Panama a strategic hub for the PRC

DIÁLOGO AMERICAS

Nearly 6% of global trade and 57.5% of the cargo transported in containers that ship from Asia to the East Coast of the United States passes through the Panama Canal. Today, this important infrastructure is the focus of great concern in political, economic and academic sectors given the growing presence of the People’s Republic of China (PRC). “China has turned Panama into a geographic and commercial concentration center or strategic hub for its political, commercial and military advance in the region,” Euclides Tapia, professor at the School of International Relations of the University of Panama, told Diálogo, a publication of U.S. Southern Command.

Sino-Panamanian commercial relations are longstanding, however, only since 2017, when both nations strengthened diplomatic ties, did the influence and interference of the Asian country become noticeable. “I am not wrong in saying that since Panama broke relations with Taiwan to establish them with China, the country’s independence has been extremely compromised,” Tapia said.

Since the beginning of the century, the PRC has infiltrated Latin America, overcoming physical and cultural barriers. It is now the region’s second-largest trading partner. According to the World Economic Forum, in just two decades, its bilateral relations have increased 26-fold, from $12 billion in 2000 to $315 billion in 2020.

Experts say this increase is the result of investments of all kinds, which have allowed Beijing to strengthen diplomatic and commercial ties and promote its strategic objectives. “Beijing invests significantly in grants and initiatives to match, influence and recruit potential partners. This includes cultural centers, academic scholarships and invitations to influential people,” Evan Ellis, research professor of Latin American studies at the U.S. Army War College’s Strategic Studies Institute, said.

Examples of this are the more than 300 meetings with representatives of 74 parties in 26 Latin American countries held between 2002 and 2017 by the International Liaison Division of the Chinese Communist Party (ILD), and the 44 Confucius centers now present in the region.

These investments in soft power add to another more obvious one: capital. According to the Inter-American Dialogue think tank, between 2003 and 2022 the PRC invested $187.5 billion in Latin America and the Caribbean.

An important recipient of these investments has been Panama, a small but strategic country due to its privileged geographical position and its dynamic economic growth in the region. According to the China Index, a platform launched in 2022 by civil society entity Doublethink Lab, Panama is the second country after Peru with the greatest Chinese influence in Latin America. “It’s impressive how China has been weaving a network of influences with multiple Panamanian families and politicians that lead it today to have a dominant and worrying position in a strategic country for world trade,” Ellis said.

Nearly 40 Chinese companies are already present in Panama in sectors as diverse as mining, finance, logistics and telecommunications. Half of them, such as the Chinese technology multinational Huawei, have opened distribution centers in the Colon Free Zone under the special regime law.

But most important is the presence it has achieved in the Panama Canal. China controls two of the five ports adjacent to the canal, Balboa on the Pacific and Cristobal on the Caribbean, and is preparing for the construction of the fourth bridge over the canal.

Of particular concern is that Beijing could use its projects to monitor activity in the canal, gathering information that could have implications for the continent’s security. “We are talking about companies that have links with the People’s Liberation Army of China [PLA]. In an eventual conflict, Beijing could close the Panama Canal if it wanted to,” Ellis said.

The script of a diplomatic “romance”

In October 2017, Wei Qiangi, the PRC’s first ambassador to Panama, landed in Panama City. “The fact that China sent one of its most talented ambassadors to Panama with perfect Spanish illustrated its recognition of the country’s strategic importance,” Ellis said.

A year prior, the Andronikos ship of China’s COSCO Shipping made its monumental entrance inaugurating the expansion of the Panama Canal. Although such honor was due to a selection by lottery, it would remain an image of the important beginning of Beijing’s strategy. “At the geopolitical level, it marked a milestone because our traditional partner had been and continues to be the United States, and suddenly China arrived and marked its entry — things began to change,” Eddie Tapiero, Panamanian economist and expert on Sino-Panamanian relations, told Diálogo.

That same year, the Chinese consortium Landbridge acquired control of the Margarita Island port for $1 billion, located in the Colon Free Zone, the largest free trade zone in the Western Hemisphere. The agreement established the construction of the Panama-Colón Container Port (PCCP), which opened on June 7, 2017, just a week before Panama’s surprise diplomatic turnaround, recognizing the PRC and embracing the one-China doctrine. “Nobody saw it coming. It was something that was agreed secretly, without generating much noise, that’s why when it becomes official China is already ready and able to move quickly in the main sectors of the Panamanian economy,” Tapia said.

