired one, or if Trump's sights are actually set on something far less extreme. 

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"We've seen historically with the Trump presidency that he likes to negotiate very aggressively and ask for 20 miles, when what he really wants is half a mile," Comprés says. That played out in real time with both Mexico and Canada just before 25% tariffs were set to take effect on February 3, with Canada agreeing to implement a border security deal it had already announced in December 2024, and Mexico vowing to station 10,000 troops at its border to stem the flow of drugs and migrants, mirroring a similar deal made with the Biden administration in 2021, and with Trump's previous administration in 2019. 

As for what Panama could offer the U.S. short of full control of the canal, there are already hints of what that might look like. Following a February 2 meeting with Secretary of State Marco Rubio, Panama's President José Raúl Mulino announced that he would be pulling his country out of the Belt and Road initiative, a move that Rubio later said was a "great step forward" in relations between the two countries. Mulino also appeared amenable to reconsidering the concession that allows CK Hutchison Holdings to operate the two ports, although Panama renewed its contracts with the firm for 25 years in 2021.

Realistically, Miller sees the U.S. and Panama ultimately finding a way through this without causing a full-blown international crisis.

"I think there's some middle ground," she says. "I think that it could open up some good dialogue on what we can do to improve the canal, both with respect to money to help modernize it, and then security concerns. That would align with Panama, and many other countries that use the canal would be in favor of that."