Chinese inroads in Panama: Transport hubs and BRI in the Americas

Date: 01 Aug 2018

On June 13th, 2017, Panama established diplomatic relations with the People’s Republic of China (PRC). In doing so, it broke a long-standing truce in the diplomatic tug-of-war between China and Taiwan in the Western Hemisphere. On May 1st, 2018, the Dominican Republic followed in Panama’s footsteps. All bets are off now in terms of which country in the Americas will be the next to flip allegiance. Ten of the eighteen nations globally that still have embassies in Taipei are from Latin America and the Caribbean.

What, if anything, do countries that switch from recognizing Taiwan to the PRC gain? Is this simply another instance of checkbook diplomacy, as was sometimes the case in the past?  And is it really worth it for Central American and Caribbean nations—which make up nine of the ten regional countries that still have ties to Taiwan—traditionally much more dependent on the United States than their South American counterparts, to recognize Beijing? (The decision earned the Dominican Republic some grumblings in Washington.)

Panama, the fastest growing country in the Americas (5.4% projected growth in 2018, around where it’s been for the past five years), is not exactly your typical Central American republic.  The Panama Canal gives the country a unique position in world trade. China is the second largest user of the Panama Canal, after the United States, and the biggest exporter to the Colón Free Trade Zone. The current government of President Juan Carlos Varela is considered to be among the most effective in the region. Panama’s per capita income ($15,000 in nominal terms and $25,000 in PPP terms) is among the highest in the Western Hemisphere. Panama also has the biggest ethnic Chinese (largely Cantonese-speaking) community in Central America, estimated at 200,000.

Still, Panamanian history is not untroubled.  The country’s last president, Ricardo Martinelli (2009-2014) was recently extradited from the United States to face corruption charges, the memory of the Noriega years lingers, and the party system is weak. Panama’s trajectory is thus not wholly unrelated from that of its neighbors.

A standard view on China-Latin American relations is that, given China’s endless appetite for commodities, it is resource-rich South America that has much more to gain from its links to the PRC than Central America and the Caribbean. Costa Rica’s  somewhat lackluster experience since it recognized Beijing a few years ago would seemingly bear this out.

So what did Panama gain from its first year of Sino-Panamanian diplomatic relations?

The short answer is: quite a bit. The two governments have signed a total of 23 agreements, covering a multitude of areas in economic affairs and trade, tourism, shipping, infrastructure, and cooperation on development and cultural initiatives.

Apart from the formalities of opening embassies in both countries—which included Panama opening a consulate in Shanghai, a state visit by President Juan Carlos Varela to China, and a reciprocal visit by Foreign Minister Wang Yi to Panama—there have been advances in investment, infrastructure and trade:

  • In November 2017, officials launched negotiations for a bilateral Free Trade Agreement (FTA) in Beijing;
  • The China Railways Corporation (CRC) set up a committee to study the feasibility of a 450 km high-speed railway line from Panama City to David in Chiriqui province, on the Costa Rican border, a project with an estimated cost of $5.5 billion;
  • Air China initiated direct flights from Beijing to Panama City, via Houston, one of the very first such flights from a Chinese airline to the region;
  • Panama has announced its interest in an initial Panda bond issue—RMB-denominated bonds issued in China on behalf of foreign countries interested in raising capital from Chinese investors—for the equivalent of $500 million, to hit markets in the second half of 2018;
  • The Bank of China (BOC), one of China’s top four commercial banks, has announced the opening of a branch in Panama City to serve as the Latin American headquarters for the bank; and
  • Panama announced its participation in the Belt and Road Initiative (BRI). It’s the first country in the Americas to embrace China’s ambitious infrastructure and connectivity development proposal, also known as the New Silk Road.

Yes, the volume of bilateral trade in goods between China and Panama is minimal, and the likelihood of Panama increasing its own exports to what used to the Middle Kingdom, with or without an FTA, is low because Panama does not have much of a manufacturing, agricultural, or mining base. In fact, the value of its total global exports ($12.5 billion) are only a little over half of the value of its imports ($21.9 billion).

Bring it on

But focusing too much on trade misses the point. Panama is doing well precisely because it is the ultimate service economy. It does not depend on making anything but on packaging, handling, forwarding and shipping things made by others, as well as on financing these and other operations (albeit perhaps in a not wholly transparent manner, as the Panama Papers reminded us). At a time when China is increasing its trade and investment activities in the Western Hemisphere, Panama provides an ideal hub for China’s presence in the region, both because of its geographical location (at the crossroads of North and South America) and its status as a transport and financial services hub—the Hong Kong of the Americas.

As a tourism and travel hub, Panama also seems well positioned to benefit from Chinese tourism. Some 130 million mainland Chinese travel abroad every year. Their average spending is higher than that of U.S. or German tourists, with around 25% of their travel budget going to shopping (compared to 15% for most tourists). The newly established Air China direct flights from Beijing to Panama City expedite the flow of Chinese tourists to Panama, with the resident ethnic Chinese community increasing the degree of comfort of visitors from their ancestral homeland.

In deploying its airlines, banks (not just the Bank of China, but also policy banks like the China Development Bank and China’s Eximbank), construction and railway companies to Panama, China is reaffirming that it’s presence in Latin America is not just to satisfy its thirst for commodities, but also to partner with the region on economic activities across the board.

Yes, Panama is far from being a typical Central American or Caribbean nation. But the sheer variety of bilateral initiatives that have flourished in only twelve months would seem to indicate that China has much to offer in terms of business opportunities, not just to the resource-rich countries of South America, but also to the more service-oriented economies of the Caribbean Basin.

That said, it takes two to tango. Panama’s progress in the last year has as much to do with the pro-active, ambitious view of its government and business community of the country as a future global hub, as it does with China’s interest in the region.

Panama has been able to effectively build on its niche status in the world economy, while playing into China’s own commercial and international development priorities. In contrast are Costa Rica’s far less imaginative policies after it opened relations with Beijing in 2007.  That potentially important moment was dragged down by self-doubts and vacillations of various kinds, and a recurrent inability to match its own interests with those of China (as shown in the almost ten years it took Costa Rica to approve and ratify an investment protection agreement with China). The Panamanian opening to Beijing contains valuable lessons for those who want to learn from it. It may also offer a path forward for the other ten hemispheric holdouts.

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