Chinese businessmen have become a common sight at the panoramic Italian restaurant Vespa in Panama City, which lies at the bottom of a sail-shaped building, the tallest in the city, inaugurated by Donald Trump in 2011.
The property bore the once-iconic Trump brand until a few weeks ago, when the new owners decided to vocally ditch it as they now consider it detrimental to business. This sparked a feud with scorned employees of the Trump Foundation that only a court injunction and police intervention could bring to an end. Seemingly untouched by the drama unfolding around them, Chinese clients come and go. Yet their veil of indifference hides mounting ambitions over Panama’s canal – and the region as a whole.
As the White House wages trade war with Beijing, China is quietly growing its influence in Central America day by day. Panama and its canal – the most important trade nexus in the whole of the Americas – has been at the top of Beijing’s priority list for the region since Panamanian president Juan Carlos Varela cut ties with Taiwan and established formal relations with Beijing in June 2017.
Since then, major China-backed infrastructure projects along the canal have broken ground, and others are under assessment. More are likely – in July the two countries start negotiations for a free-trade agreement (FTA), just as US influence in the region begins to recede.
“We aim to close the FTA by the end of Mr Varela’s presidency in mid-2019,” says Augusto Arosemena, the country’s minister for commerce and industry. He adds, however, that negotiations will take as much time as needed to make it a good deal for both countries.
Trade between the two countries has flourished for years despite a lack of diplomatic ties and trade agreements, and China is already Panama’s second most important trade partner. The two countries exchanged goods worth a total of $1.3bn in 2017, according to figures from the National Statistics Institute (INEC). Only the US is a more important trade partner to Panama, with total trade between the two countries reaching $3.2bn in 2017.
Meanwhile, Chinese vessels are the second largest users of the canal behind their peers flying the US flag. On the other hand, Chinese FDI into Panama remains marginal, but growing. In 2016, it made up only 2.3% of the $4.2bn of FDI tracked by the INEC.
Business between the two countries is now expected to rapidly mount as diplomatic and trade ties deepen. “Panama is already importing many goods from China to then re-export them,” says Inocencio Galindo, head of the national chamber of commerce, industry and agriculture.
“This business can grow much further [with an FTA in place]. At the same time, we want to diversify the economy and export different kind of goods. I’m thinking of agriculture products – the agriculture sector is very weak at the moment, and China is potentially a big export market for our agriculture productions. But we also want to use our logistics platform to develop a base for advanced manufacturing. Chinese investors are already seeing Panama as a strategic hub to use as a logistics platform to serve the whole of the Americas, and this is the country’s main vocation.”
China seems willing to back Panama's infrastructure projects and make the canal part of a broader version of the Belt and Road Initiative (BRI).
“The main issue here is project finance, and there are different Chinese [state] banks such as China Development Bank that are open to finance any infrastructure project at the moment, which creates important synergies with the government infrastructure strategy,” says Jorge Serrano, managing director of the Panama Colon Container Port (PCCP), a major shipping terminal developed by privately owned China Landbridge.
The Panamanian government is carrying out a five-year, $19.5bn investment programme to 2019, to strengthen the country’s infrastructure and develop a new 2030 strategy to augment its role as a logistics hub at the core of the Americas.
Building up influence
Chinese companies are already building major infrastructure along the canal, including China Landbridge’s $900m deepwater PCCP in Isla Margarita, near the Caribbean entrance of the Panama Canal.
“After they re-established diplomatic relations, our projects gained momentum because it facilitated many issues such as visas for Chinese engineers that have the knowhow to develop such a complicated project,” says Mr Serrano.
Featuring three berths, one slated to be ready for president Xi Jinping’s visit in December, the port will have a capacity of 2.5 million TEUs (twenty-foot equivalent units) per year and will include a special economic zone. The company is also planning to add a liquefied natural gas terminal and a 350-megawatt gas-to-power plant worth another $900m.
On the Pacific side of the canal, a consortium comprising Belgian company Jan De Nul and Beijing-based China Harbour Engineering Co is building a $166m, two-berth touristic cruise terminal at Panama City’s Amador Causeway, designed to capture some of the 600,000 tourists that pass through the canal on cruise ships every year.
Additionally, Panama's government is now assessing a massive $5bn project for a Chinese-sponsored railway running all the way to the border with Costa Rica, and possibly on to the rest of Central America.
While the Panama government may welcome China’s appetite for infrastructure projects, this also meets Beijing’s growing ambitions in the Americas region – particularly now that trade relations with the US and the Trump administration have turned sour.
“It’s a massive opportunity,” says Mr Serrano. “There is a global trend to connect free-trade zones [FTZs]. Within that perspective, Panama’s FTZs could import [duty-free] Chinese production inputs, assemble them locally to meet local content rules, then export [the final product] to the US market. [The White House] is lifting tariffs on certain Chinese products. Panama has FTAs with 48 countries, including the US, and that’s an advantage [in these circumstances].”
Central America offers Chinese goods indirect routes to reach the North American market through existing FTAs with the US, such as the North America Free Trade Agreement in Mexico; the Dominican Republic-Central America FTA, which includes Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic; and the Trade Promotion Agreement with Panama. On the other hand, only a few Latin American countries currently have an FTA with China: Chile, Costa Rica and Peru.
Against a backdrop of growing trade tensions between the US and China, these agreements, which so far has been spared Mr Trump’s rhetoric, look set to become key to providing Chinese producers with alternative access to the US market and cementing their ties with local economies.
At the same time, China’s growing interests in Panama fit into a regional strategy that is focused on more than business. “China’s growth tells us it is in a position to boost global trade,” says Luciano Fernandes, managing director of Panama’s maritime chamber. “On the other hand, the US has been losing the hegemony it used to have. The US’s influence in the region is diminishing – it is busy with other things – whereas China is investing much more in the region.”
As an additional sign of the fast-changing geopolitical environment in the region, the Dominican Republic, the largest economy in the Caribbean and Central America after Mexico, rapidly followed in Panama’s footsteps in cutting ties with Taiwan and establishing formal relations with China in April. Costa Rica first did it back in 2006.
Mr Xi is due to make an official visit in Panama in December, marking the first visit ever of a Chinese leader in the country. He will seal the key role of the Panama Canal in the BRI vision and lay the foundations for a new era of relations between China and Central America, right in the US’s backyard.