The rise of China in Panama under Varela (2014–2019): A new Latin–American pivot of the Silk Road or a diplomatic ‘tour de valse’?

Thierry Kellner and Sophie Wintgens

Introduction

Chinese expansion into Panama has taken place in stages. In the 1990s, despite the lack of diplomatic relations, the PRC and Panama established trade ties. In the decades that followed, the volume of trade increased considerably, turning Beijing into a major trading partner of Panama and one of the most important users of its canal. In 2017, to everyone’s surprise, Varela’s administration broke off the long-standing diplomatic relations with Taiwan in favour of the PRC. In two years, under President Varela, in the context of the BRI, bilateral relations have expanded across the board. The existence of significant cross-interests as well as the dynamics at work since 2017 suggests that Panama could play a major or even ‘pivotal’ role for the BRI in Latin America. However, despite these interests and the significant achievements under Varela’s administration, the bilateral relationship faces substantial obstacles both within Panama and internationally. They weigh on the choices made by the Panamanian authorities and on the role that Panama could ultimately play in the major initiative of Chinese diplomacy, and once again illustrate the difficulties facing Chinese ambitions in Central America.

1 Trade development in the 1990s

While they had no diplomatic relations, trade relations between the PRC and Panama gradually developed. The volume of trade in goods increased by a factor of 33 between 1989 and 2000, a trend that accelerated after the PRC’s entry into the WTO in 2001. A decade later, bilateral trade reached US$11.9 billion according to IMF data based on Chinese customs figures. According to Chinese customs, bilateral trade peaked in 2012 at USS15 billion and then declined to US$6.7 billion by 2017.1

There is, however, a significant discrepancy between the figures reported by China and Panama. This phenomenon, recurrent in Latin and Central America, makes it difficult to assess the real position of the PRC in Panamanian trade. The Chinese role for this country varies if one considers the statistics of the Panamanian authorities or those of the PRC. In 2017, just before the diplomatic recognition

of the PRC by Varela administration and according to Panamanian figures, with 9.4% of its total trade (in goods), China ranked third among its trading partners, ahead of Japan (2.15%) but behind the European Union at 28 (11.4%) and far behind the United States (24.01%). This is a significant result for two countries that had virtually no trade relations prior to the 1990s and had no diplomatic relations at that time. However, if one follows the Chinese customs figures, the picture changes considerably. Panama’s total foreign trade will reach US$18.88 billion in 2017.3 With 35.6% of its total foreign trade, the PRC was already its main trading partner, ahead of the United States. Quite a symbol when one knows the weight of the American neighbour in Panamanian history.

Several factors can explain the statistical discrepancy: transport costs not being accounted for, errors in inputting or classifying products, time differences in recording, different procedures for exchange rate conversions or weaknesses in statistical systems.4 But there is a simpler explanation. Important amounts of goods exported from China to “Panama” are destined for re-export to other destinations in North, South and Central America and the Caribbean. The Colon Free Zone in Panama plays key role in this circuit. It was home to 2,600 companies in 2018 and Beijing is its largest supplier of goods (US$3,214 billion in 2018).5 The main re-exporting countries were in 2018 (in order of importance): Puerto Rico, Colombia, Venezuela, Panama itself, Costa Rica, the United States, the Dominican Republic, Guatemala, Ecuador and Honduras.6 Goods are therefore listed differently for the two countries. If this explanation is correct, Chinese figures show that Panama had already become a hub for the re-export of Chinese products to other markets in the Americas since the 2000s and was therefore for Beijing a “natural place” to promote the extension of the BRI to the entire LAC region.7 [1]

(Hutchinson Whampoa Ltd.) to manage its ports of Balboa (Gulf of Panama, Pacific side) and Cristobal (Limon Bay, an arm of the Caribbean Sea, Atlantic side), strategically located at both ends of the Panama Canal. The head of the company, Li Ka-shing, was known at the time to have ties to the Chinese government and senior PRC military officials. As a result, some American observers have expressed concern about this development.9 This Panamanian decision reflected both its desire for independence from the United States, which intervened militarily in the country in 1989-1990, and its interest in developing ties with China, which had just recovered Hong Kong (1997), an entity with which it already had significant economic relations.10 After the hand-over of Hong Kong, Beijing suddenly became the third-largest user of the Panama Canal after the United States and Japan. However, Panama’s desire to benefit from the Chinese economic boom did not, at that time, call into question its close relations with Taiwan.

