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Chinese Foreign Minister Wang Yi and Panamanian Foreign Minister Isabel de Saint Malo attend a press conference, Panama City, Sept. 17, 2017 (AP photo by Arnulfo Franco).

What Panama’s Recognition of China Means for America’s Backyard

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When Panama cut diplomatic ties with Taiwan in favor of recognizing China in June, it was an acknowledgment of the significant commercial interests China already has in one of the most important transport and financial hubs in the Western Hemisphere. It also opened the door for deeper Chinese involvement in Panama. In an email interview, R. Evan Ellis, a research professor of Latin American studies at the U.S. Army War College Strategic Studies Institute and the author of “The Strategic Dimension of Chinese Engagement with Latin America,” explains what’s behind Panama’s diplomatic shift, the opportunities the move unlocks and what it means for China’s wider strategy in the region. The views expressed in this interview are strictly those of the author.

WPR: What prompted the sudden engagement between Beijing and Panama, and why were there no official relations prior to 2017?

R. Evan Ellis: The change reflected China’s abandonment of its informal “diplomatic truce” with Taiwan in 2016, as well as its significant, economically driven soft power in Central America. In 2008, China and Taiwan had agreed to suspend their struggle to change the diplomatic posture of states recognizing the other, while working to strengthen their own political and diplomatic relationship. But a breakdown in the truce following the January 2016 election of the Democratic Progressive Party in Taiwan led Beijing to punish Taipei through its diplomatic relations. Panama’s shift from recognizing Taiwan to China was the third such victory for Beijing in its resumed diplomatic struggle, which began with the recognition of Gambia in March 2016, followed by Sao Tome and Principe in December.

On the Panamanian side, China had already established a strong commercial position in the country. A significant amount of Chinese products are shipped through Panama, and China Shipping and China COSCO are major commercial users of the Panama Canal. The Hong-Kong based Chinese company Hutchison operates port facilities on both sides of the canal—at Cristobal and Balboa—and Huawei, the principal Chinese telecommunications company in Latin America, has designated Panama as a regional hub.

Given Panama’s position as a global logistics and financial hub, with a significant portion of the goods and money passing through the country tied to China in some way, Panama was clearly positioned to benefit from establishing formal relations. The completion of the widening of the canal in 2016, and the subsequent capacity to accommodate the larger vessels crossing the Pacific, has only expanded that potential upside.

Panamanian President Juan Carlos Varela clearly understood the possible benefits of recognizing Beijing. The lack of diplomatic recognition made it difficult for Panamanian businesses to secure contracts in China, and for Chinese companies in sectors such as construction and logistics to secure business in Panama. Traditionally, Chinese institutions have also rarely approved loans for, or otherwise supported, major projects by Chinese companies in countries that do not side with Beijing over Taiwan.

Adding to the temptation, the U.S. withdrawal from the Trans-Pacific Partnership, the appearance of a more protectionist U.S. policy orientation and a more adversarial posture by the incoming Trump administration toward some countries in the region may have bolstered Varela’s conviction that the moment for Panama to change its diplomatic posture toward China had arrived.

WPR: What opportunities have been created for China and for Panama as a result?

Ellis: While Panama is likely to receive many economic rewards that include infrastructure projects and expanded access for Panamanian goods in Chinese markets, the principal advantage will be gained in Panama’s position as an international financial center and logistical and distribution hub for Chinese products transiting Latin America, as well as Latin American raw materials and foodstuffs moving west. The new diplomatic relations will likely facilitate much greater Chinese investment in Panamanian sectors such as banking, logistics and operations to assemble, transform and distribute products to the region. Similarly, it is likely to expand participation by China-based companies in the construction of transport, logistics and communication infrastructure, probably including equity investments and not just loans—due to Panama’s strong rule of law and stable market-oriented economy.

