Opportunities and challenges in Sino-Panamanian relations, one year after the establishment of diplomatic relations

In June 2016, Panama inaugurated the expansion of its Canal. In June 2017, the Panamanian government decided to establish diplomatic relations with China (Central America has been a traditional ally of Taiwan), thus giving rise to the flow of new Chinese investments in a Canal revitalized with the expansion. On the one-year anniversary of the establishment of relations, here is a review of the opportunities and challenges posed by the increased Chinese presence in the isthmus.

▲Container ship of the Chinese shipping company COSCO, making transit issue 2,000 in the expanded Canal, in September 2017 [Panama Canal].

article / Ximena Barria

In the last decade, the People's Republic of China has made efforts to increase its presence in different regions of the world. China's projection as a global power has meant that no region is alien to it and there are hardly any countries that do not actively seek commercial exchange with the Asian giant. Therefore, it is not surprising that China has wanted to increase its activity around the Panama Canal, and that this Central American country has established diplomatic relations with Beijing, breaking the traditional relationship with Taiwan.

Panama's privileged geography and its rapid economic growth in the region are two important aspects taken into account by China. The Panama Canal offers advantageous access to the Atlantic and Pacific oceans and about 6% of global maritime trade passes through it. At times there has been talk of Chinese interest in building a canal in Nicaragua, something that was never really on Beijing's diary . China sees Panama as an important geostrategic point from which to project its foreign policy in Latin America, which undoubtedly unsettles Washington.

On June 13, 2017, the Republic of Panama and the People's Republic of China announced the establishment of diplomatic relations. With this, Panama recognized the government of Beijing as the legitimate Chinese government and broke the previous diplomatic relations established with Taipei. The new Sino-Panamanian relations gave way to 19 agreements in various areas.

Chinese projects in the isthmus

In a country as open to trade and transactions of all subject as Panama is, the population of Chinese origin has always had a relative presence. The Chinese community in Panama is made up of some 135,000 people, which represents 4% of its 4 million inhabitants.

Since 1911, Panama had maintained diplomatic relations with China. However, after the defeat of the Chinese Nationalist Party and the victory of Mao Zedong's communism, the Panamanian State decided to maintain diplomatic relations with Taiwan, due to its capitalist stance, during the Cold War. Since 1949, Panama remained one of Taiwan's major allies until its rupture in 2017.  

Despite the recognition of Taipei, trade relations between Panama and the People's Republic of China have been increasing in recent years, generating a larger volume of exchange than that recorded between the Central American country and Taiwan.

Panama's most important economic engine is the Canal, which links the Atlantic and Pacific oceans and constitutes one of the most important routes for world trade. Canal revenues generate one third of Panama's Gross Domestic Product. Over the years, China has become an important customer of the Canal, becoming its second largest customer Username after the United States. The first ship to cross the expanded Canal, at the inauguration held in June 2016, was a vessel of the Chinese shipping company COSCO, which was awarded the honor by lottery.

China is the largest provider of the Colon Free Zone (CFZ), located on the Caribbean coast of Panama, next to the northern mouth of the Canal. It is the most important free zone in the Americas and the second largest in the world, with an annual volume of imports and re-exports of $16.16 billion. In the first semester of 2017, the FTZ imported $1.344 billion worth of goods from China. Likewise, important Chinese companies have sought to establish themselves in the FTZ taking advantage of the strategic advantages it offers.

China has also announced the construction of a container port at area in Colon, which will have facilities for receiving liquefied natural gas. The planned construction is estimated to cost $900 million. The construction will result in the first container terminal designed to handle Neopanamax ships, which have the maximum dimensions to transit the canal.

In the area of communications, the People's Republic of China expressed its interest in building a railway infrastructure connecting the capital of Panama and the province of Chiriqui, covering a distance of 400 kilometers. As for air transportation, the Air China airline committed to operate the Panama City-Beijing route twice a week. Panama has the most important air hub in Latin America and having a direct flight to Beijing represents an important opportunity to bring Asian markets closer to Latin America.

In addition, Panama has an important and diversified financial center that is attractive to Chinese banks as a strategic gateway to establish themselves in the region. The presence of Bank of China, with more than 30 years in the country, and future establishments of other entities such as Banco Industrial y Comercial, Exim Bank and China Development Bank will contribute to increase the flow of Chinese capital to Panama. This, in turn, will diversify and make Panama's banking sector increasingly dynamic.

The Panamanian challenge to seize the opportunity

Ensuring that this increased relationship with China and the Asian market structurally benefits Panama and does not degenerate into a future status of dependence presents important challenges for a country that is in the process of development. Panama will have to increase productivity in sectors such as agriculture and industry, train more staff and create a transparent framework of financial institutions.

The agricultural sector presents marketing difficulties and a lack of agricultural policies to produce and sell crops at fair prices. In recent years, there has been a shortage of land for crop marketing purposes as a result of droughts and floods. Another challenge is food imports, since many imported foreign products are cheaper and this causes a drop in the prices of domestic products, which makes their production unprofitable for the farmer.

The increase in industrial productivity goes hand in hand with the effort of training of a better human capital. Currently, in the Panamanian republic there is a lack of preparation of people who can manage important companies. In 2015, the issue of enrolled in universities reached only a meager issue of 160,000 students. The Panamanian government should promote projects of technical training and scholarships to increase this issue so that in the long term there will be more staff trained for the new companies that will arrive.  

The Panamanian financial structure should also be prepared to create new legislation that will contribute to legal certainty. In order to harmonize the financial sector with international anti-money laundering conventions, the Panamanian government should establish tax reforms that promote fiscal transparency. The entry of foreign banks should be regulated more effectively. The discussion to consider classifying tax evasion as a tax crime will present an important challenge for the country to consider.