In the late 1990s, when the United States formally transferred authority over the Panama Canal to the Panamanian government after almost a century of control under the Torrijos-Carter Treaties (September 1977),11 concerns were expressed in both Taipei and Washington about the possibility that Panama might establish diplomatic relations with the PRC. This possibility was raised by the Chairman of Panama’s Foreign Affairs Committee, who visited China in 1999.12 However, the Panamanian Foreign Minister was quick to reassure Taiwan.13 In 2003, the two countries concluded a FTA, the first of its kind ever signed by Taipei.14 Yet, the possibility that Panama might break off its relations in favour of Beijing could no longer be excluded. Symbol of the growing economic interests between the two countries during this period, the Colon Free Zone, located at the Atlantic entrance to the Panama Canal, became in the decade 2000 the largest free trade zone fox- distribution and re-export of goods in the Western Hemisphere and the second largest in the world after Hong Kong. It already hosted more than 2,500 companies in 2005. At that time, China and Hong Kong were responsible for the largest volume of goods transiting the zone.15

Despite official ties with Taipei, in the wake of the international financial crisis of 2008, the newly elected President of Panama, Ricardo Martinelli (2009-2014), declared in 2009 his desire to establish diplomatic relations with the PRC. He thought that “the Panamanian business world would benefit from this” according to his statements to the American ambassador revealed by Wikileaks.16 However, this amiouncement was not followed by any development. The main blockage did not come from Panama but from Beijing. Indeed, under the Presidency of Ma Ying-jeou (KMT) (2008-2016) Beijing and Taipei kept a gentlemen’s agreement that the PRC would not seek to subvert Taiwan’s international recognition. As the Chinese Foreign Minister told his Panamanian counterpart (then Juan Carlos Varela) in January 2010, the PRC did not wish to undermine the positive climate of bilateral relations with the Taiwanese administration.17 Panama’s overtures thus remained a dead letter. Panama maintained and reaffirmed its diplomatic relations with Taipei, evoking a “strategic relationship” between the two countries.18 In June 2016, just one month after taking office, Taiwan’s new president, Tsai Ing- wen (DPP), travelled to the Panamanian capital to meet President Varela for the opening ceremony of the expanded Panama Canal.19 However, despite this visit, the situation changed rapidly. Tsai's stance on the issue of cross-strait relations has irritated Beijing. The Xi administration took the decision to increase pressure on Taipei.20 It is in this context that discreet contacts were established with Panama. According to our Panamanian interlocutors, the negotiations that led to the establishment of diplomatic relations took place in the greatest secrecy.21 It should be noted that it was Beijing that set the timing and pace of this process. Whatever it is, one year after the visit of the Taiwanese president, in June 2017, to the surprise of all, the PRC and Panama officially established diplomatic relations. Panama became the 23rd Latin American state to establish diplomatic ties with Beijing and the second in Central America after Costa Rica (2007).

This event has been described as a ‘diplomatic victory’ for the PRC.22 In fact, this was made easier by a combination of several factors. Among these, in addition to the impressive Sino-Panamanian commercial links already mentioned, one can cite the close ties established between Presidents Varela and Trump intended in the mind of the Panamanian President to reassure Washington,23 the disinterest of the Trump administration in the Latin American continent which left the field open to China, the imbalance between the economic and financial capacities of Beijing and Taiwan, the geopolitical reality of a China with undeniable influence on the international scene, the image of Taiwan tarnished in the press by revelations of corniption in Central America, and finally, the desire to establish such links expressed by the business community as well as by Panamanian intellectuals24 and political leaders for many years.25 Panama had maybe another pressing interest in establishing relations with Beijing at this moment: the canal project in Nicaragua announced by President Ortega. Even if the numerous criticisms and oppositions encountered on the ground by this project reinforced doubts as to its realization, the risk of seeing it launched could not be ruled out. The Panamanian authorities may have thought that diplomatic ties with the PRC would further reduce Chinese interest in supporting this project. As for Beijing, ties with Panama would deprive Taiwan of one of its most important diplomatic partners.

For Washington, this decision came as a complete surprise. The American ambassador to Panama only learned the news an hour before President Varela officially announced it.26 In Panama too, this unexpected recognition comes as a surprise. It was not unanimously appreciated. It is not so much the rapprochement with China that is criticized and a cause for concern, but rather the lack of transparency that has prevailed throughout the process and which has subsequently continued within the framework of the negotiations for a FTA. For some, the very functioning of Panamanian democracy has been called into question by President Varela’s decision.27 The former representative of Panama to the Organization of American States (OAS) (2009-2013) noted that this choice was a "unilateral decision, without any discussion, which was made by President Varela, without any consultation with the sectors concerned”.28 Nils Castro, former ambassador of Panama to Mexico, while approving - like many Panamanians - the decision, warned for his part against the unpreparedness of the authorities, and in particular the fact that this decision “was not accompanied by a national plan on the use to be made of these relations”.29

While the timing of this diplomatic recognition must be seen in the context of tensions between Beijing and Taipei and President Trump’s disdain for his Latin American neighbours, this development also reflects more broadly the strengthening of the mutual interests of the PRC and Panama, particularly in the economic field, where they also share common positions against protectionism and in favour of an open world economy, contraiy to the orientations defined by Donald Trump.