The expanded Chinese presence in these sectors is aligned with China’s official “1+3+6” engagement strategy toward the region. The strategy emphasizes that Chinese engagement efforts are unified in “one plan,” whose three principal vehicles of engagement are trade, loans and investment, and that such efforts are concentrated in six focus areas: energy, natural resources, infrastructure, scientific innovation, technology and agriculture. The expanded presence will also likely stimulate second-order investment from Chinese engineering and service companies—following their traditional Chinese clients into the region—as well as real estate investment in support of both business and tourism. Panama’s relatively large ethnic Chinese community will only enhance the attraction and level of comfort for such investors.

In the near term, the establishment of diplomatic relations is expected to give Panama “most-favored-nation” trade status. This could lead to talks on a Panama-China free trade agreement, which would complement the U.S.-Panama free trade agreement in providing Chinese companies enhanced access to the U.S. market through Panama. Relations will also likely promote a key role in the Panamanian logistics system for the Margarita Island container terminal, operated by Shandong-based China Landbridge, and currently being expanded by China Communications and Construction Corporation, or CCCC. Chinese participation in the Chan 2 hydroelectric project in Bocas del Toro and the construction of a fourth bridge over the Panama Canal have also been mentioned.

Beyond commerce, diplomatic relations are likely to facilitate cooperation between Chinese and Panamanian authorities against trans-Pacific organized crime, similar to the cooperation between Chinese and Argentine authorities established in 2016 to counter the Chinese mafia group Pi Xue.

WPR: How does this fit into the larger regional context of Chinese engagement in Central and South America, as well as U.S. hegemony in the Western Hemisphere?

Ellis: China’s high-profile move in Panama is just one of a series of loosely coordinated, but reinforcing, steps through which the country is reshaping Latin America and the global order in a way that is advantageous for Beijing’s continued rise. It also has potentially negative implications for the strategic position of the United States in the region and its policy agenda of Western-style free trade, democracy, human rights and the rule of law.

Both in Panama and in the rest of the region, China’s investment and other commercial engagement is advancing, following a model that adapts to the political conditions and opportunities presented in each country. For example, China is consolidating influence in leftist Venezuela, even while it moves cautiously there in the context of the country’s economic and political crisis and the shadow of U.S. sanctions. Counterpoised with its initiatives in Venezuela, China is also pursuing new opportunities with the conservative governments of Mauricio Macri in Argentina and Pedro Pablo Kuczynski in Peru. It is leveraging Brazil’s crisis to buy up assets being sold off by distressed firms and to bid for projects across the region previously won by the corruption-plagued Brazilian construction giant Odebrecht. China is further taking advantage of Mexico’s souring relations with the United States to develop banking, manufacturing and petroleum projects in that country. Mexico’s president, Enrique Pena Nieto, has met with his Chinese counterpart, Xi Jinping, seven times, most recently in Xiamen at the BRICS summit in September.

With the breakdown of the China-Taiwan truce, it is likely that other states in Central America and the Caribbean, and perhaps even in South America with Paraguay, will follow Panama in recognizing China over Taiwan. Although such changes may not play out quickly, each will lead to new opportunities for expanded commercial, political and military engagement by China with those countries, most of which are geographically and politically close to the U.S.

Renewed diplomacy will be complemented by an array of other tools as Beijing works to shape the economic and political landscape of the region to its advantage. These include “strategic partnerships” and associated high-level committees for advancing bilateral coordination on issues such as trade, investments, loan-backed projects, military relations and even political positions. China will also expand its use of multilateral tools, including the China-CELAC Forum that next meets in January in Santiago, as well as vehicles that include the “BRICS Plus,” the Asian Infrastructure Investment Bank and China’s ongoing attempt to launch the Asia-Pacific Free Trade Area—a trade regime that would favor commerce on Beijing’s terms through its emphasis on market access over the elimination of nontariff barriers or the protection of intellectual property.

“What Panama’s Recognition of China Means for America’s Backyard,” Interview. World Politics Review, October 5, 2017,