Panama Elections: Navigating the Dragon’s Shadow

Post the May 5 presidential election in Panama, it’s of utmost importance for the president-elect to strategize a long-term plan with China, such a plan that prioritizes Panama’s development. Back in 2017, six months subsequent to the initiation of diplomatic relations with China, Juan Carlos Varela, the then Panamanian President, articulated in Beijing his nation’s ambition to serve as China’s “commercial arm” in Latin America. This proclamation served as a rationale for Panama’s newfound partnership with the authoritative People’s Republic, following the termination of its ties with democratic Taiwan.

Six years into the bilateral ties, characterized by striking differences, the gap between intended plans and actual actions is clear. China holds a dominant position in the current relationship, with Panama’s benefits being secondary. The partnership has not made a significant contribution to Panama’s development. Beijing has achieved several strategic goals in Panama. It has diplomatically isolated Taiwan and maintained its “one China” policy, while strengthening its presence in the Colón Free Zone (CFZ), which has become a commercial hub for re-exports and the regional headquarters of 18 Chinese companies. China has also gained access to Panamanian copper and made progress in infrastructure projects, such as the fourth bridge over the interoceanic canal.

Viewed from Panama’s standpoint, even though it has accumulated nearly $1 billion in stocks from Chinese direct investments, these haven’t been focused on sectors that foster productive chains. In the realm of trade, from 2019 to 2023, the primary focus of Panamanian exports was copper, making up over 95 percent of total exports. The definitive cessation of copper mining in the country’s main deposit will considerably alter the trade balance, especially considering that in 2023, the mine supplied China with copper valued at $1.55 billion. Beyond this “monoculture,” the revenue from other goods barely exceeded $61 million.

While the provision of natural resources isn’t necessarily harmful, it doesn’t lead to sustained wealth and confines the nation to a primary sector-based economy. At the same time, Panama is importing goods from China that have significant added value, such as mobile phones, vehicles, and components. The Panamanian governments have fallen short by not proposing a strategy to encourage diversification in the agricultural and livestock sectors. It’s crucial to note: One of the reasons for China’s engagement in Latin America is to secure its food supply. The limited volume of exports can also be linked to the non-tariff barriers that Beijing is especially keen on. Only a handful of six phytosanitary licenses for food have been granted since 2018.

While there’s no formal explanation for these delays, it’s widely perceived that it could be a maneuver by China to gain more concessions. Therefore, considering the data, Panama’s aspiration to serve as China’s “commercial arm” in Latin America has not only fallen short, but it has also failed to convince Beijing to open its market to Panamanian products. After the establishment of diplomatic relations, the Varela administration inked 47 agreements with Beijing, the majority of which were designed to foster and protect investments, thus forming a political bond favourable to Beijing. Due to this, China undertook numerous infrastructure projects and there were five rounds of negotiations for a Free Trade Agreement (FTA). However, it’s important to question whether these actions truly serve Panama’s interests or if they are merely serving China’s strategic goals.

This partnership caused unease in the United States as well. China failed to adhere to the “Protocol to the Treaty on Permanent Neutrality and the Operation of the Panama Canal,” which is backed by more than 40 countries, and the U.S. considers Panama as a key strategic base and a geopolitical ally. The “Varela model” was a source of concern for Washington, leading his successor, President LaurentinoCortizo, to strive for balance. Cortizo didn’t hinder the participation of Chinese companies in the CFZ, which guarantees income from the operation of the interoceanic canal, nor did he limit copper exports. He even sought to boost such exports with a law to renew the concession. However, unlike his predecessor, he put the FTA negotiations on hold, stopped the construction of the Panama-David train, and didn’t resist the Panama Maritime Authority’s termination of the contract for a Chinese container terminal in Colón.

Cortizo staked his strategy on a tripartite relationship framework encompassing Panama, China, and the United States, with the goal of capitalizing on his country’s geographical location and logistical strengths for enhanced benefits. Nonetheless, a slow disengagement from China was inevitable, which included delays in the approval of new phytosanitary licenses.

As the enduring dilemma about China continues, the incoming Panamanian president will be faced with the puzzle of ‘whether to forge ahead with Beijing or to tread carefully’ would remain in the midst of a geopolitical contest between China and the United States. The “Varela model” didn’t succeed in boosting the country’s productive potential and also strained the relationship with the U.S. Despite the early political cordiality, the benefits for Panama were minimal. The new administration must champion a policy that maximizes the advantages with both China and the U.S., leveraging Panama’s strategic location. At the same time, it needs to foster a trust-based relationship with its allies, so that China should not get over its vested interest and threatens the security of the backdoors of U.S. along with other Latin American countries. Although Panama was the first regional country to join the Belt and Road Initiative, it doesn’t necessarily imply a sacrifice of its democratic commitments. Moreover, the incoming administration must prioritize a long-term strategy with China, expanding the variety of exports, and creating conditions favourable for Chinese investments in sectors other than finance and logistics. While the candidates agree on sustaining a cordial relationship with Beijing, it’s remarkable that none have disclosed their strategy. Moving away from the current trend of either approaching or distancing – as the situation demands – from China or the U.S., and establishing a consistent position that will bring long-term benefits for Panama, should be a primary concern for the state.