3 The Siuo-Panamauian all-out rapprochement under

Varela administration

Enhancing political relations

At the political level, the two countries set up a consultation mechanism in September 2017. Officials from their foreign ministries are to meet twice a year to discuss issues of common interest. In his exchanges with President Varela, Xi Jinping insists on the principle of non-interference in internal affairs, a recurring theme in Chinese diplomacy, but one that takes on a particular resonance in Panama given the direct intervention of the United States in Panamanian politics in the 20th century and local concerns about the risk of loss of sovereignty over the canal and its adjacent areas. Seen from Beijing, the aim is to reassure people of its intentions but also to capitalize on the desire for independence and the anti- US sentiment present in the isthmus. The PRC has also sought to show its partner the interest and usefulness of cooperating with it. The Xi-Varela Joint Declaration of December 2018 thus affirms that both sides will support each other’s efforts to safeguard each other’s territorial integrity, sovereignty and security.30 The two sides offer mutual support on matters affecting their fundamental interests. Thus, Panama confirms the principle of “one China”. For its part, Beijing declares that it respects Panama's sovereignty over the canal and recognizes that it is a permanently neutral waterway. This reassures the Panamanian side even though the PRC has not signed the Protocol to the Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal (1977).31 Beijing also offers support for Panama’s increasing regional role. It is a question of playing on its partner’s ambitions. Beijing, while increasing its political capital in the country, offers Panama the oppoxtunity to expand its room for manoeuvre, diversify its support and become less dependent on its traditional American partner. This positioning, while offering Panama political gains, is also in line with China’s desire to rebalance the international order to its benefit and work towards “multipolarity”.32

Beijing has cultivated interpersonal relationships with Panama’s luling elites through increased visits and contacts between senior govermnent officials. Until the end of his term in July 2019, President Varela visited China three times (November 2017 and 2018, and March 2019). During his first visit, no fewer than 19 agreements were signed, and a joint declaration was issued. The Chinese President returned the courtesy to Panama in December 2018. On this occasion,

18 additional cooperation agreements were signed in a variety of fields, demonstrating the density and diversity of relations between the two countries.33 China pledged to provide Panama with non-reimbursable assistance for the implementation of various projects in line with the Panamanian Government’s Strategic Plan and the National Cooperation Plan for “Panama Coopera 2030”. The amount has not been disclosed. A joint declaration was also signed. In total, in two years, the two partners have concluded no less than 46 bilateral agreements in a multiplicity of areas. That is more and much faster than between China and Costa Rica in twelve years of diplomatic relations. In the eyes of many Panamanian commentators, China already appears to be the country’s second most important partner just behind the United States.34

Beijing has also sought to diversify its political contacts and relays in Panama by promoting exchanges with the Panamanian National Assembly, political parties and personalities from all spheres of the country. A parliamentary group to promote bilateral friendship has been set up. There is also a Panamanian Association of Friendship with China (Asociacion Panamena de Amistad con China [APACHI]) with more than 350 members (eminent public figures, businessmen, intellectuals and academics).35 Moreover, during his visit, Xi highlighted the role the Chinese diaspora should play in his eyes in the long-term development of relations between the two countries (infra). Finally, Beijing has also taken some precautions in the run-up to the presidential elections in May 2019 by meeting with members of the opposition to try to maintain the proximity established under President Varela in case he is not re-elected.

Promotion of trade

The PRC and Panama established a Joint Commission in the suimner of 2018 to negotiate a FTA. If it comes to fruition, it will be China’s fourth such agreement with a Latin American country. The cross economic interests of the two partners are important. Panama’s aim is to boost its exports by improving access to the Chinese market for its goods (agricultural and seafood products, agro-industrial products, etc.)36 but also for its services - in particular logistics and maritime services - while at the same time seeking to protect certain sectors.37 It also aims to attract more investment from Beijing, particularly in its infrastructure sector (ports, bridges, roads, power stations, trains and metro lines). By concluding a FTA, in addition to stimulating its exports and investments, it also hopes to revitalize the activities of the canal and the area adjacent to this infrastructure. Finally, it wants to strengthen its role as a “gateway”, a logistics hub, for the re-export of goods from the PRC to Latin America but also for its investments in the region. Panama can be “the commercial arm of China in Latin America and the gateway to this continent”, declared President Varela in December 2018.3S To achieve this objective, the country has serious assets. It occupies the 4th place among Latin American countries in the WEF’s Global Competitiveness Index 2018.39 It can put forward its canal but also its inter-oceanic ports, its air connectivity thanks to the international airport of Tocumen, its free zones, its excellence in terms of logistics and transport but also its financial system which includes no less than a hundred banks. A series of advantages of which the Chinese side is well aware. Beijing is also interested in the financial services offered by Panama, opportunities that have already been exploited in the past as the Panama Papers has shown in a negative way40 but that it hopes to make better use in the future. However, despite these interests, the change at the head of the Panamanian state has had an impact on the negotiations. After having advanced to the fifth round of negotiations during the Varela administration, the process of signing a FTA was completely interrupted with the arrival of Laurentino Cortizo. Mid-October 2019, weeks after the Cortizo government decided to interrupt the negotiations of the trade agreement, Panama’s Minister of Commerce and Industry announced that in 2020 the issue of the FTA with China could begin to be seen again. These twists and turns cause uncertainty about the future of the negotiations with China.

