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 Chinese shipping line 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 Chinese population 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 an exchange Issue greater 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 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 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 import and re-export Issue 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 in the Colon area , 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 dependency status presents important challenges for a country that is in the process of development. Panama must 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 to training 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 people enrolled in universities reached only a meager 160,000 students. The Panamanian government should promote technical training projects and scholarships to increase this issue so that in the long term there will be more qualified staff 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 of considering tax evasion as a tax crime will present an important challenge for the country to consider.

One Belt-One Road' project aims to consolidate China's rise as a superpower

The ambitious initiative launched by Xi Jinping to connect China with the rest of the Eurasian continent may prove costly and difficult. But unlike the overland route through the Central Asian republics, the sea route may not take long to become a reality on certain stretches, as China has already built some ports on part of the route.

▲The land and sea lanes of the Chinese initiative [yourfreetemplates].

article / Jimena Puga Gómez [English version].

Following Chinese President Xi Jinping's 2013 speech on the revitalization of the ancient Silk Road, the initiative that started out as just an idea has become the Beijing government's biggest economic challenge: a revolution that, if carried out, will change the Asian continent's passenger, freight and hydrocarbon transport infrastructure, as well as high-tech. Dubbed OBOR-OneBelt-One Road, the plan is intended to be the core topic of China's rise as a regional superpower.

The OBOR initiative is a grand plan to redesign China's strategic environment, project Beijing's economic power, secure the communist country's access to energy and mineral supplies, and boost economic growth in the west of the People's Republic. OBOR seeks to achieve these goals by fostering greater and faster connectivity between China and Europe through intermediate points in Central, West and South Asia, as well as with Russia.

For its part, the maritime route that will form one of the core topic of the OBOR initiative, also known as the Silk Road of the 21st century, counts on the fact that seven of the ten largest ports in the world are in China and, as is well known, these infrastructures make the Asian giant an important exporter of port management services. 

The Eastbound Maritime Silk Road will start in Fujian province and pass through Guangdong, Guangxi and Hainan, before heading south to the Strait of Malacca. From Kuala Lumpur, the Route will continue to Kolkata and Colombo, then cross the rest of the Indian Ocean towards Nairobi. From there, it will travel along the Horn of Africa, seeking to cross the strategic Gulf of Aden until it reaches the Red Sea. Beijing's plan aims to create sufficient infrastructure to enable Chinese ships to safely reach the Mediterranean after sailing through the Suez Canal. But the ambition of the People's Republic does not stop at the gates of the European Union, since China wants to reach Athens by sailing the Aegean and from there to Venice, where it will look for land routes that will make it possible to move its goods throughout the Union. Chinese investment has focused, among other things, on the port of Piraeus, with a new logistics center, and on the development of a network of logistics infrastructures through the Balkans and Hungary.

The South Pacific has also been included in this strategic map of routes devised in Beijing. Thus, the maritime Silk Road has two routes. The first, as mentioned above, originates on the east coast of China and, via the South China Sea, aims to establish strategic control of the Spratley Islands, the Strait of Malacca and the entire Indo-Pacific area, including the Bay of Bengal, in order to reach the heart of Europe. The second sea route will also cross the South China Sea to direct its ships to the coastal ports of the South Pacific. With this, China would also control the routes of the essential raw materials that come from Latin American countries.

Although this is a long-term economic project , the Chinese government has already begun the construction of certain infrastructures and the necessary negotiations with various countries. A clear example is Germany. The European Union is China's largest trading partner , while the People's Republic is the Union's second-largest provider . Germany, for sample , not only enjoys an excellent reputation as a reliable partner for China, but is also regarded as "Europe's trade gateway". test of this is that, at a meeting in Duisburg, the world's largest inland port and an important transport and logistics hub in Europe, Chinese President Xi Jinping proposed to Germany "to work together to realize the ambitious project of the revival of the economic belt of the new Silk Road of the 21st century". Germany and China are currently connected by the Chongqing-Xinjiang-Duisburg international railroad line.

The ports built by China at Hambantota and Colombo in Sri Lanka; the China-Suez Economic and Trade Cooperation Zone in Egypt; Kazakhstan's negotiation of the right to clear its imports and exports through the Chinese port of Lianyungang; and a new alliance between ports in China and Malaysia are additional examples of China's ability to leverage its newfound skill as a port modernizer and manager to support its strategy.

The New Silk Road initiative is a project that will require multi-billion dollar investments in order to build smooth, safe and efficient transport infrastructures. The effects of this economic network ensure benefits not only for China, the leader of the OBOR initiative, but also for all the countries affected by it. However, the financing of the project is still an unknown quantity that should be clarified.