Panama: China’s Strategic Hub

Nearly 6 percent of global trade and 57.5 percent of the cargo transported in container that ships 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.

Sino-Panamanian commercial relations are long standing, 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, told Diálogo.

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.

This investments in soft power adds to another more obvious one: capital. According to the Inter-American Dialogue think tank, between 2003 and 2022 China 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, which measures the degree of influence and incidence of the PRC worldwide, 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 as 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, expert on Sino-Panamanian relations, and presidential advisor, 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), whose work began 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 Belt and Road Initiative (BRI), Xi Jinping’s most ambitious foreign policy project, and with it 19 non-public memorandums of understanding 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, citing the 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.

The 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 that begun to come to public light.

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 the BRI, 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 China’s portfolio is more modest today than it was a few years ago, “China’s setbacks should not invite complacency,” warned Ellis, who says China 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, Minister of Public Works Rafael Sabonge announced that construction will resume in March. Said 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.

The unspoken: spying on Central America’s largest mining company

On October 23, 2023, Panamanians paralyzed the nation in what has been considered the largest protest in the last 30 years. The reason, to reject the contract that the Panamanian Parliament approved days before between the State and Minera Panama, a subsidiary of First Quantum Minerals (FQM), for the exploitation of Cobre Panama, the largest open-pit copper mine in Central America. The project, located in the province of Colón, in the Panamanian Caribbean, also boast a port structure, the port of Punta Rincón, since August 2015.

The controversy surrounding this contract goes a few years back, when in 2021 a ruling of the Supreme Court of Justice declared the previous contract awarded in 1997 unconstitutional, for not having been subjected to public bidding or environmental impact studies. However, the contract was extended for 20 more years and with the possibility of extending it for another 20 years.

Behind this contract is none other than China. First Quantum presents itself as a Canadian company, however, the major shareholder is the Asian country. The Chinese state-owned company Jiangxi Copper Co Ltd owns 19.5 percent of Quantum, which makes it the mining company’s largest shareholder, NASDAQ data indicated. However, sources close to Diálogo assured that China’s percentage in this mining company could reach up to 40 percent of the shareholding. And, as if this were not enough, 60 percent of the copper which is extracted and exported from the mining company has the PRC as its final destination.

After the contract renewal, dozens of unions, environmentalists, students, and civil society organizations protested the contract in defense of the environment and against corruption, arguing that the new contract had committed the same errors as the previous agreement and demanded its unconstitutionality. Finally, on November 28, 2023, Panama’s Supreme Court of Justice declared the project unconstitutional.

But what was little talked about, Tapiero says, was the security clause imposed in the new contract. “They [China] demanded total land and air control of the 13,000 hectares; Panama only had the right to allow six Panamanian members of the government to monitor the activities; otherwise, they could do whatever they wanted. This led to fears and speculation that China might have a research center and a submarine base for espionage.”

Chinese military strategy and opacity?

The advance of the PRC in the Panama Canal raises concerns about the risks that Chinese companies and infrastructures bring to Panama’s sovereignty and security.

One of the major concerns lies in the lack of transparency, experts say. “The level of cooperation that the Panamanian government can get from Hutchison for example, is not the same as it can get from other port terminals,” Ellis said, adding, “when you have limited transparency in the port that is being operated by China, when you have limited transparency in the warehouses that are being operated by China, when you have politicians who are reluctant to stand up to the Chinese for their own interests, we are already talking about loss of sovereignty.”

Concern that Tapiero also expressed, indicating that there is a lack of clarity about what is happening inside ports administered and operated by China. “They have the right to restrict any entry [to the ports of Balboa and Colón], so what are they doing there? It isn’t known. What if they have an office where they have hackers? I don’t know, it’s a security clause they put in place and now it’s up to them to comply with it for 25 more years.”

The PRC’s security law compels all companies in the Asian country to cooperate with the government’s intelligence efforts. Therefore, the lack of transparency and the strategic location of Chinese infrastructures allows Beijing to have access to invaluable information on commercial products and maritime routes.

This information is even more valuable if one considers that the port of Balboa in Panama is only 6 kilometers away from the Noel Rodriguez Naval Base. “This allows China to observe the operational routes, personnel, requirements, and movements of other armed forces,” said Ellis.

It is worth noting that the vice president of COSCO Shipping is a member of the Panama Canal Advisory Assembly. Although it is a representation as part of the industry and second user of the Canal, through this chair, Beijing has greater access to privileged and sensitive information.

Various investigations have shown that behind these civilian infrastructures there is the stamp of military hegemony. “According to Chinese law, in an eventual military mobilization, all civilian assets must be at the disposal of the PLA, that of course includes all ports that are under the management of Chinese companies,” Ellis said.

“Panama is a primary military objective and that is why they want control,” Tapia said, adding “there are already Chinese military bases in countries such as Argentina and Bolivia, although they are not denominated as such, that is what the space research centers they have there are, and the ports in Panama have the same capacity to be convertible, by appearance they are civilian spaces, but they could be transformed into a military unit if they wanted to.”

There are concerns about China’s ability to shut down the canal in an eventual conflict. “It would not be because of Hutchison, but because of Beijing’s understanding of operations. They have achieved enormous knowledge of the lock system for water control and the physical operational characteristics of the canal, and they have a massive group of people working for them. This would put pressure on other places where the Chinese are also developing a presence such as in the Strait of Magellan with the port of Ushuaia [in Argentina],” Ellis said.

“Bridge of the world, heart of the universe”

The PRC’s advances in Panama cannot go unnoticed in the rest of the continent.

Although countries are free to make sovereign decisions, Panama, as a logistics center for global trade, is such that its decisions have a greater impact on the world. Hence the visionary phrase of the liberator Simón Bolívar in 1824 when he referred to Panama as the bridge of the world, heart of the universe. “Everything that happens or fails to happen in Panama has a replicating effect in the region and beyond,” Tapia said.

Experts and analysts see greater participation of Western countries in the Panamanian economy as crucial. “We know the symptoms and we see the disease, but to change things, we need more companies to support Panamanian infrastructure to have more competitive alternatives with the Chinese offer, or the risks will continue to increase,” said Tapiero.

Case in point are the upcoming projects for the canal’s new water management system, which would give the operator technical access to the system for monitoring and control of the canal water system, SCADA, and other canal operations. “The awarding of the system to a Chinese company, still unlikely, would give Beijing a huge new leverage over global trade,” Ellis, said, noting that the project has aroused the interest of at least five Chinese companies.

For Tapia, this is part of a strategy that the PRC has been carefully outlining. “China’s primary objective is to control the canal, they are not here for the beauty or wealth of this country, they are here because Panama has become the hub of the region, and they want to control it.”

Experts and analysts call for caution when doing business with the PRC.

“Business elites believe that with their longstanding understanding and mastery of Panamanian politics they can control China’s risks while securing profits; the sad reality is that they often underestimate the power China has through legal means to get what they want and have let China get further than anyone understands,” Ellis said.

“As long as we do not have a foreign policy, strengthen our institutions, and confront corruption, Panama is not prepared to continue expanding its relations with China, because, although we do not want it, we are the lamb negotiating with the tiger,” concluded Tapiero.

‏Source dialogo-americas.com