A limited penetration of Chinese companies

By the suimner of 2018, there were more than 40 Chinese companies either active in the Panamanian market or taking advantage of the country’s ideal location to access neighbouring markets in the Americas and the Caribbean.41 They are interested or already present in areas such as port, bridge and road construction, energy, retail and automotive sales. Their penetration was felt before the normalization of diplomatic relations. For example, in 2016 China Landbridge bought Panama’s largest port on Margarita Island (Atlantic side of the Panama Canal, inside the Colon Free Zone), for about US$900 million.42 But it accelerated under Varela’s presidency. The China Harbour Engineering Company, in cooperation with a Belgian company, won a USS 165.7 million contract in the summer of 2017 from the Panama Maritime Authority to design, develop and build the Amador cruise terminal (Causeway Islands, Pacific side).43 It is also a Chinese consortium (China Construction Communication Company and China Harbour Engineering Company) which won in June 2018 the call for tenders launched by the Panamanian government for the construction of a fourth bridge over the Panama Canal. At that time, it was the largest infrastructure project since the expansion of the Panama Canal (US$1.42 billion).44 The final decision had to be postponed after rival bidders appealed. Some in Panama have suggested that irregularities may have occurred. The consortium submitted one of the cheapest bids, but its technical proposal did not score high in the evaluation. In any case, it finally won, and work began in May 2019.45 In September 2018, the private Chinese group Shanghai Gorgeous announced its intention to invest US$1.8 billion in two projects: the “Panama Colon Container Port” (US$900 million) and a natural gas thermoelectric plant and a terminal for regasification of LNG (US$900 million).46 An announcement that seems to have subsequently materialized. The percentage of construction completion for these two projects remained unknown in the spring of 2020. Finally, in April 2019, the China Railway Group Limited and Power China, the latter associated with the company Acciona (Spain) each issued competing proposals for the construction of Line 3 of the Panama metro, a project estimated at US$2 billion and financed by Japan (25 km and 14 stations). Chinese companies seemed well-positioned to win this bid as well. However, the Panamanian authorities, under the new President Cortizo, finally chose in February 2020 a competing consortium, the HPH Joint Venture Consortium (South Korea), suggesting that cooperation with Chinese companies may not be a priority for the new administration as it was the case under the previous one.47

The same scenario emerged with regard to another mega-project proposed by China under President Varela. Indeed, a MoU on rail transport had been signed between Panama and China (November 2017). China provides non-reimbursable cooperation for feasibility studies for the construction of a high-speed passenger and freight train to link Panama City with the city of David (391 km) in Chiriqui province, some 50 km from Costa Rica. The full study, carried out by the China Railway Design Corporation, was submitted in March 2019. The cost has been estimated at USS4.1 billion. This mega-project has been identified as part of the “Silk Road of the 21st century” according to statements by President Varela.4S The project could have created useful synergies for further economic penetration and expansion of China’s influence in both Panama and Costa Rica, and even beyond, with a possible extension of the line to Mexico. However, the project was criticized in Panama for being unrealistic and unnecessary.49 In September 2019, the new President Cortizo indicated that he was not much interested in giving the green light to this project, confirming his reluctance to cooperate with Chinese companies.50

Cooperation in merchant shipping

Beijing has been eager to be useful to its partner in the economic field, while promoting its own interests. In this spirit, an important maritime cooperation agreement was concluded as early as November 2017.51 It entered into force in May 2018. The PRC has granted Panama “the most-favoured nation status”, which should help it consolidate its global leadership in merchant shipping.52 Under the agreement, ships flying the Panamanian flag will receive preferential treatment in China. Prior to this treaty, they paid about 30% more than competing vessels, which had led to a reduction in Panama’s registrations, particularly for the main shipping fleets on Asian routes. This agreement is therefore intended to revive ship registration in Panama. Other measures, such as the opening of a merchant marine consulate and a Segumar office in Shanghai for services to customers of Panamanian-flagged vessels, are along the same lines.53 This agreement should make Panama more competitive in maritime transport, a major sector of activity (services) for the country. Seen from Beijing, it will promote bilateral trade and ultimately strengthen Panama's role as a bridge for Chinese goods to LAC.54

Low-level security cooperation

In the public security sector, judicial cooperation in the fight against transnational organized crime and corruption was developed with the signing of an agreement in September 2018, supplemented by an extradition treaty the following

December. More original, through the “Colon Secure City” project, China and Panama have set up cooperation on surveillance technologies, an area in which Chinese firms are increasingly exporting their “know-how”. Huawei was awarded a contract to install a surveillance and monitoring system in Colon, based on facial recognition cameras connected to a data network linked to government services (police, migration, fire and ambulance sendees). This project replicates in the city of Colon the mass surveillance system used by Beijing for its own population. The development of this type of cooperation raises questions in particular for the protection of human rights in the country.55