Five months later, Panama became the first Latin American country to join the One Belt, One Road (OBOR) initiative, Xi Jinping’s most ambitious foreign policy project, and 19 non-public memorandums of understanding were signed with the PRC. According to the minister in charge of China’s State Council Office for Overseas Affairs, Qiu Yuanping, the agreements with Panama constituted the most important diplomatic achievement for China in 2017.

Chinese companies quickly began winning bids for diverse and numerous strategic infrastructure concessions. These included a $4 billion high-speed train to link Panama City to David, a $1 billion natural gas-fired power plant, a cruise ship terminal on the Amador Causeway, a new building for the Chinese Embassy on the banks of the Canal, a convention center and the construction of the $1.4 billion fourth bridge over the Panama Canal, which President Juan Carlos Varela called at the time “the fifth most important infrastructure project in the entire history of Panama.”

The telecommunications sector was also strengthened. The Chinese technology company Huawei, which has been banned by several countries due to the purported risk of espionage by the Chinese government, turned the Colon Free Zone into a hub for the distribution of its products. “We have decided to set up in Panama not only because of its geographical position, but also because of its regulation and flexibility,” Huawei’s vice-president for Latin America, Jonathan Zhang, told Spanish agency EFE at the inauguration of the center. President Varela also announced that the opening of this center consolidated Panama as China’s “commercial arm” in Latin America.

Academic and cultural aspects then followed suit. In June 2018, the first Confucius Institute of China in Panama, one of the most influential public institutions in the country, opened its doors to promote the Chinese culture and language. “This has been one of the most important penetration strategies, but at the same time one of the most neglected. I can say with certainty that in Panama it has reached an impressive advance through which they seek to condition the minds of Panamanians that they are the world power and here there is nothing that cannot be done without them,” Tapia said.

Diplomatic collapse of an “arranged courtship”

Yet the diplomatic romance between China and Panama during the first years did not take long to crumble. With the change of government, several projects were suspended due to disagreements in financial terms, cost overruns and irregularities in the awarding of contracts.

An example of this is the revocation of one of the most strategic projects of the Asian country, the PCCP in Colón’s Isla Margarita. The project that promised to be the country’s most modern container terminal failed to comply with numerous contractual terms, including the investment of approximately one-fifth of what was agreed, as well as employing much less local labor than promised, according to an audit by the Comptroller General of the Republic of Panama. Additionally, the controller of Shanghai Gorgeous Group, a partner in the project, was arrested in Shanghai on charges of fraudulent loans, which further contributed to the suspension of the project. In addition to this, the Supreme Court of Justice also suspended the Environmental Impact Study after denouncing damages to the coral reefs and mangroves in the area.

The bullet train proposal, an emblematic project of OBOR, was also eliminated. “This was one of the first victims, it never made sense. Panama does not need a fast passenger railroad to David. It is a very well-connected area in addition to the high costs involved in the project and the long-term return on investment,” Ellis said.

For Tapia, it was an attempt to lure Panama in what analysts have called the debt trap. “The strategy is the same one that has been successfully practiced in other countries where they indebt them until they are forced to pay with assets, as in the case of Sri Lanka, which was forced to lease the port to China for 99 years. I have no doubt that they were trying to do the same with the canal,” Tapia said.

The proposal to build the Chinese embassy at the gates of the canal also fell through. Panamanian society expressed its discontent, denouncing that building the embassy there was an offense to the country, Panamanian daily La Estrella de Panamá reported. “Locating its diplomatic headquarters and consequently its national emblem at the entrance to the Canal was something that no other country had dared to do before,” Ellis said.

And among so many setbacks, the possibility of a free trade agreement was lost. Although the countries had made progress up to the fifth round of negotiations, the talks were suspended and have not been resumed.

Tug of war

While the PRC’s portfolio is more modest today than it was a few years ago, “China’s setbacks should not invite complacency,” warned Ellis, who says the PRC continues to “invest significant effort and is making important, if uneven, progress in building leverage as well as trade position.”

Over time, suspended projects have resumed.

This is the case of the Panama Canal fourth bridge. On February 26, 2024, Minister of Public Works Rafael Sabonge announced that construction would resume in March. The project had been suspended after irregularities were found in the awarding of the contract, the commission of the Panamanian National Assembly said.

In March 2021, a 25-year extension of the lease contract for Hong Kong company Hutchison Whampoa to continue operating and managing the ports of Balboa and Colón, one on each side of the canal, was announced. Many criticized this decision, viewing it as Panama’s opportunity to broaden the conditions of the contract. “This has been one of the most controversial decisions and at the same time the biggest show of China’s influence over Panama,” Ellis said.