Deciphering Panama's approach to China

Otávio Costa Miranda

Panama’s shift from Taipei to Beijing is the result of a long-expected but hard-to-predict coalition of factors. Panama’s President Juan Carlos Varela had a fundamental role in perceiving the favorable political momentum generated by Taiwan’s Democratic Progressive Party’s victory in 2016, engendering the end of the truce across the Taiwan Strait. President Varela’s position is not new. Since holding office simultaneously as Vice-President and Chancellor in 2009, the Panamanian politician and entrepreneur always advocated for the rift. His might was crucial for the inauguration of official diplomatic channels between both countries in his first term as President, solidified by his first State visit to China - the first Latin American leader to come to Beijing since the 19th Party Congress.

People watch fireworks during the celebration of the establishment of diplomatic relations between China and Panama in Panama City, Panama, June 12, 2017.[Photo: Xinhua]

The split decision was rather practical. China already ranks as the biggest user and supplier of the Colon Free Trade Zone, and as the second biggest client of the Panama Canal. Though a services-based and trade-oriented country, Panama depends on a vibrant and interconnected world economy for thriving. As the G7 countries are expected to maintain the current trend of stagnation even in the most optimistic IMF forecast, stratagems such as the Belt and Road Initiative (BRI) are decisive to Panama. On Christine Lagarde’s words, preventing a “new mediocre” from becoming a “new reality” is the quest of our times. For Panama, China is the ruler of 15% of the global economy and contributor for 30% of global growth. Not just an option, but a target, and establishing formal relations with it is a prerequisite for integrating to the key projects undertaken by Beijing.

The international trade environment is shifting towards developing economies, and China occupies a central spot in it. In Latin America, China is playing a pivotal role in maintaining trade warm and investments steady in a critical period, and Panama is well aware of it. According to Sebastian Naranjo Rodriguez, Ph.D Candidate and Researcher at Renmin University’s Center for Latin American Studies, closer ties with China is “a decisive opportunity for Panama to promote its strategic position as a regional hub for Chinese investments and headquarters for Latin America, due to Panama’s major assets: vibrant services and a blessed geographical position”. Indeed, the linkage between the Chinese supply of recyclable capital and its own demand for safer and well-connected sources of commodities places Panama at a special site.

Although Latin America is not officially included at the BRI by geographic standards it should be, if observed by a logical and tactical perspective. The region’s demand for infrastructure building and upgrading is as blatant as in other key BRI participating countries. But the logic for Latin America contrasts with the one employed in Eurasia. Although both share similarities on transport infrastructure building and market-seeking primacy, the western continent relevance is dictated by the Chinese ever growing numbers in protein consumption and food security risks. Brazil and Argentina are among China’s main suppliers, and most of its production is shipped on Panama registered vessels, through the Panama Canal. 

On his first travel to China as President, Varela’s main strengths are Panama’s sea and air corridors, and a friendly banking system. The triumph of the country as a key trade and logistics hub centered on the Panama Canal came at the cost of constraining the urban connectivity and energy sectors. Roads in Panama don’t match its world-class ports and air transport infrastructure, also having one of the lowest road densities in Central America. Land infrastructure construction, among many other factors, is a fertile field for the integration of Panama to BRI’s broader agenda. As vouched by Varela, Panama shall be the base of the Central American infrastructural integration. The region has yet to reach its full potential in the global economy, and that will only be achieved as a consequence of an efficient multimodal logistics system. Chinese infrastructure companies are already bidding on government projects leaning towards the goal.

Panama, a small country in a unique geographic position, recognized the ‘One China Principle’ at a time when Chinese companies are thriving in the region. Varela aims at reproducing the conditions found in key logistic nodes along the Maritime Silk Road for attracting them, actively extending the Belt and Road cooperation to Latin America. Panama is well positioned to endeavor such ambitious targets as a champion of unimpeded trade, a safe regional haven for financial integration, and an infrastructure inter-connectivity hub in one of the world’s most excluded regions from global trade. All regional imbalances and turmoils considered, Panama’s neutrality, political stability, and openness shall surprisingly justify a conceptual expansion of the BRI. By including Latin America on its framework, this might be the first China-led truly global initiative.

(Otávio Costa Miranda is a Research Associate at Renmin University Center for Latin American Studies)