Cultural exchanges, education and assistance

In addition, the two countries have increased their exchanges in culture, education and assistance. They can capitalize on the Chinese diaspora living in Panama. Approximately 300,000 people of Chinese descent were living in the country in 2018, representing about 7% of the Panamanian population.56 Beijing intends to use this community to strengthen its ties with Panama, as evidenced by the statements made by President Xi Jinping during his visit to the country. In terms of cooperation in education, a first Confucius Institute opened at the University of Panama in September 2017. Panamanian officials and students benefit from Chinese scholarships. The PRC is reported to have trained about 6,000 Panamanian officials and professionals in various fields by the end of 2018, while nearly 1,000 Panamanian students were studying in China.57 At Panamanian request, Beijing has also contributed to various social projects promoted by President Varela or his wife. All of these activities promote a positive image of China to local public opinion and increase its soft power in Panama through practical assistance that immediately benefits the population but also Panamanian leaders.

Association of Panama with the dynamics promoted by the PRC

Finally, another useful channel for fostering Sino-Panamanian rapprochement has been the association of Panama’s with the multilateral dynamic driven or promoted by Chinese diplomacy. Even before the establishment of diplomatic relations between the two countries, Panama joined the China-Celac Forum, with its Deputy Foreign Minister attending its first-ever ministerial meeting in Beijing in January 2015. Panama also took an interest in the BRI initiative. During his visit to Panama in September 2017, the Chinese Minister of Foreign Affairs spoke of the inclusion of Latin America in this initiative, remarking that Panama could play “a unique and significant role”.58 A proposal that the Panamanian administration has taken up. During President Varela's visit to Beijing in November, one of the most important documents to be signed was the MoU for cooperation within the framework of the BRI initiative proposed by China.59 Panama thus became the first Latin American country to sign such a convention. It was subsequently followed by other States in the region.

President Varela has repeatedly stated that he wanted to join the BRI because of the commercial and financial prospects it offered and which he believes were useful in supporting his country’s economic growth and infrastructure development. On the Chinese side, President Xi did not fail to stress the possible synergies and complementary interests of the two countries by recalling that the BRI was compatible with Varela’s “National Logistics Strategy 2030” aimed at making the country a world-class logistics centre.60 By participating in the development of Panamanian infrastructure, Beijing hoped to strengthen its influence while ensuring the coimnercial promotion of its companies. Panama could also play a key role in China’s efforts in Latin America, with its canal and financial and logistics platforms that will provide additional capacity to support its commercial penetration in all the region.

Beyond this obvious economic dimension, the PRC also had an important geopolitical interest in increasing its influence in this key country controlling a strategic international communication canal. The main transit route between the Atlantic and Pacific Oceans indeed uses it. It carries 5-6% of world trade.61 The Panama Canal already plays a significant role in Chinese trade. According to the statistics of the Canal Authority, in 2018, China was the second-largest user of this infrastructure behind the United States in terms of freight transit (origin and destination).62 Increasing its influence in this geographical area is thus useful both to protect its own interests, but also to give itself the possibility of creating “insecurity” for the other players using this infrastructure, first and foremost the United States.

Finally, in addition to this geopolitical interest, more subtly, through Panama's membership of the China-Celac Forum and the BRI, the PRC associates this key country with the parallel multilateral dynamic that it promotes and which, in its view, contributes to the emergence of an international order that is less centred on the “West” and more balanced in favour of the “South”, of which Beijing considers itself the "natural” leader. Through the promotion of these parallel multilateral dynamics, Beijing seeks to increase “multipolarity” while contributing to the emergence of a “multiplex world” as Acharya termed it.63

4 Domestic aiul international fears and limitations

In the context of the rapid development of Sino-Panamanian relations under the Varela’s administration, fears have arisen both domestically in Panama and internationally about China’s growing economic and political clout in the country.

Obstacles and limitations in Panama

Three aspects are of particular concern: the asymmetry of economic power between China and Panama, which could be very unfavourable to the latter; Beijing's growing political weight in the country and its influence on the local political class, which could provide it with gains contraiy to Panamanian national interests; and lastly, the geopolitical ulterior motives of the PRC, which could place Panama in a delicate situation.

On the first point, some questioned the preparedness of the Panamanian part vis-a-vis the PRC. The Varela government has neither really defined the priorities of the Panamanian state in the context of the negotiation of a FTA with Beijing, nor really thought about what complex relations with that country entail; relations that cover many other aspects than economic issues. Ernesto Perez Balladares, former Panamanian president (1994-1999), called for caution in the negotiation of the FTA, because Panama is “a very small country” whose economy is underweight compared to China. While some people are pleased with the relations with Beijing and the opportunities they offer, this type of fear has been expressed by both the business community and the trade unions.64 Some were also worried about the control that Beijing could establish over the canal through its financial power and the “debt trap diplomacy”. One project in particular has fuelled concern: the construction of a fourth set of locks in the canal. It is being caressed by the Canal Authority, which has evaluated it at US$16/17 billion in 2015. The China Harbour Engineering Company Ltd. expressed its interest at that time. In the context of the rapprochement with the PRC, some recalled the precedent of Sri Lanka which, unable to honour its debts, was forced to cede its port of Ham- bantota to Beijing for 99 years.65 A scenario that remained hypothetical but whose fears were fuelled by the lack of transparency of the Varela administration in its relations with China.

They have indeed developed in a climate of secrecy. The appointment of President Varela’s cousin as the first ambassador to China and the awarding of important contracts or projects to Chinese companies under discussed conditions have also raised questions in the country as to the influence that Beijing has acquired over the Panamanian political class. Secrecy has also fuelled speculation and concern in Panama about what has actually been agreed with the Chinese side. Fox- China, this is hardly good news. With bilateral relations having been strongly promoted by a President Varela who has become very unpopular and criticized for his economic management and various corruption scandals, Beijing runs the risk of being associated with him in the minds of many Panamanians and of being vulnerable to local criticism of non-transparency, corruption and influence peddling.66 The PRC also faces uncertainty about the change of political personnel at the head of the Panamanian state. It has sought to reduce it by cultivating relations with the opposition. Its ambassador in Panama met with members of the Revolutionary Democratic Party, whose presidential candidate, Laurentino Cortizo, was leading in the polls.67 He was indeed elected in May 2019.

Finally, concerns have arisen in Panama about the intentions of the PRC. Former President Balladares declared that he was very sceptical of the links with Beijing, especially because of its geopolitical ulterior motives. For Euclides Tapia, the Chinese presence is linked to control of the canal.6S The risk would be for Panama to be used by Beijing as an instrument to create insecurity or to put pressure on Washington. As Carlos Guevara Mann pointed out, “being caught in the rivalry between China and the United States would be extremely problematic for Panama”.69 Panama would be at risk of becoming a hostage or future victim of tensions between the PRC and the United States. This is a very difficult position for this small country, which has a history of US military interference and intervention.

There is therefore reluctance and concern in Panama, as well as a latent mistrust in various segments of society regarding relations with China. In an attempt to counter them, the Chinese ambassador has addressed Panamanian public opinion several times (via twitter and interviews in the local press) in an attempt to reassure it. It is not clear whether these statements were sufficient to appease them.

International concerns and obstacles

The main criticisms came as no surprise from the United States, given Washington’s sensitivity to the influence of extra-regional powers in its neighbourhood since the beginning of the 19th century and the fact that it physically dominated the Panama Canal from 1904 to the end of 1999 by deploying dozens of military installations there. The location and role of the Panama Canal in world trade continue to make it a “vital” infrastructure to US prosperity and national security.70 It continues to be important for US trade because it provides a faster link from the east to the west coast, saving about 13,000 km for a sea voyage. Approximately 12% of US maritime trade uses it.71 The United States remains the largest user of the canal. Two-thirds of the ships that pass through it go to or come from its territory. In addition, Panama's key location along major land and sea transit routes also makes it a key partner of Washington in interdicting illicit drugs trafficking for the US market.72 Access to the canal also remains vital for the US Navy, including nuclear submarines. Few waterways are of such great importance to the United States, so China’s growing presence in Panama is seen as an issue. As the Commander-in-Chief of SOUTHCOM reported to the Senate in February 2018, “increased (Chinese) reach to key global access points like Panama create commercial and security vulnerabilities for the United States”.73 In the latter area, the former US ambassador to Panama revealed that Washington is also concerned about the risks of espionage and the potential for Beijing to expand this type of activity in the Caribbean Basin through its increased presence, particularly in Panama.74

Other analysts in the United States go further. Beyond these concerns or the more diffuse one linked to a “loss of influence” in their backyard as a result of Chinese penetration, some American observers envisage more problematic scenarios, notably the idea of a future form of Chinese control over the canal in the context of the expansion and modernization of its military navy and the establishment of a global network of commercial ports which they believe can be converted into military bases.75 Such fears are associated with a strategy that they believe Beijing is already pursuing elsewhere. Coined "geo-positional balancing”,76 its objective is not so much to build offshore military bases as to establish a non-military presence on selected areas (such as commercial ports). These can be maintained in the long term with the aim of “insecuring” a strong geopolitical rival and thus forcing it to moderate its behaviour by making it aware of the presence of the incoming actor. Under these conditions, China’s continued penetration of Panama would create vulnerabilities, uncertainty and insecurity for the United States. Whatever one thinks of the reality of this strategy, the timing of the rapprochement between Beijing and Panama does not play in favour of a benign perception in the United States of Chinese intentions with regard to this country. Alongside the "Taiwanese” factor mentioned previously, it is also part of the context of growing tensions between Beijing and the Trump administration as the two countries increasingly see themselves as global rivals.77

In this context, the Trump administration, which had long been passive towards Latin America, began to react. To counter Beijing in Panama, it tried to revive its relations by signing a MoU in August 2018 on bilateral cooperation in the area of investments in the energy and infrastructure sectors. It has also increased pressure on Panama by expressing its growing unease over its proximity to Beijing. Washington recalled its charge d’Atfaires on 7 September 2018, officially for consultations linked to the recent decision to no longer recognize Taiwan and to discuss ways in which the United States can support strong, independent and democratic institutions throughout Central America and the Caribbean.78 The latter reference suggests that Washington is concerned about the fragility of the democratic system throughout the region (including Panama) which could be exploited in various ways by China. The date chosen for this reminder is symbolic: the 41st anniversary of the signing of the Torrijos-Carter Canal Treaties on the transfer of control of the canal to Panama. Washington also warned about the proliferation of electronic surveillance systems in Latin America through cooperation with China.79 The head of the Western Hemisphere section of the National Security Council of the United States also came to remind outgoing President Varela and his newly elected successor in May 2019 that the Chinese company Huawei, which is very present in the Colon zone, was “a branch of the Chinese government and army”. These were strong and clear diplomatic messages expressing American concern and discontent to Panamanian decision-makers.

The Trump administration also stressed the dangers for Panama of Chinese investments and the risk of over-indebtedness linked to loans that Beijing might grant in the framework of BRI-associated projects. On the latter point, Panama’s public debt is low (37.8% of GDP in 2017).S0 However, this risk cannot be dismissed lightly given the size of some of the projects envisaged. A study published in March 2018 showed that over-indebtedness is found in 23 of the 68 countries involved in the BRI launched by Beijing, 8 of which would already be faced with unsustainable debt levels.81 And the situation could be even more worrying according to another report which notes that around 50% of China’s loans do not appear in the statistics of the World Bank and other international institutions and are in fact "hidden”.82

Confronted with these warnings, the Panamanian authorities have reaffirmed the strategic alliance that binds them to their great neighbour.83 President Varela sought to reassure Washington by emphasizing (March 2019) that Panama’s relations with Beijing “will not affect relations with our strategic partner”84 (i.e., the United States). The position of the new Panamanian President elected in May 2019 regarding relations with Beijing and Washington was not clearly fixed at the beginning. The new president, who studied in Texas, stated that he was in favour of ties with China, but without harming strategic relations with the United States.s5 However, he was quick to assure that the United States was “(our) strategic partner, our primary strategic partner” prioritizing links with Washington,86 as subsequent decisions appear to confirm. Indeed, President Cortizo has put the brakes on trade and infrastructure agreements with China. The FTA was still not signed in the summer of 2020. The presence of Chinese engineers and businessmen has also diminished.87 Between Washington and Beijing, whose relations have further deteriorated since his election. President Cortizo leaned towards Washington. The presence of China has certainly increased Panama's room for manoeuvre, but the United States remains an unavoidable strategic partner and the most powerful regional player. Under these conditions, Panama has little interest in incurring the wrath of its neighbour. The all-out boom in relations that had developed under Varela's presidency seems to have reached its limits, showing the fragility of the ties forged between the PRC and Panama to change of political personnel. So, were relations between China and Panama under President Varela just a diplomatic “tour de valse”? In view of the important economic cross-interests between the two countries, China's capacities and intentions in LAC, and the prospects opened up in Panama by the BRI, the latter option could resurface if the context becomes more favourable again. But Panama will then have to show caution, creativity and transparency if it is to play the pivotal role proposed by China in the BRI without provoking hostile reactions from Washington again. A real challenge for any Panamanian administration.

Notes

  • 1 IMF database (https://data.imf.orgf).
  • 2 Benita and Urziia (2016).
  • 3 This figure is obtained by taking the total amount of foreign trade as reported by Panama, that is, US$13.38 billion in 2017 according to IMF statistics, from which is subtracted the figure of US$1.29 billion (the trade with Beijing officially presented by Panama) but to which is then added the amount of trade as defined by Chinese customs, that is, US$6.74 billion.
  • 4 Benita and Urziia (2016:179).
  • 5 Colon Free Zone, https://Iogistics.gatech.pa/en/trade/colon-free-zone.
  • 6 Idem.
  • 1 Wintgens (2018).
  • 8 Taiwan is an important development cooperation partner for Central America. It has financed many bilateral and regional projects. See Taiwan ICDF (2020).
  • 9 Gertz (2000:75ff).
  • 10 Economist (2002).
  • 11 The Torrijos-Carter Agreements of 7 September 1977 dealt with the handover of control of the Canal to Panama. This infrastructure was therefore jointly managed by the United States and Panama from 1979 to December 1999.
  • 12 Taipei Times (1999a, October 9).
  • 13 Taipei Times (1999b, December 14).
  • 14 Ho (2003).
  • 15 Inec (2006).
  • 16 Quoted in Wu (2011).
  • 17 Fornes and Mendez (2018:57-58).
  • 18 La Prensa (2011).
  • 19 Improvements were made to the canal between September 2007 and May 2016. Since June 2016, they allow the transit of larger vessels (post-Panamax).
  • 20 Brown and Scott (2017).
  • 21 Informal discussions, Panama, April 2019 (SW).
  • 22 Bland (2017).
  • 23 Associated Press (2017).
  • 24 Tapiero (2014).
  • 25 Bland (2017).
  • 26 Quoted in Wong (2018).
  • 27 Informal discussions, Panama, April 2019 (SW).
  • 28 Panama Today (2018).
  • 29 CE Noticias Financieras (2018a).
  • 30 MIRE (2018).
  • 31 This protocol is signed by 40 states, including the five major members of the Security Council with the exception of China, see www.oas.oig/juridico/english/treaties/h-9.html
  • 32 Mendez and Alden (2019).
  • 33 Food and seafood exports, phytosanitary governance, environment, culture, cooperation in radio and television, e-coimnerce, trade in services, infrastructure, maritime sector with a maritime cooperation agreement to jointly develop the Maritime Silk Road of the 21st century and an agreement on maritime transport, banking sector, science and technology, education and tourism.
  • 34 Goncalves (2018).
  • 35 La Prensa (2018).
  • 36 CE Noticias Financieras (2018d, 2019b), People’s Daily Online (2018).
  • 37 CE Noticias Financieras (2018e).
  • 38 EFE Newswire (2018).
  • 39 WEF (2018).
  • 40 About one-third of the front companies set up by Monssak Fonseca at the heart of the revelations on tax evasion published by the International Consortium of Investigative Journalists (ICIJ) were set up by its Chinese offices. The records of the Panama Papers also revealed that families of senior executives were involved. See www.icij. org/search/china and Bernstein (2017:162ft'.).
  • 41 Xinhua (2018a).
  • 42 Yu (2016).
  • 43 Xinhua (2018b).
  • 44 Newsroom Panama (2018).
  • 45 Jimenez (2019). However, the new Panamanian authorities announced in the spring of 2020 that the project for a new bridge over the canal will be scaled down.
  • 46 Sierra (2018).
  • 47 Bulletin Panama (2019).
  • 48 CE Noticias Financieras (2019a).
  • 49 EFE Newswire (2019).
  • 50 Cajar (2019).
  • 51 MIRE (2017a).
  • 52 Sanchez (2018).
  • 53 Segumar is a technical office that serves as a liaison in case of emergencies, but also for seafarers’ certificates, technical documents and all necessary documentation on board ships flying the Panamanian flag. See www.segumar.com
  • 54 CE Noticias Financieras (2018b).
  • 55 Kellner and Wintgens (2020).
  • 56 Liu (2018).
  • 57 Xinhua (2018c).
  • 58 Hsiang (2018).
  • 59 MIRE (2017b).
  • 60 CGTN (2018).
  • 61 See Wang (2017).
  • 62 Pancanal (2018).
  • 63 Acharya (2017).
  • 64 CE Noticias Financieras (2018e).
  • 65 CE Noticias Financieras (2018c).
  • 66 Wintgens and Nevache (2020).
  • 61 Associated Press (2019).
  • 68 Youkee (2018).
  • 69 Idem.
  • 70 Bureau of Western Hemisphere Affairs (2018).
  • 71 Rodrigue et al. (2013:33).
  • 72 Bureau of Western Hemisphere Affairs (2018).
  • 73 Tidd (2018:6).
  • 74 Mr. Feeley quoted in Wong (2018).
  • 75 Wall Street Journal (2018).
  • 76 On this concept, see Garlick (2018).
  • 77 China is described as a “strategic competitor” and “revisionist power” in the US National Defense Strategy 2018. See US Department of Defense (2018).
  • 78 Nauert (2018).
  • 79 Ellis (2019).
  • 80 CIA (2019).
  • 81 Hurley etal. (2018).
  • 82 Horn etal. (2019).
  • 83 Presidencia Panama (2018).
  • 84 Associated Press (2019).
  • 85 Zamorano and Martinez (2019).
  • 86 Channel NewsAsia (2019).
  • 87 Youkee (2020).

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  • [1] The establishment of diplomatic relations Contacts between China and Panama date back to the 19th century, when in 1854Chinese workers - mainly from Guangdong province in southern China - arrivedin the country to help build the railway across the isthmus. They are at the origin ofthe large Chinese community that now lives in Panama. But it was not until 1922that the country welcomed a diplomatic delegation from the Republic of China.It was raised to the rank of embassy after the Second World War (1954). Panamaestablished an embassy in the Republic of China in 1933. After the Second WorldWar, in the context of the Cold War, Panama, close to Washington, aligned itselfwith the Western camp and maintained diplomatic relations with the Republic ofChina in Taiwan. It was to prefer Taipei even after the entry of the PRC into theUN in 1971. Panama maintained this position after the end of the Cold War, at atime when Taiwan could still compete in “chequebook diplomacy” with the PRC,whose economy was just beginning to take off.8 In the 1990s, while maintaining diplomatic relations with Taiwan, Panamaestablished commercial ties with the PRC. A first step was taken with the establishment of mutual trade offices in 1996. The following year, the Panamanian government awarded a 25-year renewable concession to a Hong Kong multinational
 
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